When investing in real estate, investors must decide between commercial and residential properties. The decision will depend on the investor’s short and long-term goals, risk tolerance, liquid capital, and financial situation. The type of property an investor chooses will also impact the kind of return on investment they can expect, and there are a few key differences between commercial and residential real estate. The Interesting Info about Commercial Vs Residential Real Estate.
Commercial real estate (CRE) includes office structures, retail spaces, and warehouses, among other property types. It is generally considered a higher-risk asset than residential real estate because the tenants are less likely to pay their rent, and the lease terms are longer. CRE assets are more susceptible to changes in interest rates, which can have a more significant effect on the value of a building than a single-family home.
Residential real estate is the ownership and management of single-family homes, condos, and townhomes. Investors can purchase and rent these homes for various purposes, including housing older people or providing student housing in college towns. There are many benefits to buying and managing residential real estate, such as its low barrier to entry. The cost of residential real estate is much lower than that of commercial property, and the product offers a familiarity that draws many first-time investors to this asset class.
Another reason newbies often choose to invest in residential real estate is its availability of financing. Several competitive loan programs are available for multifamily properties, including Fannie Mae and Freddie Mac and the Department of Housing and Urban Development. These entities’ mortgages allow for higher loan-to-value ratios and can be easier to qualify for than those for commercial real estate.
Moreover, investors who own residential properties have multiple options for selling the homes once they are ready to be sold. They can sell to a new homeowner, a buyer looking for an owner-occupied residence, or another investor interested in residential investment. However, when a commercial property is vacated, it may take longer for the landlord to find a new tenant and begin collecting rent again.
As a result, the returns on residential real estate can be more attractive than those on commercial property. This is especially true for investors who pursue a buy-and-hold strategy, purchasing residential properties and holding them long-term rather than trying to flip the property or manage it themselves.
While both commercial and residential real estate have the potential to deliver strong returns, it is essential for any investor considering an investment in either asset class to consider their specific situation. The most successful real estate investors pick a niche, become experts, and execute a sound strategy. Those who jump in without researching the market could face severe challenges and fail to reach their investment goals. At Saint Investments, we understand the nuances of commercial and residential investment property and can help you make the best choice.