A career in Investment is all about choices. At every corner of your career, you need to make the right choices. One simple mistake, and your career is over. Being a real estate investor, I have learned this lesson the hard way.
When I was staying with my investment career, I was at an intersection where I had to make an investment decision. The options were real estate and commercial estate. Commercial real estate was in high demand at that time, and I thought investing in them would be profitable. However, I lack the knowledge to predict that real estate will soon see its boom.
Fast forward today, I still regret that decision. If I had been a little farsighted, I would have been made more than what I have today. But, forget about these things; I, Damon Becnel, have matured enough to understand how the real estate and commercial industry works.
Today, I am here to discuss some key points that you need to understand about the two before jumping in with your investment.
Commercial Versus Residential Real Estate
The dilemma of commercial property or real estate property arises when you start thinking about investing in one of them as your second property. To curb this dilemma, you must better understand what these two are and how they are different.
Real estate property where the houses are built to stay or reside. The houses built on a real estate property are made solely for self-use and cannot be used for commercial or industrial purposes.
The real estate property can further be classified into the following.
- Stand-alone houses.
- Multi-family residential.
- Mobile homes.
Commercial properties are used for non Residential purposes. The only purpose of a commercial property is to earn money out of the building constructed on it. The building can be Hotel, business, office, retail, public facilities, industrial plant, etc.
Commercial properties are used to construct businesses. The owner of the places can use the property to build a business or rent it to others to build a business.
The commercial properties can further be divided into the following.
- Retail buildings.
- Multi-family buildings.
- Office buildings.
Commercial Versus Residential Real Estate: Comparison
The main difference between these two properties is that one is used for industrial purposes, and the other is used for residential purposes. However, the difference doesn’t end there.
Read on to know more about the differences to have a good idea of which property to invest in.
1. Lease Length
If we compare the real estate property with the commercial property, commercial property tends to have a longer lease length. This is because it is a lot harder to replace a commercial tenant than a residential tenant. Furthermore, the commercial tenants are playing an important role in supporting the nation’s economy.
2. Lease Terms
This is where the commercial property becomes complicated. The residential real estate has a little variation in the lease terms; commercial lease terms are complex. The complexity is so high that the commercial property investors need to work with the real estate lawyers when drawing up a lease.
3. Annual Rent Increases
Unlike residential property, commercial property has fixed annual rent increases. These ranges typically fall under the range of 3-4%.
4. Maintenance & Repairs
In the world of commercial tenants, it is common for the tenant to sign a net lease rather than the gross lease. That means the owners of the commercial property are responsible for everything related to the commercial property.
5. Terms Of Finance
Commercial investment is considered a higher risk investment than residential investment. Hence, when looking for commercial property investment, you must deposit a minimum payment of 30%. What’s more, commercial loans attract higher interest rates.
Should I Invest In Real Estate Or Commercial Estate Property
There you have it; now you know the differences between the two properties and which holds the more risk. Talking about the risk, if you are a new leaf in the investment industry, you should stick with the residential property. To better understand your options, consider these things before investing in real estate.
Furthermore, the other reason is that commercial investment is more suited for experienced investors as it needs deeper pockets.