Commercial and residential real estate are different in more ways than one. When most people think about real estate, they picture a single-family home. However, that’s just one option when it comes to the many types of properties to invest or work in. Each industry has its own risks and benefits. Take a look at the ways in which commercial real estate is different from residential real estate.
The Differences Between Commercial and Residential Real Estate
There are many instances where commercial and residential real estate differ. The technical, defining difference between a residential and commercial property is that a residential building is all single-family homes and one to four-unit rental residences. A commercial property is anything with five or more units. Condos and duplexes make up the residential real estate while offices, retail spaces, industrial buildings, and multifamily properties (five or more units), hotels, and special purpose buildings are considered commercial real estate.
Another blinding contrast between commercial and residential properties is in the type of tenant each building sets out to attract and retain. Residential properties are generally leased to individuals and families while commercial properties are leased to businesses.
These are just some of the ways in which residential and commercial properties differ. More contrasts include:
- Property occupancy – As stated above, residential real estate is a single-family home or a building with four or fewer units that have individuals or families as tenants. A commercial property, on the other hand, is one that has commercial businesses as tenants or a multifamily complex with over five units. Both residential and commercial property will be zoned accordingly with the county regulations.
- Property valuation – Single-family residences are typically priced upon comparable properties on a per square foot basis, for example, $100 per square foot. Generally, commercial properties are not valued in the same way. Capitalization rates are equally – if not more – important in determining a property’s value.
- Financing – Residential real estate loans are underwritten and structured very differently than commercial real estate loans. While residential loans are incredibly dependent on the borrower’s personal income and financial strength, commercial properties are underwritten by taking additional factors into consideration such as borrower experience, property cash flow, occupation, industry, location, property type, and tenants.
- Legalities – The laws around homeownership and residential leasing are different than the laws surrounding commercial real estate. In general, residential landlords typically have a higher threshold of responsibility than commercial landlords.
- Required experience – It tends to be fairly easy to purchase your own home or a rental property with little to no experience. However, it is much more challenging to own and run a commercial property with little to no experience. Operating a commercial property requires at least a basic knowledge of area rents, tenant negotiations, expense management, property maintenance, and financial structure to make sure returns are met.
These are the basic differences between commercial and residential properties. Are you looking for a commercial or residential loan to get started on your next project? At Fidelity Mortgage Lenders, we’re here to help. Get started to today – Contact Peter directly on PSteigleder@FidelityCA.com or give him a call on 818.422.8879.