The Differences Between Residential and Commercial Real Estate
Real estate: It’s an important topic in every major investment guide. It’s an expensive, necessary asset for businesses and a high-ticket item for potential homeowners. Real estate is one of the most significant purchases many people make in their lifetime, and often one of the most challenging.
Real estate can be a confusing subject for those who aren’t familiar with the market. There are intricacies that stretch beyond simply owning property. And there are regulations, market trends, and common issues surrounding the different segments of the market.
The most commonly recognized two real estate sectors are residential and commercial real estate (CRE). Naturally, the main differentiating factor is the use of the property. Residential real estate is purchased as a living space, and CRE is purchased for business use. But there are other components that divide the two as well. Before purchasing property, investors, business owners, property managers, homeowners, medical groups, etc. should all be aware of the differences between residential real estate and CRE.
Residential Agents vs Commercial Agents
Many people are more familiar with the idea of residential real estate agents than commercial real estate agents. Home transactions, whether those homes are individual condos, townhomes, single-family houses, or large estates, are handled by residential agents. It is not necessary for residential agents to have a college degree; they just have to earn their real estate sales or broker license.
Meanwhile, CRE agents are typically expected to have earned a college degree as well as a license. They also need to have a thorough understanding of business, economics, cap rates, and industry-related terminologies. Taking it a step further, CRE agents should know the demographics associated with a certain city and how commercial real estate is trending. CRE agents have a big-picture view of their targeted commercial areas and have insight into what businesses are coming into or leaving the area. Their experience in past CRE settlements helps them navigate the lengthy negotiation process that is often associated with corporate business property transactions.
Factors that Influence Real Estate Costs
Residential real estate prices are determined based on several factors. Square-footage, neighborhood comps, major home repairs, and upgrades to the home are among the most important considerations that determine the price. These elements are included in the appraisal of the property.
Meanwhile, CRE prices are determined differently. These properties are bought to make a profit, whether by monthly income or capital appreciation. Property owners lease them out, resell them, or own and operate businesses out of their facilities. In the case of a CRE lease, the price can be determined based on annual rent amount by square footage. Since there is substantial profit to be made in CRE, property sale valuations are based on factors like location, demographics, or history of profit earned. The population and growth trends of a city can also indicate the local economy, influencing the price of a property. Other price factors include interest rates, capitalization rates, or new legislations.
Managing The Real Estate
The owner of residential property usually manages the estate. If the owner chooses to lease the property, the lease can be handled directly between the owner and the tenant. While a residential owner may choose to hire a property management company, the small number of tenants are usually manageable by an individual.
Meanwhile, CRE properties can host multiple tenants at a time. Many CRE owners choose to hire a property management company to assist with marketing and lease negotiations. These property managers can be a valuable, and even necessary resource for CRE owners. This is especially true since property managers are required to be licensed as real estate brokers in many states in the U.S. A few of their other responsibilities can include maintaining financial records, managing building maintenance, and keeping tax and insurance information updated.
Choosing which type of real estate is right for investment or purchase is not an easy decision. Both residential and commercial real estate have risks involved, including cyclical market downturns. And both residential real estate and commercial real estate can yield a significant return on investment (ROI). However, commercial real estate usually provides an ROI that far outweighs ROI from residential real estate.
Investors and business owners should always research and speak with their agents or brokers before selecting a house or commercial property. Both types of real estate are valuable and can have a significant impact on the overall economy. And both residential and commercial real estate could make all the difference in accomplishing a well-rounded investment portfolio.
