Investing in real estate can be super exciting, but there are a few major decisions you’ll have to make before getting started. One of these might be what kind of property to buy, residential vs commercial real estate. Both options can be rewarding, but there are some differences.
Financial Differences
There are specific financial differences that may help make your choice easier. The initial start-up cost to invest in commercial property can be a lot more than that in residential purchases. With the various programs and grants available to home buyers, you may not even need cash to close. Insurance and maintenance costs are also a lot more expensive with commercial properties.
When you buy a commercial property, you will probably end up contracting with a maintenance company that will keep the grounds. With residential properties, you will be able to do a lot of it yourself. If you’re renting, you may also require a deposit to cover any maintenance issues. Insurance is even lower with residential investments because there is lower risk.
ROI
It may be easier to buy into residential real estate, but commercial real estate yields higher ROI. Commercial properties lease to businesses who pay more to lease, and the leases are longer. Additionally, it would seem that business leasees are easier to qualify. Since commercial spaces are large and cost more, you will only attract those able to afford it.
Residential properties are usually easier to rent out, and so the ROI may come sooner than when renting a commercial space. People are always looking for homes and apartments. If you keep the property in good condition more than likely, finding tenants won’t be an issue.
Property value plays a role in ROI as well. With residential properties, this is mostly determined by the local market and comparable homes. The earning potential of the space determines commercial real estate value. Size, location, and accessibility, for example, will indicate the value of the property.
Reselling residential vs commercial real estate
When you purchase an asset you should keep in mind the ability to resell it at a later date. Selling residential vs. commercial property is also slightly different. Both require a strategy to attract the right buyers, but deciding when to sell is more involved with commercial real estate. If you have to sell your home, there are fewer considerations to decipher.
Selling a commercial asset is usually based on the potential for future returns. Depending on what is going on locally, this will play a significant role in resale. In an up incoming city that has plans to build and invest, you’ll probably hold on to the property. However, there is more to be lost in commercial investments if a city’s economy crashes. Residential properties are generally recession-proof. Timing is crucial for selling any asset, but the consequences are more severe for holding commercial properties too long.
Conclusion
Real estate is an excellent way to invest and build wealth. Both commercial and residential real estate can become lucrative ventures. Your decision may come down to where you are and what your business goals are. If you don’t have as much money to start, you may prefer to build cash flow with residential properties before jumping into commercial investments. If you already have homes you’re renting, maybe now is the time to sell and use that money as leverage to invest in commercial real estate. Either way, you can’t lose. Do your research and weigh the pros and cons to make the best decision for you.
