One career path or way to earn some extra income on the side is to invest in property. The good news is that you have some options as to what path you choose to go down and where you want to put your money.
In some cases you may want to rent out homes or apartments or maybe you think investing in office buildings is the way to go. Before you put any money toward your new venture it’s important to do your homework and know what you are getting yourself into. Here you can learn more about the difference between residential and commercial investments so you can make a decision as to which direction you want to head next.
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Purpose & Demand
One key difference between residential and commercial property investments is the purpose of them. For example, with residential, the main objective is to house families or individuals and provide them with a place to live. It can be anything from a single-family home to an apartment or townhome. As for the commercial side, the purpose of these buildings is to have the available space for companies to run their businesses. For example, you may invest in an office building, warehouse, or retail space.
The aspect of demand is also going to differ depending on whether you invest in residential versus commercial properties. The demand for residential is typically higher and more stable since there is a constant need for housing. On the other hand, the commercial side can be a bit more volatile since you need to take into account some other factors such as the economic conditions and business climate.
Maintenance & Management
There are also differences in the maintenance and management approach and requirements with residential and commercial properties. One good example to point out is air duct cleaning services. There’s going to be a difference with the size and complexity of the duct system, cleaning process, equipment used, as well as the frequency of cleaning it.
Managing a residential property is usually going to be a little easier since there are housing standards in place you need to meet and they usually only have basic amenities to care for. Managing a commercial property tends to be a bit more complex. A tenant in an office building is typically going to have specialized needs that will require more expertise and heavy lifting.
Risk
While there’s some risk involved in both scenarios as an investor, there are some key differences between the two to be aware of. Generally speaking, residential properties tend to carry with them a lower risk attached to them. The reason is that you’re likely to experience a bigger pool of buyers and potential tenants. If you take good care of your property and it’s in a prime location you likely won’t have a lot of trouble filling it.
Investing in a commercial property brings with it a higher risk to be mindful of. Your property may unexpectedly become vacant due to a company going out of business or your tenets choosing to move. However, the upside of investing in a commercial property is that it tends to produce higher returns. You’ll collect more in rent and these buildings appreciate faster.
Financing
If you’re contemplating investing in a residential or commercial property then you should consider the reality that there are financing differences and challenges you may face. You may have an easier time securing a residential loan with a lower interest rate compared to a commercial loan. The interest rate with a commercial loan may not only be higher but these loans usually require a more significant down payment. Get your finances in order so that you know how much you have to spend and put toward your investment. You not only need to be able to pay off the loan but also have money set aside for upkeep and repairs or updates.
Lease Terms
The lease terms are also going to differ when you’re working with a residential property versus a commercial one. A residential lease term tends to be shorter such as one year. While it’s common for a commercial lease term to be longer. In some cases, they may extend to anywhere between five and ten years, for example. You have to be prepared to find new tenants if the lease terms change or are broken. With a residential property, you may have to do this every year to ensure you can collect rent. Residential tenants are usually responsible for rent and utilities while a commercial tenant may cover expenses like taxes, insurance, and maintenance.