Should beginner real estate investors go for a commercial or a residential real estate investment?
If you’re new to real estate investing and you still haven’t decided between a commercial and a residential real estate investment, this article will give you a better understanding of both investments and tell you why, in our opinion, a residential real estate investment is a better choice for beginner real estate investors.
We will break down the advantages and disadvantages of investing in residential real estate based on affordability, management, demand, profitability, and diversity.
What’s the Difference Between Commercial and Residential Real Estate Investment?
Before getting started, let’s briefly explain what we mean when we say commercial or residential real estate investment.
A commercial real estate investment refers to investing in a commercial property, such as an office building, a shopping mall, a storage house, or any other type of commercial real estate. Although there are some types of commercial real estate that are used as residential properties, commercial properties are generally and mostly used for business purposes, and they are rented out to companies and other similar business entities to utilize as office spaces or for any other aspect of their business.
A residential real estate investment refers to investing in a residential property, including both single-family homes and multi-family homes, which in turn include all types of residential properties such as condos, apartments and apartment buildings, townhomes, luxury houses, or any other type of property that is mainly used as a residence.
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Below are the 5 focal points that we will use to compare the two types of investments, and see whether each of these points has an advantage or a disadvantage for a residential real estate investment vs. a commercial real estate investment.
Residential Real Estate Investment – Affordability
First and foremost, the main reason why we choose residential real estate as the better choice for beginner real estate investors is affordability.
Generally, residential properties are significantly more affordable than commercial properties. This is because commercial real estate is usually more massive in scale (such as office buildings or shopping malls), and it requires a larger budget to develop and thus costs much more to purchase.
Residential properties, on the other hand, come in all shapes and sizes without having much effect on the performance of the property. A beginner real estate investor is not likely to have a large budget at their disposal for purchasing a commercial property, but they can easily find residential investment properties that can fit within their budget and that can still generate good profits.
So, when it comes to affordability, residential real estate is definitely the go-to option for beginner real estate investors who have a limited budget for investing.
Residential Real Estate Investment – Management and Maintenance
One of the perks of investing in commercial real estate for renting out is the triple net lease.
Signing a triple net lease with the tenant means that the tenant (a company or a business entity in this situation) will be responsible for all expenses related to the maintenance and management of the property.
In residential real estate, however, the landlord or the owner of the property will be responsible for managing the property (unless they opt-in for hiring a professional property manager) as well as paying the costs of maintaining the property.
While property maintenance costs are relatively low in residential real estate, they are still an expense that you need to account for during the planning phase of your investment.
This is not always the case, however, as the landlord of a residential property will also have the option to include the maintenance costs in the lease agreement and make the tenant responsible for part of the maintenance/repair costs.
However, when it comes to managing and maintaining the property, commercial real estate is generally the better option as the tenant will typically handle these aspects of the property.
Residential Real Estate Investment – Demand
When it comes to demand, both commercial and residential real estate properties can have a high demand and can always be occupied depending on the area that you’re investing in.
Residential real estate, however, has a slight advantage in that people need a place to live wherever you’re investing. If the area has population, or if people are moving into an area, then you’re almost guaranteed to find tenants who are looking for a place to live and who are willing to rent your property.
Commercial real estate, on the other hand, might not be a good investment in certain areas where there are no businesses or the growth of businesses is moving very slow. In urban and metro areas, however, commercial properties will always have a high demand as new companies and businesses will be looking for office spaces to rent, and high-end companies will be major attractors for new business tenants to move into the area and rent office spaces in it.
Residential Real Estate Investment – Profitability
Both commercial and residential real estate investments can be lucrative and profitable when done right.
Commercial real estate, however, has a higher potential for larger profits. This makes sense considering commercial properties usually cost much more than residential properties, which justifies the higher returns that they can have on your investment.
Additionally, businesses are typically more inclined to pay a higher rent for the property than individual tenants.
Residential real estate can also be a very profitable investment, and in many cases, a residential property can have a return on investment of +200% due to residential properties being more affordable while still benefitting from appreciation when the market grows or the area develops.
Generally speaking, commercial real estate is a more profitable investment, but a riskier one as well. Residential properties, on the other hand, although less profitable, have a much lower level of risk and are easier to profit from in the long run.
Residential Real Estate Investment – Diversity
Both commercial and residential real estate have several property types that any real estate investor can choose from.
Commercial properties include any type of property that is used for business purposes, such as office buildings and shopping malls.
However, depending on the type of property that you choose, the scale of the property and its costs can increase drastically from one type to another. Additionally, commercial properties are used for different purposes. If you decide to invest your money in a shopping mall, for example, you won’t be able to use the property as an office building afterwards.
Residential properties, on the other hand, are all used for the same purpose – a place to live. This allows for more creativity and for more options to be available to the investor when it comes to what they want to do with the property, its design, and the investment strategy that they want to use. Additionally, the same property can be used in many different ways in residential real estate.
While both commercial and residential real estate have several options to choose from, we recommend beginner real estate investors to consider residential real estate as it allows them to try out different strategies and approaches for profiting from their investment using the same property and without getting stuck with a single strategy that is deemed to fail.
Whether you choose to go for a commercial or a residential real estate investment, both options are lucrative opportunities and can be very profitable.
For a beginner real estate investor, however, we highly recommend starting out with a residential property and learning from your experience with it. The lower risk, higher affordability, and higher diversity of residential real estate investing makes it a better overall option for beginner real estate investors.
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