Commercial and Residential | Business vs Lifestyle Properties
Have you seen For Sale signs on properties and thought that they looked a little bit different? That’s because in real estate, there’s a distinct difference between commercial and residential real estate and even the aesthetics of signs reflect that!
Commercial and Residential Real Estate: How are they different?
In summary–commercial properties are used to conduct business, meaning to facilitate some kind of transaction.
In contrast, residential properties are primarily used as a place of residence, or as a home.
What is commercial real estate?
Commercial real estate refers to properties that are used for business purposes. This can typically range from more common types of business like restaurants, retail, or professional services–like an insurance office. Then, there are less common commercial properties, or ones that don’t commonly get noticed like manufacturing and warehouses. Here’s a quick list of commercial uses:
Office–generally few displays, primarily used as a space for employees to work, or to meet clients
Retail–tends to have some kind of branding or display to attract customers to walk in
Industrial–like a manufacturing plant, or large facility that processes raw materials or goods
Warehouse–a large facility primarily used for storage and the movement of goods.
Hospitality–basically a hotel/motel
Here are some examples of commercial properties, so you can get a visual:
What is Residential Real Estate?
Residential real estate is more straightforward. It really includes anything you typically think of when you think of a house in which an individual, or family resides. Common types of residential properties include:
Single family residence–a standalone house that does not typically share land or common areas with any other house
Condo–may be synonymous with an apartment, and often has an HOA (homeowner’s association) that helps maintain common areas and parts of the property (like the roof, or hallways). Usually does not have land ownership or anything other than the unit itself
Townhouse–somewhat similar to a condo, and often has an HOA, but sometimes also has limited access to land like a backyard, or may have multiple floors.
Duplex, Triplex, Quadriplex, etc.--sometimes referred to as a multifamily home, these properties contain multiple units, or buildings, on the same piece of land with one common owner. Often, the units are rented out independently as rental income properties. Similarly, some families prefer to live in a multi-unit property for added privacy from other cohabitants.
What is the difference between commercial and residential real estate?
Commercial real estate refers to properties that are intended for use by businesses or organizations, such as office buildings, retail stores, warehouses, and hotels. The primary purpose of commercial real estate is to generate income or profit from the rental or sale of the property.
On the other hand, residential real estate is intended for personal use, such as homes, apartments, and condominiums. The primary purpose of residential real estate is to provide housing for individuals and families.
The differences between commercial and residential real estate are primarily related to their intended use and the types of tenants they attract. Commercial properties generally have longer lease terms and higher rental rates, while residential properties have shorter lease terms and lower rental rates. Additionally, commercial properties may require more maintenance and may have higher operating costs, while residential properties typically require less maintenance and have lower operating costs.
Another significant difference is that commercial properties are typically valued based on their income potential, while residential properties are valued based on comparable sales of similar properties in the area. As a result, commercial real estate investing requires specialized knowledge and expertise, whereas residential real estate is more accessible to individual investors.
Commercial vs Residential Real Estate Agents
While all realtors/real estate agents are licensed and legally able to do both types of real estate transactions, the skills required for a commercial vs residential realtor can be very different.
Commercial and residential real estate agents have different skill sets and responsibilities, as they work with different types of properties and clients.
Commercial real estate agents typically have specialized knowledge and experience in working with commercial properties, such as office buildings, retail spaces, warehouses, and industrial properties. They must understand market trends, zoning laws, and financing options for commercial properties. They also need to have strong negotiation skills to work with business owners, developers, and investors.
Residential real estate agents, on the other hand, work with individuals and families to buy or sell homes, apartments, and condominiums. They need to have strong interpersonal skills to understand their clients' needs and preferences, as well as knowledge of the local housing market, property values, and financing options.
Both types of agents need to be licensed in their state and have a deep understanding of real estate law and regulations. However, commercial real estate agents may require additional certifications or education in areas such as property management, finance, and commercial leasing.
In summary, commercial real estate agents work with commercial properties and clients, while residential real estate agents work with individual clients buying or selling homes. While there is some overlap in skills and knowledge, each type of agent requires specific expertise and training to be successful in their respective fields.
What are the benefits of commercial real estate?
For someone who is deciding between investing in commercial real estate or residential, here are some strong considerations for commercial properties:
Higher income potential: Commercial properties generally have higher rental rates and longer lease terms than residential properties, which can lead to greater income potential for investors.
Diversification of assets: Investing in commercial real estate can provide diversification of assets for investors, as it is a separate asset class from stocks and bonds.
Appreciation potential: Commercial properties can appreciate in value over time, especially if they are located in high-demand areas and are well-maintained.
Tax benefits: Investors in commercial real estate can take advantage of several tax benefits, including depreciation deductions, 1031 exchanges, and capital gains tax treatment.
Professional relationships: Investing in commercial real estate can lead to valuable professional relationships with tenants, property managers, and other real estate professionals.
Control over the investment: Investors in commercial real estate have greater control over their investment compared to other types of investments, as they can actively manage the property and make decisions that can impact its performance.
Inflation hedge: Commercial real estate can act as a hedge against inflation, as rents and property values tend to increase in periods of inflation.
Overall, investing in commercial real estate can provide attractive returns, diversification of assets, and tax benefits for investors who are willing to do their due diligence and carefully select properties that meet their investment goals.
On the other hand, here are some considerations for residential real estate
What are the benefits of residential real estate?
There are several benefits to investing in residential real estate over commercial real estate, including:
Lower barrier to entry: Residential real estate investing typically requires less capital than commercial real estate investing, making it more accessible to individual investors.
Easier to finance: Residential properties are generally easier to finance than commercial properties, as they are often viewed as less risky by lenders.
More stable occupancy: Residential properties tend to have more stable occupancy rates than commercial properties, as people always need housing, regardless of economic conditions.
Less maintenance: Residential properties typically require less maintenance than commercial properties, as they have fewer mechanical systems and are less prone to wear and tear.
Larger pool of potential tenants: The pool of potential tenants for residential properties is larger than for commercial properties, as almost everyone needs a place to live.
More predictable income: Residential properties tend to have more predictable income streams than commercial properties, as rental rates are generally more stable and predictable.
Higher liquidity: Residential properties are generally more liquid than commercial properties, as there is a larger pool of potential buyers and sellers.
Overall, residential real estate investing can provide attractive returns and a more stable income stream for individual investors who are looking to invest in real estate. While commercial real estate can offer higher income potential and other benefits, it may require more expertise and capital to invest successfully.
How does financing differ between commercial and residential properties?
Financing terms, loan amounts and general provisions can vary widely between residential and commercial loans.
Financing for commercial and residential properties differs in several ways, including:
Loan terms: Commercial loans typically have shorter loan terms than residential loans, with terms ranging from 5 to 20 years, while residential loans often have terms of 15 to 30 years.
Interest rates: Commercial loan interest rates are generally higher than residential loan interest rates, as commercial properties are viewed as riskier investments than residential properties.
Down payment requirements: Commercial loans typically require larger down payments than residential loans, often ranging from 20% to 35% of the property's value, while residential loans may require as little as 3% to 5% down.
Loan-to-value (LTV) ratios: Commercial loans typically have lower LTV ratios than residential loans, meaning lenders will lend a smaller percentage of the property's value. Commercial LTV ratios often range from 60% to 75%, while residential LTV ratios can be as high as 97%.
Underwriting standards: Lenders have more stringent underwriting standards for commercial loans than for residential loans, as they are evaluating the income potential of the property rather than the income of the borrower.
Appraisal process: The appraisal process for commercial properties is more complex than for residential properties, as appraisers must consider the income potential of the property as well as the property's physical characteristics.
Overall, commercial loans are viewed as riskier than residential loans, and lenders require higher down payments and shorter loan terms to mitigate that risk. Borrowers for commercial properties also typically need to provide more financial documentation and meet higher underwriting standards than borrowers for residential properties.
FAQs:
What is difference between commercial and residential?
The main difference between commercial and residential properties are the use cases. For commercial properties, most tenants are there to conduct business and make a profit. On the other hand, residential properties are mostly used for living.
What is the difference between residential and commercial and industrial?
Residential properties are where people live and sleep. Commercial properties are where people conduct business or sell goods/services, like a storefront. Industrial properties are a larger type of commercial property where goods are created, stored, or transferred for large operations.
What are examples of commercial and residential buildings?
Residential properties include single family homes, condos, townhouses, duplexes, etc. Commercial properties include shopping centers, retail stores, plazas, warehouses and storage facilities.
