Are you looking to invest in property and wondering if it should be commercial or residential? Your decision is about to get a bit easier because we’re about to discuss the differences between commercial and residential property and the pros and cons of investing in each.
The one similarity between investing in commercial and residential property is the need for an experienced legal opinion. Many firms like the LegalVision NZ Leasing Lawyers are experienced in property leasing, and it’s important that you consult one before jumping into the market to avoid long-term problems.
But for now, let’s see how commercial and residential properties differ.
What makes a property commercial or residential?
The difference between commercial and residential estate lies in the size of the property as well as its purpose and the kind of buyers it attracts. Smaller single-family homes and properties with four or less units of rental residences are considered to be residential while anything with 5 or more units is called commercial. Examples of residential property include duplexes, condos, and quadruplexes.
On the other hand, larger buildings designed for offices, retail, hotels, multifamily residences, and industrial purposes are examples of commercial property.
Of course, because they’re made for different purposes, commercial and residential properties attract different types of buyers. Commercial properties are generally leased to companies and businesses while residential properties attract individuals or families. With that out of the way, let’s see how both types of property differ when it comes to investing in them.
1. Commercial properties cost more than residential estate
As a general rule, investing in a commercial property is going to be a costlier venture than buying residential estate.
You might already be aware of this but what you might not know is that the price of each type of property is determined by different sets of variables.
Residential property prices are affected by things like property size, the location, the amenities that surround it, and the neighbourhood it’s located in. For commercial properties, a simple rule exists. The more money a property makes, the higher its price.
For example, a shop that’s located at the road front is going to be more prominent in people’s eyes, which means it’s likely to attract more buyers and generate a greater revenue than a shop located further away from the main road. The shop at the front is going to be more expensive than one on the back, even if it’s slightly smaller.
2. Commercial properties are harder to modify
The laws become very strict when you shift from residential property to commercial estate. This means that if you buy residential property, you’ll have far greater freedom with regards to its design, construction bylaws, the layout, and rental agreements compared to when you invest in a commercial property.
So if you decide to buy commercial estate, make sure you’re in touch with a great legal team to cross the multiple hurdles that will be in your way before you can design and build your property the way you desire it.
3. It’s easier to find long-term tenants for residential estate
Because tenants at a commercial property are usually businesses, it’s difficult to retain them as ups and downs in the business world can easily make them change offices.
On the other hand, residential estate is occupied by families, and with the right screening and selection of tenants, you can easily find families or individuals who are looking for long-term contracts. This means you’ll have to spend less time looking for tenants if you invest in residential estate compared to commercial property.
Also, long-term tenants for residential property not only save you time, but they are also more likely to keep your property pristine.
4. During an economic crisis, residential property takes a softer hit
That’s because if the crisis is not too severe, housing will always be in demand. This means you’re less likely to run out of tenants for a residential property during difficult times.
On the other hand, businesses are very easily affected by even minor changes in the economy so if the economy takes a particularly bad turn, your commercial property can become starved for tenants very quickly. Not only that, because the times will be tough, you’ll have a difficult time marketing your commercial estate for acquiring new tenants.
5. Commercial property has the benefit of higher returns and better tenants
While it’s costlier (and riskier) to invest in commercial estate, it provides you with greater returns compared to residential property, especially if your property makes good money for the business that’s renting it.
But apart from that, since tenants renting commercial estate are usually companies, they’re more likely to keep your property in good shape and respect the building rules more than the families who rent residential estate. This helps you save money on maintenance costs and keeps your property pristine for longer periods!
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