Choosing between commercial and residential real estate investing is not easy, especially for people that might be new to real estate investing. Each investment strategy comes with its share of benefits and challenges. Here are a few things that might lead you to make the right decision.
Note: In this article, we refer to commercial real estate meaning warehouses, office buildings, industrial buildings, retail buildings, and 'mixed use' buildings. On the other hand, residential real estate refers to properties like townhouses, condos, single-family homes, duplexes, triplexes, and quadplexes. Apartment buildings could be considered commercial or residential, but we are considering them as a residential property in this article.
Comparison between commercial real estate investing and residential real estate investing
Returns – Generally, commercial properties have a higher earning potential compared to residential properties. Depending on the location, a commercial investment can have an annual return of between 6% and 12% (NOLO.com).
Lease terms – The lease term for residential properties is usually six to 12 months. On the other hand, the lease term for commercial real estate in Canada could be anything from five to ten years. A long lease term means lower vacancy rates and a more reliable cash flow.
Appreciation – The value of residential real estate is usually tied to comparable properties. However, commercial real estate is valued based on how much income it generates. The higher the revenue generated, the more valuable the property will be.
Cost of entry – It is generally more costly to invest in commercial properties than in residential real estate. The down payment for commercial property is usually 30-35%, which is much higher than the 20% required for residential property.
COVID-19 effects – Due to the coronavirus pandemic, many physical retail stores and offices were forced to close. With the shift to online sales and working from home, there is now a lower demand for brick-and-mortar spaces. Since people still need a roof over their heads, the demand for residential real estate was not affected as much by COVID-19.
Familiarity – Most people are familiar with what is involved in being the landlord of a residential property. However, very few have any knowledge about managing commercial real estate.
In our opinion, since commercial real estate investing requires more know-how, time commitment, and capital, the best option for beginning investors would be residential real estate investing. However, each situation is different. Take the time to talk through your options with a real estate investing coach. Click here to make an appointment now: https://www.regalwayhomes.com/bookings-checkout/real-estate-investment/book