Real estate is an ever-growing industry, and with current market conditions, it is the most reliable and safest form of investing. The real estate industry is divided into two major categories, including commercial and residential real estate.
Investing in residential properties is different compared to commercial. This means you should be careful and know key differences between the two before you go to the next step. These differences are based on the following:
The costs of commercial and residential developments are very different, even for properties of comparable size. Apart from the compliance standards and materials, these cost differences stem from all the costs associated with equipment, overhead, and labor.
The quality and number of workers can affect the final costs of a project. Labor is usually secured through the bidding process.
On the other hand, residential properties may rack up bills for equipment, overhead, and labor. Though because residential construction is on a smaller scale, the cost difference is rarely comparable.
2. Vacancy Period
A combination of several factors means that the vacancy period in the commercial market is longer than that of the residential properties.
This basically means that commercial investors have to cover the outgoings of properties without the support of rental incomes.
3. Construction Materials
Although all construction projects use different materials, the kinds of materials used vary. In residential construction, houses are normally built around a timber frame. Since residential properties are smaller, they require less reinforcement. Timber suffices for structural requirements is usually affordable.
On the other hand, commercial buildings are larger, so they require more support. Timber frames can easily collapse under the weight of commercial buildings. Because of this, commercial properties prefer steel frames. They are stronger and support tall buildings better.
However, GS Building, a leading commercial carpentry company, advise contractors to use wood for flooring, decking, and furniture. Wood can also be used to make:
- Window sills
4. Returns Profile
The main driver for capital growth over the long term is an increase in rental income. Tenants of commercial properties usually sign long-term contracts with leases of ten years or more. These leases have terms that include a mechanism, which restricts rentals from going lower than the ratchet clause.
It is unlikely to get this kind of structure in residential leases that decrease income certainty for investors. Additionally, commercial properties allow more opportunities to augment the growth of rentals through efficient and active asset management, which improves returns on properties.
5. Barrier of Entry
Compared to other forms of real estate, residential properties take the cake with quantity. The law of supply and demand suggests that if the quantity of suppliers is high, the cost will reduce as long as the demand doesn’t change.
Lower costs allow a lower barrier of entry because residential properties need less cash than other forms of real estate. Combine this with the familiarity of the product, which comes from many Americans growing in residential properties.
Tenants use residential properties 24/7. This means they are more susceptible to wear and tear. Though the problems are simple and you can solve them by calling an electrician, plumber, or other local tradespersons.
For commercial property, maintenance is more complex since buildings are bigger and accommodates many facilities for clients. In some situations, the law expects onsite property managers to take care of the maintenance.
Choosing between residential and commercial properties is no easy feat to handle, particularly because both have their own sets of drawbacks and benefits. Both can also diversify your portfolio and bring you one step further to attaining your financial goals and freedom.
As an investor, you need to spend more time thinking about your long and short-term goals. If you want to make a buck quickly, wholesaling or rehabbing residential properties can be the way to go.
Though if you are in for a long haul and wish to achieve a passive income, commercial investments will provide you with more attractive benefits.