Cost, Value, Rent: Residential vs. Commercial Property
Most investors opt to put their money in a house, instead of an office or retail space. Whatever your preferences are, it is still important to note their differences. Here’s the catch, how do residential and commercial properties differ in terms of start-up cost, value, and rent?
Simple. You all know residential properties are homes for sale, right? In this sector, investors often rent or sell the property to homebuyers, tenants, fellow investors, or in some cases, real estate companies like PlistHub. On the other side, commercial properties are retail and office spaces—wherein investment return in the form of rent. Commonly, these types of properties are leased to business (i.e., office spaces for companies, while retail spaces for restaurants and mini stores)
See their differences in terms of start-up cost, valuation, and rent.
Unlike commercial properties, investing in residential properties require lower costs. Since commercial units cost much more, its rental returns are undeniably higher than what investor can get from residential asset.
Weighing the value of both assets varies depending on the approach taken. As for residential properties, it only require comparative market analysis or CMA. This details how much similar properties have sold within the neighborhood. On the contrary, commercial properties are using the income approach. This involves the multiplication of the annual income of the property with a cap rate (this varies per location and by type of a property). Needless to say, this is much more complicated means of evaluation.
In the case of a residential asset, the investor
can opt to put the property up for sale, rent, or rent-to-own. If the investor
would rather not be saddled with the responsibilities of a landlord, he can
simply sell the property. Meanwhile, putting it up for rent typically requires
the tenant to lease the property for one to two years, with an option to renew
the lease after every year. Landlords are often in charge of repairs and
maintenance costs. On the other hand, tenants of commercial property often
shoulder the maintenance costs, as well as property taxes and insurance. The
minimum term of the lease is also at least five years, on average.