Commercial Real Estate Vs Residential: Where To Invest?
Real estate is an excellent investment vehicle for passive income. You can get monthly income from rent, leases, or dividends from real estate investment portfolios.
You’ve got a ton of options to choose from. No matter your risk appetite, there’s an investment opportunity waiting for you. The question is which one to choose.
You can either go for residential or commercial investments. But as with all investments, research is needed to find the perfect fit. We’re here to help with that!
Examples of Commercial and Residential Real Estate
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Before choosing what to invest in, it’s best to know the distinct differences so you can find the real estate investment strategy that fits your investment style.
What is Commercial Real Estate?
If it’s a place of business—it’s commercial. Think of fast-food chains, office spaces, banks, or strip malls.
Here are other popular examples of commercial real estate:
- Industrial buildings
- Warehouses
- Retail stores
- Multifamily Units (Typically more than four units)
- Healthcare facilities
- Resorts
- Restaurants
What is Residential Real Estate?
If people are living in a property—that’s an example of residential real estate. It could either be occupied by the property owner or rented out to tenants.
Some of the popular examples include:
- Single-family Homes
- Cooperatives (co-ops)
- Mobile Homes
- Duplexes
- Triplexes
- Fourplexes
Even if a property is designed to be lived in, once it has more than four units, it can already be considered commercial real estate. Examples of these include:
- Hotels
- Student Housing
- Apartment Buildings
Condominiums on the other hand are an interesting case. They’re considered residential since condo owners typically live in the unit or rent them out.
They reside in a building or complex with other condo units. Owners pay a fee for the maintenance of the common spaces and other shared amenities.
But business owners can also lease out or buy a condo unit, making it commercial. They get the benefit of having consistent foot traffic from tenants and renters in a typically nice location.
Which is a Better Investment: Commercial Vs Residential Real Estate?
Now that we know the basic differences between commercial and residential real estate, let’s explore the pros and cons to help you decide which investment is for you.
Pros of Residential Real Estate Investments
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People need a place to live. That’s a demand that will never go out. But investing in residential real estate also has a lot more benefits including:
- Low Barrier To Entry: The cost of residential real estate is considerably less than commercial. You can even invest in residential real estate without being a landlord.
- Easier Financing: There are a lot of financing options to choose from for residential real estate. Firms typically ask between 20-25% of the purchase price as a down payment.
- Bigger Buyer and Seller Market: There are more people looking for a place to live compared to commercial real estate buyers.
- More Stable Market Crisis: In general, businesses catch the brunt of economic downfalls. Residential property won’t be immune to these but housing will always be a necessity despite the market.
- Options for Short and Long-term Tenants: You can set up Airbnb for short-term rentals or lease a property for the long term.
Cons of Residential Real Estate Investments
Learning how to invest in real estate for passive income through residential properties brings you one step closer to financial independence. But, it does have drawbacks you need to consider such as:
- Potentially Higher Vacancy Rates: Residential property has fewer units than commercial ones. If a tenant moves out, the tenant application process might be longer than expected.
- Landlord Responsibilities: Landlords will be responsible for a lot of things such as maintenance, rent collection, eviction, and more.
- Harder Eviction Process: Eviction can be a difficult process, especially when tenants start getting emotional. You want to have empathy but at the same time, keep your financials afloat. But there are housing and landlord-tenant laws to keep things fair.
- More Competition: Single-family rentals were the most popular real estate investments even during the COVID-19 pandemic. But as demand increased for housing, so did home prices and rent. This made it hard to find good rental properties to buy.
Pros of Commercial Real Estate Investments
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There are a lot of factors to consider with commercial real estate. For starters, you need to know the differences between Class A Vs Class B properties. But it can bring stability and consistent cash flow in the long term. It also gives the following benefits:
- Higher Returns: In general, commercial properties have more space. This could ultimately lead to more tenants and higher returns on your investment.
- Qualified Tenants: The best part is, tenants looking to lease commercial spaces are typically better quality than those in residential properties. You’d find businesses, corporations, or companies leasing your properties.
- Capital Appreciation: A commercial property’s value is based on the revenue it generates. If the property owner finds the right tenant that can bring in bigger cash flows, its value can appreciate much faster compared to residential properties.
Cons of Commercial Real Estate Investments
Commercial real estate is more susceptible to the ebbs and flows of the market. When the market is down, commercial properties tend to get hit first. You also need to consider:
- Having Higher Capital: Financing for commercial real estate can be more complicated, take more time to evaluate, and approve. Larger upfront capital is also needed.
- Bigger Competition: Larger companies such as Walmart or Target can dwarf smaller retail businesses. This can result in more empty commercial spaces.
- Finding Financing: Firms generally see commercial loans are riskier. A lot more factors come into play. Businesses need to present solid credit scores, projected cashflows, and more.
Key Takeaways
The real estate investment you choose ultimately depends on your risk appetite. Some investors start with residential properties and work their way up to commercial.
But before investing, consider the following:
- Residential real estate has a lower barrier to entry.
- Commercial real estate is harder to finance and can include complicated contracts.
- Property is commercial if people do business in it.
- Property is residential if people live in it. But if a property has more than four units, it can be considered commercial real estate.
- Commercial real estate can have higher returns, better quality tenants, and faster appreciation.
If you want to learn more about how you can invest in real estate affordably, look no further than Doorvest! Get started today and experience how Doorvest makes real estate investments easy.