Residential vs Commercial Rental Income, Which One Is The Best
Residential property
A residential property is described as a property purchased by the property owner to either live in it or lease it out to a tenant to gain rental income. Residential properties usually include, single family homes, townhouses, duplexes, condominiums and multi unit apartment buildings.4
Commercial Property
A commercial property is described as a property used for business activities such as office spaces, shops, malls, hotels, entertainment centers, industrial buildings, public facilities etc. The commercial real estate market is huge as there are many companies that prefer to rent an office space to run their business rather than own it. This also increases the scope of return on investment for the investor as they will be able to receive a steady rental income. Also, the growth in commercial real estate properties has been steady as a result of growing demand and supply that just about matches it; so the prices are also increasing steadily.
Benefits of Residential Real Estate Investment
Cost of Entry
The cost of entry in a residential real estate market is quite low as compared to that in a commercial real estate property. It is possible to get a loan on commercial real estate properties for new investors but they might not have enough savings to make the down payment on a commercial property. The cost of entering residential real estate is not as high as compared to the commercial real estate. An average investor might have enough saved to buy a single-unit family home. Thus, the cost of entry here is low.
Decreased Tenant Turnover
In residential real estate investment, the investor tries to find a tenant that will stay for a longer time. Usually, those who rent a residential property are often the people who have a job. They want to live closer to their offices so as to save time and money on commuting. So, such people change their residence in very rare cases. If there is a change in their job or job location or if the rents increase. This makes the turnover ratio lower in residential property.
More lenient zoning laws
With residential real estate, the zoning laws and other rules and regulations are quite lenient and small scale as compared to commercial real estate. Commercial investing brings far more bureaucracy and red tape for the property owner.
Larger buyer and renter pool
Residential real estate benefits from having a wide pool of potential buyers and tenants. These renters are usually looking for a place of residence near their office area. So if the location of their job changes they may end up changing the place of residence. Although the pool of buyers and renters is huge, it is also very volatile.
Performs better in Economic Crisis
Businesses are generally the first to bear the consequences of an economic downturn which can impact commercial investors in a number of ways. As a result, commercial property owners could find it difficult to attract tenants during an economic crisis. Now, residential real estate is not exempt from these challenges; however, residential property owners will gain from the fact that even if there is an economic crisis in the country, people still need a place to stay. So, the demand for residences may slow down but it will never die. In commercial real estate, there is no assurance that the business will remain in operation until the period of the commercial lease ends.
Benefits of Commercial Real Estate Investment
Higher Return
When compared to residential property returns, commercial property returns are much higher and far more appealing. Commercial real estate investments have an annual average return of 12.7% when compared to S&P 500 which has an annual average return of 8.8% for the past 15 years, according to the National Council for Real Estate Investment Fiduciaries (NCREIF) Property Index.
Qualified Tenants
Commercial property tenants generally tend to be businesses who operate it as their office wherein they may call their clients. The office then becomes the face of the business. So it is more likely that they will take care of the property and abide by the rules and regulations.
Triple Net Leases
Although triple net leases vary depending on the circumstances, they are extremely valuable to commercial real estate investors. The property owner is not required to pay any property costs under a triple net contract. All property costs, including real estate taxes are handled by the lessee, leaving the property owner with only the mortgage to pay. Large corporations will usually sign this form of lease to retain a consistent look and feel for their branding. As a result, they manage those expenses while the investor pays nothing in operating costs. Investors may use a variety of net leases; however, a triple net lease is exclusively for commercial properties.
Longer Lease Terms
Commercial leases are usually much longer than residential leases which typically vary from 6 to 12 months. It is not unusual for commercial properties to be leased for periods ranging from 5 to 10 years. This means that the turnover costs and vacancy rates are much lower for commercial property investors. Longer lease terms are a sign of positive and consistent cash flow for those concerned with marketing a property from year to year. Commercial property owners can find themselves with less desirable tenants for longer periods of time but with proper legal protections and the right application process, investors can avoid any long term issues.
Easier to increase value
The value of commercial real estate is directly impacted by how much revenue it generates. In simple words, the higher the amount of revenue a commercial property generates, the higher its property value will be. In residential real estate the value of the property is mainly influenced by comparable properties. Thus, with the right kind of tenants, a commercial property owner could see an increase in the property value at a much faster rate than residential property owners.
Conclusion
It is always important to look at both the pros and cons of an investment before making a final decision. Both residential and commercial property investment has its own positives and negatives, you have to look at your own requirement and budget to decide which investment option is the best for you.
