When investing in real estate, investors can opt to put their money in a house, or look, instead, to an office or retail space to rent it out. It is important to take note of their differences. For instance, how do residential and commercial properties differ in terms of start-up cost, value, and rent?
Residential properties, needless to say, are homes for sale. Investors in this sector often rent or sell the property to homebuyers, tenants, fellow investors, or, in some cases, real estate companies. Commercial properties, on the other hand, are retail and office spaces, in which investment returns come in the form of rent. Commercial properties are leased to businesses -- companies, in the case of office spaces; and shops to restaurants, in the case of retail spaces.
Investing in residential units require lower costs. By contrast, investing in commercial properties require much more start-up money. But because they cost so much more, rental returns are also significantly higher than what one can get from a residential asset.
Determining the value of a commercial asset varies wildly from the approach taken for residential properties. Homes for sale require only a comparative market analysis (CMA) detailing how much similar properties have sold within the neighborhood. By contrast, commercial properties are valued using the income approach. This involves multiplying the income the property makes in a year with a cap rate, which varies per location and by type of property. It is a much more complicated means of evaluation.
In the case of a residential asset, the investor can opt to put the property up for sale, rent, or rent-to-own. If the investor would rather not be saddled with the responsibilities of a landlord, he can simply sell the property. Meanwhile, putting it up for rent typically requires the tenant to lease the property for one to two years, with an option to renew the lease after every year. Landlords are often in charge of repairs and maintenance costs. On the other hand, tenants of commercial property often shoulder the maintenance costs, as well as property taxes and insurance. The minimum term of the lease is also at least five years, on average.