Commercial vs. Residential Real Estate
Investing in real estate is a great way to begin diversifying your portfolio, but for those unfamiliar with the industry, it can be hard to decipher which properties are best to invest in, and, frankly, quite overwhelming. Before making a decision, it’s important to first take a step back and understand the two overarching terms in the real estate space: commercial and residential.
Commercial real estate encompasses retail, office, flex and industrial space, and is used exclusively for business or work purposes. These properties come in a variety of forms, ranging from apartments, warehouses, self-storage, office buildings, shopping centers, etc. Most of these buildings are owned by investors who lease the space out to businesses, typically for a long period of time.
On the other hand, residential real estate is any property that’s been developed for living. Though this mainly consists of single family homes, it may also include townhomes, condos, duplexes, etc. Depending on local laws, certain residential properties can be leased out as short term or long term rental properties (like AirBnBs for example).
While these property types differ in use and occupancy, there are some financial differences to keep in mind, as well. Some top factors include:
- Return on Investment
- Lease Types (like Triple Net Leases)
- Value in Property Over Time
- And Lease Terms
Typically, in a commercial investment, investors will stay in the property as a limited partner for a long time span, bringing in an increased rate of return on the investment and the ability to secure longer lease terms from tenants. This type of investment helps diversify risk in your portfolio and remains steady over the time span selected (typically 5-10 years). Commercial real estate also tends to increase in value over the investment life with things like tenant improvements and rising rent prices.
For the normal single family home, investors are expecting less risk, shorter lease terms, and the ability to get their cash out fast, if needed, by selling the property at a short term gain. These investments are great for beginning investors or the general public and do not require much capital up front, as there are more financing options available.
Which is a better investment vehicle?
While both commercial and residential can offer excellent investment opportunities, they’re two completely different worlds, and they come with their own set of pros and cons. It really comes down to your personal investment strategy and what you’re looking for. If you’re interested in a long term investment with higher returns, you may find commercial real estate aligns well with your goals.
If you’re interested in learning more about the commercial real estate space, or simply have any questions about the industry in general, we’d love to connect with you.
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