Key Differences Between Commercial and Residential Real Estate
Choosing between commercial vs. residential real estate is not an easy decision made overnight. Each real estate strategy offers unique selling points and benefits as well as different sets of challenges. An investor and developer must look closely at both to determine which one best aligns with their goals, liquid capital, risk tolerance, and schedule.
Let’s first define residential and commercial real estate and then dive into what to expect from the strategies of each.
What is Residential Property?
Residential properties include townhouses, condominiums, duplexes, single-family homes, and apartments, where the property owner can live in the property or rent out the space. Families and individuals typically lease these properties and pay rent to the owner each month. As an investor, residential properties offer you many benefits, including:
Decreased tenant turnover
Low cost of entry compared to commercial real estate
More lenient zoning laws
Large pool of potential tenants and buyers
Outperforms commercial real estate in an economic crisis
When screening for residential properties, landlords should review any prospective tenant’s credit, income, rental history, and other background details to ensure they are responsible, long-term tenants who will care for the property. These types of renters will provide the property owner and investors with a steady financial income.
What is Commercial Property?
Commercial real estate properties are those with five or more units focused on business. As opposed to residential properties, these are typically sold, leased, or used to achieve a predetermined business objective. This type of real estate includes office, retail, hotels, warehouses, apartment complexes, and land for development. Investors look to achieve an anticipated return on the funds invested when investing in commercial real estate. Key reasons to invest in commercial properties are:
Higher cash flow and return on investment
Reliable tenants such as businesses and corporations
Triple net lease allows the property owner to now pay any property expenses
Lease terms are longer and typically range from six to twelve months
Which is Right for You?
While commercial and residential properties share common traits, they have several differences as well. Commercial properties tend to come with higher risk, zoning law complications, and property management challenges. On the other hand, residential properties have a higher tenant turnover rate, as leases can range from 12 months, 24 months, or a fixed month-to-month contract with no end date.
Commercial and residential properties also differ in building materials, codes, costs, construction equipment, and construction time. In general, commercial construction is typically quicker than residential, but is expensive, utilizes more specialized equipment, and holds to stricter building codes. Residential construction tends to be less complicated, but takes longer to complete.
So, before you decide to invest in, or develop a commercial or residential property, it is imperative to conduct careful due diligence to determine which is the right strategy for you.
Choosing the Right Company for Your Commercial and Residential Developments
If you are looking for a commercial or residential real estate development company to manage and complete your large-scale projects, contact DBe. We believe each project is unique and comes with its own set of distinct challenges. To ensure the project vision is realized, we offer in-house expertise in site identification, zoning, entitlements, financing, master planning, and more.