Choosing between Commercial real estate vs residential real estate is not an easy task for everyone and it can’t be taken overnight. Firstly we start with the basic introduction of these two terms:
Commercial real estate is those properties which primarily use for business or commercial purposes like office spaces, retail shops, shopping complexes, apartments, and duplexes for firms and startups. People who are involved in commercial real estate business lent these spaces to others and make good rental income.
Residential real estate is those properties that include single-family homes, multi-storey homes, societies, and townhouses, etc. Basically residential real estates are for living purpose. Owners can live there with their families or they can be lent these properties to others or enjoy rental income.
Now we will proceed further and try to find out the key differences and pros and cons for commercial real estate vs residential real estate. There are several key differences between commercial and residential real estate which are given below:
We already know that there are potential risks in the real estate business because profits are also high and it is obvious that ‘more profit comes with more risk’. Commercial properties have less risk than residential properties because in commercial properties lease tenure is vary from 5 to 10 years or sometimes it can go even higher so commercial properties can generate more stable income while on the other hand the lease tenure of residential properties usually ranges from 6 months to 1 year so there is a kind of instability of income until we don’t find a new buyer or tenant.
In this factor commercial real estate is the clear winner because according to market study commercial properties have a 7 -13 percent return on investment while on the other hand residential properties have only a 2-5 percent return on investment.
Commercial properties require more funds and investments because they are meant for business purposes and office buildings and also required prime location from where business houses have easy access to get facilities, but on the other note, residential properties don’t require that much capital and funds because they are meant for living purpose and target upper middle class and lower middle class.
One of the major difference between commercial and residential property are customers. For residential properties, the majority of your customers are tenants and they are obliged to pay you a fixed monthly amount while for the commercial properties, the majority of your customers are business owners and companies.
It is also one of the stark differences between commercial and residential properties. Tenants use residential properties 24/7 and it leads to more tear and wear but most of these problems are very simple and easily solved by plumbers, electricians, and carpenters, etc. On the other hand, maintenance is more difficult or complex for commercial properties because these properties are much larger in size and sometimes business owners demand property managers or dealers to manage maintenance through law.
In commercial properties, value increment or appreciation is far greater than residential properties because of the steep rise in facilities provided by commercial real estates which makes the property of more value than before. Commercial properties are like the hub for business houses and startups to catch greater eyeball so, it also makes value addition in the property while on the other hand residential properties also have value appreciation but they are not that much high as commercial ones are.
So, we have discussed all the main differences between commercial and residential real estate. Now we will try to highlight some reasons which can help you to decide to make an investment in real estate :
- Growth Aspect: Investing in commercial properties are a great decision because it yields a 7-14 percent return on investment which is not the same in the case of residential properties because the return on investment is 2-5 percent
- Public attraction: It is obvious that commercial properties have greater chances to attract more people because in the 21st century everything is going to be digitalized which requires new startups, so the new startups require new spaces with allied facilities. It’s like a supply-demand chain.
- Initial Investment: Purchasing commercial properties require heavy investment because it is meant for the business houses and corporates who do not need only a random property but they also need all the facilities related to their business-like markets, location, transport, and other outsourcing services so, do complete research before making an investment because initial investment in commercial properties and residential properties differs very much.
- Time Management: If you invest in commercial property and lease out commercial spaces to few tenants, even 4 or 5 still have to be attentive as a landlord if you want to maximize your income. Being a commercial property owner, you have to keep an eye on tenants and their activities, getting your maintenance charges from time to time and other activities also have to be done in the correct manner but in residential properties, the owner can be lenient sometimes because work pressure is not that much as in case of commercial properties.
We hope all these differences and points will make you understand more about commercial real estate and residential real estate and helps you to decide the best option for you to invest your hardened money in the real estate business.