Commercial vs. Residential Property Investments

Many investors start out with residential property investments as opposed to jumping right into commercial investing. There are many similarities and differences between residential property management and commercial property management. 

If you’ve made up your mind to purchase an investment property and are debating which type to begin with, you need to compare residential property management and commercial property management in order to come to a sound, educated decision.

Residential Investing

The reasons to begin your investing endeavor with residential properties are compelling and range from simple familiarity to a lower level of overall risk.

The Benefits of Residential Property Management

There are several appealing benefits to choosing residential property investing over commercial. 

Familiarity

Perhaps the biggest reason so many investors choose residential properties is that they are simply more familiar with them. 

Easier Maintenance

Both types of investment properties require maintenance, but overall, residential properties don’t necessarily have the maintenance challenges that many commercial properties do. Many people are already familiar with residential property maintenance, so there is less to learn when you’re starting out. 

Lower-Risk Residential Property Management

For the most part, residential property investing carries a relatively low level of risk simply because people will always need a place to live, no matter what. Using a great property management software can help as well.

Lower Cost of Entry

In general, it costs more upfront to invest in commercial properties than in residential ones. In addition, it’s not uncommon for commercial property purchases to require a down payment of 25% or more. 

The Drawbacks of Residential Property Management

There are a couple of drawbacks to residential property management that you should be aware of. 

Less Favorable Lease Terms

One of the biggest ones is the fact that lease terms for the owner are generally less favorable than those of a commercial investment property. Lease terms are typically much longer for commercial properties than for residential.

More Frequent Turnover

There is generally more tenant turnover in residential properties than commercial buildings, especially if, for example, there are four tenants in a residential and one in a commercial building.

Commercial Investing

There are different advantages and disadvantages that come with commercial investing and commercial property management. Keep in mind that there are always exceptions to the rules, and the following generalities may vary depending on the specific commercial property and the number of tenants involved.

The Benefits of Commercial Investments

There are a few big advantages that commercial property investments have over residential ones.

Longer Lease Terms

Perhaps the biggest benefit of commercial property management is the lower turnover rate. In general, the average lease term for these properties is about ten years, compared to one year for a residential lease term. 

Higher Rental Income

Since commercial buildings are usually larger than residential ones, the monthly income for the property owner is normally significantly higher. Keep in mind that upfront costs of a commercial property, however, are also higher.

Easier Property Management

Commercial property management generally doesn’t require the level of effort or time that residential property management does. This is especially true with the use of excellent property management software, which can make everything from rent collecting to tenant screening to accounting much easier.

The Disadvantages of Commercial Properties

The drawbacks of commercial properties are that they generally are more complex and require more due diligence by the investor before purchasing and leasing. 

Larger Up-Front Investment

The purchase price of a commercial property is generally much higher than that of a residential one, and insurance on the property will likely be much higher, as well. 

Much of this is due to the larger size of commercial properties, but it will also depend on the specific purpose for which they will be used.

More Difficult to Obtain Financing

Again, due to the size and nature of commercial buildings, financing is typically more difficult to obtain. The purchase price and down payment requirements, as previously stated, are also typically much higher for the same reasons.

More Risk

Whenever there’s a downturn in the economic climate, businesses are typically the first properties to feel the negative effects. This has been evident in light of the COVID-19 pandemic.

Consider your options and take the time to perform the due diligence required to make a sound decision. No matter which option you choose, the best property management software can help effectively manage the property.