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How do commercial and residential real estate differ?

On Behalf of | Jun 24, 2022 | Firm News |

When first getting into property investment, the options available can feel overwhelming. It helps to start at the most basic level of decision-making: whether to go for commercial property or residential property.

Each type of property has its own unique earning potential and benefits that the other does not offer. At the same time, they also have potential drawbacks and may not work well for everyone.

Commercial vs. residential real estate defined

Leverage takes a look at both commercial and residential real estate. First, the main difference between the two is that residential real estate handles property between one and four residential units big. This includes single-family dwellings, condos, mobile homes, townhomes and multiplex buildings. Commercial real estate handles property with five or more units, like apartments, hotels, retail spaces, office spaces and industrial buildings.

Pros and cons of commercial spaces

The main benefits of commercial spaces include leases that last for longer periods, more qualified tenants, fewer tenant obligations, higher returns, and fewer hurdles when wanting to increase property value.

The primary downsides of commercial spaces include a higher level of dependence on economic trends, a higher cost, more zoning laws, and more competition from retailers.

Pros and cons of residential spaces

As for residential real estate, the biggest pros include more resilience to economic shifts, steady demand, a lower entry barrier, and earlier IRS depreciation.

The biggest cons for residential real estate include lower cash flows, more frequent turnovers, and a property value dependent on the neighborhood itself.

When choosing a property, it is important to keep all of these factors in mind. One may outweigh the other in terms of cost-benefit analysis.