Commercial real estate and residential real estate are two major kinds of real estate investments.
Similar to most investments, they both have their characteristics, benefits and challenges.
Residential real estate is focused on providing living spaces for individuals. Where as, commercial real estate is mainly for business use.
Both investments differ in certain areas, however, they can be similar also. This article will help you compare and contrast betweeen both investments.
What is Commercial Real Estate?
Commercial real estate is a term used in real estate to describe properties that are used for business purposes. Properties, such as; retail spaces, office buildings, warehouses and industrial sites.
Properties that fall into this category can be used for a number of business operations. For instance, commercial real estate buildings can serve as space for manufacturing, distribution and storage.
These properties can be owned or leased by any business. They can also be used for most business operations.
How are the value of commercial real estate properties determined? There are a number of factors here. Factors, such as, location, size, zoned usage, accessibility, property condition and the economy of the region.
Furthermore, commercial real estate properties generate money for the owner through leases or sales. Depending on the owner’s intention for the property; these properties can generate long term incomes or a one-time big payout.
Moreover, here are some common types of commercial properties: office spaces, retail spaces, warehouses, hospitals, etc.
What is Residential Real Estate?
On the other hand residential real estate is a term used when referring to properties owned by individuals or families. These kinds of properties are often referred to as private properties.
Properties, such as, single family homes, townhouses, apartments and other structures where people can live are regarded as residential real estate. Residential real estate is a big part of the real estate business in most regions. This is the route that most real estate moguls take.
Similarly to commercial real estate, the value of residential real estate is also determined by factors like location and size. However, residential real estate value can also fluctuate based on the market conditions and some other factors.
Residential real estate is very important, especially to the economy. In countries like the US where real estate has become one of the fastest growing industries; residential real estate is most important because it’s a means to provide homes and opportunities for people.
It is important to note that the residential real estate market in the US alone, is worth trillions of dollars.
Moving forward, residential real estate properties are properties, such as, single family homes, townhomes, condominiums, cooperatives, duplexes, triplexes and mobile homes.
Pros and Cons of Investing in Commercial Real Estate
Pros
- The potential to earn higher because of the high rental yields.
- Leases are usually longer; that means, long-term/ stable income.
- High potential for property appreciation.
- Net lease can be arranged so the tax insurance and utility bills can be the duty of the tenant.
Cons
- Higher investment cost upfront.
- Property management is more difficult; depending on the size of the space.
Pros and Cons of Residential Real estate Investing
Pros
- Requires lesser investment upfront. Therefore, affordable for most investors.
- Generates long-term income through rents and the property appreciates over time.
- Easier to manage
Cons
- Smaller rental yields. Definitely smaller than commercial real estate.
- Tenants can be difficult to deal with.
- Vacancy risks.
Comparing Commercial vs Residential Real Estate Risks and Rewards
| Factor | Commercial Real Estate | Residential Real Estate |
| Average Returns | Higher rental income due to long-term leases. Properties in commercial real estate often have the tendency to appreciate. | Lower rental income. However, the income is steady due to shorter leases. Property consistently appreciates. |
| Initial Investment | First investments are often too high due to size and location of properties. | The initial investment is lower; which means, most investors are able to partake. |
| Operational Costs | Maintenance, property management and operational costs are higher. | Compared to commercial real estate, the properties are easier to manage and operational costs is low. |
| Market Sensitivity | Market is more volatile to economic conditions. Demands are also often unstable. | It is less sensitive and has a stable demand. |
| Tenant Turnover | Lower tenant turnover due to the longer lease agreements. | Higher tenant turnover with shorter lease terms. |
| Risk Profile | Higher risk, however, has potential for huge returns. | Risk is lower. Also offers stable and consistent income. |
| Accessibility for New Investors | Properties are less accessible due to the capital and management requirements. | Properties are more accessible and requires lower capital. Also, management is easier. |
| Lease Structure | Net lease is most common; single, double and triple. This kind of lease transfers expenses to the tenants. | Gross leases are more common. Therefore, the landlord covers most of the expenses. |
Classification of Commercial and Residential Real Estate
Commercial Real Estate:
- Office Space:
Office buildings or office spaces are leased or rented by firms who need space for their workforce. They are usually leased for long-term because management doesn’t move their workforce frequently.
- Retail Space:
Retail spaces are commonly used for a variety of commercial purposes. For instance, neighborhood stores, large malls and entertainment places. Furthermore, retail spaces are more expensive than office space due to location. Similarly to office space leases, retail leases are long-term.
- Industrial Real Estate:
Industrial real estate are often spaces for warehouses, manufacturing spaces, distribution centers. Etc. They are usually located in areas outside urban or residential areas.
Residential Real Estate:
- Single Family Homes
A single family home is a structure usually on its own. This structure is designed to accommodate one family.
- Townhouses
A townhouse is a multilevel structure, usually attached to one or more other townhouses.
- Condominiums
A condominium or a condo is a unit in a larger building. Condos are commonly owned by individuals; however, the common areas are utilized by every resident.
- Apartments
An apartment is a unit in a larger building that is rented out to individuals called tenants.
