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What separates commercial real estate from residential real estate?

On Behalf of | Jun 15, 2022 | Real Estate |

When you first start out with real estate, you have one big question to answer first: do you go for commercial properties or residential properties?

Understanding the differences between the two can help pave the way to making the best possible choice.

Pros of commercial and residential real estate

Leverage discusses commercial versus residential real estate, which have many notable differences. First, by definition, a commercial property includes any property with more than five units. This can include apartments, hotels, industrial spaces, offices and more.

On the other hand, residential properties include one to four units. This can include single-family dwellings, condos, mobile homes, townhomes, and multiplex buildings.

Both types of property have benefits. On the pro side for commercial properties, they have longer leases, more qualified tenants, higher returns, fewer obligations for tenants, and a property value that is easier to raise. For residential properties, they have higher stability in an ever-changing economy, a steady demand, lower entry barriers, and an earlier IRS depreciation.

Cons of commercial and residential real estate

Both types also have potential drawbacks. For commercial properties, the biggest downsides include the cost, the amount of research necessary per purchase, competition from large retailers, more zoning laws, and a higher level of dependence on economic trends. For residential properties, the downsides include less cash flow, more frequent turnover rates, and a property value that depends directly on the neighborhood itself.

Based on your goals and needs, one of these properties may hold a higher value to you than the other. It is important to examine each carefully before making a final decision.