What to Consider Before Buying A Residential or Commercial Property
Real estate is something that is permanently attached to the land. This includes man-made additions on the land like buildings, houses, apartments, shops, etc. There are three terms in real estate which are often confused and interchanged:
- Real property: This property refers to the inherent ownership to use the land and benefits and have rights.
- Land: Anything which is below the center of the earth to the airspace above, including trees, buildings, etc.
- Real estate: This includes land and any additions made by humans like building, houses, apartments, shops, etc.
Real estate can be broadly classified into five broad types. They are residential real estate, commercial real estate, industrial real estate, land, and special houses. In this article, you will get detailed knowledge of residential property and commercial property, their characteristics, and the differences between residential and commercial property.
What is a Residential Property?
Alley with office buildings in modern Budapest area Residential property is a place where houses are built for the purpose of staying in or residing. These houses are completely for self-use and cannot be used for industrial or commercial purposes. A residential house can be broadly classified into the following types:Different Types of Residential Properties
- Stand-alone house: As the name suggests, this is a type of house that is a free-standing residential building. This is also known as a detached house, detached residence, single-family home, and single-detached dwelling.
- Multi-family residential: This is also known as a multi-dwelling unit or MDU. Here, there will be multiple separate houses for residential purposes inside one building. This can be built either one next to another one or one on top of the other. Common examples include apartments, mixed-use buildings, row house or brownstone, bedsit, cluster house, condominium, deck access, flats, four-plus ones, garage-apartment, Garlow, warehouse version, Maisonette, penthouse, plattenbau, terraced house, triple-decker, etc.
- Mobile home: This type of house can be moved from one place to another. Most common examples include park homes, trailer homes, caravan, RV, motorhome, etc.
- Duplexes: These are the housing type where one house has two distinct dwelling units with two separate entrances, but a single structure.
Things to Consider Before Buying Residential Property
- The home must be properly ventilated
- Space must be well utilized
- The material used for construction is of superior quality
- The height of the ceiling should be at least 10-12 feet
- There should be enough space for all the compartments of the house
- Quality fittings
Benefits of Residential Property
- Comparatively lesser cost: residential properties cost lesser than commercial properties. If you are a beginner and want to invest money in real estate, investing in residential property is a great option.
- Fewer complications: residential properties do not have many regulations as in the case of commercial properties. It’s easy to own and use.
- Easy to find tenants: If you are holding a residential property, finding a tenant is easier since you can decide whether the tenants can stay for the long term or short term.
- Small scale operation: Residential homes operate on a small scale compared to commercial properties. Hence, fewer complications.
What is a Commercial Property?
Commercial properties are used for non-residential purposes like hotels, business, office, retail, public facilities, industries, etc. This property will be used to run businesses. The owner can use the property by himself for business or rent it out partially or fully to the tenants.
Types of Commercial Properties
- Office buildings: This includes small professional office buildings, single-tenant buildings, downtown skyscrapers, etc.
- Retail buildings: This includes small shopping centres, grocery stores, power centres, restaurants, etc.
- Multi-family buildings: This includes high-rise apartment buildings or complexes.
- Land: This includes raw, undeveloped, or underdeveloped land which will be commercialized in the near future.
- Miscellaneous: This includes all other commercial buildings including hospitality, self-storage developments, medical, and many more.
Things to Consider Before Buying Commercial Property
- Availability of different modes of transport
- Connectivity to major commercial hubs
- Growth potential of the property
- Industries around the property location
- Infrastructure facilities available
Benefits of a Commercial Property
- Return on Investment: The return on investment is higher compared to residential properties since commercial properties will usually be located in prime locations.
- Lower maintenance cost: The amenities provided are less compared to residential properties, hence the maintenance cost is less.
- Qualified tenants: The tenants of the commercial property tend to respect the buildings since they are backed up by larger companies.
- Triple-net lease: This is a form of lease agreement where the tenant is responsible for any ongoing expenses of the building like maintenance cost, taxes, insurance, etc. Many companies like McDonald’s, Starbucks, etc., get into this agreement to maintain their brand image.
Differences Between Residential and Commercial Property
- Loans: The loan for a residential property will be provided for the individual owner of the property, whereas for the commercial property, the loan will be provided for the business entity. The procedures and paperwork for a commercial property loan are lengthy and require many documents like who is going to pay the loan, additional maintenance cost, tenure, etc. Also, the terms and conditions are involved with heavy restrictions and penalties.
- Electricity rates: Although both the properties use electricity from the same source, the rates differ for both residential and commercial properties. Some businesses purchase electricity in bulk for their operations and get some tax benefits in their bill.
- Difficulties in purchasing: Residential properties are easier to buy than commercial properties. The commercial property owner has to undergo a significant amount of investigations before making an investment.
- Returns profile: The return of investment is usually higher with commercial properties compared to residential properties. The commercial properties are usually leased out for more than 10 years, where the owner gets the bulk money. The ROI for residential property is around 4-10% and for a commercial property, it is around 6-12%.
- Risk profile: The commercial properties are leased out for a longer period of time and give the owner a stable income. But, in the residential properties, the rent period is very short. Also, the notice period is very short, hence the tenor many leave soon. But that is not the case with commercial properties since they have a longer notice period.
- Maintenance: The maintenance cost for residential property is very less. The tenants use the building 24/7 and the problems that may arise because the usage is very minimal and the repair cost is less. However, the maintenance of commercial properties is expensive because of the larger machines and equipment. Sometimes, an on-site manager is required to manage the property and its maintenance.
- Contracts: for both types of properties, you have to sign either rent or lease contracts to use the property. But in the residential property, the rental contracts are signed for the short term and are less complicated. The commercial properties, on the other hand, in-depth and complex renting contracts based on accounting standard 19 and will be signed for a long term.
- Location: The location of the property matters the most for a commercial building since many factors like transportation, water, amenities, etc. affect the running of the business. Residential property need not be in a prime location as it is only for residing.
- Law: The residential legislation supports tenants over the owners. Hence, it can be difficult to evict the tenants. On the other hand, commercial property’s lease or rent is agreed upon by both parties with contract law.