Commercial real estate (CRE) is generally accepted to be a more risky investment than residential real estate. However, with this risk usually means higher returns. Today, we will take a look at the top differences between commercial and residential real estate. You will also learn the benefits these two may provide.
Differences Between Commercial and Residential Real Estate
First, commercial real estate comes in all different categories. For example, commercial real estate can be but not limited to: retail plazas, office buildings, hotels, industrial facilities, and multifamily properties. Residential real estate on the other hand can be: single family homes, condos, villas, and any properties up to 4 units. Duplexes, triplexes, and quadplexes are considered residential real estate. Even if you buy them specifically for income producing reasons or investment purposes.
To help differentiate the two, think of someone wanting a place to live (residential) vs a business wanting to lease, buy, or sell (commercial real estate). Next, we will take a look at why one may be better than the other.
Commercial or Residential Real Estate – Which is better?
Well, commercial real estate is usually the first to struggle during an economic crisis. Therefore, residential real estate is already looking to be a less risky. However, the combination of tax benefits, appreciation (and depreciation), asset protection, capability to receive cash flow, it seems commercial real estate comes with its extreme risk but large potential benefits.
In addition, according to most surveys, investors see income capitalization rate of 12% annually in commercial real estate, compared to 4% average in seen in residential. So both seem to have great benefits as tax benefits also come with owning residential real estate. However, it seems the residential route is “more stable” and “consistent” than owning commercial like properties.
Is Residential Real Estate The Best?
With the larger pool of tenants to choose from, residential is usually a more safe investment. For example, it will be hard to live in a commercial property. It can be done; however, with most people, they would want a friendly and residential zoned neighborhood. As a result, on average there is more people searching for residential real estate than commercial property. This can be a factor when selling your property. So when it comes to commercial vs residential real estate, these are a couple situations to think about.
A larger priced property can likely yield a lot lower asking price than expected if wanting to sell the property quickly. This is because if the pool of buyers isn’t as large they may not be willing to pay top dollar. With residential real estate, there is almost always a buyer for a just a bit below fair market value of your home. Which means if you need to sell your home or property fast, residential real estate is probably better to be in.
Is Commercial Real Estate The Best?
In my opinion, as of now and for investing purposes, commercial real estate is where it is at. This can change, but with commercial real estate you have access to a larger pool of money, greater tax benefits, which all results to the potential of very large gains. Some show a 100% cash on cash return within 2 years. Investors essentially receive their own money back, and then everything after that is pure profit for that property as long as prices remain going up. And at that point investors either refinance or sell it and move on and repeat. The risk is the requirement of the possibility of a larger down payment for commercial properties, higher credit scores, and experience. Residential real estate is a bit easier and cheaper to get started with.
Of course, just like what we are seeing now, an unexpected drop in expected Florida tourism has led to a large decrease in sales for retail and businesses that lease commercial properties. Not so good for owners of commercial real estate. Some will have to take on loans just to stay afloat. With residential real estate, it is still moving on almost like normal and time will tell what the effects will be like. A slight decrease in market value prices and volume is happening, but not too much.
Commercial vs residential real estate is a great debatable topic, and it is important to outweigh the benefits each may provide. You will see on average higher returns with commercial real estate but with larger risks. And with residential real estate, it is on average a more liquid market to buy and sell quickly. In addition, it can have the potential to see large gains as well great tax benefits. If wanting to provide families a nice place to live, residential real estate may be for you. If you like keeping a plaza or facility looking and running A+, perhaps managing commercial real estate is best.
What are you opinions on this subject? Comment below. Do you like residential or commercial real estate?
Call Jeramie deBerard, Realtor®