What kind of property should you invest in: commercial or residential?
Real estate investing can be difficult to understand for those who are unfamiliar with it. What kind of property should you invest in? Which area of the country is performing the best? Are commercial properties more lucrative than residential properties? Investors need answers to these questions so they can make informed decisions about where their hard-earned capital will be allocated.
Commercial real estate is an umbrella term that encompasses important parts of the market such as retail, office, and industrial properties. These properties come in all shapes and sizes and include apartments, daycare centers, movie theaters, parking lots, warehouses, and retail and industrial spaces occupied by business large and small.
Residential real estate includes housing that is typically rented, not owner-occupied. Any property that is created solely for the purpose of living is termed residential real estate. They can also be part of multi-use spaces.
Does an investment in commercial real estate make more sense rather than an investment in residential real estate? The answer doesn’t necessarily have to be yes or no, and both options are worth exploring. Real estate, as per thumb rule, is an asset that generates good returns only when held for a long period of time…at least two years or usually longer. You can invest in both with your money, but renting out a residential home is a lot more work than owning a commercial property if we’re thinking about maintenance and time spent communicating with tenants and such.
Investment is dependent on two major factors from the investor’s side: the risk involved and the goals in mind. Investing in real estate also comes with a risk of potential loss of investment. If the property does not get enough tenants through the investment period, the returns would not justify the investment involved.
In general, commercial real estate is less risky from this perspective as it almost always has a steady cash flow due to the rock-solid lease terms in place for tenants. In contrast, acquiring a residential property can be quite risky as those tend to have unstable cash flow with the potential for drastic changes in market demand.
Residential real estate was the one that was hit the hardest in the real estate segment during the onset and spread of the pandemic. Not just that, any drop in economic activity in any area will first affect residential tenants, since they would always want to cut their losses in the absence of a concrete, long-term lease agreement.
If you know a market sufficiently well and have local contacts, it may make sense to invest in residential real estate for a relatively shorter period of time. For commercial real estate, it is good to have long-term goals, to the tune of at least five years or more. That way the returns generated make more sense and passive income actually frees up your time for looking at other investment avenues.
The advantage of commercial property is that the rents tend to be steadier and lease terms are typically more concrete and long-standing, which means tenants are almost always available. Commercial properties tend to return more gross revenue with less work. Residential properties offer better returns in most areas of the country and they don’t require a significant outlay of capital since there is no mortgage and tenants don’t incur any interest costs.
At the end of the day, it pays well to look into all the available options you have before you commit to investing in commercial or residential real estate.