- November 14, 2018
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All real estate is not created equally. This could be the reason so many people find themselves wondering about the differences between residential and commercial real estate! Whether you are just curious or you are considering looking into investment opportunities, it’s important to understand what makes each type of property unique and how their differences will affect you. Read on to learn more about each type!
The most obvious difference between residential and commercial real estate is what it is used for. Residential property is used solely to provide housing to its inhabitants, whether as an owned property, rental, time-share, et cetera. Commercial property, however, refers to any property that is used primarily for business purposes. This could mean buildings that businesses are run out of, such as retail storefronts, warehouses, or medical office space. It may also pertain to land that is intended to produce a profit for the owner, such as apartment complexes or other larger groups of residential rental dwellings.
Codes & Permits
Buildings of any sort must strictly adhere to the guidelines outlined for them by the municipality governing the area where the structure is intended to be built. There are, however, vast differences between the rules put forth for residential construction and those presented for commercial real estate. Commercial properties typically follow a much stricter set of rules and adhere to many more applicable codes and permits. This is largely due to the level of complexity involved in the erection of such a structure. The safety codes, for one thing, will be greater due in part to the number of people who will be expected to utilize the space. It may also require permitting for elevators, escalators, medical or specialty equipment, or elaborate electric and IT technology.
Access & Zoning
With any type of real estate, location is crucial, but zoning laws in a given area will determine where certain types of real estate may exist. An area that is zoned as strictly residential would not, for example, be an intelligent place to start looking for a commercial real estate investment property. Commercial properties will be zoned in such a way that those requiring walk-in business have easier access to the general public, and that those requiring more interior space, as well as accessibility for delivery trucks and trailers, will be set apart, perhaps in an industrial park or something comparable.
There are a multitude of extremely important differences when it comes to choosing whether or not to invest in residential or commercial real estate. Let’s take a look at some of the more pertinent ones.
- Cash: An investment property is there to make you money, so this should be the first area you look at. There are benefits to both. Residential properties are much more recession-proof, based on the sheer fact that people need a place to live, regardless of the state of the economy. Commercial property, however, yields much higher returns on the initial investment. In fact, you can expect a return of anywhere from 6-12% annually on commercial property, compared to a 1-4% potential annual return on residential real estate.
- Tenants: While it’s certainly possible to attract positive or negative tenants in either investment situation, the reasons that your tenant needs the space will be different. In residential real estate, you are more likely to find tenants who refuse to pay their rent on time, do not take good care of your space, or who will not leave the property pending they are asked. The residential eviction process is time-consuming and difficult. In commercial real estate, however, your tenants are banking on the state of the property as much as you are. They are much more likely to keep it in a clean, working state, as they understand that the outward appearance of the property directly affects the type of business they will generate.
- Leases: While most residential leases are relatively cut and dry and dictated largely by the outlines put forth by the governing authorities, commercial leases offer much more room for negotiation (which can work in the landlord’s favor). This also means that the residential lease is fairly easy to understand and easy to implement. The commercial lease, however, can be lengthy and will likely require the help of a competent lawyer to fully understand.
Ready to Find Commercial Real Estate in Baton Rouge or the Surrounding Areas?
Only you can determine whether or not residential or commercial real estate is the best route for you to take in your investment journey. However, getting clear on the facts of what makes them different is always the first step. Now that you are armed with that information, it’s time to find your perfect investment. At SVN | Graham, Langlois, & Legendre, LLC, our team of dedicated Advisors knows just what it takes to make an investment successful. We’re ready and excited to walk you through the process of becoming a commercial property owner from start to finish. Contact us today!