Is it Better to Invest in Commercial or Residential Property?
Commercial or Residential real estate? Which one is better? Today, you'll find out in this article.
Making the decision to invest in real estate is one first step to setting up your wealth and financial security. And one of the biggest decisions will be what to invest in. The two main areas of property real estate investing are commercial and residential. Both are similar in ways, yet vastly different. So how do you choose between them? What is better, commercial, or residential property? Before you make the decision between commercial or residential, you will need to understand the difference. Both may involve the purchase of a physical property, but they are quite different in management style, sources of income and initial cost.
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What is commercial property?
Commercial property is described by Investopedia as being any real estate that is used for business activities. More different types of properties fall under the commercial umbrella. So your options are wider. The main types of commercial properties include:
- Large scale multifamily housing (housing with more than 5 units or individual dwellings).
- Office buildings.
- Retail spaces.
- Storage Units, including warehouses.
- Industrial buildings.
The key point that makes a property a commercial property is that it is used for business purposes. The exception being multi-family housing and storage units. The reason multi-family units are considered commercial is due to the size and scope. It goes beyond single residential. If you are not sure whether a property that you are looking at is commercial or not, just think about the type of tenant you would expect to have, and what they would use the space for. If it is going to be used even partly for business or retail, then it is likely commercial. And if nobody is using the space for their place of residence (such as a storage unit), then it cannot be considered residential.
What is mean for a property to be residential?
So now that we understand that commercial real estate is any property that is used for business purposes, on the other end is residential, which is designed for living in. Residential property is much easier to understand. It is any property that is used as someone’s normal place of residence. Main examples include:
- Townhouses and duplexes
It does not matter who is living in these properties, whether it be an individual person, a couple, or a large family. If it is considered their home, then it is residential. Holiday homes and vacation rentals are also considered residential as it will generally only hold one family at a time.
What does it mean to invest in commercial or residential property?
Investing in real estate is a good way to build wealth. But what does it mean to invest in commercial or residential property? To become an investor, you would need to purchase a property, and rent it out in order to make an income from it. The main difference between commercial and residential investments will be the types of tenants as explained by Real Estate University. Commercial properties will generally be rented or leased to businesses. Or individuals operating a business. Alternatively, for storage of someone’s personal belongings. But you would not have anyone living in such property. Residential property on the other hand will involve a more detailed lease as it will be considered someone’s home. An individual or a family will be living in the property, and pay you rent. No matter whether you choose commercial or residential, you will earn an income from renting out the space. The main difference is who you rent it out to, and how much you will be able to rent it out for. Commercial real estate can be more expensive to purchase, however can bring about higher returns.
What are the main benefits from commercial and residential properties?
As discussed, the general process behind commercial and residential estate investing is similar, yet there are clear benefits to both. And whether one is better for you depends on your personal circumstance, your financial position, and your tolerance to risk. Source: Fortune Builders.
Benefits of commercial real estate
- High returns. The saying goes, “with greater risk comes greater reward”. And this is definitely true for commercial real estate investments. Compared to residential investments, returns for commercial are higher and more attractive. One reason is that more space equals more tenants, and these tenants tend to be higher value.
- Longer lease terms. Businesses and commercial tenants will tend to want to stay in one spot for longer than the average residential tenant. It is not uncommon for commercial leases to range from 5 to 10 years. This is a long time to have consistent, guaranteed income.
Benefits of residential real estate
- Low cost of entry. There are very expensive homes out there on the market, but there are also some real bargains. It is possible to purchase residential real estate for a lower cost than commercial. A single-family home will be much cheaper than purchasing a large warehouse or shopping center.
- Larger renter pool. At any one time there are countless families looking for properties to rent, so finding a good tenant is rarely difficult. If you have a residential property in a high demand area, you could have tenants fighting to rent from you.
- Lower risk in economic crisis. When there are problems in the economy, businesses will often be the first to suffer. But residential properties will always be in demand as people will need a place to live no matter what. There is also no guarantee that a business will be around forever, however the demand for residential properties is constant.
There are clear differences and benefits for both commercial and residential properties, and either type can be a good long-term investment. There is no clear answer as to what is better between the two, rather you need to consider what is best for you and your situation.
Charles is the founder of infoSpike.com. His real estate investing experience started in 2004 and he is currently focused on rental property projects. He enjoys learning about real estate investing, personal finance, and marketing. Read more about Charles here.