What to Choose: Commercial or Residential Real Estate Investment?
For new real estate investors, a question will probably appear in their minds before investing. Which is the best investment: Commercial or Residential Real Estate?
Some investors would probably say that investing in residential real estate is the best for those new in this field. Because people investing in commercial properties are for experienced investors. But is this really the case? Before disclosing the answer to it, let us first differentiate the two: commercial vs. residential real estate.
The Commercial Real Estate
There is so much to say in investing commercial real estate, and you probably know some of them. Businesses are typically the tenants of commercial properties. But let us discuss further what's in commercial property before you invest:
Commercial real estate’s value increases without difficulty, hence producing higher returns. It's not a secret that the value of commercial properties in the market can increase smoothly. These properties attract many real estate investors because of its ability to produce more money. But how does its market value establish?
Determining its market value considers several factors. It includes the number of properties of the same size and state, and their potential income within the area. If the property's location is accessible to many establishments with many potential customers, it will likely entice more business tenants. Thus, it will be valued higher.
It has longer and flexible lease terms. When it comes to commercial property, the lease terms typically range between five to ten years. This period is a good deal for investors as it lowers the vacancy rates and the turnover costs.
It needs bigger initial investments. It’s a fact that commercial properties can give higher rewards to investors, but it also requires higher costs. When you invest in a commercial real estate, you will need a large amount in your pocket. Expect capital expenditures such as repairs for the roofing or other maintenance expenses in the property. It is important to provide the best facilities for customers to get higher returns in investment.
Commercial deals are more difficult to analyse. Managing commercial properties is similar to owning a small business. Investors need to have a full understanding of acquisition and valuation ratios in order to increase operating income. Maintaining transaction records is a must to obtain the appropriate analysis.
The Residential Real Estate
For residential real estate, it usually leases to families and individuals. The opportunities are different when it comes to investing in residential properties. If you choose this investment strategy, you'll find yourself meeting below circumstances:
Investing in residential real estate is easier to start and understand. Unlike commercial real estate, investing in this kind of property doesn't demand professional help. It’s easy to understand the flow of operation since it only revolves between the landlord and the tenant. Investors can also acquire residential properties smoothly than the commercial ones, especially when it comes to the funds. Residential real estate does not require investors to secure a large amount of initial investment.
Residential real estate has a larger buyer and renter pool. One of the best benefits of residential property investment is having a larger target market. Since residential real estate offers lease to families and individuals, it's easier to find potential tenants. Nowadays, several retail stores are not performing well, plus online retailers are in demand. Due to this, some of the commercial spaces are vacant. On the other hand, residential properties have a steady demand in the market regardless of economic downturns.
Investors will shoulder property expenses. Even if the residential real estate has lower initial cash outlay, it doesn't mean investors have no longer property expenditures. Landlords pay property taxes and other fees and licenses, aside from the maintenance and mortgage of the property. Unlike in commercial real estate, lessee pays the property taxes and other property expenses.
Both commercial and residential real estates have a different set of benefits and downsides for the investors. But identifying your goal will be helpful when you're deciding to invest in real estate.
If you want to earn passively, choose commercial. Otherwise, if you want to produce income immediately at the beginning, go for the residential. If you want to get most of the returns, you may want to consider commercial. But if you prefer working on a small scale, residential fits you better.
Whichever you choose to invest in, it's critical to keep your investment risk to a minimum. Study and understand well these properties so you can create a strategy that will suit you best. Until then, you can decide which among the two is right for you.