Residential vs. Commercial Investments

Residential vs. Commercial Investments

Thinking of investing in real estate but not sure which kind? The first step is knowing your options and what they mean. You’ve probably heard the terms ‘commercial real estate’ and ‘residential real estate’, but do you really know the difference between them? Educate yourself about what you’re getting into and which option is the best for you to ensure your success before you invest.

What Is the Difference?

Residential real estate includes property that is used for residential purposes only—i.e. a single family or multifamily dwelling. Whereas commercial real estate includes any kind of property that is intended to generate a profit. The commercial real estate includes office buildings, apartment buildings, industrial property, warehouses, garages, retail stores, hotels, etc.

Commercial Real Estate

There is a lot to consider with commercial real estate. One of the biggest benefits of commercial real estate is what’s called a triple net lease. This lease basically says that all maintenance costs are the responsibility of the company leasing the property—virtually eliminating maintenance costs, which can be a big concern for investors. Another perk of commercial real estate is the length of the lease. Generally speaking, commercial real state will lease for longer periods. This can ensure cash flow for longer periods of time and save you the hassle of finding new tenants regularly. Commercial real estate generally has high value—meaning that you get more return for your investment, but you also need to invest more. It is usually much more expensive to invest in commercial versus residential, but high risk also leads to high reward. Property value can easily rise with commercial real estate. Appreciation can occur when the business renting your location is successful or when the surrounding location brings in new developments or customers. However, because commercial real estate is more expensive, it is also hard to sell, so be prepared for a long-term investment with this one.

Residential Real Estate

Residential real estate is usually a safer investment. It is usually easier to find tenants, people always need a place to live no matter the economy. Because residential won’t require you to invest as much, you likely won’t see as high as a return as a commercial investment. On the flip side—because it is a cheaper investment it’s also easier to sell. With a residential investment you will have to deal with tenants directly and any needed maintenance. You can hire a property manager to deal with tenants, but with residential, you likely won’t be profitable enough to justify it.

Which You Should Choose

Either commercial or residential real estate could be a good option for you depending on your circumstances. If you are looking for a larger, more long-term investment that won’t require much upkeep, commercial real estate may be the best choice. However, you’d like a safer and more short-term investment residential is a great option. For someone just starting out in the world of real estate investing, residential is a good place to start. But whichever you choose to go with, be sure to advise with an experienced professional.

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