The difference between commercial and residential property

The difference between commercial and residential property

The basic division of assets in the real estate world distinguishes between two types of principal assets – commercial properties and residential properties.

We will distinguish between the various assets according to the types of investment, yield, risk level and type of use of the assets.

In the classification of commercial properties, we can find real estate such as shops, parking lots, commercial centers, office buildings, hotels, hospitals, nursing homes, etc. In the United States there are also Data centers, communication sites and foresting properties.

The classification of residential properties includes apartments, houses, neighborhoods and residential complexes that are used for rent.

Sometimes there are also properties that include mixed use assets, such as a building that includes commercial areas for rent, hotels and apartments.

The main differences between commercial properties and residential properties

  • Return on investment – there is a difference between the yield rates obtained from a commercial asset and a residential property. The annual return on commercial real estate may be twice than of a residential property.
  • Investment size – in commercial real estate, a smaller amount can be invested for a smaller area with a higher yield, so buying a store or office in a central urban area may cost less than buying an apartment in the same part of the city but may produce higher yield than apartment rent in this area.
  • Contract length – Commercial real estate contracts are signed for longer periods of time compared to residential rental contracts. While in residential properties, most contracts with tenants are renewed each year, contracts with companies renting offices or businesses are longer. Commercial real estate is more suited for investors looking for yield and cash flow over time, without the need to renew contracts or exchange tenants.
  • Financing and taxation – there are differences in the tax rates when purchasing commercial properties as opposed to residential properties, as well as the methods and financing options required for executing such purchase transactions. The level of interest rates in financing granted to commercial properties differs from the percentage of mortgages to residential apartments.
  • Non-direct investment in commercial real estate – contrary to investment in an apartment, investing in commercial real estate enables you to invest in a variety of assets through REIT. It provides the investors with a better ability to become financially liquid and get a quicker return on investment when compared to residential assets.
  • Management and maintenance – the maintenance of a commercial property usually requires cooperation with a management company, which assumes all maintenance and management tasks with the tenants in the property. In residential properties, the maintenance and care of property is performed by the owner.
  • Level of improvement and value growth of the property – residential real estate, especially apartments purchased at low prices in peripheral areas or areas facing urban renewal, have long term potential for profit, due to the more expensive neighborhoods and a significant increase in property prices. In Urban renewal, the value of residential property expected to rise significantly, compared with commercial properties.
  • Complexity of transactions – Transactions in commercial real estate are more complex and more time consuming as well as it requires more involvement of professional advisors. The combination of commercial income and financing, insurance and collaterals makes commercial contracts more complicated than sales of residential apartments and tenant leases.
  • Risk level – as opposed to residential assets, commercial properties are more sensitive to the overall economic situation in the country and to the economic situation of businesses renting land in business properties.
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