Commercial and residential real estate investments both have benefits and challenges which is why making a decision between investing in commercial or residential real estate is not a decision that can be made all of a sudden. Therefore, an investor needs to choose based on his goals and risks.
This article reviews both commercial and residential real estate investments so as to help you make your final choice before investing.
Before we delve right into their benefits let’s talk about what differentiates commercial and residential real estate.
Residential real estate investments are basically when you invest in properties typically rented by families or individuals who want to live in them. This includes Flats and apartments, Penthouse, Mansions, Bungalows and so on.
Commercial real estate investments include investments in properties that are rented by business owners, company’s managers and startups. These commercial properties are solely rented for business purposes and not for one to live in. Examples include shops, workspaces, malls and companies.
Benefits of Commercial Real Estate
Rental Yields: The rental yields derived from the commercial investment is probably higher as compared to residential investments. This is why more people are moving to commercial investments unlike before. The commercial market interest rate is a lot more than what you would earn from house rent.
Longer Lease Period: The lease term is generally for longer periods in the case of commercial investments, whereas in residential it depends upon the tenant. Commercial properties can be leased out from 5 to 10 years. This is good for investors as it means lower turnover costs and vacancy rates. There is no need to market the property year to year as the long lease terms signal reliable cash flow.
No furnishing or staging required: Commercial properties do not need extra investments, unlike the residential properties which would need some form of interior designing so as to attract tenants to take up the home. Commercial properties require little or no work to attract business owners. There is no need to furnish the offices because the people who would lease them would still stock it upon their wish depending on their business model. Residential properties on the other hand require you to actually furnish up the house with good amenities for the tenants.
Easier to Increase in Value: Investors who invest in commercial properties can increase its value faster than those who choose to invest in residential properties. This is because residential real estate is largely influenced by comparing properties to know how much a property is meant to generate. However, revenue from commercial properties determines how much is charged, tenants. This means with the right tenants earning well in their shops or offices, the investor can charge as much as possible for the property.
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Benefits of Residential Real Estate
They are rented out faster: One major benefit about investing in residential real estate is that the properties lease faster than commercial properties. It is easier to get tenants for residential properties because people would always need a roof over their head but not everyone needs to rent an office or shop as people work under other people.
A typical commercial property may be vacant for as long as a year or more before it is leased but residential on the other hand is more likely to be vacant for less time.
Decreased Tenant Turnover: For residential real estate investors, especially if their focus is on single-family homes, tenant turnover is not something dealt with often. Commercial properties, on the other hand, businesses change, grow and some even close down so it may be hard keeping tenants for long. As a residential real estate investor, if you market and screen tenants correctly you can find individuals who are committed to be long term renters. These long term renters would also help you as they would treat the home as their own.
Hardly affected by Economic Crisis: An economic crisis would affect commercial investors more because businesses are always the first to experience costs of economic downturn. Although residential properties are not immune to challenges that come with an economic crisis, they are however at an advantage as housing is always in demand with or without an economic crisis.
In summary, choosing between a commercial and residential real estate investment property is no easy feat to tackle, this is because both come with their own set of benefits and challenges. Therefore it is important that you understand what they both entail so as to enable you to make your firm decision.
