Both residential and commercial real estate are profitable investments, but what sets each of them apart? And more importantly, what type of property should you invest in? Is it even possible to invest in both (spoiler alert: yes it’s possible if you partner with a property management firm)? In this article, we tackle their key benefits so you can decide which property aligns with your goals.
What is residential real estate?
Residential real estate comprises properties that are used for residential purposes. They are either rented out or owned, however, in the investment world, the former is what applies. When residential real estate is used as an investment, renters will pay rent, which the owner can use to cover costs such as the mortgage, property management fees, etc. Landlords can also gain from the property’s long-term growth, price-wise, as well.
What is commercial real estate?
Commercial real estate is a catch-all term that pertains to properties specifically for retail, office, and industrial purposes. It also covers certain residential property types, particularly multi-unit properties such as condominiums. The main characteristic of commercial real estate that sets it apart from residential real estate is that it’s geared toward income generation, either from rent or capital gains.
What are the benefits of residential real estate as an investment?
Below, we’ve broken down the benefits of buying residential real estate as an investment:
1. Low barrier to entry
In general, residential real estate is ideal for investors who don’t have the capital to purchase large-scale property types. Usually, new investors only have enough money saved for a single-family home. If you’re starting out as a real estate investor or don’t have a lot of cash on hand, it would be more doable to obtain a residential property as they’re considerably cheaper than commercial properties.
2. Wider tenant pool
Wherever your market may be, you’ll always be able to find residential renters. This isn’t to say it will be easy, but it will be easier than what a commercial real estate investor would have to go through. People will always need a place to live, meanwhile, more and more commercial enterprises are opting to work remotely. You’ll have a vast tenant pool from which to choose.
3. Reduced tenant turnover
As a residential real estate owner, you’ll find that retaining renters is easier. The reason for this is that residential tenants are more likely to be looking to rent for the long term – after all, who would want to constantly move? You can rent with confidence that tenants will continue to rent with you – as long as you don’t forgo tenant retention strategies, of course.
4. Flexibility of use
One of the main benefits of residential real estate is that you can choose to live there, rent it out, or both. This can be advantageous for you if your goal is to have a multi-purpose property. For example, if you’re merely looking for a way to make money on the side, you can turn your home into a short-term rental. In that way, you can still use it as your second home.
What are the benefits of commercial real estate as an investment?
Now that we’ve gone over the advantages of residential real estate, let’s take a look at its counterpart’s perks:
1. Longer rental periods
Commercial rental contracts tend to run anywhere between five to ten years, which means you’ll have to deal with fewer vacancies. However, it’s worth mentioning that longer leases mean you may be stuck with bad tenants. To make sure your tenants don’t become problematic, it’s crucial to partner with a commercial property management company (they’ll be the unbiased party) that can enforce your rules.
2. Higher return on investment
Over time, in terms of revenue and valuation, commercial real estate tends to do better than residential real estate. The more “doors” you can rent, the more income you can collect – and since commercial real estate tends to have significantly more doors, that also means significantly more money. While commercial real estate carries more risk, it certainly comes with more rewards.
3. Predictable profit
When you rent to residential tenants, you can only hope they’ll decide to renew their lease agreements. Commercial tenants, on the other hand, have stricter and set-in-stone contract terms. Since you have a good idea of the length of their stay, you will be able to predict how much you’ll earn yearly. Furthermore, you’ll be able to benefit from a more stable cash flow.
4. Rapid appreciation
In residential real estate, the value of a property can be estimated by observing the value of comparable properties. On the other hand, the value of commercial real estate is influenced by its revenue. Generally, the more revenue it generates (and can generate), the greater its value. Your commercial property will appreciate more rapidly, which means you can raise your rent or sell your property (while maximizing the ROI) sooner.
Should you invest in residential or commercial real estate?
To guide your choice, consider your short-term and long-term goals. If you want to make money fast, and if you don’t have the capital, residential real estate may be the best option. On the other hand, if you’re interested in long-term income generation and more income in general, commercial real estate may be more suitable for you. If you have already invested in residential property and want to convert it to commercial, learn how to convert residential property to commercial property.
Another option is to invest in residential real estate now and add commercial real estate to your portfolio later on. Get the hang of managing residential real estate first, and once the cash is flowing, you can use the funds generated to purchase a commercial property. You can always consider fractional ownership for commercial properties, anyway.
With Luxury Property Care, you can invest in both
Whichever you choose to invest in, it’s a must to partner with a company that can help with day-to-day management. At Luxury Property Care, we’re ready to provide our expertise in residential and commercial property management to make sure reap every reward that comes with your chosen investment. Or, you can even choose to invest in both if that floats your boat. Whatever your goals are, we’re here to give you our full support so you can see success.