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What is the Difference between Residential & Commercial Property

There are 3 types of real estate- Residential real estate, commercial real estate, and Industrial real estate. Residential real estate is mainly consisting of homes or apartments. Commercial real estate is mainly retail shops, office space, hotels, and many more. Industrial real estate consists of warehouses, factory land, industrial shed, etc.

types of real estate

Here we are going to discuss the key differences between residential and commercial real estate.

What is a Residential Property?

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. there is typically an emotional element involved in residential real estate as it involves renting individuals or families their primary place of residence. A residential house can be broadly classified into the following types:

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 Villa, 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, cluster house, flats, penthouse, 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.

What is a Commercial Property?

Commercial properties are used for non-residential activities like hotels, businesses, offices, retail showrooms, warehouses, 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. Many companies prefer to rent rather than own the property they operate their business from since real estate is not their core business they can free up capital to invest in their core business.

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.
  • Warehouse: This includes warehouse storage, as well as cold storage also.
  • Miscellaneous: This includes all other commercial buildings including hospitality, self-storage developments, medical, and many more.

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. Also, the terms and conditions are involved with heavy restrictions and penalties.
  • Lease: Residential properties are typically leased to families and individuals, while commercial properties are leased to businesses.
  • Electricity rates: Although both the properties use electricity from the same source, the rates differ for both residential and commercial properties. Electricity rates for commercial and industrial properties are higher.
  • Returns profile: The ROI is usually higher with commercial properties compared to residential properties.
  • 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. Notice period is short in residential properties as compare to commercial properties which has longer notice period.
  • Maintenance: The maintenance cost for residential property is very less. However, the maintenance of commercial properties is expensive.
  • 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. The commercial properties 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.

Final thought

The first thing you need to do in either market is get invested, but this varies a little between residential and commercial properties. If you are a beginner in investing, the best option for investing is a residential property. Purchase some residential properties, gain some experience in real estate and then you could think of buying a commercial property because of the risk involved in these properties. If you’re looking to rent or buy Industrial properties or commercial properties you can start your search here IndustrialPlot.

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