In this article, we discuss how does commercial real estate is different from residential real estate!
The main difference between commercial real estate and residential real estate is their primary usage: commercial is for business, while residential is for personal.
Residential real estate is the property that one acquires primarily for self use. These constitute of the homes that one builds. Technically, residential real estate is all single family homes and one to four unit residences, while commercial real estate is anything with five or more units. Commercial real estate investments can profit through either rental revenue or value appreciation. It is more common for residential profits to come from appreciation, but these usually come from a sale made after having paid a long-term loan after a long residency. Usually the profit and value of a residential property comes with the local property values of the area. Whereas for the commercial properties it’s very genuine to profit from rental revenue, it is obvious for commercial properties to have a higher tenant turnover rate, but the constant problems are the vacancies and their potential losses.
However, both commercial and residential investments can provide a profit with rentals or appreciation, but the way they are understood legally and financially affects how this happens. Commercial real estate property is commonly used for running offices, godowns, warehouses or factories and they are very costly, whereas residential real estate property is for living which cost you little lower than commercial property. The rental charges of commercial property are different as per the rules whereas the rental cost of residential property fluctuates & mostly depends on the owner of the property who is renting. It depends on the popularity of the locality where you are searching. Residential property has consistently been the best option of speculators needing to profit by the land venture openings in India. For commercial properties good times isn’t a problem but when things go tough for a periods of time then there are possibilities that commercial, industrial space remains vacant for a longer period than residential. We have observed residential rents are medium to low in a market which can be affordable even in bad periods with government assistance. There is a social safety net for people but not business. The idea of being able to just change locks in industrial, commercial leases for nonpayment and they often spend money fixing your building to suit their needs.
Old industrial property comes also with contamination risk. Clean up can be more expensive. Lots of cities have many contaminated places. As property is older the more likely the hidden potential of deep issues only found by drilling core samples and having them tested. On industrial sites you have to do a chemical analysis of the land just to make sure it’s not toxic (toxic sites can have a history and cost you a fortune in insurance cleanup cost), zoning issues and other issues.
However, both commercial and residential investments can provide a profit with rentals or appreciation. but the way they are understood legally and financially affects how this happens. Homeownership is the most common residential real estate investment, through mortgage loans between buyers and banks, residential real estate investments are financed. This kind of loans generally comes with fixed or variable interest rates; they generally take long period from 10 to 30 years to pay off fully. High interest mortgage loans between banks and business entities are used to finance the commercial real estate investments, for this kind of investment loan amount will be much higher and pay off period will be shorter from 5 to 20 years.
Conclusion: For Residential real estate investments lower the risk but smaller returns, whereas for the Commercial real estate investments greater the risk but larger returns.