You want to invest in good and decent properties. But cannot decide which investment will be
beneficial for you. Residential Real Estate or Commercial Real Estate!!
Well, deciding between these two real estates is not easy and the decision cannot be taken
overnight. Each strategy offers its own set of benefits as well as its related challenges. The investor can choose according to his/her goals, risk tolerance, liquid capital, and time. Specifically, one can easily invest in properties in Lucknow.
Residential Property v/s Commercial Property
A residential real estate can be defined as all single family-type homes, which are also one to four-unit rental residences. They include Condos, duplexes.
A commercial real estate is considered having anything with five or more units. They include office, retail, industrial, multifamily, hotel, and multipurpose buildings.
Enjoy longer lease terms with Commercial Properties
Residential leases run for 12 months. Commercial leases are much longer than residential ones and are for at least 3 years.
The benefits of longer leases are:
More assurance of reliable cash flow.
Lower turnover costs.
Lower vacancy rates.
If you want your tenant to move out, then you can make them leave and not renew a short-term lease.
Residential real estate investing has lower barriers
It is easy to start in residential real estate investing. The reason is the relationship between the landlord and the tenant, which can be understood. To invest, you need a little experience and less money!
Commercial deals are complicated and require more research to find and evaluate. The money invested is in a hard asset that cannot be moved physically. Therefore the risks are higher. Comparatively, purchasing a commercial building is very expensive than buying a family home.
Most of the buyers prefer Residential Properties
Residential rentals have a steady demand almost everywhere. Many millennials are renting longer before buying homes. The rental prices come down due to the empty commercial spaces. Hardly any retail tenants are available to fill them up, so it takes at least 6 months to rent out a commercial space. This increases the cost of vacancies all over.
Which is easy to finance?
Both the real estates have their own side of information regarding investment. Many banks are reluctant to lend loans to retail commercial spaces because they are considered as higher risk. It is also taken into consideration that it is easy to secure large amounts of capital for a commercial deal as compared to lower amounts for residential properties. The most important factor is the Location – affecting financing!
Commercial Deals are complicated to analyze
Money can be made with residential real estate investing in three ways – cash flow, equity buildup through a loan and appreciation. You can easily understand the common ratios like return on investment, the capitalization rate and cash on return.
Commercial real estate investing means like you are owning a business. Making money here means increasing your net operating income. With commercial properties, you need to evaluate ratios and details like maintenance records, expenses, and rental history. Along with all this, you will also look at the last 12 months of profit and loss statements.
Which real estate category delivers a Better Return on Investment?
Residential investors aim for cash on the return of 8-12% after all expenses. The return of investment also varies from one kind of property to another. It all depends on location, property type, vacancy rate, property management costs, and other relating factors.
Commercial investors compare properties at looking at their cap rate and cash on returns. This depends on the location and type of property.
Residential Real Estate is fine at the moment
With residential properties, you can spread out your risk and diversify across multiple types of properties that are located in different areas. Commercial real estate requires large cash to deal with. You must also check it if both are LDA approved if dealing in Lucknow.
An article by Nidhi Rastogi