The Benefits of Investing In Commercial vs Residential Real Estate

There are important things to consider when investing in commercial vs residential real estate. Mortgage rates are low, and a lot of people are fed up with renting, and want to put their savings toward a long- term investment. But which type of real estate should you invest in: commercial or residential?

Commercial real estate is a sector of the economy that has been growing for decades and shows no signs of slowing down. With more than 2 million commercial properties in the United States, there are ample opportunities to invest in this lucrative market. Whether you're looking to make your first investment or add another property portfolio to your portfolio, commercial real estate might be worth considering. 

But it's not as simple as buying any old building or land; there are many different factors to consider when deciding what to buy, how much to pay, and what the best strategy is for maximizing profits.

On the other hand, residential real estate can be anything from single-family homes to multi-unit buildings and everything in between. These types of properties provide a plethora of benefits for buyers and sellers alike. For example, there are many tax advantages that come with purchasing your first home as well as selling your current one. 

So, when thinking about investing in commercial vs residential real estate, which is the better investment? Let's find out.

What is a Commercial Real Estate?

by Iain McKelvey

Commercial real estate is any type of property that can be bought and sold for the purpose of generating a profit. It encompasses all types of property, including office space, industrial parks, retail stores, hotels, and apartment buildings. Commercial properties can be owned by individuals or corporations who use them as investments to earn a return on their money.

The term "commercial" refers to the type of ownership and use; businesses are often called tenants or occupants. Commercial properties generate income for their owners through rental payments from tenants. Not only do these units provide income opportunities in the form of rent payments, but they also offer potential profit if you sell them at some point down the line.

Commercial real estate also includes investment entities such as REITs, which are companies that own and trade commercial properties with investors who want exposure to this asset class without owning any property themselves. They may offer potential benefits like lower volatility than stocks because their values depend less on fluctuations in economic activity.

As with all investments, commercial properties should be thoroughly researched before committing any money to the project. 

What is a Residential Real Estate?

by Iain McKelvey

Residential property is most commonly associated with single family homes. While Condominiums can have up to 4 units and still be classified as residential, the majority of residential property is single family homes.

There are many different types of residential properties, including houses, condos, and townhouses, which all offer different benefits depending on what they're being used for. Residences also vary greatly in terms of their size - some might be just one bedroom while others might be over three bedrooms with multiple living rooms and baths. 

Usually, there will only ever be one owner, but occasionally you'll find co-owners who share the responsibility for upkeep and maintenance duties between them. 

Many people believe that residential real estate is just a place to live, but the truth is that it can be much more than that. The word "residential" means "of or relating to the residence." Residential property has many different qualities and purposes, including being an investment as well as a primary living space.

Pros

Commercial Real Estate

  • Higher Returns

The Realty Times say the number one benefit to commercial real estate is profit. The average return for commercial real estate is 3.1% in the U.S., which is higher than other investment types like stocks and bonds. The average return on investment (ROI) has been close to 12%. This year, it's estimated that there will be $1 trillion in transactions. The reason for this is because of an increase in global trade, which means more people need space to sell their goods. Also, major corporations are downsizing and moving some of their employees from offices into warehouses or other types of buildings like retail stores. To understand the tax benefits of real estate, click here.

  • Qualified Tenants

Many people think that commercial tenants are not as good as residential tenants, but in reality, they are much better. Commercial leases can be for a shorter period of time and give the tenant more flexibility. This is especially important if your business has been struggling lately or you're looking to move out of town for an extended amount of time.

  • Easier to Increase Value

Commercial real estate is an investment that has the potential to increase in value over time. The best way to maximize your investment is by understanding what factors cause a building’s worth to rise or fall. Keep in mind that the value of commercial real estate is easier to increase, but it's more difficult to decrease. When you are thinking about buying a commercial property, make sure to do your homework and get the right experts involved in the process early on. 

Residential Real Estate

  • Cost of Entry

Real estate does have higher barriers to entry than investing in stocks or cryptocurrency. However, this is because real estate not only provides you with a place to live, but a tangible property to own. Many people think that residential properties are more expensive than commercial properties, however this is untrue. In fact, a recent study concluded that the median price per square foot for a residential property was $220 while it was $333 for commercial property.

  • More Lenient Zoning Laws

The zoning laws for residential properties are much more lenient than commercial property. The main reason for this is that the government does not want to limit the potential of a family home, so they give homeowners more leeway with what they can do on their property in order to accommodate any changes in circumstance. Residential zoning allows diverse uses such as businesses, churches, or schools if it is approved by city officials and has been designated as a planned mixed-use development district.

  • Performs Better in Economic Crisis

A recent study from the National Association of Realtors found that residential properties outperformed commercial properties during the recession. This is because people are more likely to spend money on their homes than they would on commercial property, which has been shown by data compiled over decades. People who own homes put their energy into making their house livable and appealing: this usually means higher quality materials and upgrades (including new appliances) as well as landscaping. These investments can be tracked with an ROI percentage of 100%+ for homeowners-a far better investment than any other type of real estate.

Cons

Commercial Real Estate

  • More Volatile During Economic Downturns

The commercial real estate market is a volatile one. It's not uncommon for the value of property to change drastically in just a few years, even if the economy has been doing well. As the economic downturns hit, they are felt more prominently in this sector than anywhere else, and it can be difficult to recover from them if you're unprepared. It won't happen all at once – But when economics go south, so do commercial real estate prices. What will happen is those who have invested in these properties will see their investments plummet as values drop and vacancies rise across industries that rely heavily on consumer spending (retail stores, entertainment venues).

  • Zoning Law Complications

Commercial real estate has a more strict zoning law than residential. Commercial properties are often zoned as commercial, industrial, or mixed-use. This is because commercial buildings have different functions and require certain areas for parking, loading zones, and other features that residential homes don't need to contend with. The U.S Department of Housing and Urban Development goes into detail about the differences between these three types of zoning in their Designing Cities blog post titled FAQs on Mixed-Use Zoning Areas (2015).

Residential Real Estate

  • Lower Profitability Potential

Residential property owners must deal with homeowners associations, insurance costs, and mortgage payments. Residential property owners are also required to pay for utilities such as electricity when they live on site. Commercial landlords have none of these issues because tenants typically deal with all of the maintenance themselves.  The fact that you can rent out a single space in your building hundreds or thousands of times means that commercial investment opportunities have significantly higher profitability potential than residential ones. 

  • Higher Vacancy Risk

The vacancy risk of residential real estate is higher than commercial property. This is due to the personal and sentimental attachment that people have with their homes which makes it difficult for them to leave if they do not need to or are unable to afford the cost of living in an area anymore.

Conclusion

There are many different investment opportunities available to people looking for a good return on their money. Investing in commercial vs residential real estate is a big commitment, and it takes planning and due diligence to find the right investment for you. The difference between these two types can be confusing, so it's important to understand what each has to offer before making your decision.

Whether it be residential or commercial, there are many benefits that owning property can bring. Commercial real estate and residential real estate are two different types of properties. The main difference between them is the type of income they generate. Residential property generates rental income, while commercial property generates a profit from sales (or leases).

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