Commercial versus residential real estate, is it a fair comparison? In Real estate Investing, you can invest exclusively in one type of property. And or have a mix of Residential and Commercial properties in your investment portfolio.
A key question that this article will answer is:
Commercial or Residential, Which One Is More Profitable For You?
Before making this decision, successful real estate investors see the importance of doing some research on both sectors to develop an understanding of the Differences between them.
So let’s first answer another key question:
What Are The Differences Between Residential and Commercial Properties?
1: We will start by stating the obvious. People live in residential properties and commercial properties are business premises.
2: Residential tenants are usually in plentiful supply regardless of the economic conditions that exist at the time. The viability of commercial investment is far more likely to depend on the prevailing economic conditions.
3: Commercial properties tend to be more lucrative, in the long term, than residential properties. This is because of steady returns and better cash flow.
4: It is easier to sell houses than commercial lots.
5: Unlike residential, tenants in commercial properties usually pay their own expenses such as repairs and maintenance.
6: In the commercial sphere, the lease period is usually longer than in residential.
7: Unlike residential, leases are very important in commercial property rental. These documents determine the price, value, and most importantly the rents of commercial property.
8: Most banks are willing to loan more for the housing market than for the commercial market.
9: With commercial properties you can add clauses and conditions when necessary.
10: In the commercial sphere, unlike residential buyers and sellers, the representative that you are dealing with may not be the decision maker.
11: Tenants of commercial buildings have a greater number of responsibilities than residential tenants.
12: Residential property can take up more management time and money than commercial property.
Now that we’ve looked at some key differences between residential and commercial properties; let’s take a look at the question posed at the outset:
Commercial or Residential, Which One Is More Profitable For You?
Or put another way:
Is Commercial Property Worth More Than Residential?
Commercial properties can lead to far higher dividends than residential properties that are rented out or sold. On the flip side, commercial properties are far more expensive to purchase than residential properties. And also cost more to maintain.
It’s important to understand the full list of Pro’s and Con’s of investing in commercial properties. It’s important so that you can be empowered to make the investment decision that’s going to be right for you.
What Are The Pro’s & Con’s of Investing in Commercial Properties?
Pro’s:
Higher Rents.
Owners of commercial properties command higher rents from their tenants than landlords of residential properties.
Public Eye.
The fact that the property is in the public eye motivates you, the owner, to maintain and improve the quality of the property. Thereby increasing the value of, and likely the ultimate return on your investment.
Better Maintenance.
Your tenant will want to take care of the place because they are running a business. Why? Because the appearance of their place of business affects their bottom line.
Limited Hours of Operation.
Businesses usually go home at night. In other words, the theory is, you work when they work.
More Objective Price Evaluations.
It’s often easier to evaluate the property prices of commercial properties. Because you can request the current owner’s income statement and determine what the resale price should be based on those figures.
Triple Net Leases.
You as the property owner do not have to pay any expenses on the property.
Stronger Contracts.
With commercial properties, you’re dealing with 30 to 40 page contracts that clearly define everybody’s responsibilities and rights. This makes sure you are protected legally and prevents time consuming misunderstandings.
Now let’s take a look at some of the negatives.
Con’s:
Time Commitment.
Your tenants are worried about the impact of the appearance of the property on their business, so you have to manage more. As we saw earlier this could be considered a pro depending on your perspective.
Professional Help Required.
The likelihood is you will need to hire someone to help with emergencies and repairs due to the more large scale nature of some types of work.
Bigger Initial Investment.
Acquiring a commercial property typically requires more capital up front than acquiring a residential rental in the same area. Unless we are talking about multi-family dwellings of course.
More Risks
There are more public visitors and having more people on the property each day increases the risk of damage to your property. And we all know, high traffic equals much higher wear and tear.
Economically Vulnerable.
Commercial properties are more vulnerable to the vagaries of the economy.
Zoning.
Commercial properties are more strictly zoned and regulated than residential properties.
Now that you have considered the key differences between residential and commercial properties. We also looked at some key pro’s and con’s of investing in commercial properties. What is your preference?
When it comes to the question of which type of property is a better investment you may well conclude that there is no right or wrong answer.
Rather, it’s just a question of which investment is right for you.
Once you have a good understanding of both types of property, whether commercial or residential and invest wisely in accord with that knowledge, both can represent a good investment opportunity.
So which type of property is right for you? Only you can determine that.
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