Most people have some understanding that investing in property can be a smart money move, but not many casual investors know the difference between commercial and residential properties and which one is the best option. Here are five things you should consider when looking into property investment.
1. Income Potential
Naturally, potential income from the property is a significant factor in any investor’s decision. Noted investor Paul Daneshrad notes that overall, commercial properties are capable of creating much greater profits. Average return a return of purchase price between three and six times higher than single family residential properties do. On the other hand, expenses like maintenance, emergency repairs and security may eat into those profits if you don’t manage the property well.
2. Time Commitment
Commercial properties are more likely to have more than one tenant, and more tenants equal a greater time commitment to keep everything running smoothly. You may even need to bring in professional help to manage the property effectively. Residential tenants typically have fewer problems by volume, but they are not constrained by business hours so you may have to deal with calls and other contact at all hours of the night.
3. Risk Variation
There are many more risks associated with commercial property than residential. There are more visitors from any number of places, increasing the number of people who may potentially injure themselves or inflict damage on the premises. Slip-and-falls, vandalism and car collisions in the parking lot all become your purview, and you may need to seek legal advice to protect yourself in advance.
4. Lease Flexibility
In many states, there are a host of laws that govern what you can and cannot put as terms on a residential lease, and how hard it is to evict someone even with obvious cause. Even things like security deposit limits can get in your way with residential real estate. If you’re interested in having a greater say in your tenants’ lease terms, you’ll have less of a headache with commercial properties.
Commercial tenants are more likely to keep the property in good shape, as their ability to draw business depends on a clean and inviting environment. Residential tenants have no material incentive to keep the property looking nice and may neglect to submit timely repair requests, resulting in unnecessary wear and tear.
As always, your diligent research into local markets is the best way to select the right investment, but keeping an eye on these factors will help inform your decision as well on any kind of property investment.