Commercial vs. Residential Real Estate
Some real estate professionals have strong opinions on whether it’s best to invest in commercial or residential real estate. The truth is that your financial position and your goals will determine which investment is best for you. In the end, each strategy has its own pros and cons.
Your residential real estate investment could be a single-family home, condo, townhome, and anything up to a quadruplex. Commercial real estate is anything that has 5+ dwelling units, office buildings, retail space, hotels, etc. To decide which path is right for you, let’s look at some of the benefits of the two types of real estate investment.
Pros of Commercial Investment
While it may be tougher to get started due to higher costs, there are some great benefits of commercial real estate.
- Well-Qualified Tenants: In residential properties, you typically work with families or groups of people as tenants who may not treat the property as you would. In commercial real estate (aside from apartment buildings), your tenants are well-qualified businesses that likely won’t create as much wear and tear on the property.
- Lease Terms: In commercial real estate, five to ten-year leases are common, which means there is significantly less turnover than in residential leases. Additionally, triple net leases are often used, meaning the tenant handles all property expenses directly, significantly reducing the property owner’s maintenance costs.
- Appreciation: In residential real estate, the value of a home is heavily dependent on comparable homes in the area. For commercial properties, the building’s value is almost purely based on its cashflow potential and thus can appreciate very well over time without being affected by the surrounding structures.
- Return on Investment: The larger scale of commercial investment properties typically correlates to a greater return on investment. While it may require more cash to begin investing, the cash flows almost always beat residential properties.
Pros of Residential Investment
There are also many pros to residential real estate that may make it a better fit for some.
- Large Tenant Pool: As opposed to working primarily with businesses, residential real estate has a large pool of tenants and buyers. A larger tenant pool ensures that vacancy rates stay low and cash flow is consistent.
- Starting Cost: Residential real estate is often much more affordable than commercial properties. The lower starting cost makes it easier for investors to start in the industry.
- Recessions: Businesses are always quickly impacted by an economic downturn which inevitably affects their landlord. Companies may go out of business or look to cut down on costs, and suddenly commercial properties are hard to market. Residential real estate, however, typically stands strong, no matter the state of the economy, as people always need a place to live.
- Fewer Rules: Commercial real estate comes with many zoning laws, regulations, and paperwork. Because residential real estate doesn’t involve renting to businesses and is typically smaller scale, there are significantly fewer rules to follow.
What is Best for You?
If you are curious about what investing strategy might be best for you, it’s important to connect with a real estate professional to discuss your options. Please contact Steve Longenecker at WeBrokerCORealEstate or 720-600-9513 if you have questions about the commercial real estate market in Longmont, CO, and our neighboring communities.
