August 31, 2023

Commercial versus Residential Real Estate: What Is the Difference?

Diving into the world of real estate investment can be a thrilling experience – but it’s important to approach your new venture with reliable information and accurate data. Understanding the difference between commercial and residential real estate will allow you to make the best decisions for your portfolio and develop an investment strategy that yields the results you crave.

Commercial vs. Residential Real Estate

When it comes to real estate investment, there are two distinct sectors: commercial and residential real estate. Commercial real estate is a niche sector of the market that focuses on larger properties that consist of five or more units. Generally speaking, commercial real estate properties are not residential properties, with the only exception being multi-unit developments like townhomes and apartment complexes.

The residential real estate market focuses on properties that are intended as single-family homes. The residential real estate market can be more volatile, however, it is often easier to tap into this market due to the relatively low start-up costs.

Advantages of Commercial Real Estate Investments

The commercial real estate market is distinctly different from the residential real estate market, which is known for being tumultuous. Some of the advantages of focusing on commercial real estate investments include:

High Returns

Investors who are looking for a high yield often set their sights on the commercial real estate market. While these properties have a higher listing price, they also are typically large buildings or complexes that can house multiple tenants. This allows you to maximize the amount of income that you generate on an individual property, giving you much higher returns than you would get on a residential property.

Long Lease Terms Make These Investments More Stable

Commercial properties are occupied by businesses, organizations, and corporations, many of which are looking for a space to call their own for many years. This allows you to craft leases with long terms, some of which can last for multiple years before they need to be renegotiated. By offering leases that last for between five and 10 years, you will not only secure a stable tenant but will also reduce your marketing costs, given the low turnover rates for your property. When you secure a long-term tenant for your commercial property, you can feel confident in your investment knowing that you will have stability in the months and years ahead.

Triple Net Leases Allow You to Minimize Responsibility While Maximizing Profit

A triple net lease is a unique lease option that is available to commercial property investors. With a triple net lease, the tenant is not only responsible for paying the rent on the space they are occupying, but they also are responsible for all building expenses and property maintenance. Essentially, all of the responsibility and cost of the building falls on the tenant, which allows you to enjoy incredibly high returns on your real estate investment. Triple net leases are most common with large corporations, such as national chains, that want to maintain control over the appearance of their building.

Commercial Tenants are Easier to Vet

Finding a qualified commercial tenant is typically a little bit easier than securing a reliable residential tenant. This is because prospective commercial tenants are usually businesses and organizations that care deeply about the space that they occupy, and they have a vested interest in developing a successful, long-term relationship with their landlord. In addition, a lot of prospective commercial tenants are subsequently supported by a larger organization, which adds to the strength of their application. You can craft an application that allows you to vet your prospective tenants and select the organizations that are the best fit for your property as well as your investment portfolio.

Benefits of Residential Real Estate Investments

While the commercial real estate sector is known for its stability and strength, there are still some benefits to consider when it comes to residential real estate investments. Some of the advantages of investing in residential real estate include:

A Lower Initial Investment

Those who are new to real estate investing may find it easier to dip into the residential real estate market. You can often begin your venture by purchasing foreclosures for a very low price point and then fixing those homes up to sell them for a greater profit. As your investment portfolio grows, you can begin to purchase larger, more spacious homes that you can rent to prospective residential tenants for a higher price point. The residential real estate investment market allows you to start slow and build your portfolio over time.

Regulations and Zoning Laws are More Lenient

With commercial property, you are subject to strict zoning laws that dictate what your property can be used for. For example, an industrial building in a particular zone will only be able to be used by specific organizations or businesses that fit within those zoning laws. Residential real estate is always zoned for residential use, which gives you a lot more flexibility when it comes to maintaining your investment portfolio and securing a diverse range of tenants.

It Can be Easier to Secure Residential Tenants

The residential real estate market is much larger, which means that there are more prospective residential tenants available. This large pool of candidates makes it relatively easy to secure residential tenants for your single-family properties, however, you may struggle to find long-term, reliable tenants. In many cases, residential leases only last for six to 12 months, and many tenants are looking to relocate as quickly as possible. This can require you to have a more hands-on approach to managing and maintaining your residential real estate investments.

Residential vs. Commercial Real Estate Property Types

By exploring the different property types available in each sector of the real estate market, you can decide which is the best investment for your budget, your lifestyle, and your professional goals. A residential real estate investor will be focusing on properties where people will reside, such as:

• Single-family homes
• Condominiums

Generally speaking, residential real estate investors will invest in multiple properties in a given region, and will sometimes diversify their portfolio by adding different property types to the mix. Single-family homes are the most affordable investment, but they also can require the most significant time commitment, as you may be responsible for the maintenance of the property. Condominiums are a residential real estate investment opportunity that can reduce your responsibilities while allowing you to benefit from your investment returns.

A commercial real estate investor, however, has a lot more options to choose from. There are many types of commercial property types that you can focus on, or you can create a mix of investments across those property types. These are the most common types of commercial real estate investments:

• Industrial properties
• Retail developments
• Office space
• Medical buildings
• Hospitality properties

Financing Commercial vs. Residential Real Estate Purchases

Another major difference between commercial and residential real estate investments is the way that these properties are financed. While you will need to apply for a mortgage for both types of properties, there are differences in how these loans are distributed. Here’s what you need to know:

• Residential mortgages are typically issued to an individual person. You have a variety of loan options available, ranging from conventional mortgages to specialty loans, like FHA or VA loans.
• Commercial mortgages are generally issued to an organization or corporation, rather than an individual. These are high-risk loans, so you will usually be subject to higher interest rates and shorter terms than a conventional residential mortgage.

How to Find Commercial Tenants vs. Residential Tenants

Once you have purchased a real estate investment property, you will need to focus on securing the best tenant for your building. Your marketing strategy will be different based on whether you have commercial space or residential units available.

The best way to secure commercial tenants is to partner with a real estate brokerage that specializes in the commercial sector. These organizations have access to a vast network of connections in the industry, and they can quickly match an available property with a prospective tenant.

Residential real estate, on the other hand, may require a more direct marketing approach. You can often use digital media, such as social media or targeted ad campaigns, to generate buzz about your available properties.

Beginning Your Real Estate Investment Adventure

As you begin to create a real estate investment strategy for yourself, it’s important to find the support and resources you need. One of the best ways to begin a successful real estate investment venture is to partner with a full-service real estate firm that can represent you and advocate for you throughout the entire process. If you have decided to focus on commercial real estate, RakowGroup is the best firm for your needs. Contact us to find out how we can grow your commercial real estate investment portfolio smartly and strategically.