Real estate investment is a great way to create an income for yourself and to diversify your portfolio to provide stability for your financial future. There are several ways to invest in real estate. We’ll be comparing residential and commercial properties here, exploring the pros and cons of each type of property to help you decide which is right for you.
What’s the Difference Between Residential and Commercial Real Estate?
This is a more loaded question than you might realize. There are a lot of different parameters by which people judge whether a real estate deal is residential or commercial. They may be differentiated by the intended purpose of the property, the regulations associated with purchasing and/or renting or leasing the property, the property’s income potential, or the size or value of the property.
Residential real estate consists of properties in which people live, generally speaking. We’ll narrow it down even further for the purpose of this comparison to single family homes intended as investment properties, either for flipping or renting out. Purchasing a home that you intend to live in could be considered another form of residential real estate investment.
Commercial real estate will be defined as income properties aside from single family homes. This could include land for development, multi-family dwellings like apartment buildings, office or retail spaces, or other special purpose properties.
Residential Real Estate Investment Pros
Residential real estate transactions tend to be easier and less complicated than commercial transactions. You’ll likely shell out less cash to complete the transaction, as well.
You’re more likely to find an opportunity to make a smaller-scale investment in residential real estate. This will allow you to get your feet wet in real estate investment with less risk than a larger, more expensive property would create.
Residential properties, though they are regulated and you must provide tenants with a livable space, tend to be easier to maintain yourself. Plus, you can add sweat equity to your property at will.
Single family homes are generally faster and easier to sell than commercial properties.
Pros for Commercial Real Estate Investment
Commercial real estate tends to come with higher potential profits than residential real estate or even other types of investment.
The value of commercial real estate tends to be more steady than other types of investment like the stock market. This is one main reason why it’s a great addition to a portfolio in need of diversification. Commercial property values tend to keep up with inflation better than other types of investments, as well.
Renting out commercial properties tends to be less personal than does renting out a home. It allows you and your tenants to be more objective in your dealings.
Commercial property owners are often less involved in the day-to-day operations, with many of the required services being contracted out. For instance, you may have a maintenance person and a security service contracted rather than handling issues that arise yourself.
Lease terms tend to be less regulated in commercial properties than they are for residential properties, leaving you more wiggle room to set a contract that works in your favor.
Tenants in commercial properties tend to do a better job keeping the property in good shape than residential lessees. This is because the property’s appearance in crucial to their business’s success.
Residential Property Investment Cons
Tenants will be counting on you to provide them a functioning home, and any issues that arise may need to be dealt with immediately. This could mean you wind up dealing with an emergency in the middle of the night. You’ll be responsible for making sure the property meets federally mandated minimum requirements.
Your income potential is more limited with a single family residential property. You’ll also be out the rent when you’re between renters.
Dealing with residential tenants can be a real hassle, and tenant actions can result in damage to the property that you have to repair. Recouping your losses for these sorts of damages can be very difficult, time consuming, and expensive.
You’re likely making more of a commitment, both in time and money, when you purchase a commercial property.
You likely won’t be able to handle much of the maintenance or renovations on a commercial property. Most of the work will likely need to be performed by a licensed professional to meet building codes and reduce liability for any accidents.
Speaking of liability, when there are likely to be more people on site at your investment property, there is a higher chance of something going wrong, leaving you liable for damages.
So, Which is Better?
You’ll have to decide for yourself which type of property is ideal for you. Your preferences, experience, location, and the amount you have available to invest will likely dictate which type of real estate investment you make.