Are you considering becoming a real estate investor but you aren’t sure if you should pursue commercial or residential real estate? Residential properties are typically single-family homes or rental properties with fewer than five units. Commercial properties include rental properties with five or more units, as well as office buildings, retail stores, hotels, and industrial properties.
Both residential and commercial investments are beneficial, but here’s how you can decide which one is right for you.
How you feel about risk can be a large determining factor when deciding between the different types of investing. Commercial real estate investing involves more risk. Since residential investments are often single-family homes, tenants are less likely to turn over than in commercial real estate. On the flip side, commercial investments will often provide higher returns.
Commercial real estate investing involves more investment than typical residential investments. The higher cost of entry deters many would-be commercial real estate investors. However, if you’re more drawn to commercial properties, you can always start with residential properties until you’ve built up enough capital to begin commercial investments.
Commercial real estate investors need to deal with zoning laws on a larger scale. The laws around commercial properties are also often much stricter than those governing residential properties. If you are someone who prefers as little red tape as possible, you would be better off investing in residential properties.
As you might expect, loans for commercial and residential properties work very differently. Residential loans are easier to get and are typically made to individuals rather than businesses. These loans are considered lower risk, so they usually come with lower interest rates and longer terms (usually 30 years).
Contrastly, commercial loans come with higher interest rates and shorter terms (usually five to 20 years). To obtain a commercial loan, you will be required to have a business plan. The bank issuing your loan needs to understand how much money will be coming in and how everything will run.
Lastly, when choosing between commercial and residential real estate investing, you’ll want to consider how much time you have to commit to your endeavors. Commercial real estate investing is on a larger scale and will end up taking more of your time than residential investing. However, if you don’t mind putting in the time in exchange for larger returns, commercial investing is the way to go.