Commercial or residential real estate: which one would you choose?
Every investor’s portfolio is unique. Since there are many theories about maximizing profits and reducing risk, everybody takes the path based on their preferences and advice that they follow. Analysts agree that diversifying your portfolio is critical to minimize risk when it comes to investing in real estate. You can diversify your real estate investments in many ways, including diversifying by market, asset type, price, and much more.
One of the main questions real estate investors ask is whether they should specialize in commercial or residential real estate. Commercial properties, such as retail spaces and office buildings, are excellent options for investors who can handle higher risk in exchange for higher rewards. Residential properties are ideal for investors who prefer to be more hands-on and encounter less risk. It’s also an excellent way to enter the world of real estate investments.
At Marketplace Homes, we specialize in residential and new construction investments, making us a valuable partner to have as you plan to diversify your portfolio. Today we can explore the benefits and considerations of both investment types so that you can make the best plans for your budget, skill set, and risk preferences.
The answer to that question ultimately depends on what they want to gain by investing in real estate. Investors should take some time to think about their short and long-term goals. If they are looking to make a quick buck to start, rehabbing or wholesaling a residential property might be the way to go. On the other hand, commercial properties offer attractive benefits if they are in it for the long haul and looking to achieve passive income.
Your Personal Journey
No two investors are the same, so choosing the right investment options that suits your circumstances and abilities is important. As you explore residential vs. commercial real estate, consider these factors:
- Your goals: Do you want to keep things small and have enough money for retirement, or do you want to expand your holdings for more long-term wealth? Commercial properties are associated with higher risk and profits, while residential properties have lower risk and gradual profit gain.
- Your tolerance for risk: Commercial investments involve more risk than residential real estate. This is due to the higher upfront costs and the increased risk of resident turnover. However, the rewards are higher when the scenario pans out correctly.
- Your liquid capital: Commercial investments cost more than residential real estate. The amount you have in the bank (and what loans you qualify for) determines what type of asset is accessible to you.
- Difficulty level: Across the board, residential real estate is easier to manage, especially when you recruit the expertise of a hands-on property manager. This allows you just to buy the property and hand it over to someone else who will do all the marketing, administrative work, and financials.
It’s up to each investor to understand their financial capabilities and investment preferences. This will help everyone create the investment portfolio that is right for them.
- Note: Your portfolio doesn’t have to be “all or nothing,” either. If you feel comfortable investing in both types of assets, then proceed!
The Universal Benefits
No matter your preferred type of investments, residential and commercial investments will diversify your portfolio. Investing in any real estate also grants you some financial perks that are hard to find elsewhere, such as:
- Some nice tax deductions
- High probability of appreciation
- Consistent trends of rising rents
- One of the most reliable ways to secure and grow wealth
When you make the right plan with a real estate professional based on your needs, you can rest assured that you reap these benefits regardless of asset type.
The Main Differences Between Commercial and Residential Real Estate
Now that you know what benefits are available to you, here are the main differences between commercial and residential real estate. What are they exactly, and what are their pros and cons?
Residential investments are typically envisioned as single-family homes, but they actually include everything from residential single-family rentals to four-unit rentals. Specifically, these properties classify as residential:
- Single-family homes
- Single apartments
- Mobile homes
On the other hand, commercial properties are much more than office spaces. This category includes anything with more than five units or a property used for business. This includes:
- Retail spaces
- Apartment complexes
- Multifamily buildings
- Manufacturing facilities
- Raw land that can be developed
Residential Investment Pros and Cons
If you’re new to real estate investment and don’t want to play with higher-risk properties, then residential real estate is the way to go. Here are the pros and cons.
Pros of Residential Investments
- Lower upfront cost makes it more accessible to the everyday investor.
- Lower risk due to less upfront cost and a higher chance of longer leases.
- Universal appeal since everybody needs a home. Not everybody needs business space!
- Easier to get loans to buy residential properties vs. commercial loans.
- Simpler leases compared to commercial properties.
Cons of Residential Investments
- Less risk means less reward. Residential properties generally bring fewer returns than commercial properties.
- Residential rentals can’t use a triple net lease, which means as the landlord, you are still responsible for taxes and upkeep.
- While commercial properties are often in public spaces that are constantly watched, residential properties can be in secluded areas that increase their risk for neglect or damage.
- You must screen residents more carefully than with commercial leases to reduce risk since businesses are more likely to keep up with a commercial rental.
Commercial Investment Pros and Cons
Commercial investments have a lot to offer anyone willing to accept the higher risk factor, stringent loan terms, and potential volatility of business tenant turnover.
Pros of Commercial Investments
- Potential for more returns. High risk can pay off with higher commercial lease profits.
- Commercial properties can have a triple net lease, which means the landlord doesn’t need to pay taxes or upkeep.
- Commercial properties are often in public spaces, reducing their risk of neglect or damage.
- Commercial leases have businesses as residents, which are more likely to ensure that the property stays in good condition. Business budgets can go to upkeep and taxes, while residential residents may not be as financially robust.
Cons of Commercial Investments
- Higher upfront cost makes it less accessible to the everyday investor.
- Higher risk due to more upfront cost and less chance of stable leases.
- Lacks universal appeal since not everybody needs business space.
- Harder to get loans vs. with residential properties.
- Lease agreements are more complicated since there are several types to choose from.
Residential Real Estate Investments with Marketplace Homes
Whether you’re exploring what asset type to acquire, need to sell properties in bulk, or obtain more real estate investments to grow your business, Marketplace Homes is here to help you. We can walk you through your choices to determine the best option for you. If you would like to diversify your portfolio by adding residential properties, contact us today.
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Alicia Persson is a real estate content/SEO writer at Marketplace Homes. She has several years of experience working in real estate teams that specialized in investments and property management. Before she joined Marketplace, she was a freelance writer for 7 years, leading to a specialization in real estate and home living content for boutique digital marketing agencies. During her writing years, she learned the basics of SEO and gained experience writing for many different clients, making her highly versatile at creating diverse content.
She is a proud University of Virginia master’s graduate and enjoyed her undergraduate years at the University of Mary Washington. When Alicia is not writing, she plays keytar and sings in a local 90’s rock cover band, or she spends time with her amazing family.