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Real estate investing is a great way to fund a luxury lifestyle and prepare for retirement. While it’s true that the real estate industry has turned out some of the wealthiest people in the world, it’s not for everyone, and there are differences in the types of investing that you’ll need to consider. Let's break down commercial vs residential investing to help you decide what path to take.
The type of real estate investment that’s right for you will depend on your goals, how much money and time you have, and how much risk you’re willing to take. Before deciding, take a look at the key differences between commercial and residential real estate investing:
Commercial vs Residential Investing
This one may be a no-brainer for some. However, the main difference between the two sectors is that commercial properties are those used for business purposes (like office buildings, factories, and retail centers). Residential properties are used for housing purposes and include single and multi-family homes and apartments.
Tip: Maintaining any type of property is time-consuming. Consider hiring a residential or commercial property management company, so you can reap the benefits without the hassle.
Potential for Profit
In most cases, commercial properties are larger than residential properties. As such, there’s more money to be had in commercial real estate. The more space you have, the more tenants you can accommodate, which means greater returns.
Of course, as with any investment opportunity, the higher the returns, the greater the risk, which is also true of commercial real estate. The money sounds good, but you must decide just how much risk you’re willing to take.
Qualified Tenants
Whether you own commercial or residential investment properties, you’ll need tenants to make money. A dream tenant pays their rent on time and sticks around for the long haul. Unfortunately, when you deal in residential investing, finding good tenants can be a challenge.
If you own commercial property, however, finding qualified tenants is easier because you’re renting to business owners or large corporations who have respect for your property and its rules, plan to stick around for a while, and have the financial backing to pay rent on time every time.
Lease Terms
Residential leases tend to be shorter than commercial lease terms. A residential lease may last for six months to a year. Commercial lease terms can be set for anywhere from five to ten years. This long-lease term gives a commercial investor peace of mind because it’s guaranteed income for an extended length of time.
Note: Of course, with these long-term leases, it’s possible for a commercial investor to end up with a troublesome tenant for a long time. However, with a property investment advisor on their side, a detailed application process, and the proper legal protections in place, most commercial investors avoid major issues with less-than-desirable tenants.
Appreciation
One of the biggest differences between commercial and residential investment is the rate at which the property values go up. Residential property values are largely affected by comparable properties in the area. Commercial property values, on the other hand, are based mainly upon how much revenue the business generates. The more money a business makes, the higher the value of the property itself.
As you can see, there is a major difference between residential vs commercial investing. If you’re on the fence as to which sector you’d like to invest in, be sure to consider the differences above before making a decision.
