top of page
  • Writer's pictureMichael Reyes

Commercial vs Residential: What Is A Better Investment?

Updated: Feb 26

Let’s be honest: Real estate investment is challenging. You keep on tossing between which kind of property I should invest in. Should I invest in commercial real estate or residential real estate? Which location would be best for me? Which kind of property will bring me more returns? 


If you are constantly confused between the loops of such questions, you are at the right place. We will provide all the answers to you. While both residential and commercial real estate are popular investment choices, there are significant differences between the two. Let’s find out more about commercial vs residential real estate. 

 

What is commercial real estate?

As the name suggests, commercial real estate refers exclusively to the properties used solely for business-related purposes or providing workspace to individuals instead of personal living space, which comes under residential real estate. Many individuals prefer commercial real estate options for income-generating activities. For instance – Commercial real estate properties include office buildings, restaurants, warehouses, coffee shops, healthcare facilities, and many more. Leasing, holding, or reselling commercial real estate properties are the ways to generate income and make money. 


Commercial Real Estate

What is residential real estate?

Residential real estate refers to the properties that you can live in. It could be single-family homes, condos, apartments and townhouses. These properties are meant for residential purposes and not for business. All other properties that do not fall under the category of residential real estate come under commercial real estate. 


Residential Property

Commercial vs residential: What should you choose? 

Before deciding on which type of property you should put your investment into, you must know the significant differences between the two. What are they? Let’s find out.

 

Tenant expenses

When it comes to residential properties, tenants generally have fewer responsibilities except paying the rent. In fact, some leases don’t even include utility costs but require the tenants to pay separately for their water, electricity, and utility bills. 


On the other hand, commercial expenses are wider, including insurance, maintenance, and property taxes. In the case of a triple-net lease, all three expenses are expected to be paid by the tenant. Conversely, the owner makes the payment in gross lease. There is a modified lease in which maintenance is split between the tenant and the owner, and insurance and property taxes are covered by the tenant. 

 

Lease characteristics

Owners of residential real estate properties are most likely to manage their property by themselves. The reason is that they find it simple to deal with it legally. In residential properties, typical lengths, renewal periods, and common terms are easy to implement. 


But that’s not true in the case of commercial leases. You will have to take care of the variables like built-in variable rent increases, longer leasing times, and the knowhow of termination clauses. Thus, you will have to pay special attention to these details if you are considering a commercial real estate clause. 

 

End-user needs

What does the end user of the residential property need? A place that he can call his home and where they can call their day off at the end of the day. 


Comparatively, commercial property users want something to assist with their business and a partnership that can benefit them as well as the associated stakeholders. 

 

Risk profiles

Buying residential properties comes with a lower risk profile. Talking about residential properties, they have more stable demand, are less expensive, and don’t get much affected by the economic downturns. As they are used for living purposes, people tend to live in them for the long term, thereby having a stable source of income stream for the owner. Moreover, financing them is easy, and people find them more affordable for individual buyers. 


Risks associated with commercial real estate are generally higher. They are more prone to the risk of economic downturns and are more expensive. You need to have an extensive and brilliant credit history to finance commercial properties, not to mention their income stream is more volatile due to the higher vacancy rate. 

 

Loans 

A common loan given for residential real estate is a mortgage loan, which you can get from banks and other lending institutions. These loans are given by keeping the creditworthiness and income of the borrower in mind in addition to the property value. 


Commercial real estate loans are vast and include bridge loans, equity loans, small business loans, and construction loans. 


Commercial Real Estate Loans

Locations

Location plays a vital role in determining the value of residential property. For instance – Properties in posh areas or desirable neighborhoods will be valued more. If factors like schools, parks, and healthcare facilities are near the property, it will increase its demand and value. 


“Location” holds the same importance for commercial real estate, too. For instance – a retail space in an easily accessible and highly visible area is more valuable. A warehouse is more likely to have high value if it is outside the metro area and offers easy access to an interstate highway. 


Making a choice between Commercial vs residential depends on considering your own preferences and interests. Some investors prefer investing in residential real estate, while some are impressed with the idea of higher returns if they invest in commercial real estate.


Ultimately, the decision depends on you and your risk tolerance. Conduct thorough research and seek professional guidance before making any decision. You can reach out to commercial real estate brokers in El Paso, TX, for further information to assist you with your financial goals. 

Some other things investors should remember while picking an investment option:

 

Market analysis

You have to dive deep into the nitty-gritty of the market to understand the dynamics of local real estate. Deeply analyze factors like vacancy rates, projected growth, demand trends, and rental yields. Also, look into the economic factors like infrastructure development, future market opportunities, and employment opportunities, to name a few. Analyzing the market will help you pick better investment options.

 

Commercial Real Estate Market Analysis

Diversification

Have you heard the saying, “Don’t put all your eggs in one basket”? Well, in the investment world, this means that you should not invest all your money in one place; rather, you should diversify. Invest separately some amount in the commercial property and some in the residential one to achieve the balance to mitigate the risks. By talking to the experts, find out the optimal allocation between residential and commercial properties. 

 

Long-term outlook

You have to think about the future in the long run. Whether you choose the residential property or the commercial one, evaluate its long-term prospects. Factors like population growth and urbanization trends should be taken into account. Assess the type of property that is going to meet your needs in the long run. 

 

To make a long story short

At the end of the day, only you know what you want from your investment goals. If you are struggling to make a decision, fret not. Michael Reyes, an expert commercial real estate agent in El Paso, will help you make the right choice. Being a real advocate of real estate, I know how the landlord thinks and will do my best to provide you with more leverage. So, discover your ideal space with a team of commercial real estate brokers in El Paso Tx and let your wealth journey begin.


44 views0 comments

Comments


bottom of page