Choosing between residential and commercial real estate investing isn’t a decision that you can make speedily. Each scheme has its benefits and challenges.

An investor settles on a strategy depending on his liquid capital, goals, time and risk tolerance. You should go through the benefits below before making a decision.

Commercial vs Residential Property: The Difference 

The stark difference between a commercial and residential property is this: the commercial property has five or more units, while residential real estate is one to four-unit rental residences and all single-family homes. 

Residential real estate consists of duplexes, quadruplexes and condos, whereas commercial real estate comprises retail, office, industrial, multifamily (of five and above units), unique purpose buildings and hotels. 

Another distinct difference between residential and commercial properties is the kind of tenants the building attracts. Commercial buildings are usually leased to businesses, while residential properties are customarily leased to individuals and families.

Finally, every property type has a different set of opportunities. Commercial real estate usually grants investors a much broader range of potential investments. 

For instance, commercial property investment capital is more than residential ones. Contrastingly, residential real estate investing gives investors a more active part in the property. 

Pros of Commercial Property Investment 

  • Qualified tenants: Finding qualified tenants who will maintain the property well can be daunting for investors seeking to rent out their small multi-unit or single-family property. 
  • It’s easy to increase value: determining property values is one of the significant differences in commercial and residential real estate. 
  • Higher returns: The saying “with greater risk comes great reward” is entirely the instance with commercial properties and higher returns. Commercial property returns and cash flow is much more attractive compared to residential properties returns.  
  • Triple net leases: Even though triple net leases vary depending on the case, they are valuable investors in commercial real estate. A triple net lease allows the property owner to forgo paying any property expenses. 

Pros of Residential Property Investment 

  •  Residential real estate is advantageous as it has a vast pool of prospective buyers and tenants than commercial real estate, which depends on businesses. 
  • Reduced tenant turnover: Real estate investors who focus primarily on single-family homes do not deal with tenant turnover often.
  • Lenient zoning laws: as a commercial investor, there are more red tapes you will have to deal with: building permits are hard to get, and zoning laws are more strict.   
  • Cost of Entry: While you can acquire commercial real estate loans as a newbie investor, the initial investment cost of residential real estate is much less than that of commercial real estate. 

Commercial vs Residential Property: Loan Options

Traditionally, banks usually distribute residential loans and mortgages to borrowers. Residential mortgages typically are between individuals and banks instead of commercial mortgages, which generally are between banks and companies.  

In the eyes of many lenders, commercial loans are riskier compared to residential loans. Therefore, commercial loans have shorter terms and higher interest rates.

This is because there is an entire secondary market for commercial lenders different from conventional banking institutions. 

An investor can only qualify for a commercial loan if they have a solid credit score and have a business plan. Compared to residential lenders, commercial lenders are more concerned with the projected cash flow of the property.

Commercial lenders will want to know the type of maintenance needed, who will pay utilities and many more details before giving you a loan.

If you’re unsure on what type of loan is best for you, Joust’s free home loan calculator is a great resource to help guide you through your investment decision. 

What’s Better? 

Deciding whether to invest in a residential or commercial property is challenging since both come with their own set of advantages and disadvantages.

Both investments will diversify your income portfolio, both have notable tax benefits, and both will bring you a step closer to attaining financial freedom. Therefore which one should an investor consider?

This question essentially relies on what an investor hopes to achieve when investing in real estate. As an investor, take time to evaluate your long term and short term goals.

If you want to make some quick cash, wholesaling or rehabbing, investing in residentials is advisable. On the other hand, if you desire to invest for the long haul and want to earn passive income, investing in commercial properties is recommended.