At first glance, the differences between residential and commercial investors seem obvious: residential property investors sell, lease, or rent out properties that people will live in, whether they’re condos, apartments, or homes; commercial property investors buy business properties and rent or lease them out to enterprises.
But for those new to investing, the differences are much more nuanced, both in how each investor begins their journeys and the returns they hope to get from their purchases.
How Each Investor Makes A Profit
The main difference between investing in commercial property as opposed to investing in residential is the type of clients, buyers, or tenants. Residential property is let out to consumers, whereas commercial property is let out to businesses. This means the contracts, by-laws, and investment advice to follow are very different for each area of investment!
Another way the profits are different is in the ways the market value of these properties are assessed. The basis of a residential property goes by the average cost of similar properties in the surrounding neighbourhood, taking into account features like the number of bedrooms and bathrooms. But determining the value of the commercial real estate takes a more precise approach. Comparable properties are considered, yes, but figuring out the final market value relies on the amount of revenue the property will generate.
In the long run, commercial property leasing can yield better returns than residential rentals, leasing, or selling, and this is because of the differences in their tenants. Business buyers or renters only occupy the property during business hours, and the wear and tear are lower: they don’t leave the bath running and flood the building, they don’t leave the cooker on and burn the building down. But fewer opportunities, longer sell times, and different by-laws await potential investors in commercial properties. These characteristics all make them more costly investment opportunities!
The Opportunities For Each Investor
Commercial investors will often have access to have a wider range of opportunities, meaning there are more investment funds and asset management companies for commercial properties than residential ones. However, the hurdles to access commercial properties are much harder to clear for the average investor, especially for those only getting started. Despite not having the same range of companies involved, new investors can gain better access to funds for residential properties.
Opportunity isn’t the only advantage that residential investors have – the returns on their money are quicker, too. It often takes an average of six months to rent out a commercial space, increasing the overall cost of vacancies. In this time, investors have to be able to take the losses while paying out any expenses. Getting the necessary financing from a financial institution can also be harder because, in the era of online retail, many more banks see commercial spaces as a higher risk. Commercial investing is more like owning a business than anything else, whereas residential investing is better suited for those looking for additional income without a lot of commitment.
Simply put, it takes less experience and less money to become a residential investor! It’s easier to get started in residential property investing because it’s easier to understand this kind of property investing. Most people know the relationship between landlords, sellers, tenants, and buyers, and we know what’s expected on both sides of the transaction. Not everyone has the skills needed to sell or lease and maintain commercial properties. When money is on the line, the safest and most profitable kind of investment is the one that comes to you!