Deciding between commercial vs. residential real estate investing is not a decision that can be made overnight. Each strategy offers its own set of benefits as well as its own set of challenges. An investor’s path will depend on their goals, risk tolerance, liquid capital, and time. Review the following benefits before making your final choice.
What Is The Difference Between A Residential And Commercial Property?
The technical difference between a residential and commercial property is as follows: Residential real estate is all single-family homes and one to four-unit rental residences. In contrast, commercial property is anything with five or more units. Condos, duplexes, and quadruplexes make up residential real estate, while office, retail, industrial, multifamily (of five units or more), hotel, and special purpose buildings are considered commercial real estate.
Another stark difference between commercial and residential properties is in the type of tenant each building attracts. Residential properties are typically leased to families and individuals, while commercial properties are leased to businesses.
Lastly, each property type comes with a different set of opportunities. Commercial real estate tends to award investors a much wider range of potential investment. For example, there are more commercial property investment funds than residential ones. On the other hand, residential real estate investing tends to give investors a more active role in the property.
Commercial vs. Residential Building Costs
The costs of commercial vs. residential real estate are usually widely different, even if the properties are similar in size. The cost differences include materials, compliance standards, overhead, labor, and equipment.
For commercial properties, the amount and quality of workers and the use of specialized equipment strictly for commercial construction can heavily increase costs compared to residential real estate. On top of that, there are usually many more people involved in a commercial project, and those people all need to be paid. Costs really start to add up from the project manager to the general contractor to all of the subcontractors underneath them needed to complete the project. Scheduling all of the different pieces of a commercial project can also be a challenge due to so many moving parts, and rescheduling often comes with a cost.
On the flip side, all of these costs usually end up resulting in a faster completion time than that of a residential project. Homeowners also tend to change their mind often during the construction process, resulting in delays and schedule changes. These changes aren’t as common in commercial projects as it is much more difficult and expensive to make changes on this larger scale. Residential real estate may have significantly high costs for overhead, labor, and equipment. However, building residential real estate rarely compares to the cost of commercial as it is on a much smaller scale.
Commercial Vs. Residential Real Estate Agents
There are many similarities between commercial and residential real estate agents. Still, it is important to understand the key differences to determine which path would be the right fit for you.
- Education & Training: Real estate agents will be required to complete training and education to obtain a real estate license regardless of whether they are involved in commercial or residential real estate. However, commercial real estate agents should have a college degree in either business or finance to better understand the financial concepts of the deals they will encounter and undergo more mentorship training before entering the field.
- Property Types: The clear distinction between these two types of real estate agents is the type of property they work with. Residential real estate agents only work with residential property, whereas commercial agents can encounter property used for multiple purposes. Therefore, commercial property agents must have the knowledge required to distinguish the proper processes and legalities of both residential and commercial property deals.
- Earnings: Commercial property tends to present a higher earning potential than residential real estate. Although it is easier to get a residential property off the market, commercial agents can make a higher commission from the properties they sell.
- Clients: Residential properties are easier to sell due to economic factors that can affect the commercial real estate market in different ways. Residential real estate agents have an easier time searching for tenants to occupy their properties, while commercial real estate clients are less abundant.
- Worklife: The work-life of a commercial real estate agent vs. residential agents vary in work schedules and responsibilities. Residential agents can expect to be available to work at unconventional work times, including evenings and weekends. On the other hand, commercial real estate agents typically stick to the 9 to 5 workday. However, commercial agents take on a heavier workload, which will involve researching and reporting on market and economic trends to ensure their more intricate deals.
Choosing Between Commercial And Residential Real Estate
Choosing between a commercial vs. residential investment property is no easy feat to tackle, especially because both come with their own set of benefits and drawbacks. Both will diversify your portfolio, both come with significant tax benefits, and both will bring you one step closer to achieving your financial freedom…So how is an investor to choose?
The answer to that question ultimately depends on what they want to gain by investing in real estate. Investors should take some time to think about their short and long-term goals. If they are looking to make a quick buck to start, rehabbing or wholesaling a residential property might be the way to go. On the other hand, if they are in it for the long haul and looking to achieve passive income, commercial properties offer attractive benefits.
Summary
Overall, there are numerous considerations to make when choosing between commercial vs. residential investments. If you want to earn the most returns, you might want to consider investing in commercial real estate. On the other hand, residential properties may be more appealing if you’re more comfortable working on a small scale. Thinking about how much time you’re willing to devote to your project and your risk tolerance can make it easier to decide where to invest your money. Keep your goals in mind as you decide and remember, there is nothing saying you can’t choose the other type down the line.
