Real estate properties are typically categorized as either commercial or residential. Most people have a general understanding of the nuances regarding these two types: the residential real estate is sold to consumers whereas commercial real estate is sold to businesses. However, there are are some other fundamental differences distinguishing them that prospective investors must know.
Tenants of commercial real estate properties are typically easier to manage than those of residential. There are countless horror stories about residential tenants destroying the property, stealing items, not paying rent and engaging in illegal activities. While this doesn’t apply to all residential tenants, most real estate professionals agree that commercial tenants are easier to manage.
Tenant Turnover Rate
The tenant turnover rate for residential real estate is generally higher than that of commercial real estate. When a business moves into a property, it usually stays there for a while. This means investors don’t have to seek new tenants as frequently as they would with residential property. On the other hand, the high tenant turnover rate of residential real estate creates an open market with new opportunities for investors.
Lease lengths differ between commercial and residential real estate. Residential properties often have a one- or two-year lease length. Commercial properties, however, often have a five- or 10-year lease length. With a longer lease, investors can focus on other real estate projects.
Maintenance and Repairs
In a residential real estate property, the landlord is typically responsible for property maintenance and repairs. If the air conditioning stops working, for instance, the landlord must pay to fix it. This is in contrast to commercial real estate where the tenant is typically responsible for these expenses.
Commercial vs Residential Real Estate Return on Investment
Both residential and commercial real estate offers lucrative investment opportunities. According to Investopedia, the average Return On Investment (ROI) for commercial real estate over a 20-year period is about 9.5 percent whereas the average ROI for residential real estate is slightly higher at 10.6 percent. Of course, these are median numbers, with actual ROIs varying depending on many factors.
These are just a few ways in which commercial and residential real estate vary. Investors will likely discover other nuances when buying and leasing the two property types.