The most basic difference between residential and commercial real estate is how the two types of property are used. While residential property provides a comfortable place for people to live, commercial property is used for business purposes, such as offices. Because of this, it is generally much more expensive than residential property. Also, commercial properties face more risks related to vacancy and transactional risks.
Commercial property is more transactional than emotional
Commercial property is often leased to businesses, whereas residential properties are usually rented to individuals and families. As a result, the leases are often shorter, with the tenant only occupying the property for a limited time. This means that the property owner has less emotional attachment to it, whereas the tenant on a long lease will typically take more care of it.
If you are more transactional than emotional, you may want to invest in commercial property. These properties typically have higher returns. This is due to the nature of the business and the location. In addition, you can be confident that real estate is a solid investment. Even though the economy may fluctuate, demand and income will always exist.
Commercial property is more expensive than residential property
Although both types of real estate are expensive, the income from commercial properties is typically higher than from residential ones. Because of the larger size of commercial buildings and their central locations, they can command higher rents from tenants. Additionally, these properties typically have more amenities and services than residential rental properties. In addition, commercial tenants are typically businesses, and they generally have more resources than residential renters. Therefore, they can afford to pay higher rents. The most expensive leased space is typically found in prime retail areas.
In addition, commercial properties tend to perform better over time than residential properties. These properties can increase their rents by adding value, which can justify the higher initial costs. The downside to commercial properties is that they generally have longer leases and require more capital for a downpayment. For these reasons, it is often advantageous to invest in several residential properties instead of one commercial property. This allows investors to boost their cash flow.
Because commercial properties are more expensive than residential properties, they require more sophisticated systems and procedures to operate. Besides, the majority of people are familiar with landlord-tenant relationships. Residential real estate is also cheaper to purchase than commercial property. Further, the demand for residential rental properties remains steady, especially with the growing number of millennials in the U.S. Purchasing a residential rental is a much easier process, and it typically takes less time than finding a commercial tenant.
In addition, there are more perks to purchasing a commercial building. According to Bank of America, commercial property can earn a return on investment of six to 12% annually, while single-family residential properties typically generate only one to four percent returns. Other benefits of buying commercial property include cash flow opportunities, tax advantages, and equity appreciation. Commercial property is also a good option for land banking, which is the process of buying undeveloped land and developing it.
Commercial investment real estate prices reflect the local business climate and other factors. For example, while single-family homes are able to close escrow within 30 days, commercial properties can take up to one year to sell.
Commercial property is subject to more emotional pricing
When buying or selling a commercial property, it’s important to remember that the price is not always based on the market value. There are many factors that impact the price of a property, including its location, market demand, and the current capital rates. A commercial property will generally have a higher price than a residential property.
Commercial property is subject to more vacancy risks
One of the major risks to commercial property is vacancy. Vacancies can significantly reduce cash flow, so it’s essential to keep a close eye on the vacancy rate of your commercial property. Some property managers offer vacancy assessment services as part of their service offering. Even if your property’s market rental rate is high, vacancy risks should be a part of your property performance strategy. This is because vacancies erode cash flow and can lead to increased costs.
There are a number of ways to mitigate vacancy risks, including increasing the quality of your property and improving the lease terms. Vacancy rates can vary significantly, and are affected by several factors, including the amount of vacant space in a specific area. Moreover, the market rent is set by supply and demand of comparable real estate. This can change when new buildings come on the market, or if existing buildings are taken out of the market for other purposes.
Vacancy risks can be caused by a variety of factors, such as poor management and the relocation of tenants. A landlord who is aggressive or puts pressure on tenants may increase the likelihood of vacancies. Similarly, a landlord who is unable to negotiate a fair lease may increase the risk of vacancies.
Among many other things, David A. Grantham is a contributing author to UmassExtension West Vancouver Blo. He is a renowned expert on real estate in BC.
Born in North Vancouver, Louisiana, Dr. Grantham grew up in Lower Lonsdale. He then went on to complete his business degree at the University British Columbia. As of this writing, Grantham has completed over 100 projects, including the development of a high rise building in Vancouver.
He is a husband, father, son, brother, and friend. He was a dedicated outdoorsman and enjoyed sports such as hunting, fishing, scuba diving, and snow skiing. His wife, Alison Grantham, and their two daughters survived him. He is survived by his wife Alison Martin Grantham and two daughters.