5 Differences Between Residential and Commercial Real Estate Investing
Photo by Jesse Roberts
Real estate sounds like an excellent investment when you first hear about it. That’s why investors have made it one of the most popular types of investments out there.
The problem is that there are many ways you can go about it. You have rentals, flipping, and wholesale. If you want to move past residential, you have commercial real estate as well.
While they are similar in some ways, commercial real estate investing and residential investments each have their own challenges. Keep reading to discover five ways that each of them differs from one another.
1. Cost of Entry
It doesn’t cost much money to get started with residential real estate. You can buy a cheap fixer-upper and be on your way. On the other hand, you’re looking at higher price points when investing in commercial properties.
Not only do the properties have higher values, but you also have to make sure that your building is up to the commercial building codes set by your location. You’re looking at a more significant investment if you decide investing in commercial property is worth doing.
You’ve probably heard the saying, with great risk comes great reward. That saying applies well to commercial property investments.
You’re taking a much more significant risk if you decide to invest in a commercial property. However, finding the right deal can provide you a much higher return on your money in the future.
3. Lease Time
You’re going to deal with leases between 6 to 12 months for residential properties. Most residential tenants don’t want to be locked into a rental for longer than that.
For commercial properties, you’re looking at 5 to 10 years. Longer lease times mean lower turnover and fewer vacancies for your properties. Tenants who stay in properties for this long tend to have good cash flow and give fewer problems.
4. Deal Complexity
There isn’t that much to analyze with a residential deal. You need to make sure your terms are good, and the property you’re looking to buy is in good shape. You just need to make sure that there aren’t any surprises.
Renting a commercial property has another set of challenges. A commercial real estate holding is more like running a small business. This complexity means there are many more details you’ll need to look over when you’re searching for a property to purchase.
Residential real estate is much easy to get into. All you need to do is head to a mortgage lender and apply for a typical mortgage.
Commercial real estate loans are harder to get than residential mortgages. Banks consider commercial properties a higher risk, so they are more strict with their approval process. You’ll need to jump through more hoops if you want to get approved.
Commercial Real Estate Investing Is a Big Commitment
You have a lot to deal with when you buy a commercial property. Make sure you’re willing to put in the effort when you get into commercial real estate investing. It’s an entirely different skillset than dealing with residential tenants.
If you’re looking for tips for dealing with your new tenants, head back to our blog. You’ll find our latest tips that will help you keep great relationships with your renters.