[ecis2016.org] We explain the differences and similarities between residential and commercial buildings, to help you make an investment decision
Residential and commercial properties make up the bulk of the real estate market. Investing in residential real estate is quite different from investing in commercial real estate and you need to be aware of the differences and similarities, before making a decision.
You are reading: Residential and commercial buildings: Key differences you should know about
In other words, both investments have their rewards and risks.
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The decision to invest in residential or commercial real estate is long-term. You must adequately assess the benefits and drawbacks of each investment. Making a choice depends on your risk-taking abilities, objectives and the amount of time you have to devote.
What is residential property?
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Residential property is land that has been designated particularly to live or reside for people or families. Home owners can live in them, generate cash flow by renting out their residential property, or sell it at a profit when the home’s values rise.
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Examples of residential properties
Residential real estate may be divided into a few different categories.
1. Single-family residences
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A commonly found type of residential property, a single-family house is situated on its own plot.
2. Townhouses
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Individually-owned, multi-story dwellings that share one or two external walls with other properties are known as townhouses.
3. Condominiums
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A condominium, often referred to as a ‘condo’, is a kind of multi-unit building in which each apartment is individually owned and the common amenities shared by all the residents. In contrast to apartments, condos are generally held by a single individual in joint sovereignty with a condominium owners association (COA) rather than a huge business or property management organisation.
4. Houses with several units
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Duplexes (residences with two) and residences with four units, are examples of multi-family housing.
5. Apartment buildings
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Flats constructed as low-rises, mid-rises, or high-rises fall into this category.
What is a commercial property?
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Commercial properties may be defined as properties that can deliver profit, either via capital gains or rental revenue. It is common to think of commercial property as composed of buildings that host companies. Still, it may also refer to land utilised to create income or huge residential rental homes.
Examples of commercial properties
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A few examples of commercial real estate are as follows:
1. Office
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There are two main kinds of office buildings: urban and suburban. High-rise structures such as skyscrapers and multi-million-sq ft office towers are common in major cities worldwide. Offices in the suburbs tend to be more compact and clustered together in office parks.
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2. Hotels
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The hotel real estate comprises enterprises that provide lodging, food and other services to visitors and travellers. The hotels may be independently owned or affiliated with a big hotel chain, such as Taj or Marriott.
3. Retail
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Retail real estate comprises businesses that design and develop shopping malls and entertainment centres. As described, retail real estate is only for the marketing and selling of consumer products and services.
4. Industrial
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Industrial real estate is often defined as manufacturing, storage, and transportation premises. For the most part, industrial buildings are situated away from densely populated metropolitan areas, particularly along major highways and railroads.
Advantages of investing in residential properties
- Entry is relatively inexpensive: Commercial properties have a higher initial investment cost, whereas residential real estate has a lower entry price and fewer hassles.
- Lenient laws: Compared to commercial property rules, residential property regulations are not only more liberal but are also less complicated.
- Tax benefits: Investing in residential real estate and owning a rental property may provide significant tax advantages to the investor. Legal fees, depreciation and property taxes are exempt from government income taxes.
Disadvantages of investing in residential properties
- Market uncertainty: The real estate market may be unpredictable and your investment in residential property may lose value. Several factors influence real estate trends and prices, including supply and demand, the economy, demography, interest rates and government regulations, as well as unexpected occurrences.
- Increased interest rates: When interest rates begin to rise, mortgaged homes may be at risk of experiencing difficulties. Your monthly loan repayments may exceed the amount you make from renting the house.
- Bad tenants: Some tenants may pose a significant danger to landlords by destroying the property, failing to pay their rent and engaging in dishonesty. Even if you do not have any tenants, having a bad one may end up costing you more in the long run.
Advantages of investing in commercial properties
- High rental revenue from a dependable source: Although residential real estate generates an average rental income of 1%-2%, commercial real estate generates an astonishing 8%-12%, resulting in three times more return than residential real estate.
- Professionalism: The tenants in commercial real estate are often well-established firms and as a result, one may expect them to conduct themselves professionally.
- Lease duration: The lease duration of commercial tenants is often longer, running anywhere between 10 and 20 years, which offers investors a more secure and steady stream of revenue from their investment over the long term.
- Appreciation: Commercial real estate gives tremendous appreciation over other forms of property, over an extended period. Additionally, investing in quality commercial real estate or even fractional ownership may provide good returns with a far smaller and more manageable initial expenditure.
Disadvantages of investing in commercial property
- Difficult entrance: Inexperienced investors may find it challenging to invest in commercial real estate due to its complicated regulatory framework and local market options.
- Management of assets: Renters are an essential component of the whole asset management process, which goes well beyond just storing your money in a specific asset. Managing commercial real estate assets is more difficult since renters are corporations rather than individuals. Retail investors may lack the specialised knowledge needed to handle commercial real estate assets.
- Finding the right commercial property: Extensive market research and expertise of the local market are required when selecting the right property and geographic location. As a result, a residential investor may find it incredibly difficult to engage in commercial real estate due to insufficient skills and market knowledge.
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