If you want to start putting your money into real estate investing, it’s not an easy decision to decide between residential and commercial property. To make this decision requires taking your time and weighing out the pros and cons of each, taking into account your goals, risk tolerance, liquid capital, and time. Commercial and residential properties both come with their own headaches and advantages. Learn about real estate investing by reading the information below before making your final decision.
Difference Between Commercial and Residential
The simplest difference is that residential buildings are any property with a single family home or a building with one to four units, while a commercial building is a property with five or more units. To be more specific, residential properties consist of single homes, condos, duplexes, and quadruplexes. Commercial property is made up of office, retail, industrial, multiplexes (five units or more), hotels, and special purpose buildings.
A main difference between the two property types are the tenants. Commercial properties attract businesses, while residential attract families and people looking for a home.
Benefits of Investing in Commercial Real Estate
Better Return on Investment.
Commercial properties tend to be riskier investments than residential properties. As the old adage goes, with great risk comes great reward, and in this case, that can mean an average return of 12.7% annually, compared to residential property’s average 8.8% return over 15 years.
High Quality Tenants.
Whereas it can be more of a challenge to find high quality tenants for residential properties, with the required income, insurance, credit score, and history desired, commercial tenants tend to be backed by bigger investors or companies, which means they are more likely to meet your standards and follow your rules.
Residential properties usually rent out for six months to two years, leaving landlords on the hunt to regularly find new tenants. Commercial leases are much longer, lasting sometimes up to ten years. Having longer leases in place means less chance of a vacancy, and no vacancy means you have a constant cash flow.
Faster Property Value Increase.
One of the biggest differences in residential versus commercial property is how the properties are valued. Residential property is valued based on surrounding property values, but a commercial property’s value is determined by how much income it is generating. So if you fill your building with five to ten year leasing terms, the value of your property will go up, increasing your value for the next business that comes in and wants to rent from you.
Benefits of Investing in Residential Property
Lower Cost of Entry.
It may seem daunting to save up enough money to invest in a commercial property. A good compromise to this is to invest in residential properties. A person may have enough in savings to purchase a house or duplex and rent it out. Over time, after you generate enough income, you can take your capital and invest in other residential buildings, or take it up a notch and invest in a commercial property.
Decreased Tenant Turnover.
In the volatile economy we currently have, businesses may come and go, but families renting from single family homes tend to stick around longer. As long as you are quick to deal with tenant issues, keep a clean property, and have a fair rental fee, your tenants will be loyal for a long time. When interviewing applying tenants, get to know them and to see who are more likely to be long-term renters.
Better Zoning Laws.
With commercial properties come commercial zoning laws. These laws make building, renovating, and leasing a lot more difficult than the zoning laws for residential homes, where the rules are more lenient.
Economic Crisis? Not as Big a Deal.
During an economic turn-down, businesses are the first to go. If you own commercial real estate, you might see some of your tenants file bankruptcy and be forced to leave, not fulfilling the length of their lease. If you own residential real estate, your tenants won’t feel the wallet squeeze as quickly. Also, if your tenants leave, there are usually other people looking for homes. Your residential real estate is more likely to stay filled compared to commercial during down economic times.
Need a Commercial Restoration Company to Fix Up Your Real Estate Property?
Contact Alpha-Omega Disaster Restoration. At Alpha Omega, we have a trained, certified, and licensed emergency response team available 24/7 to assess your situation. We’ll make a cleanup plan and work directly with your insurance company, as well as your tenant’s. We want to restore your rental property as quickly and safely as possible, to get your tenants back into their home.