Residential vs Commercial Real Estate Investing

  • March 15,2021
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Most investors discuss two main kinds of real estate investment: commercial and residential. There are several options in real estate to invest in, but on what basis should you choose?

It is a prerequisite to learn about the types of the most booming real estate in this age. What is the difference between them? What are their risks and benefits? 

Read more to discover the answers to these questions.

 

The main differences between Residential and Commercial Real Estate:

The most booming real estate types are residential and commercial. Intuitively, a residential real estate is for personal-use while a commercial real estate is used for business.

Residential property includes apartments, single-family homes, duplexes, etc.

Commercial property includes hotels, offices, retail shops, warehouses, etc.

With residential investment, emotion is an important factor as the property becomes the individual’s or the family’s place of residence. 

On the other hand, commercial property relies on productive tenants. Productive tenants are those who engage in business activity to generate their income. This is why commercial property is seen as a more productive asset.

 

The main risks vs. rewards to each investment, Which is more complex?

Residential real estate investment requires less knowledge than commercial investment, and this is because we naturally understand the landlord-tenant relationship through being individuals who require a residence. It also requires less equity to invest in residential real estate, as the LTV (loan-to-value) ratio is lower when the bank issues it to commercial real estate investment.

While any investment requires a lot of research and knowledge, it can’t be argued that commercial real estate investment requires a lot of in-depth knowledge and expertise to delve in. With commercial real estate investment, there is a lot of investigation to be done on terms of the property’s condition, operational functionality, underlying tenant covenant, property management etc. It takes a thorough understanding of the long-term relationship between a landlord and a commercial tenant as the commercial lease agreement requires protection.

 

Financing each real estate investment: Which is easier to finance?

It also requires less equity to invest in residential real estate, as the banks issue a higher LTV (loan-to-value) ratio to residential investors. On the other hand, the LTV ratio is lower when the banks issue it to commercial real estate investors.

Why? Because it is of a higher risk for the borrowers, such as the banks, to write a loan if tenants with long leases aren’t in place.

 

Following the demand market: Which has a larger buyer pool?

As we mentioned previously, we all need a place for residence at the end of the day, which makes residential real estate always on demand for both rental and buying (knowing that the millennial market is heading towards renting instead of buying).

Additionally, the retail sector is the first to get affected when there is an economic recession, which drives down the property rental/buying prices in locations that are affected by the declined economy. Not to mention that IoT (internet of things) has a playing hand in everything nowadays. More people are heading to pursuing their commercial activities online, which dispenses their need to demand solid commercial property such as retail shops.

 

Wrapping Things Up

It is a known rule of thumb that the higher the risk, the greater the reward. Be it residential or commercial real estate investment, both can have high ROI (return on investment) if the right cards were played. To avoid the consequences of uncalculated risks, it is vital to have experience in several aspects of investment; such as contracts, loans, real estate booming locations, etc. The expertise of Esrar real estate consultants will save you the hustle of this process and secure the highest-rewarding investment.

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