Commercial properties and residential properties have different characteristics and aspects that make them very different real estate investment opportunities, and should thus be approached differently.
This blog aims to explore the similarities and differences between residential and commercial property investment, and will try to answer the real estate question of which one of them you should invest in.
But there is more to both types than just one being better than the other. As we will learn, both somehow rely on one another, and it is hard to invest in one without investing in the other.
What Is a Residential Property?
A residential property is a real estate property that is designed to host residents, such as a single-family home or a multi-family home of up to 4 housing units.
Investing in a residential property is usually easier than investing in a commercial property due to the size of the investment which is generally significantly smaller. Most residential property investments involve rental properties as the main strategy for generating an investment income. There are, however, other less popular strategies for investing in a residential property, such as fix-and-flip, which involves purchasing a residential property with the goal of selling it after fixing or renovating it, and where the profit is the margin between the purchase price and the selling price.
Additionally, a residential property is relatively easy to invest in due to loans and mortgages being more facilitated and more available, and due to the fact that residential properties are generally less expensive than commercial properties.
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What Is a Commercial Property?
A commercial property, a type of an income property or an investment property, is a real estate that is designed to serve the purpose of housing a large number of people, such as multi-family homes of 5+ housing units, or to serve as a business property, such as office buildings or shopping malls.
Commercial property investment isn’t considered an entry-level real estate investment, as it requires more financing than a residential property, and it is much harder to acquire a loan from a bank to invest in a commercial property than it is to invest in a residential property.
Additionally, a commercial property requires a higher level of knowledge and experience in the real estate market and business. In return, commercial property investment reaps bigger rewards when successful.
Most commercial property investments use long-term leasing in order to generate a rental income.
Advantages of Investing in a Residential Property
The advantages of investing in a residential property include:
- Entry-Level Investment: Residential properties are a good investment for people who are just starting out with their real estate investment business. They require less knowledge and experience in the real estate investing field, although having the knowledge and experience would pay off and increase your chances of success.
- Low Price: Residential properties usually have cheaper variations than commercial properties. This is due to the size of the , as residential properties are usually smaller in size and functions than a commercial property.
- Easier Financing: Residential property investment is easier to finance due to the real estate investor’s ability to use banks as loaners, whereas your chances of acquiring a bank loan for your commercial property investment are severely lowered.
- Larger Tenant Pool: One of the best aspects of residential property investment is the size of the tenant pool that would be available to you. There is almost nowhere in the US where you can invest in residential properties that won’t provide a large enough pool of tenants to keep your investment property occupied.
Advantages of Investing in a Commercial Property
The advantages of investing in a commercial property include:
- Higher Returns: Commercial property investment is known to yield higher profits than residential property investment. However, the risk associated with commercial properties is also higher than the risk of investing in a residential property.
- Experience Pays Off: Investing in a commercial property should not be done right from the get-go. Before starting your commercial property investment, you will need a large base of knowledge and experience in the real estate business, as commercial property investment involves a number of legal and financial processes that are more complicated than with residential property investment.
- Maintenance Costs: One of the advantages of investing in a commercial property is to not worry about maintenance and reparation costs. In most commercial property leases, the party leasing the place will be responsible for any reparation costs that may arise during its stay in the property.
Putting the Pieces Together
Investing in a commercial property is better than investing in a residential property, and should be your long-term investment goal in many cases. You have to keep in mind, though, that commercial property investment requires a good amount of real estate knowledge and experience; otherwise, you will be facing a high risk of failure. Since commercial properties are already associated with a higher risk on your investment, which is balanced out by a higher return if the investment is successful, you should occasionally test your knowledge in the real estate business in order to make sure that you are ready for commercial property investment before you risk it all in it.
On the other hand, residential property is where you will want to start your real estate investment venture, and it might even be where you want to end it. Residential properties might not yield the high profits that commercial properties do, but they can still be a very profitable investment, and they can help you finance other bigger investments such as commercial properties. Additionally, residential properties are an excellent learning opportunity as the risks associated with failure in residential property investment is less punishing and easier to learn from. Eventually, your strategy for investing in a commercial property should be built and based on your experience in investing in a residential property.
So, it’s not that one type of investment is better than the other, it’s just that one can lead to the other or that one relies on the experience you’ve acquired in the other.
Additionally, if you start your journey in residential property investment, you might find yourself falling in love with the process: from tending to the tenants, to managing all aspects of the rental property (unless you prefer to go with property management); residential property investing can still be a life-long investment that you can enjoy as well as profit from.
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There is no “better” type of investment property. Both residential and commercial properties can be profitable and can help you achieve financial freedom… when done right. Whichever investment strategy you end up with, always keep in mind that the real estate business has more things to be learned than you will ever do. You should always base your investment decisions on your knowledge and experience, and so you should use any learning opportunity to your advantage in order to make your next investment a successful one.
For more blogs and guides on all aspects of real estate investing, visit our website at Mashvisor. Especially if you’re going with residential property, make sure to give Mashvisor’s property finder a look, as it can help you find the perfect property for your investment, along with all the data and numbers that you need to develop the optimal investment strategy for your particular case.