There are few differences between residential and commercial real estate. Let's discuss them:
Residential Versus Commercial Real Estate
Property investment requires you to make major decisions, such as the decision to invest in commercial or residential property. Both may have its pros and cons, but when asked with property experts, they say it all comes down to risk and return. We shall evaluate the risks and returns of both kinds of investments here. What is important when you evaluate both kinds of investments is that how risk averse you are.
What are the Risks Involved in both types of Property Investments?
Investing in residential property is generally easier for people since they know the ins and outs of residential properties and are more accustomed to buying homes, says Todd Tretsky. Investing in residential property is also low risk as compared to commercial property, and where there is low risk there is low return. In essence, your residential property will not stay vacant as compared to a commercial property; you can find a tenant as soon as one vacates the place. It will not be difficult. Whereas, vacancy rate in commercial property is high. It may be months before you are able to find a tenant, thus being high risk but also consequently giving high return.
Rental income from commercial property is largely dependent on the health of the economy. Since most tenants are businesses, if the economy is doing well, businesses do well in general. Although it gives a high return, investing in commercial property is costlier than investing in residential property and it is also more complex. If something goes wrong with your investment in commercial property, more money is at stake as compared to residential investment.
In terms of maintenance, Todd believes that commercial property may be hard to maintain and can affect your cash flow greatly. Renovating a large commercial property can cost much more as compared to doing the same renovations in a residential property. For example, it may require air conditioning, upgrading of security system and so on. However, where you can save on maintenance costs in residential property, it has other kinds of costs attached to it, like utility and maintenance. If these costs go up significantly and you are bound by a rental agreements, your costs will go up as you will have to bear these costs. With a commercial property, you do not have to worry about these costs.
What are the Returns associated with both kinds of Investment Options?
The main reason to invest in commercial property is due to the higher rental returns. A retail shop could give you a 6% yield, while an office property 7% and an industrial property could provide a yield of 8%. These returns are stated as a guide and could be much higher or lower depending on the state of the property, quality of the tenant and the area you decide to invest in. Nevertheless, commercial properties present a much better rental situation because a house could give you a 4% return while a unit may give a 5% return.
When it comes to investing in real estate, Todd believes you should evaluate your risk profile and conduct thorough market research to make the best decision of investing in either residential or commercial real estate.