Adding real estate to your investments can be an effective way to diversify your holdings and add some valuable stability to your investment portfolio. However, real estate might require more research and maintenance than stocks and bonds because a real estate property is a physical location that your tenants would use. If you’re interested in investing in real estate, learning about the different investment options can help you choose the right one for your needs. Keep reading to find out the differences between commercial and residential real estate investment.
What is Commercial Real Estate Investment?
Commercial real estate investment involves constructing or buying buildings zoned explicitly for commercial use and renting them to companies who want to establish a retail or professional location in the area. These real estate properties might include stores, warehouses, laboratories, or office buildings. You can invest in real estate directly through a real estate investment trust (REIT). These trusts allow people to buy a proportion of the value of a real estate property.
What Is Residential Real Estate Investment?
Residential real estate investment involves owning and renting spaces meant for habitation. Some residential real estate investors own individual houses, while others might own apartment buildings and other multi-family residential buildings. Like commercial real estate, residential real estate investment can involve direct management or investment through a REIT. Residential investors might directly handle their tenants’ needs or engage a property management company to collect rent and make repairs.
What Is Mixed-Use Real Estate Investment?
Some buildings and developments are zoned for both residential and commercial use, allowing investors to own properties with both these objectives in mind. These mixed-use developments often feature houses or apartment buildings conveniently placed close to movie theaters, restaurants, and retail locations. In some developments, buildings might house commercial space on the bottom floors and living space on the upper floors. While a single investor might own some mixed-use real estate developments, many of these developments are owned by funds, where investors can own a fraction of the property’s value.
Commercial versus Residential Real Estate Investment
While commercial and residential real estate can be lucrative, these types of investments have important differences. Here are some key ways that commercial and residential real estate differs when it comes to investment:
Getting involved in commercial real estate usually requires more capital and takes more time than doing so for a residential real estate investment. Because residential real estate investors might own individual houses in other developments, they can start by buying one home, making money from rentals, and slowly expanding to additional homes. However, commercial real estate properties tend to be much more expensive than homes since they might contain spaces for multiple vendors. There are also fewer of these properties than residential homes, so potential owners might have competition during the buying process.
Once you own the property, it usually takes more time to start generating income from commercial real estate than it does with residential real estate. The rental approval period for individuals leasing a home is typically shorter than those for companies looking for new retail and office space. In addition, enacting a rental agreement with a commercial tenant might involve more price negotiation than a residential rental agreement, as companies might leverage their accounting or legal teams to push back on initial terms of rental costs.
While commercial real estate investment usually has a higher upfront cost than residential real estate investment, it is often more profitable in the long term. Some residential real estate investors own apartment buildings, but most own individual homes, so they collect a limited number of rent payments each month. Commercial real estate investors often own shopping centers, which might have dozens of individual stores in a single building. They can collect multiple rent payments for each building they own, and these payments are often higher than residential rental rates in the same area.
Once you’ve acquired property and formed a written agreement with your tenants, commercial real estate tends to be more low-risk than residential real estate investments. Typically, commercial lease agreements are lengthy, binding documents, and as long as the renters stay in business, they tend to pay their rent. According to Forbes, commercial tenants are usually more stable, and since these buildings usually have more extended leasing periods, the property values tend to appreciate more between renewal periods.
Residential real estate investment comes with the risk of truancy, and tenants don’t always give the required amount of notice before breaking their lease. Economic recessions and national crises often affect residential real estate sooner than commercial real estate since the investor’s profit is directly tied to individual renters’ work status.
What’s the Best Time to Invest in Real Estate?
While specific markets might have different times of the year when prices typically drop, the rule of thumb for real estate investment is to start when you have the time and money to manage a property. Since real estate tends to produce a profit over a long period, it’s best to invest when you’ve got years or decades before you need to realize the profits. Since there are so many factors to investing in real estate, it’s a good idea to meet with a financial advisor to discuss your goals and capital.
If you’re thinking about investing in commercial real estate in the medical field, Castle Development Group’s brokerage team is here to help. Our experts can help you identify prime locations, find quality tenants, and build new facilities that can provide revenue for decades to come. While managing a commercial property can be difficult, our full-service management team can eliminate the stress by handling your building’s maintenance needs while keeping your building expenses as low as possible. Contact us today to find out how we can help you meet your investment goals and provide for your future.