The Difference between Investing in Residential and Commercial Properties

The differences between investing in residential and commercial properties are night and day.  When investing in residential properties, you are investing in places where people will live.  Whether they are single-family homes, duplexes, apartments, or condos, to name a few, people live in residential properties.

Commercial properties, on the other hand, are places where business is conducted.  Commercial properties encompass a far broader range than residential.  Commercial properties can include restaurants, supermarkets, office space, and mom-and-pop stores, to name a few.  Due to this wide range of possibilities, commercial investing may be more difficult.

As stated above, people live in residential properties.  As such, the basic premise for tenants is the same regardless of the size of the property.  You show a property and a person or people decide whether they want to purchase or rent the property.  There is no build-out, you do not have to worry about signage, there are no tenant improvement costs, and you should not have to worry about zoning or restrictions.

Commercial properties, on the other hand, require consideration of all of these things and more.  If you purchase an office building, you have to consider whether the new tenant is going to remodel or improve the space and who (you or the tenant) is going to pay for those improvements.  Additionally, common area maintenance expenses need to be spread among all of the tenants.

For all of these reasons, commercial properties generally cost more, but can also be more profitable.  Of course, this is not an absolute.  There are many residential properties that are more profitable than commercial properties that are less expensive to purchase and maintain than certain commercial properties.

If you want to invest in commercial properties and are currently investing in residential properties, you may want to first invest in a large residential property (such as an apartment complex).  Doing so will enable you to have a smoother transition from residential to commercial investing and will afford you fewer surprises.

Each has their advantage and disadvantages, but they are extremely different.  The lure of bigger profits from commercial investing may be enticing, but the properties will be more expensive and there are many more regulations and obligations you will need to concern yourself with.  Residential properties usually are not as profitable, but they are easier to manage and cheaper to acquire. 

Ultimately, you need to decide the scope and goals of your investing in order to decide whether you should venture into residential or commercial real estate investment.