Residential real estate describes property with houses owned by families and is considered a very significant investment. The cost of these real estates can be determined by factors such as size and location. On the other hand, commercial property describes property with buildings used to carry out business activities such as production, storage and distribution. Commercial property earns the investors income through leasing and selling and it is a long-term investment. Valuation of commercial plots is determined by location, accessibility and market trends. Residential property offers individuals with homes and investment opportunities while commercial real estate generates investors income. In this article, we are going to contrast residential and commercial real estate’s together with their positives and negatives.
Types Of Commercial and Residential Properties
There are several types of residential and commercial properties. They include:
Commercial properties
- Office spaces
- Storage facilities
- Restaurants and hotels
- Multi family
- Banks
Residential real estate
- Duplexes
- Condominiums
- Single family
- Apartments
- Mobile homes
There is a very great difference between these two types of properties that revolve around factors such as privacy, where residential properties are private owned to provide living spaces and commercial properties are set to generate income. Discussed below are detailed differences between these properties.
1. Location
When choosing a location for residential properties, consider desirability. Properties in well-equipped neighborhoods are likely to do well and appreciate with time. You might also consider the availability of schools, public transport and restaurants to attract more tenants.
For commercial properties, location is also an important factor depending on the intended use. Different commercial properties require different locations. For instance, storage facilities will do well in areas that access the highway whereas office spaces require a silent location for smooth running of office activities. However, all commercial properties require areas that are densely populated in order to earn favorable income and attract tenants.
2. Management costs
Residential properties need to be maintained at all times but do not need a property manager to be on site at all times. In case need to fix something arises, the property manager is the one to handle it.
Commercial properties also have a property manager who is always available during working hours. Big commercial institutions such as storage facilities always have tasks arising such as repairs and maintenance.
3. Tenant expenses
Tenants in a residential property have lesser expenses than those in a commercial property. Some apartments require tenants to cover the water, gas and electricity costs with no extra utility bills. However, in a commercial property, the tenant is exposed to more complex bills such as maintenance, taxes and insurance. A modified lease enables the landlord and tenant to split the maintenance bills but the tenant will still pay the insurance and property tax.
4. Manager’s operating hours
Residential properties need managerial services at all times because emergencies can crop up unexpectedly since the use their residential property at all times. Similarly, in a commercial property an emergency can come up any time. The difference is that in a commercial property the emergencies are less frequent because the manager has working hours which he spends on maintenance of the property. Since commercial properties are large institutions, they are connected to third party monitoring services that take care of emergencies.
5. Purchasing formalities
Residential properties purchasing procedure is quite a simple one. The buyer will identify a property of interest, approach the seller with an offer and carry out land inspection once the offer is approved. The final step is closing the purchase by finalizing the transactions and ownership transfer.
Purchasing commercial property, on the other hand can be comprehensive. The investor identifies a property that meets his qualities and need depending on the type of business at hand. They conduct market research, check the condition of the property and analyzing their financial status and expected income. Negotiating the price and agreeing on terms of sales is the next step after the decision for purchase has been made. The closing step involves legal procedures, financial transactions and transfer of ownership. A buyer may also want to seek financing from lenders and investors thus making the closing stage more complex.
6. Risks portrayal
A residential property certainly has less risks because they are cheaper and have high demand. They are not affected by economic deterioration and can be occupied for a long-term resulting to a consistent flow of income to the landlord. They are also quite affordable and easy to finance.
Contrary, commercial properties have higher risks because they are more expensive and easily affected by the economy. They require a huge deposit making them harder to finance especially if you have a poor credit history.
Advantages And Disadvantages of Commercial Property
Advantages
- High ROI: The ROI on commercial properties is higher than in residential properties especially when the buildings are fully occupied.
- Long term leasing: Commercial properties are more profitable because investors lease them for a long period of time that can be up to 10 years. This lowers the turnover costs for the landlord and assure them of a regular income for the time frame agreed upon.
- Responsible tenants: Commercial properties attracts well behaved and responsible tenants because they are guided by the rules of the company.
- Triple net leases: The tenant handles all extra costs that comes with renting such as taxes and miniatous fees. This means that your rental income is not taxed and you have it all to yourself. Downtown rentals are high on demand because they are cheaper and enables companies to get high returns after signing the triple net lease, that makes them maintain their brand.
Disadvantages
- High risks: Managing commercial properties can be risky because it requires a larger investment and it may not succeed as expected. The maintenance and construction costs are also hefty and the costs are expected to be covered by the landlord.
- Complex paperwork: The documentations involve in a commercial property is complex and it requires you to look for a property lawyer. This process is costly and take a lot of time and energy.
Advantages And Disadvantages of Residential Real Estate
Advantages
- High demand: Rental properties keep increasing in demand with time, because the cost of buying a house is on the rise.
- Easier to invest: Investing in residential property is proving to be cheaper than commercial properties. Having the appropriate knowledge of this investment can enable you grow gradually even without a significant down payment.
- It is a risk safe investment: If you are looking for an investment with low risks, residential property is the way to go. Since the tenant is the one who pays for the extra costs, your rental income remains untouched.
Disadvantages
- Irresponsible tenants: It is important to research about your tenants before letting them in your rentals. Maintaining professionalism on repairs and maintenance requests enhances good relations.
- Short term lease: Tenants in a residential property tend to lease for a short period of time of about 6- 12 months risking the landlord’s flow if rental income.
- Low returns: Residential property has lesser returns as compared to commercial property. To increase their earnings, owners are limited to investing in one property which in turn earns them a lower profit.
- Requires excessive maintenance: Maintaining a residential property can be a lot of work. This means that if you are busy with other responsibilities, you may lose a lot of money.
Conclusion
Property investment is a very promising and lucrative investments you can choose. You will need to have a prompt understanding of both commercial and residential properties because your money is working hard for you. Commercial properties come with higher risks and costs while a residential property has lesser risk. However, managing both types of property require you to have sufficient funds to finance repairs and maintenance. If you want high returns, consider investing in commercial property if the finances are available. however, if you are looking to work on a certain scale consider residential property but you need to be patient to get the expected returns.
FAQs
1. What type of commercial property is best to invest in?
Industrial property such as factories and warehouses are high on demand as the market keeps growing. Most of these companies use the net lease basis where the tenant is required to pay property taxes, insurance, electricity and water bills. This means that your rental income remains untouched and untaxed.
2. Which commercial property is the most profitable?
Commercial properties with a high number of tenants and the ones high on demand are the most profitable. The higher the number of tenants in your premises, the higher the returns. Such properties include apartments and student housing.
3. How much ROI do I expect on my commercial property?
Commercial property usually has 5%- 12% return on investment. However, good returns are dependent on conditions such as the property type and the local market trends.
4. what is the main difference between a residential and commercial property?
The main difference between these two properties is their risk portrayal. Commercial properties are rented for long term and assure the lesser of a reliable source of income whereas a residential property the leasing period is short and the income may be irregular.