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Commercial Real Estate vs. Residential Real Estate

Written by Sumeet Manhas Posted On Sunday, 06 June 2021 20:21

There are two major types of real estate: commercial and residential. Homeowners are most familiar with residential real estate because that’s the type they own or rent—usually a house and the land on which it’s permanently attached, a condominium or apartment. Commercial real estate is typically for business purposes. . Read on to find out more about both types of real estate, commercial and residential.

Residential Real Estate

Residential real estate exists for dwelling purposes—a place for people to live. However, tightly defined exceptions are sometimes possible when it comes to specific home office-type businesses.

Commercial Real Estate

The root word of commercial is “commerce;” therefore, commercial real estate is real estate built for the creation of income for its owners through commerce. 

There are generally five types of commercial real estate: 

  • Offices or office buildings
  • Hospitality-type properties, such as hotels and motels
  • Industrial properties, such as auto factories
  • Retail properties like malls and stores
  • Multi-family buildings, such as apartments


Residential Real Estate Investing

The beauty of real estate is that if you’re qualified and want to, you can purchase or invest in it regardless of the type. For example, in residential real estate, you could buy a four-unit residential property. You can live in one unit, rent the other three units out and obtain a federally-backed mortgage loan to help with the purchase. 

Keep in mind the following advantages for investing in residential real estate:

  • It’s frequently easier to invest in residential real estate than commercial because the barriers to purchasing it are lower.
  • In many cases, there’s enough residential real estate to go around for both hopeful homeowners and investors, meaning prices for it could be lower.
  • Many residential, real estate mortgage loan programs exist, including insured loans from the Federal Housing Administration (FHA) and guaranteed loans for qualified veterans from the Veterans Administration (VA).
  • The two largest, government-sponsored entities that buy residential mortgage loans from lenders are Fannie Mae and Freddie Mac. Both have lending guidelines that encourage qualified borrowers to buy residential real estate.
  • People always need a place to live. Residential properties tend to offer a steadier, though frequently lower, economic return on investment than other properties.


Of course, there are several potential downsides if you intend to invest in to residential real estate. :

  • There’s a risk of not having enough tenants to fill your properties. As a landlord, if you have vacancies, you’re still responsible to cover all mortgage loans and other expenses. Even if you own your residential investment property outright, a lower vacancy rate means you’ll make less money.
  • As a landlord, you’re on the hook for all the expenses of your residential rental property, including unplanned plumbing, electrical and other potentially expensive problems.
  • Tenants not paying rent are also a problem and it can become expensive to evict them as well as repair any property damage they create.

Commercial Real Estate Investing

Commercial real estate is frequently more lucrative than residential real estate because the vacancy risk is lower and profits may be higher. For example, commercial property tenants often pay common area maintenance (CAM and other costs, including unplanned maintenance. However, it’s also more difficult to invest in commercial real estate than residential real estate for some of the following reasons:

  • Inexpensive commercial real estate is difficult to find in many cases.
  • Many large, well-funded, commercial real estate investors exist, and they can drive up commercial real estate prices.
  • Lenders usually take a much closer look at commercial real estate loan applications. They also have stricter lending guidelines and higher credit requirements.
  • Tough economic times, such as during a recession when businesses, can quickly hurt a commercial real estate investor’s bottom line.
  • Residential real estate leases are typically short and often only run from six months to a year. Commercial real estate leases generally run from three to five years in length, which in most cases is beneficial; however, a long-term lease is also risky whenever a tenant’s business fails and rent disappears. In the meantime, your commercial property is earning you less money.

Get an Expert

Investing in commercial real estate requires time, knowledge and patience. While it’s relatively easy to invest in residential real estate, you should always obtain the services of a commercial real estate expert if you’re thinking bigger. Lastly, you may not know enough about commercial real estate or have the patience to look for or invest in it on your own. An expert commercial real estate broker will save you time, money and a lot of aggravation.

Sumeet is a professional writer who loves to research unique topics and express his thoughts by content writing.
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