Commercial vs Residential Real Estate: Where to Invest?
If you are to classify every decision you make in life, as to its significance, ‘investing in real estate’ is definitely under the can’t-go-wrong category. You see, investing in residential or commercial real estate is a complex process and such investments could require a large amount of money to put in, along with a lot of time and effort into finding the most suitable investment that will work for you. Many investors have found financial freedom and lifetime security in real estate investing. In this article we’re going to dive into both the residential and commercial so you can decide which one is the better investment for you.nn nnThe Differencenn nnYes, there is a difference. Real estate is not just one single thing. It differs in many variables, let’s discuss four (4) of them: purpose, kind or type of properties included, lease length, and vulnerability to the economy. nn n
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- Purpose – Investing in real estate works whether your needs fall under business or simply a roof above your head. Commercial real estate deals with the former, providing the tenant with a workspace for whatever money-making endeavors they have. Generally, it’s leased to and by those whose purpose is to generate income through their business operations. Contrary to that, residential real estate, as the name suggests, deals with the latter, having been marked and made for the sake of living, catering to those with plans of settling down and starting a life for themselves.
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- Properties included – You’ll find that the specific properties that both sides offer actually highlight their difference. If you’re gunning for a small retail space or the whole shopping complex itself, then that is commercial real estate. So long as its purpose is for providing services like health care facilities, or to act as a business. That makes residential the opposite of it – these are properties ranging from family homes that fit small or big families, villas and such. The properties included are single family homes or condominiums.
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- Lease length – As for the lease length, you can usually expect longer terms in commercial real estate as opposed to residential for the very reason that commercial tenants avoid the hassle of moving its business location from one place to another. Thus, commercial real estate has a lower risk of vacancy.
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- Vulnerability to the economy – When taking the economy into account, wherever and whenever, residential demand remains constant and stagnant, steady but with no real or increasing gain. Whereas, commercial real estate will always expect a shift in what the populace wants, various highs and lows that fluctuate based on the market.
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n nn nn nn nnThe Pros and Consnn n
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- Commercial
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n nnCommercial investment comes with a risk-reward system that has its ups and downs. For one, investing in multi-tenant commercial real estate guarantees that you make a profit even if one tenant leaves, and with the terms of commercial leases and their average duration, you can expect to have a higher return than that of residential estate. Although the right commercial real estate property is more difficult to find and, in most cases, tend to be larger than residential properties making them more costly in terms of investment, leases for commercial property tend to last longer than the average of residential giving you a more stable and sizable profit.nn nnTaking into consideration the possibility that your profits will depend on the flow of the economic market, it is entirely up to what investment strategies you have in handling the constant change of the market and the ‘costs-rewards’ of every risk you take. Investing in commercial properties is of course never spared from this truth. To equalize this, know that commercial real estate has the capability of having multiple tenants and has longer leases for each one. Adding the fact that space can be prepared for an upcoming tenant even before an existing one has left makes the risk of vacancy in commercial real estate really low.nn nnManaging a property with a large number of tenants is a lot of work. We suggest consider hiring a property manager. Their expertise in handling tenants and property concerns takes the pressure of you– the key is efficient management. Note that the value of your property lies in the value of your tenants, and with the right ones bringing in the right amount of revenue, its growth and potential are more than that of residential real estate.nn n
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- Residential
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nResidential real estate may be steady, but steady is also not without its limitations. The pros include the fact that even during periods where the economy becomes fidgety, residential investments remain constant and when the economy does manage to break the stability, the difference is insignificant. When times arrive where the situation calls for businesses to call it a day, a house will always be needed and there will be people willing to invest. The number of people who will need a house will always be larger than those who need to start up a shop and so this ultimately makes the number of buyers for residential larger and more consistent. This makes residential real estate a common investment. With common, however, also comes with the possibility of lower potential for growth. nnEveryone needs a house, and most people typically work and save to afford only small residential real estate, not necessarily seeking commercial real estate properties with larger intrinsic value to consequently generate bigger income to the investor. Although this makes residential properties an easier investment with the lower cost required, it can also mean higher competition to finding a property. Call to mind that people have subjective standards and your investment may at times end up below their bar. Residential real estate has a high risk of vacancy for the simple reason that prospective buyers or tenants have “wants” superseding their “needs” and may not find the property appealing or suitable enough.nn nn nnReal Estate Investing involves big decisions and may very well decide how far up in life you can reach. Risks will always be inevitable whether you choose to invest in Commercial or Residential Real Estate. However, risking does not necessarily mean failing because while you are able to equip yourself with sufficient knowledge on the market and with the full understanding of how the whole process works, and if we are to weigh the differences, the pros and the cons – you are sure to make the right decision.nn
nnEven after outlining all the information above, deciding whether to go for a 1031 Exchange or a Cash Refinancing can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your business and investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.nn nnNeed help on your 1031 Exchange? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!n
nn nnPhill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns. nn nnBookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCREnn nn
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