Commercial Property vs Residential Property Investments: What Every Investor Needs to Know

Commercial and residential property compared side by side

Investing in property is one of the best choices a person can make for their financial future. By investing in real estate, you purchase something that can bring an income while you own it and, by growing in value, allow you to turn a profit when you sell.

Real estate investments generally fall into two categories: residential and commercial. The decision to purchase one or the other should take into account many factors, and while both are useful, you may find you are more suited to a certain type.

Commercial Property vs Residential Property Investments

Note: San Diego Purchase Loans is not an investment expert. Before making any decisions on your investment strategies, talk with a qualified professional.

Advantages of Investing in Commercial Property

Longer Lease Terms

One of the main advantages to investing in commercial real estate is that you can often get longer lease deals from your tenants. In many cases, residential leases are on a year-to-year basis, but with commercial property, businesses are often willing to sign leases for five or ten years, or even longer in special cases.

With longer leases, you will have more assurance of a reliable, consistent cashflow, as well as the chance for lower vacancy rates. There can also be lower turnover costs as a result of not needing to advertise the property every year.

Longer lease terms can come with a downside, such as the chance to host a bad tenant for a longer period, but in general most landlords (both commercial and residential), prefer long leases.

Strategic Changes Can Bring Better Profits and Higher Property Value

With residential property, it’s hard to make a significant upgrade on the overall value of the property, at least not without a comparable investment. In general, investing in your currently-owned residential property is a 1-to-1 proposition, or worse. In other words, for every dollar, you’ll only get about a dollar or less in returns on the value of the property, and it may not bring a significant increase to the property’s earning potential.

However, with commercial property you can make more strategic changes that increase the value and the earning potential of your investment. For example, you can make strategic changes to the floor plan to appeal to retailers, then use these changes to charge more in monthly rent.

Retails store with fashionable clothing.
With the ups-and-downs of the economy, commercial property brings more complexities to owners, but can also bring stronger profits.

Commercial Investment is More Complex

When investing in residential property, there are some basic ratios and business concepts that you need to understand, including cash-on-cash return, ROI, and capitalization rate. With commercial properties, you need to understand all of these concepts and more, as they will be crucial to the profitability of the property.

With commercial real estate, the prospect is more like running a business, and you’ll need to focus on many factors, including increasing your net operating income. Before buying, you’ll need detailed records on maintenance, expenses, rental history, and more, as well as profit and loss statements for the property. All of these make commercial investing far more complicated than comparable residential investments.

Investing in Residential Property

Lower Point of Entry

Perhaps the strongest attraction to owning residential property over commercial is the chance to enter into ownership at a lower cost. Yes, you can certainly find extremely expensive residential properties, and there are commercial properties available at low prices, but in general you can buy a residential property for far cheaper. Also, if you are buying a low-cost commercial property, there is a chance that you could be buying a property that is less profitable.

Maintain Consistent Income During Economic Downturns

Economic swings come and go, and while some commercial-property owners may be able to sustain high profits through a financial downturn, residential properties tend to maintain a more consistent performance. Simply put, they’re not as susceptible to the financial swings; after all, even when the economy is slow, people need a roof over their heads. On the other hand, they may not want to invest in a business, reducing your chances of finding a commercial tenant.

Trend is Renting Longer, More Tenants in the Market

Earlier, we discussed that with commercial property you are more likely to have long-term leases. While this remains true, it’s also true that people are renting for far longer periods than in previous decades. Young adults are more mobile, and more likely to move from town to town; this mobility has brought an increase in the overall length a person remains a renter. (Just not a renter in the same place.)

There is also an increase in the overall number of renters. According to a survey by RENTCafé, 22 major cities in the U.S. have more renters than owner-occupants. This suggests that you will have a better chance at finding a tenant for residential property than in years past.

So…Which is the Better Choice?

There is no “better” choice. However, for some people residential property may be preferable, while others will prefer commercial property. If you are simply looking for a place to make a small side investment, a place to diversify your investment portfolio outside of stocks and mutual funds, then residential property may be a good choice. If you’re not interested in taking a hands-on approach for your investment, perhaps you should stick to residential.

However, if you want the chance for major profits, and are willing to commit the time and energy it takes to realize a large profit from your investment, then you may prefer a venture into commercial property.

Commercial Property vs Residential Property Investments: Diversification May Be Best

So far we’ve talked about residential and commercial property as a one-or-the-other situation, but it’s important to note that you can certainly own both. In fact, this may be a good strategy for diversifying your overall investment and property portfolio.

If you are interested in making a real estate investment, San Diego Purchase Loans has many loan products that can help secure appropriate financing, including our minimum-down-payment loans for investment properties. You could also use HomeStyle renovation loans to make purchases of certain residential properties.

Contact our staff today and we’ll take a common-sense approach to underwriting your investment loan.

CONTACT SAN DIEGO PURCHASE LOANS TODAY!

Testimonials

“Hi Juliann and Chad, I wanted to take a moment and thank you guys for what would have been impossible for us to do without you. We wouldn’t have our keys in hand if it had not been for your help in navigating the financing, and Juliann’s perseverance in getting the rest of the players in the transaction to deliver. Out of everything, our interaction with your office has been a highlight – and your customer service has been beyond everything we’ve experienced in the real estate industry. Is there a way we can provide any reviews, ratings, testimonials, or other statements that can express to your potential future customers how much you guys do to make the customer’s life easy? Please let us know how we can share our great experience with you to the rest of the public. Whether we refinance this under a VA, or get in a bigger/better house in a few years, we’re not going to go anywhere else for financing. We are customers of yours as long as you are in business. Thanks again for getting us in a house!”

“Chad, it was a pleasure working with you. Your loan was smooth, speedy, and we were kept well informed. I will make sure to prioritize offers where you are the loan officer as I know they run smoothly.”

When looking for a house, we had couple recommendations for a lender. After talking with all the lenders, many were difficult to work with and couldn’t get it done as quickly as we needed. I was referred to Chad Baker’s team and I am glad we did. Not only did they get the things done quickly for us, they were very easily to get ahold of. It wasn’t rare to get a response within 15 minutes whenever an email was sent. I could not express how friendly and outgoing this team is. And on top of that, they came back with the best offer for us amongst all the other brokers. I am glad I worked with these guys. If you are looking for a lender…MAKE SURE TO CALL CHAD BAKER AND TEAM!!! Thanks Chad for all your hard work. Next time we buy another house I am calling you first!