Among the most important choices you’ll make is selecting your first investment property. Investing in an appropriate asset can give you the money and expertise you need to keep making wise investments. Making an incorrect decision can turn into a costly mistake that could drain your funds for years to come. Here is a detailed breakdown on commercial property vs residential property which can help you make an informed decision while investing in a property.
What is a residential property?
A residential property is an area where homes are constructed to be inhabited. These properties are exclusively for personal use; they cannot be used for business or industrial endeavors. The following categories can be used to broadly categorize residential houses.
Stand-alone house: This kind of home is a free-standing residential unit, as the name would imply. A detached house, single-family home, and single-detached dwelling are other names for this.
Multi-family residential: Also referred to as multi-dwelling unit (MDU). Here, a single building will house several independent homes for residential purposes. This can be constructed on top of another unit or next to the other. Apartments, mixed-use structures, brownstones or row houses, bedsits, condominiums, flats, deck access, garage-apartment, warehouse versions, penthouses, terraced houses, triple-decker, etc. are typical examples.
Mobile homes: These are the kind of homes that are portable. The most typical instances are park homes, caravans, motor homes, trailer homes, RVs, and others.
What is a commercial property?
Non-residential uses of commercial properties include hotels, companies, offices, retail stores, public spaces, industries, etc. There will be businesses operating out of this property. The property can be rented out entirely or in part to tenants, or the owner can use it for his business purposes.
Types of commercial properties
Office buildings: This category includes skyscrapers in the downtown area, single-tenant buildings, and small, professional office buildings.
Retail buildings: These comprise grocers, restaurants, power centers, small shopping centers, and so forth.
Multi-family buildings: These comprise apartment complexes or high-rise buildings.
Land: This refers to undeveloped, underdeveloped, or raw land that will soon be put up for sale.
All other commercial buildings, such as those in hospitality, self-storage, medical, and many other industries, are categorized as miscellaneous.
Difference between commercial and residential property
Residential real estate consists of houses or apartments. These could be apartments, townhomes, studios, or single-family homes. The majority of individuals who purchase residential real estate but do not intend to occupy it do so to rent it out and make money. This establishes a very particular kind of relationship between the renters and the owner, or landlord. The relationship between commercial landlords and tenants is not the same as this one. This is because when it comes to residential property, the landlord has a greater influence on the tenants’ personal lives. After all, they reside there.
Conversely, commercial property includes any type of property that isn’t primarily used for residential purposes, such as hotels, retail establishments, offices, and warehouses. Owners of commercial real estate may operate out of those spaces, but investors in such assets typically lease them to other companies.
In order to save money for investments in their own businesses, many companies would prefer to rent rather than buy a space. This indicates that investing in commercial real estate is aided by the efforts of other companies. In other words, while residential tenants tend to be more reliable, successful businesses are simply better commercial tenants than unsuccessful ones.
Loans: When it comes to residential properties, the loan is given to the individual owner; however, when it comes to commercial properties, the loan is given to the business entity. A commercial property loan has extensive paperwork requirements, including who would clear the loan, the tenure, additional charges, and a cumbersome document verification procedure. Additionally, there are severe limitations and penalties included in the loan terms.
Electricity rates: Although the electricity used by both properties comes from the same source, the commercial and residential rates are different. For their operations, some businesses purchase electricity in bulk and receive tax breaks on their bills.
Purchase difficulties: Buying residential real estate is less complicated than buying commercial real estate. Before investing, the owner of the commercial enterprise needs to carry out a thorough investigation.
Returns profile: Generally speaking, commercial properties yield higher returns on investment. Most commercial properties are leased for longer than ten years, during which time the owner receives the majority of the rent. The ROI is approximately 4–10% for residential property and 6–12% for commercial property.
Risk profile: The owner of a commercial property receives a steady income over a longer lease term. However, the rental period is very brief for residential properties. Furthermore, the notice period is very short, so the tenor might depart quickly. However, since commercial properties have a longer notice period, that is not the case.
Maintenance: Keeping residential property in good condition costs very little. The building is occupied by tenants around the clock, and as a result of low usage and low repair costs, issues are unlikely to arise. However, due to the bulk size of the machinery, maintaining commercial properties is quite expensive. Occasionally, overseeing the property and its maintenance calls for the presence of an on-site manager.
Law: Tenants are given preference over owners under residential legislation. Therefore, it might not be easy to kick out the tenants. On the other hand, under contract law, the parties agree upon the terms of the lease or rent for commercial property.
Mixed commercial residential property
A property with different use classes for different floors or parts of the building is referred to as a mixed-use property. A property with a shop on the ground floor and apartments above are two examples of mixed-use properties. Another example would be a sizable new development that includes retail, office, and residential space. Generally speaking, a mixed-use property is divided into commercial workspaces (such as stores, gyms, and offices) and residential living spaces (like houses and apartments). It encompasses a wide range of properties and has a very broad definition.
The majority of mixed-use buildings are set up vertically, with some floors devoted to residential and others to commercial use. They can be arranged horizontally with residences and offices in larger developments.
Many residential tenants value being so close to the amenities found in mixed-use properties, like a shop or gym. These properties are highly sought-after by a diverse range of tenants. Additionally, living in a building with commercial space typically means that you are close to public transportation, which is something that residential tenants value highly. When a commercial tenant rents a mixed-use property, they are typically positioned in a high-traffic area or on the high street.
Nonetheless, mixed-use properties appeal to a lot of investors for tax reasons. When buying a mixed-use property, the buyer’s tax liability is typically lower than if they were just purchasing a residential property because they are paying stamp duty on the entire property as a commercial unit. Furthermore, properties with mixed uses have several revenue streams and frequently fetch higher capital values than those that are exclusively commercial.
If you are keen on investing in real estate but the technical aspects seem complicated to manage on your own, then you can rely on a trusted service for the management of the commercial property. They will take care of everything from property hunting to maintenance, rentals, and taxes.
Commercial property tax
A property owner who uses their property for business purposes must pay commercial property tax to local authorities, which includes the municipal corporation. It consists of everything that an individual owns and leases to third parties to operate a business, industrial enterprise, or industry.
Several tax benefits are also associated with investing in commercial real estate, including depreciation deductions that enable investors to lower their overall tax liability by offsetting a portion of their rental income. Although there are depreciation benefits associated with residential properties as well, these are frequently less significant because of the shorter useful lives of residential buildings.
Commercial vs. Residential real estate – What will you choose?
It all boils down to the one basic question that every prospective real estate investor should ask themselves: Is it commercial or residential? It might be worthwhile for you to invest in a commercial investment property if you have the required experience and available capital. Look for a premium commercial real estate property in a market that is in demand and expanding. Then, to protect yourself from risk, make sure you’re checking everything two and three times.
For now, the residential real estate market is probably a better fit if you’re looking to execute your first investment and have limited liquidity. Nobody asserts that you must always make residential investments! After gaining experience in an environment conducive to beginners, you can use your skills (and money) to invest in commercial space.
Author Bio:
Author Name: Liran Koren
I’m Liran Koren. I’m a real estate pro and co-founder of Luxury Property Care. I believe that through common work we can create a healthy ecosystem that serves investors, landlords and even tenants altogether.
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