As is known to all, residential real estate is a building made for people to live in including houses, bungalows, flats, apartments and condominiums. It is solely for private, domestic or residential purposes. On the other hand, commercial real estate is a building intended to make a profit from capital gain or rent revenue instances, office buildings, restaurants, hotels, motels, shopping malls, factories or retail stores. In short, you live in residential property while working in commercial property. Listed below are several factors used to differentiate between residential and commercial real estate investment.
In general, investing in a commercial property is always expensive than investing in a residential property. In addition, banks require a larger down payment in commercial market. Thus, commercial property investment requires a larger initial capital layout. Commercial property which is being valued higher also tends to generate more taxes than residential property. Nevertheless, commercial investment yields better than residential investment. This is because it offers higher returns with less frequent tenant turnover as the commercial leases period is usually longer by having at least 3 years in length as opposed to residential leases period which is rarely longer than 1 year. Additionally, the commercial tenant is the one who responsible for all the repair and maintenance costs that might occur as they also hope for their business running smoothly. The residential tenant’s situation is different in that the landlord is responsible to repair anything that breaks in the house. So, it is not surprising that commercial property investments will have a higher yield.
A commercial lease agreement is more complex than residential lease agreement because it comprises many clauses that consider additional factors such as title and zoning issues, liens and hazardous materials which require careful attention. Therefore, a commercial property investor normally needs to seek help from external professional management. They need to rely on experts who have more knowledge and experience to look out for their best interest. These experts will also help the investor in negotiating a commercial lease with the seller.
Next, a commercial investment is more risky than residential investment because it can be affected by economic change. When economy slows down, a company is not able to sustain its business and will eventually go under and terminate their tenancy agreement. The property owner will need to find a new tenant to prevent himself from suffering a loss. However, it is so much harder to find a new tenant for commercial property as it is more specialized as compared to residential property. Moreover, you still will not get a tenant even if you cut your rent in half. It is totally different when you will easily get a tenant if you decrease your rent by 10 to 20 percent in a residential property because people are still searching for a place to live regardless of the economic condition. Thus, if your existing residential tenant leaves, there is always a new possible tenant approaching you.
To conclude, it is hard to determine which investment is better because both serve different purposes in different situations. A person has to evaluate their own financial situation and personal objectives as well as making a deep research before venturing into these investment opportunities.