Real estate can be a lucrative investment. But it’s important to do research and choose wisely the type of property and location you want to invest in. Before buying property, consider your goals, how much money you have to invest, and the best way to invest in real estate. You can also seek advice from an investment or financial advisor.
One important decision you’ll have to make before investing in real estate is what kind of property you want to invest in. Both residential and commercial real estate can make you good money, but they are two very different endeavors. In this article, you’ll learn about the differences between investing in residential and commercial properties and how to choose the right investment.
Residential vs. Commercial Properties
Residential and commercial are two categories of properties that have different uses. Residential properties are places where people live, while commercial properties are used to make money.
Residential properties include the following:
- Single-family homes
- Apartments
- Condos
- Buildings with up to 4 rental units
- Motor homes
These are just a few examples of properties that are considered residential.
Commercial properties include the following:
- Office spaces
- Retail store spaces
- Apartment complexes
- Hotels
- Warehouses
Both property categories can be good investment choices, but you need to choose the option that you can afford and have the time and resources to take care of. Residential properties can be rented out to long-term renters, used as short-term vacation rentals, or remodeled and sold for a higher price. Commercial properties can be leased long term to companies that need office or store space and multiple unit rentals can be leased to tenants.
There are several options to make money with property, but you should consider the differences between residential and commercial properties before deciding which is the best investment option for you.
Here are some of the key factors to consider.
Initial Investment and Overhead
Property is expensive to buy, but there’s a big difference between residential and commercial property. Residential property is typically a lot less expensive to buy and build, while commercial properties require a bigger initial investment. Also, depending on how old the buildings are and what kind of buildings you buy, commercial properties often cost more to repair and maintain than residential buildings. For many, this isn’t a problem because of the high return on investment that commercial properties typically have. But if you don’t have enough capital to buy a commercial property, residential real estate might be a better place to start.
Property Management
Managing your properties will look a little different depending on if you choose to invest in residential or commercial real estate. If you have one or two single-family homes that you rent out to good tenants, you can save yourself some money by managing your properties yourself. With such a small amount of properties and tenants involved, it’s not too complicated to handle on your own if you want to. But commercial properties are a bit more complicated. Real Estate Asset Management is important because you want to take care of your buildings and avoid expensive repairs. There are plenty of asset management solutions and property management companies that can handle the day-to-day management of your properties for you. From dealing with tenants to getting repairs and maintenance done, a property manager can give you the peace of mind that your property is being taken care of.
Lease Length
Usually, tenants renting a residential property will sign a year-long lease. There’s no guarantee that they’ll stay for longer than that, and you could lose a few months of rental income looking for new tenants. Businesses leasing a commercial property usually sign much longer leases, oftentimes between 10 and 20 years. That means you have a stable income from your property during that time. The stability of commercial property rental income is one of the advantages of investing in this type of property.
Return on Investment
While commercial properties are more expensive, they also make more money. Over time, commercial investments have a higher return on investment than residential properties, making it worth the higher initial costs. Residential properties can also get a good return on investment, so don’t be disappointed if you’re circumstances don’t allow you to invest in a commercial property.
Deciding whether to invest in residential or commercial real estate is a tough choice. But you need to consider your financial situation and what you can afford before you dive into real estate investment. Residential real estate has a lower barrier to entry and doesn’t require as much overhead, but the return on investment is a bit lower. You’ll need more capital to buy commercial properties and manage them, but you’ll reap the rewards, namely a bigger return on investment and a more stable income. Consider the factors mentioned above, and be sure to seek financial advice before investing.
