When comparing things, apples and oranges come to mind for most people. But what happens when the two things you’re comparing are a bit more similar than these two fruit? Take real estate, for instance. What are the differences between commercial real estate and residential investing? When it comes down to it, these two are more like nectarines and oranges, but if you take a closer look, you’ll see they have their differences.
From potential transaction size to financing nuances, let’s review how CRE investing compares to residential investing:
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Transaction size:
You’re going to have to secure larger amounts of capital for most commercial real estate spaces than you would residential. Among other reasons, these spaces tend to be, well, bigger. Plus they can be in better locations, especially if the economy is booming.
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Earning potential:
The numbers vary, of course, but the earning potential for commercial real estate is higher than residential. You’re looking at up to a 12% return (cash-on-cash, after expenses) for residential and up to 15% for commercial. With residential investing, however, not only is the earning potential lower, but the risk is higher since you typically are only dealing with one tenant per space.
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Maintenance costs:
This is often dictated by lease terms, but maintenance costs can vary widely between commercial real estate and residential investing. More often than not, the maintenance burden is on the investor for residences and on the tenant for commercial real estate.
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Lease terms:
While the new FASB leasing standards may have an effect on this, commercial leases tend to be longer than residential leases. Residents rarely go more than 12 months on their leases, while commercial leases have been known to last anywhere from five to ten years.
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Financing nuances:
Commercial real estate is more complicated than residential investing, from a financing point of view. There are maintenance records, expenses, operational ratios and other points of analyses to consider, while residential is more straightforward.
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Valuations:
It’s much easier to increase the value of a commercial property than a residential property. While the value of the latter is often dictated by surrounding properties and the neighborhood, the former is determined by its revenue output. Simply improve the revenue and you improve the value.
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Software solutions:
Both commercial real estate and residential investing have software solutions to help you out. Quarem, for example, is a cloud-based CRE platform that lets you manage your leases, properties and assets all in one place. While residential investing tools may not have a support team like Quarem, they will provide some assistance when it comes to organizing and managing your investments.
These are just a few of the differences between commercial real estate and residential investing. If you’re interested in learning more about your potential as a CRE pro and how CRE software like Quarem can help, give us a call at 888-950-7272 today.
