Real estate is always a booming market and with the current market conditions, it is the safest and the most reliable form of investment. The real estate sector is majorly divided into two categories, residential real estate and commercial real estate.
Investing in residential is way different than commercial real estate investing and hence you must know the difference before you decide your next step. Both investments involve huge capital and potential risks.
Deciding between residential and commercial estate investing is not something you do overnight. You need to thoroughly weigh the pros and cons of each investment. The path you choose depends on your risk-taking ability, your goals and time you can dedicate.
What Is The Difference Between Commercial And Residential Real Estate?
Residential real estate is all single and family type buildings while commercial real estate is anything lent to run a business. Apartments, flats, duplexes all come under residential properties. Hotels, godowns, startups make up for commercial real estate.
Each property comes with a different set of opportunities and challenges. Commercial investments promise a good return on investment while residential investment has fewer complications, especially for beginners.
What is Residential Real Estate and What are its Benefits?
Residential real estate is restricted to personal use. The real estate agents represent the buyer or sellers of family homes.
Benefits of Investing in Residential Homes
Low Cost of Entry – Compared to commercial properties, residential real estate has a lower cost of entry and fewer complications. For a beginner who wants to get acquainted with real estate investing should try this option. Once you collect some money from residential properties you can move further to invest in commercial projects. Things you should consider before buying a commercial office space.
Decreased Tenant Turnover – With residential properties, tenants always look for long term contracts. Business often grew or shift to a new area making it difficult to keep up with them and hence commercial tenants are always volatile. This means more work has to be done often to find the right tenants. On the other hand, if you are able to find a tenant who plans to stay long term, you can sue that they will treat the property as their own.
Lenient Laws – It’s not only that residential law is lenient but also hassle-free as compared to commercial property laws. Residential laws are less complex and applicable only on a small scale.
What is Commercial Real Estate and What are its Benefits?
Commercial real estate deals with people trying to invest in properties to run their daily business operations.
Benefits of Investing in Commercial Properties
Higher ROI: With great risk comes greater ROI. Compared to the returns from residential investing, the commercial real has a great potential of giving you a higher ROI. Especially, if the property is situated at a prime location. Businesses are always looking for a prime location and are ready to pay any cost once they find it. Also, the amenities provided by a commercial complex is way less than residential requirements and hence less maintenance cost.
Qualified Tenants: It can be difficult for residential property owners to find tenants who would look at property as their own. With commercial real estate, the tenants are business owners and since they are backed by larger companies and should provide a great customer service, they tend to respect the property. This can make your life easier.
Triple Net Lease: A Triple net lease is a form of real estate lease agreement where the tenant is responsible for ongoing expenses of the property including taxes, maintenance cost, insurance, in addition to rent and utilities. World-class brands like Starbucks, McDonald’s, Walmart in order to maintain their brand image. The owner has to do nothing practically.
Commercial Vs. Residential Lones
Traditional residential loans are distributed by banks to the individual borrowers whereas, a commercial loan is lent to a business entity.
Commercial loans are riskier in the eyes of the lender. The burrower is supposed to submit a detailed business plan promising a return on investment. They will want to know who is going to repay the loan, the tenure and the additional maintenance cost.
The terms and conditions involved in residential and commercial loans differ vastly. Residential loans are usually spread for a long period of time, making the instalments far less daunting. Commercial loans have a shorter period and involve heavy restriction and penalties.
Commercial and Residential Electricity Rates
Even though residential and commercial real estate consume the same quality of energy from the same source, electricity tariffs are different for both properties. Since businesses and organizations consumer electricity heavily and always purchases it in the bulk, they are offered some tax benefits in the bills. This allows businesses to buy electricity at a cheaper rate.
Commercial Investing Vs. Residential Real Estate: Which is Better?
The answer to that question depends on the type of person you are. Other than financial obligation, these two investments differ in the way they are approached. As an investor, you should take time to think about the goals you are trying to achieve.
If you are low on capital and possess only limited knowledge about investing, you should go with residential real estate. If you are good with capital and want to earn a better ROI you should go with commercial properties. Ultimately, you should try to diversify your portfolio in order to avoid any losses during economic slowdowns.
Thinking about how much time you can devote is also an important factor when considering any form of real estate investment