Residential vs. Commercial Real Estate Investments
January 14, 2022
Real estate investing is a broad segment that has a number of niche approaches that distinctly differentiate them from one another. One of the most common questions that newer investors ask is what are the differences, advantages, and disadvantages between residential real estate investing and commercial real estate investing. While these two categories are still fairly broad they are very different from each other.
Here we’ll explain the differences between residential and commercial real estate investing and share why commercial real estate investments are a better option for you as a real estate investor.
What is the Difference Between Residential and Commercial Real Estate Investing?
The primary difference between the two is that residential real estate typically includes single-family homes and one to four-unit multi-family homes with fixed rent while commercial real estate consists of complexes with a high number of units, office buildings, retail, industrial, hotel, and special purpose buildings that offer more options on how you can generate cash from rent.
Most investors are aware of those differences, but we wanted to share that and get it out of the way to move into why commercial real estate investing is a better choice for investors.
Benefits Of Commercial Real Estate Investing
Commercial real estate investors have a number of benefits provided to them that other investment types don’t give them. And while every investment type has its pros and cons, we’ve found that commercial real estate investments have more upside than almost any other asset.
Qualified Tenants: You find that it’s easier to qualify commercial real estate tenants by having access to the history of the company, how long they’ve been in business, how much revenue they are doing, and what their plan for growth is.
This is a simple way to validate that they can pay and have the potential to grow which provides new revenue opportunities in the future for you as an investor.
Another way to indirectly qualify these tenants is to assess market conditions in their industry and look for signs of stability, acceleration, or instability to determine long-term fit.
Longer Lease Terms: Commercial real estate tenants will in nearly every case have long-term leases. It is very common for businesses to sign 5 to 10-year term lease agreements and in some scenarios enter into leases that last 15 to 20+ years. This provides a stable predictable source of revenue for investors. You’ll also find these types of lease terms with built-in rent increases over time as well.
Depending on the plan for an investment like this, having long-term forecasted predictable revenue and growth will provide more opportunities for investors to leverage against this source of cash and/or sell at higher multiples.
Higher Returns: Returns are the main focus of every investment and with commercial real estate you can expect to see higher returns than you will from other assets. According to the National Council of Real Estate Investment Fiduciaries (NCREIF), commercial real estate investments had an annual average return of 12.7% with an average annual return of 8.8% over the past 15 years. These are impressive numbers.
In addition to the higher return percentages, investors also benefit from the higher volume cash flow generated from these larger investments.
Easier To Increase Value: A significant reason commercial real estate investments are a good choice is that the asset has the potential to increase in value significantly based on controllable factors. The best way to increase the value of the commercial real estate is to increase the revenue it generates. There are a number of ways to do this whether it’s filling all vacancies, increasing rates, or creating other opportunities for revenue streams generated by the property.
For investors looking to diversify their portfolio or those wanting to do more inside the commercial real estate space, we hope this was helpful enough to give you a clearer understanding of the real benefits commercial properties provide investors like you.