Residential vs. Commercial Real Estate Investment
Investing in any real estate venture is a significant financial commitment, and one that should be considered carefully before making a final decision to move forward. And while choosing which type of real estate is the best move for your or your company can be somewhat daunting, there’s plenty of opportunity for positive return on investment and financial gain. Keep reading for some key points to be aware of if you’re considering investing in commercial or residential real estate.
Residential Real Estate
Pros of Investing
This can be said for both sides, but real estate is an investment that appreciates over time, meaning you can end up selling it for more than you bought it for—if you decide to do so. Residential properties are often relatively stable if the market is down—everyone needs a place to live, after all—due to there being a larger pool of potential buyers at any given time. Residential leases are often more straightforward, and you can easily negotiate terms with potential renters.
Residential real estate is a good option if you’re looking to invest in real estate and are more risk-averse. It can generate a steady income option for you through renters, and it also provides the opportunity for numerous tax deductions.
Cons of Investing
Investing in residential real estate means you take on the role of landlord, and you have to deal with any repairs or maintenance issues your tenants may require—and these can happen at all hours. There is also no guarantee you will end up with good tenants, despite your best efforts, and this can lead to a headache when they leave the property, and you’re looking to sell or attract new renters.
Real estate is not a liquid investment, meaning you can’t quickly turn it into cash, and it may not be a fast sell if you find yourself in a position where you need to do so quickly. You will also face higher monthly expenses when you invest in a second residential property, but the hope is always that the rent generated from tenants will cover this.
Commercial Real Estate
Pros of investing
Commercial real estate refers to properties like retail centres, office buildings, warehouses, and mixed-use facilities. The upside of investing in this type of real estate is certainly the income potential, which tends to be higher than residential real estate—commercial properties generate an annual return price between six and 12 percent, depending on the area in which they’re located.
Investing in commercial real estate also means you’re able to build strong professional relationships with the tenants of the building, and these tenants are often very conscientious of maintaining the aesthetic appearance of their space to uphold the appearance of their business. Commercial properties also come with longer leases—though they can be more complicated—so you won’t have to look for new tenants as often as you would with a residential property.
Commercial real estate can also mean more objective price evaluations. You can determine the rental price based income statements—keep in mind there is a market cap—which you can’t do with the residential real estate. As the property owner, you are also often exempt from expenses on the property—such as property taxes, for example, which are handled by the tenant.
Cons of Investing
If you own a building that has several tenants, there can be a significant time commitment involved in managing them if you want a good return on your investment. There is also a larger initial investment required than there is for residential real estate, and repairs are often much more costly.
Commercial real estate properties also harbour risks. There is more foot traffic coming in and out of the property each day, which means there’s often more opportunity for damage to occur. Patrons can also slip or get hurt in parking lots.
Whichever type of real estate you decide to invest in, do so based on what is going to be the most manageable in your current financial situation and what offers you the best return on your investment.