For those that are thinking of beginning their investment journey, real estate is a popular choice. It’s less risky than trading stocks, and when done correctly, it can make you a significant monthly income. However, knowing where to get started can be challenging. You can either choose to invest in commercial or residential property.
Each of these has its own pros and cons, so to help you decide, we are going to take a look at just some of them. Want to learn more? Then let’s get started!
Benefits of Commercial Property
Higher yields
Generally speaking, the commercial property allows you to earn higher yields compared to their residential counterparts. This is because they are often in highly sought-after locations and are on larger pieces of land. They are usually in demand, and in some cases, you rent out spaces to different companies. These can be either empty or decorated with modern private office furniture to increase value.
Longer lease length
Another advantage is that commercial properties also have a much longer lease length. Businesses are looking for a secure and stable location to do their work and can stay in one place for years. This means you’re not going to have as many vacant periods, improving your yearly rental income. Alongside this, tenants will most likely be reliable and on time with their payments.
Less maintenance responsibility
Commercial property usually requires less maintenance as it is not being used 24/7. Individuals are coming to work and leaving at the end of the day. They are more likely to take care of the space and may even be paying for regular cleaning to improve their business reputation. This means maintenance costs are reduced so that you are earning more of a profit. In some cases, they may be in charge of it altogether.
Disadvantages of Commercial Property
Higher initial costs
Certainly, one of the main disadvantages of commercial property is that while you can make a higher profit, you’re also going to have higher initial costs. Depending on the type of property, you could be spending over a million dollars. Not everybody has this money upfront, and there are hidden fees you need to think about as well. From insurance to agency costs, you’ll have to be prepared.
Longer vacancy periods
Above, we talked about how you will have fewer vacant periods with commercial property. However, the building will be empty much longer than residential real estate when a lease is finished. It could be around six months or more until you find tenants, especially if you’re in an area with a lot of competition. You’ll need to have savings or other forms of income to cover this period of time.
Advanced knowledge required
Another con of commercial property is that it requires a lot more knowledge to get started. Alongside having a solicitor that can draw up a lease suitable for both yourself and the tenant, you’re going to need to do research on your responsibilities as a landlord.
You can’t DIY jobs yourself and will instead need to go through reputable and experienced professionals. It’s a lot more work than residential real estate.
Benefits of Residential Property
Easier start-up process
In order to get started in commercial real estate, you need to look at the economy to avoid falling victim to economic shocks. This process is much more straightforward for residential property, and you won’t need to conduct as much research. In some cases, you can use a deposit of as little as 5%.
Alongside this, there are a lot more guides out there to help, like real estate investing for beginners, for example. This makes it a perfect place to start for those that haven’t entered the industry before.
High demand
Residential housing is always in high demand, and while you might go through more tenants than commercial properties, you’re likely to have new ones in relatively quickly. This leaves fewer gaps throughout the year without income and reduces the risk of investment even further.
Easy to modify
Another great advantage of residential properties is that they are a lot easier to modify. If you want to do some renovations before you put your house on the market, or even in-between leases, it’s usually a pretty simple process. It’s a great way to improve the value, and you’ll be able to increase the weekly rent.
This is much different than commercial properties, which generally require a lot more approval. You might have to meet specific design requirements, and the times you can construct are often reduced.
Disadvantages of Residential Property
More regular maintenance
Homes are susceptible to more wear and tear, meaning maintenance costs can quickly add up. From leaks, broken toilets, storm damage, electricity failures, jammed windows, and loose door handles; At times, the problems can seem never-ending, especially if the house you purchased is an older property.
All of this maintenance takes a cut into your profit, making it another thing that you will have to budget for. It might not be practical for those that are too busy to do this work themselves. Being hands-on can be both a positive and a negative.
Problematic tenants
While commercial property usually has reliable tenants, residential real estate can have problematic ones. Putting the wrong individuals in your home could lead to complicated legal issues, and they may cause severe damage that reduces its overall value. While going through an agency should reduce this risk, it’s still something you always need to be careful of.
Final Thoughts
When deciding whether or not you should invest in commercial or residential real estate, it really depends on your individual situation. If you’re new to investing, it’s probably best to start with a residential property first, as you don’t need as much knowledge, and there are fewer economic risks. However, if you already have an established portfolio, you might wish to expand into commercial real estate to improve your yields. Perhaps you should consider seeking advice from experts such as Pinpoint, a Mississippi commercial real estate firm that can guide you on how and where to start. Just remember that there is increased vulnerability, so you’ll have to be prepared.
