Financial independence and passive income in form of monthly rentals are the biggest considerations that entice people to invest real estate sector. However, deciding where to invest can be a daunting decision for a newbie investor. As if you hang around proclaimed experts or people around you or scrutinize online real estate forums, it is easy to assume that everyone suggests starting with residential properties but just by looking at the profile of wealthy investors, you will realize that they all moved to commercial real estate, eventually.
Therefore, investors and buyers often remain confused over the section that would offer better returns on investment and regular income – investment in residential properties or commercial assets. The real estate experts weigh both options on the available finance because the selection criteria such as location, quality of construction and vacancy rate in the area would remain similar for both kind of properties. Though commercial properties bring better rewards yet the investment is riskier than residential one.
Commercial and residential properties both depict some common characteristics but there are several significant distinctions both asset classes. To get its maximum potential, it is imperative to understand all the pros and cons of investment so that you can make the right investment decision.
Residential vs. Commercial Real Estate
It is commonly observed that newbie investors tend to invest in residential properties comfortably and switch to commercial investment, after becoming experienced and learning the market trends. Though it does not always work this way, as few investors directly invest into commercial properties, yet starting your investment portfolio with residential properties is more compelling. Source: financial comparison site finanse.rankomat.
Lower entry barriers
It is easier to get started with the residential real estate investment because it is easier to understand and we all are somehow familiar with running a household. Moreover, it is easier to understand and develop a bond between landlord and tenant, as in several cases, one portion of the home is rented. It is easier to manage expectations and solve the feuds on both sides. It is easier to manage a single tenant or a few more tenants in case of having more than one residential properties. And the easiest part is that it takes a very little experience and reasonable budget to invest in a residential properties as compared to commercial properties.
On the contrary, investment in commercial properties is a lot more complex as it needs a thorough research to find a suitable unit and evaluate its value in the given market. It is hard to find a stand-alone single commercial unit, where no other party is involved and you will be the sole owner. When it comes to investing in a commercial unit, the owner needs a lot more money than investing in a home. It is complicated to understand and maintain the relationship between landlord and tenants. With this all, there comes higher risk, as a lot of money is involved. Moreover, it is never easy to liquidate the commercial property and change the tenants that often. Please take a look here.
People are more comfortable investing in residential properties than commercial properties because they feel connected to a residential unit than a commercial one. After all, we all live in residential units; be it a home, apartment, villa or a townhouse but do not have direct experience with commercial properties. Therefore, the success rate of residential investor is somewhat more than the commercial investor; be it a plaza, multi-unit apartment building, shop, hotel or a warehouse.
It needs a lot of learning and plenty of experience to be a successful commercial investor and later a landlord. You must know the sector very well to make a right investment decision as it involves far more money than residential property investment.