Real estate is a booming industry. In fact, it’s one of the most important sectors in the United States economy. But there are two types of real estate: commercial and residential. While both types deal with buying and selling land, they have very different financial, legal, and practical aspects which separate them from each other in many ways. This article will discuss some of these differences between commercial and residential real estate so you can better understand how each type works and which type of property best fits your needs.
Here’s A Look at How Commercial and Residential Real Estate Differ
When you’re looking to purchase real estate, it’s important to understand the differences between commercial and residential properties.
Commercial real estate is used for businesses, while residential real estate is used for living. Compared to residential properties, commercial properties tend to be more stable and liquid because they are easier to sell. In addition, commercial real estate is usually more expensive than residential property due to its higher demand for space that can be rented or sold.
If you’re interested in investing in either type of property (or both), it’s important to understand the differences between these two types of assets before making a decision about what type of property might suit your needs most appropriately.
You might be wondering “how do I make money from these properties?” Great question! The most common way to make money in commercial real estate is through the leasing of property. Residential real estate, on the other hand, can be sold to an end-user or investor.
Financing for Commercial and Residential Real Estate
Now, financing for commercial and residential can be very different.This is because commercial properties are larger, more expensive, and require more specialized financing.
Commercial financing can also be much more expensive than residential financing. The cost of borrowing money for an apartment building or office tower is higher because these types of properties are harder to sell on the open market. Additionally, commercial properties require additional insurance coverage that adds even more expense to their financing costs.
Unlike with a home mortgage loan or car loan, you may have to put down 20% or more in cash to secure your commercial real estate mortgage loan agreement—and you may need to provide personal guarantees as well! This is because the lender needs to ensure that there is enough collateral in case you default on the loan. The good news is that there are some alternatives out there, which include, private investors who might be willing to invest their own money into projects that they think could make them money down the road; or another type called mezzanine capital which essentially acts like equity but isn’t quite so risky because it allows investors access only after certain milestones have been met.
Tax Differences on Commercial vs. Residential Real Estate
Tax is another difference that commercial and residential properties face. As a real estate investor, you’ll have to pay taxes on your property. This is true for both residential and commercial properties. However, there are some key differences between the ways that these two types of real estate investments are taxed.
Commercial property is taxed at a higher rate than residential property (28% vs 25%), and it also has different depreciation rules:
- Commercial properties are depreciated over 27 years while residential properties are depreciated over 39 years (or 27 if they were built after 1986).
- The straight-line method of depreciation can be used for commercial buildings but not for residential buildings.
Lease Terms for Commercial and Residential Real Estate:
Commercial leases are typically for 2 years or more, but residential leases are typically 12 months. That’s because there’s less risk to the landlord when leasing a home to a tenant who will live in it for only a year (or less). Residential landlords often have more flexibility in choosing tenants than commercial landlords do, so you’ll see lower security deposits as well as higher monthly rent payments. The length of time that you can renew your lease is also shorter with residential real estate than it is with commercial real estate. In most cases, you can renew your lease in the same space after six months if things are going well between you and your landlord (although this varies greatly depending on state law).
Management of Commercial and Residential Real Estate:
In addition to the differences mentioned, commercial and residential real estate have different management requirements. Commercial real estate management is more complex than residential and requires more staff, which makes it more expensive on a per square foot basis. Residential real estate managers are often less experienced but also have a lot of flexibility because they only need to deal with one property at a time.
Research Before You Purchase Any Property
You’ll need to do your research before you purchase any property. Researching the market will show you where there are opportunities for profit and where there are risks. You also need to research the property, including its condition and location. A good real estate agent can help with this if you don’t have the time or skill yourself.
Researching the area where you want to buy a commercial property is important because it will tell you whether there is a demand for such properties in that area, what type of businesses are nearby (and what kind of competition they present), how many people live near your chosen location (this affects how much traffic there will be on days when customers visit), and so on.
Conclusion
You may have heard of both commercial and residential real estate, and you may have been wondering how similar or different they are. We hope that this article has helped you get a better understanding of what each property type entails, as well as how to navigate their respective complexities.
