Choosing whether to invest in residential or commercial property is not a simple decision for an investor looking to delve into the real estate business. The decision you’ll make will largely depend on your investment goals, liquid assets, and risk tolerance. Whatever strategy you choose there will be challenges as well as rewards.
Amandeep Khun-Khun is a Vancouver investor who prefers to invest in high-potential commercial real estate, with a focus on high-quality city center properties. He believes commercial real estate is more profitable and it is working for him. However, your strategy may differ greatly, depending on your personal goals and position.
Residential vs. Commercial Properties
To an extent, you can draw an obvious conclusion that residential properties are where people live and commercial properties are everything else, but it’s not that cut and dry. In technical terms, any building with five or more units is considered commercial, including multi-family dwellings like apartment buildings. Therefore, single-family homes, duplexes and condos are all examples of residential real estate, whereas shopping centers, office buildings, warehouses and the like are commercial.
A further difference is that there is a wider range of benefits in commercial real estate, and there are more commercial investment funds than residential. Something else to consider is that, in most cases, residential properties will require a more hands-on role.
Residential Property Benefits
It is far cheaper to get started in residential real estate than commercial, and therefore much easier for a beginning investor to obtain a loan. Tenant turnover is low, particularly on single-family dwellings, whereas businesses can sometimes be less stable.
There is always a demand for residential housing; after all, people need a place to live. Even during hard times, residential property will remain a necessity, while businesses may be shuttering.
Commercial Property Benefits
There is a possibility of much bigger returns on your investment with commercial property. Of course, that higher reward potential comes with higher risk. In addition, there are much longer-term leases with commercial real estate, generally from five to ten years, whereas with residential, it may be as low as six months.
Another factor in commercial real estate is the triple net lease, which requires the lessee to pay all property expenses, including real estate taxes, leaving the property owner to pay only the mortgage. Unlike residential property, the value of a commercial property is determined by the amount of revenue it generates, which means a high-earning property can increase in value very quickly.
Real Estate Agents
There are commercial agents, who only deal in commercial properties, and residential agents, who only deal in residential properties. While they will both have the required education and training, a commercial agent should also possess a finance or business degree to help navigate the more complex financial deals.
Getting a Loan
You would most often get a loan from a bank for a residential property, but with commercial real estate, your loan would come from a company. You also need a good credit score and a business plan to attain a commercial loan. Interest rates of commercial loans are higher and have shorter terms, from five to 20 years, while residential terms are typically 30 years with a fixed rate.
There are many things to consider when deciding to invest in real estate. Your time, risk tolerance, and financial situation are all important factors before you commit to finding a property.