If you are a real estate investor, you’re looking at two types of properties that can bring in a good amount of money. Residential and commercial are two of the most common, in-demand types of real estate on the market. This guide will go over the pros and cons of each.
Teifke Real Estate will have all your answers regarding real estate for both residential and commercial. You can visit there website here: https://www.teifkerealestate.com/austin-property-management/. Now, let’s take a look at the pros and cons of both commercial and residential real estate.
Table of Contents
Commercial vs Residential Real Estate: The difference
Commercial real estate consists of tenants that operate as a business. It can be retail, tech, or any other industry. Residential real estate deals with people who want to live in a place they can call home.
Residential properties include your single family houses, apartments, condos, townhomes, and more. While they serve a necessary purpose, they each come with their own advantages and disadvantages.
Commercial real estate: The Pros
Higher return on investment
Commercial real estate will yield a higher return on investment. In other words, you can expect a business that occupies the building to pay a higher rate of rent. That’s not too bad if you are looking to earn a lot more money compared to residential.
Not only that, you can increase it a bit further by including other additions. This can include installing a car park or even metering water usage. It’s your property so you can upgrade it whenever you want to.
Multiple tenants
Depending on the size of the commercial real estate building, you can deal with multiple tenants. This means you can get more rental income for every tenant that occupies the available space. The rental rate can depend on the size per square foot.
A tenant that occupies a larger space will pay more rent compared to the other that’s in a smaller space. It’s similar to apartment buildings where someone in a one-bedroom apartment pays less than someone living in a two-bedroom apartment.
Longer lease periods
Commercial leases will be considerably longer compared to residential ones. On average, you can expect a commercial tenant to remain in the same place for three to five years on one lease. This can be a good thing for real estate investors looking to get a larger return on investment.
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Commercial real estate: The Cons
Property management is complex
One of the greatest challenges is property management for commercial spaces. That’s because there are unique requirements for every tenant. Not only that, the management includes regular maintenance, cleaning, and other services to keep the place in good condition.
Not only that, commercial real estate will mostly be in public places. So there are more visitors. The potential risk of damage (be it accidental, vandalism, or anything else) is high compared to a residential property.
Financing is a challenge
In terms of financing, it will be much more difficult due to several factors. For example, the loan for commercial buildings will have more stringent rules compared to home loans. This will also mean a higher barrier of entry as well such as a higher credit score.
The loans will also be higher in the monetary amount as well. This includes the interest rate. Plus, you’ll have a shorter amount of time to pay it off compared to residential mortgages.
The pressure is on when it comes to commercial real estate financing. If your business provides you with a positive return on investment each year, it can be manageable.
Residential real estate: The Pros
The demand is steady
People need a place to live. So it would be a good idea to consider fulfilling that steady, ongoing demand. Because of this, you might have a supply of properties at your disposal. This can include apartment buildings and single-family homes among others.
If anything, there is even better news for you if you are aiming for residential real estate. And we’ll cover that in our next pro.
Easily available properties
You can find plenty of properties available in your local area. However, you may need to do a bit of due diligence in an effort to snag that perfect one. You want to keep your tenants’ needs in mind.
Do they need to be close to a downtown area? Do they need to be in a low crime area? So many questions to ask here about the needs of your ideal tenant (assuming you know who they are).
The more due diligence that you do, the better intel you’ll gather to put together the perfect opportunity. If there seems to be more risk than reward with this potential property, say no and move on to the next one.
Easy to finance
You can easily acquire a loan for residential homes. Plus, they length of time to pay them off is six times longer than commercial ones (30 years compared to five years). They can also be easier to pay off when you start getting a larger return on investment.
Residential Real Estate: The Cons
Leases are shorter term
Most of the time, the longest a residential lease can go for is one year. Some of them are shorter than that. So this can mean you could have a tenant for as long as one year and they may leave for another place.
Fulfilling the vacancy may take awhile, so it’s important to be patient and find the right new tenant. Your property manager may also aid in this if you own multiple properties that have vacancies.
Final Thoughts
Commercial and residential properties are two great opportunities for investors. If you are new to the game, residential investing is always a great starting point. Commercial real estate investing has its challenges.
For that reason, it would be more reserved for the season vets. Especially when they understand the complexity and challenges that come with purchasing and maintaining commercial properties.
