What are the Differences Between Commercial and Residential Real Estate?

When it comes to real estate, commercial and residential the two areas of investment have more differences than commonalities. 

While residential housing is in high demand and comes at a lower cost, commercial real estate is easier to manage over time and yields a larger rental income. 

What is commercial real estate?

Commercial real estate properties are places of business – whether that is a place of work or a residence leased to tenants. 

The four main categories in commercial real estate are industrial, office, multi-family, and retail. 

If we dig a little deeper, you’ll also see hospitality properties, warehouses, undeveloped land, mixed-use developments, and more. 

What is residential real estate? 

At its most basic, a residential real estate property is one where people live. The property is either owned by renters or residents. 

Residential properties include single-family homes, as well as small multifamily properties of four units or less. Once a property surpasses four units, it is designated commercial. 

Buying Commercial Property is Complex and Takes Time

First and foremost, residential real estate is not incredibly complicated. You’ll need a real estate agent in most cases, but you can easily figure out how to navigate the system on your own.

Whereas, aligning yourself with a brokerage firm is almost always the best move if you want to invest in commercial property. In addition, it’s important to work on educating yourself about the system.

With a smaller supply and pool of buyers, the process of finding the right commercial property takes longer to buy and longer to sell. It takes an average of at least one year to find the right property for investment. 

Residential property is in high supply. According to the U.S. Census Bureau, there are over 2.3 million housing units in the state of Alabama alone.  

Properties can be found in virtually any town or community where people live and work because people need places to live. The demand is always there. 

Commercial Real Estate Costs More Initially, But Yields More Over Time

Commercial property comes at a higher price tag than residential. It’ll have a higher price tag, will take more money to manage over time, and typically incurs higher property taxes. That being said, it yields more over time.  

Tenants in a commercial property are often businesses that can provide a host of records to prove their ability to pay their rent. In addition, the lease terms are much longer – averaging at about 5 years – with less governing regulation on terminations. 

Residential property, while easier to finance with a loan, will yield less income over time. You won’t be leasing to a business, so there are many governing limitations on rent increase, eviction, and many other potential issues. 

However, the shorter leases in residential areas are a benefit. Owners can make adjustments annually in response to demand or market changes. 

It makes residential a bit more consistent over time, whereas areas of commerce are not so resilient in a recession.

Managing a Commercial Property Won’t Take Up Your Time

There may be a higher demand and consistent pool of potential tenants in residential, but commercial properties are typically easier to manage over time. 

A typical lease for a commercial property will be about 5 years. It may seem like a con, but those clients are most often businesses – they will generally be more trustworthy when it comes to consistently paying rent. 

Termination rules and regulations are pretty sparse in commercial property, so even if you take on a bad tenant, it’s easier to evict. 

Over time, management is more costly in a commercial space. More often than not, there will be a management company doing the heavy lifting for the investor.

When it comes to residential, the owner is typically far more involved in property management. 

They may both be real estate, but there are distinct differences between investing in commercial vs. residential property. 

Commercial real estate is more complex with a little more risk, it’s generally a solid investment over time and with a higher gross rental income. 

It’s important to align yourself with a brokerage firm. A professional commercial real estate broker will not only guide you through the process but their network and acumen will also mitigate a lot of the risks.

If you’re ready to start the process of investing in commercial real estate, Ironvest is here to help. 

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