A large number of real estate investors choose to stick with residential properties for their portfolio. However, commercial real estate has gained the attention of serious investors who look to diversify their portfolio.

Conventional wisdom goes that residential properties are easier to manage and maintain but the profit rate tends to be low. Commercial real estate is more profitable to invest in, but they require more attention from landlords.

Both types of properties are great for investment. Which one you choose to go with really depends on your own style of management. Here, we make a short comparison for the pros and cons of each.

Difference between Residential and Commercial Property

Residential real estate consists of one to four unit single family homes. They include condos and duplexes. Commercial real estate consists of multifamily properties (five units or more), offices, retail stores, hotels, servicing businesses like restaurants and barbershops, and industrial buildings.

Generally, individuals and families lease residential buildings while, businesses lease commercial properties. Zoning is different for residential, commercial and industrial buildings.

Commercial real estate is generally located in a town center and easily accessible location while residential real estate is preferred in a relatively quiet, private area.

Benefits of Investing in Commercial Real Estate

Higher Returns

Since commercial property is used for generating profits, the renters are willing to pay more to rent them out; therefore, commercial real estate return on investment are much higher than residential.

Reliable Tenants

Residential tenants are individuals that can be more difficult to screen. Commercial tenants are businesses or corporations that are more reliable and likely to follow property rules set by the landlord.

Longer Lease Terms

Businesses that move into a store, office, or production facility tend to stay there for a long time usually decades before they move out. This provides long-term income stability for the owner.

Value Appreciation

Property values appreciate much quicker for commercial real estate compared to residential buildings.

Benefits of Investing in Residential Real Estate

Lower Entry Cost

Residential real estate is generally much cheaper than commercial properties. This makes it easier to purchase them even for new investors. In most cases, residential properties are the only option for investors unless they are part of a real estate syndicate.

Easier Refinance Option

It is much easier to refinance a residential property compared to commercial properties.

Lenient Zoning Laws

Zoning laws are more relaxed and permits are easier to acquire for residential properties.

Higher Demand

There is a larger pool of residential property renters than commercial property renters. As businesses are switching to online stores, the demand for commercial properties is expected to further decline in the coming years.

Stability in Recession

Businesses are the first casualty of an economic recession. Commercial property landlords will find it difficult to attract businesses that are looking to rent out in a recession.

While the demand for residential properties also gets affected in a recession, the impact is not as severe because demand for housing remains high despite the state of the economy.

Choosing between a commercial or residential property for investment can be easy if you understand the benefits of each. Here we took a brief look at their differences and hope it is now easier for you to make the best decision.

For more information, you can visit Learn to invest in real estate.