Is it Better to Invest in Residential or Commercial Real Estate?
Is it Better to Invest in Residential or Commercial Real Estate?
Are you wondering if it's better to invest in residential or commercial real estate? Here is a guide on how to choose the right property to invest in.
Are you considering a residential property investment? If so, you are not alone. Bank Rate reports that individual investors own around 70% of all US residential rental properties.
Yet, before you start looking for properties, consider if commercial real estate is right for you. Commercial and residential properties may seem similar at first glance. But each has its own unique benefits and disadvantages.
Understanding the difference between the two is important. That way, you can identify the best property investment strategy for you. We are bringing you this guide to help you do just that.
Investing in Residential vs. Commercial Real Estate: What's the Difference?
Before we talk about the differences between residential and commercial real estate, we want to define these terms.
Commercial real estate includes any buildings zoned for commercial purposes. Most people think of retail spaces. But commercial real estate also includes office buildings and industrial facilities (e.g., factories and warehouses).
Mixed-use developments are commercial real estate, too. These properties combine two or more types of commercial properties (e.g., restaurants and office spaces). Some mixed-use properties also feature residential space.
Residential real estate, on the other hand, refers to living spaces. We typically distinguish between single-family and multifamily residential spaces. Single-family spaces include homes and townhomes, while multifamily includes:
As you can see, one of the main differences between these two types of property is the end user. Commercial real estate investors rent to businesses. Residential real estate investors rent to individuals and families.
What are the more financially-driven differences between these types of investments? That's what we're talking about next.
On average, commercial real estate costs far more than residential buildings and homes. You will need a large upfront investment in the range of hundreds of thousands to millions of dollars.
These days, there are real estate investment trusts (REITs) and fractal ownership opportunities. These can lower the upfront investment needed for a commercial property. However, the returns will be much lower.
Residential real estate investing has a much lower barrier to entry. You only need a few thousand dollars to make a downpayment on a home. It is also easier to get a loan for a residential property than commercial real estate.
Even if you buy the property outright, you will only pay a fraction of the cost of commercial real estate. In the US, the average home price is a little less than $350,000.
Return on Investment
Property investment advisors will tell you that residential homes do not see as good of a return on investment (ROI) as commercial real estate. There are two primary reasons for this.
First of all, commercial property value is determined based on the revenue they bring in. As such, it is much easier to increase the value of a commercial investment than a residential one.
Secondly, commercial leases are typically much longer than other types of leases. Most commercial leases are three years at the low end. It is more common to see businesses lease space for 5–10 years.
Residential real estate is different. Comparables in the local market determine a home's value, and residential leases only last 12 months. These factors make for more risk and a less stable cash flow.
However, residential properties are more recession-resistant than commercial ones. There is also more demand for residential homes. As long as you choose a property in the right market, you can get a relatively healthy ROI over time.
Commercial properties may cost more, but they generate more profits, too. At the same time, residential property costs are much lower. This mainly has to do with the fact that residential management services cost less.
Technically, you could manage a residential property by yourself. You may want to get some property management services. But even if you do, you will pay far less for a manager than with a commercial investment.
It is common for property managers to take a fee as a percentage of your monthly rental income. Fees typically range from 4–12%. The larger your property and the more services you need, the more you pay for management.
How Next Brick Can Help You Make Your First Residential Real Estate Investment
If you are looking for a real estate investment with low upfront costs and stable demand, residential homes are the way to go. Yet, many people worry about the cost of property management.
At Next Brick, we make it more affordable for first-time investors like you to manage your portfolio. Unlike some firms, we have all the services you need in one place, which can significantly lower your operations costs.
Keep reading to learn what full-service property management means to us.
A rental property manager can take on all the daily and monthly tasks needed to keep your tenants happy. These services may include but are not limited to:
- Collecting rent from tenants
- Keeping records of property goings on
- Dealing with tenants who default
Some property management firms only offer these limited services. At Next Brick, we go the extra mile. We also offer maintenance and leasing and marketing services for your investment(s).
Many property management firms employ maintenance crews. Other firms act as a middle man, connecting tenants with maintenance services when needed. At Next Brick, we have a hybrid of both. We have vendors that exclusively serving Next Brick clients, as well as an internal team to carry our day to day repairs and quality control the MAKE READY Process. Maintenance services also includes regular inspections and reporting services to all our clients, as well as:
- lawn care service
- Preventative maintenance
- Emergency maintenance issues (e.g., plumbing, electrical, etc.)
At Next Brick, we work with local partners to ensure your property's maintenance requests are covered 24/7.
One of the biggest duties of a property owner is finding new tenants. Ensuring your investment always has a tenant can increase your ROI and cash flow reliability. That is why we offer the following services:
- Property marketing(25+ accredited rental sites)
- Manage Showings and weekly reporting
- Tenant screening
We also offer lease agreement execution and lease renewal services. Whatever you need to keep your property running and tenants happy, Next Brick has you covered.
Next Brick Can Help You Manage Your Residential Property Investment in Seattle
Commercial and residential real estate investments differ in their initial investment costs, ROIs, and management requirements. Residential properties are best for first-time investors because they have lower barriers to entry.
Are you searching for a full service property management company in the Seattle area? Next Brick would love to help you manage your first residential property investment. Contact us today to learn more about our services!