Which one is better Investment: commercial property or residential property?

Posted by Alex Turner on December 9th, 2020

Investors are in constant confusion whether they should invest in a commercial property or a residential property. Everyone usually starts from a residential property and then move on to commercial property. However, real estate experts suggest that if one wishes to be a successful investor, then it is better to invest in a commercial property. Commercial and residential investments do share some common characteristics, there are certain distinctions between them as well. Various factors should be considered before investing in either one of them like risk, investment returns, capital needed in either one of them.

If you are planning to invest in commercial or residential property around Keller Williams, San Antonio area and you are confused as to which property you should invest in, then this article will surely help you take a decision.

Residential Property-

• What is a Residential Property?

Residential properties generally include apartments, single family homes, duplexes, triplexes, condominiums and so on. Families and individuals typically rent such properties. If you are a residential property owner, then you will have to screen potential tenants, review their previous rental history, credit scores and various other background information to ensure that they become long term tenants and yield good investment results.

Let us look at the pros and cons of investing in a residential property.

Pros- 

1. Stable Investment-

Property investment is said to be a stable investment as compared to other markets. It sure has its own ups and downs but, it is less volatile. Because the population in America is outstripping and a lot of migration takes place throughout the year, residential properties will always be in demand. Off season will mean that there will be changes in the rent received but money is sure to flow throughout the year.

2. It generates positive cash flow-

The biggest advantage of owning a residential property is that it can always be rented out. If you are receiving enough rent to cover up for your expenses, you are making someone else to buy the property for you. How it works is that, when you put the deposit money and the people renting out your property will pay for the mortgage and other expenses. Once the mortgage is cleared, you will be left with extra money which will become your passive income. This can later fund your lifestyle and you can even quit your job in future.

3. Property can also offer you tax benefits-

Property can be a great way when it comes to tax benefits. If you lose out money on investment property, it can be offset on your income and you can secure yourself by saving taxes.

4. It is a long term investment-

The main motive behind investing in a property is that it will reap more benefits in future. When you secure a piece of land, you can create a passive income in the form of rent that you receive from your tenants. With the inflation going on, your property too will go high up the dollars, eventually increasing the rent. This is the assurity that you have saves up in the right area.

Cons-

1. Not very liquid- 

As compared to other markets, residential property takes longer to sell. A lot of procedures are involved in selling the property. Depending on the location and the area, it can take weeks or even months to sell your property. This lack of liquidity is a con if you need money in case of emergency.

2. Bad tenants-

If the tenants do not pay the rent on time, it can affect your cash flow. However, there are several other issues with bad tenants. They can prove to be a nightmare and can cause you emotional as well as financial stress.

3. Additional costs-

With property comes its ongoing costs. Maintenance and repair costs, renovations, insurance costs, mortgage payments, etc. These costs go on a regular basis and it may come as a big surprise when least expected. 

4. High entry cost-

Thousands and thousands of dollars are required to get into the market. Property rates are constantly on the rise and it gets really hard to step in the market. This demotivates a lot of investors and they are not able to step up because of lack of money.

Commercial Property-

• What is a Commercial Property?

Properties used for business purposes are called commercial properties. It consists of buildings that house businesses and also land that generates profit and rents. A commercial property has certain implications as to how it is financed, taxed and what laws are applied to it.

Let us look at the pros and cons of investing in a commercial property

Pros-

1. Rental Yields-

This is the biggest advantage of investing in a commercial property. Survey reports state that the average rental yield of a commercial property is always two digits that is 10%. It also depends on the type of property whether it is a shop or an office space or a warehouse. Premium locations fetch rent up to 13-15%.

2. Long term returns-

The average time period of leasing a commercial property is 5 years. So, the owner has the assurity of consistent returns on investment. The lease has a clause of increasing the rent after a period of time. So irrespective of the market conditions, tenants have to pay the rent no matter what.

3. Good tenants-

Generally, depending on locations, commercial properties are rent out by banks, retail chains or corporates. Prime location fetches more rents than others. Also, the operational hassles of commercial properties are minimum. So vacant commercial properties will attract quality tenants and yield more returns.

4. Zero furnishing Cost-

One of the advantages of a commercial property is that you can rent it out to your tenant raw. The space will then be furnished as per the occupation of the tenants. For example, if you have rented your property to a bank, then they can decide whether they will use the space for an ATM machine or set up a bank office and plan the furnishing accordingly.

Cons- 

1. High Cost-

You need to shell out more money as commercial properties are costlier than residential properties. But that is not the case in all cities. Because of current situation, the real estate market has slowed down and the prices of commercial properties have reduced.

2. Economy Performance-

This case is similar with residential as well as commercial properties. The weakening of the economy reduces the demand for commercial properties and impacts it severely.

3. High interest rates on loan-

If you plan on buying commercial property by taking loan, you need to shell out more interest rates. Interest rates for commercial is higher than the residential. It depends on the risk assessment of the banks. But generally ranges from 1.5-5% more than home loan interest.

4. Selling and tenant issues-

Commercial properties are not easily sold. It takes months to finalize a deal. Also, its size is an important factor. You can easily find a tenant for small sized property. But if you own a large space, finding a tenant will be difficult.

Conclusion-

Whether you invest in a commercial property or a residential property, it is solely your choice. However, it is important that you do your research before making a decision. If you have the money and you are sporty to take the risk, then you can invest in a commercial property. It will get you more money as compared to residential.

If you do not have a budget, then investing in a residential property will be a wise decision. It provides financial and emotional security for you and your family. You can save up the money and later plan to invest in a commercial property.

We at Reyes Signature Properties are here to help you out on choosing the best investment option that suits your needs and gives you profitable returns on your investment. We are a full time real estate service providers with an extensive experience in the real estate markets and satisfying the needs of our clients since years.