Commercial vs. Residential Real Estate: Where to Invest

Real estate investment is often more attractive compared to other forms of investment. However, when it comes to real estate, you have a choice between commercial and residential properties. Most people opt for residential properties, as the risks involved are low and this gives them peace of mind. On the other hand, people with great risk appetite can opt for commercial real estate. But, before you decide which type of investment is right for you, take time to understand the difference between the two types of real estate. This will help you make an informed decision, so that you get the maximum returns from your investment.

commercial vs residential

Difference between Commercial and Residential Real Estate

As the name suggests, commercial real estate refers to buildings or land that are meant to garner profit for the owner. Usually, this type of real estate generates an income and can include residences and housing that are rented out to tenants. However, the term commercial real estate often refers to buildings that are used as offices, stores, shops and storage. The aim of such real estate is to attract people, who have sound knowledge of business and the finances to maintain the business.

On the other hand, residential real estate often means single-family or other forms of family rental units. Even condos and coops are part of this category. Many people invest in residential properties to become landlords; and some also resort to buying homes at a low cost, refurbishing it and selling it for a profit. The latter is known as house flipping.

The Best Real Estate Investment Choice

Commercial Property:

Typically, when you invest in commercial properties, you want an income-generating property. In other words, you will rent out the property to tenants, usually long-term tenants, and the monthly rental they pay will be the revenue from the property. This type of investment requires substantial money, as such properties are quite expensive when compared to residential real estate.

If you want to turn into a commercial real estate investor, you may find it difficult to get loans from financial institutions, as there is a certain amount of risk (high rate of vacancy) involved in this type of investment. Nonetheless, commercial properties have great scope for profitability if you know how to handle the property or sell them the right way.

Remember, finding tenants for your commercial property will depend on the local economy. If the economy is performing well, you will be able to make really good money. However, if the economy is going south, you will be left with a lemon property that sucks your resources instead of generating revenue.

Residential Property:

In contrast, your investment will not be as high for residential properties and you always have the option of renovating and selling them for a profit. Most people interested in residential real estate are, however, not interested in flipping. They prefer to become landlords, as finding tenants is not that tough.

Becoming a landlord comes with its own set of responsibilities and issues. You will have the onus of maintaining the property to keep tenants satisfied and address issues raised by tenants. The problem comes when you have the misfortune of getting tenants, who don’t pay rent on time or go against the terms mentioned in rental agreement. This can cause you a lot of headache and may also require you to use the law to get the tenant evicted.

Property Maintenance:

It is easier to maintain residential property compared to commercial property. You can paint residential property, change a few fixtures and install a new carpet and the property is all set for the tenant. Commercial property requires more maintenance, such as upgrading the air-conditioner or interiors, changing the pipelines, safe removal of asbestos and/or refitting the entire interior. This can be pretty expensive and will depend on how much money you have saved for maintenance and renovation.

The Verdict

The demand for residential real estate is higher than the supply. Hence, at the moment it makes sense to invest in real estate property if you do not want to make a high risk investment. However, if you are keen on commercial real estate investment, look at the local economy before making a decision. It should be stable and also the long-term outlook should be positive.

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