Navigating the Difference Between Residential and Commercial Property

Understanding the difference between residential and commercial properties is crucial for anyone considering real estate investments. Residential properties are homes where people live, while commercial properties are used for businesses. Each type has unique features, financing options, and investment advantages. This guide explores these differences in simple terms to help you make informed decisions about your real estate ventures.

What is a Residential Property?

A residential property is where people live, like houses, townhouses, or apartments. It's not for businesses or industries. Owners can live there or rent it out for others to live in.

Types of Residential Property

• Stand-alone House

  A stand-alone home is a single-family dwelling that stands alone on its own plot of land. It's not connected to any other structure and offers privacy and space for its occupants.

• Mobile Home

  Mobile homes are typically constructed in a factory and then transported to a designated site, where they are placed on a foundation or trailer pad.

• Multi-family Residential

  This category includes apartment buildings, townhouses, and condominiums, where each unit is independent but shares common areas such as hallways, lobbies, and amenities like swimming pools or fitness centres.

• Duplexes

  A duplex is a residential building that contains two separate living units, each with its own entrance. These units are typically mirror images of each other and share a common wall, floor, or ceiling.

What is a Commercial Property?

A commercial property is a real estate asset primarily used for business or income-generating activities rather than residential purposes. These properties include office buildings, retail spaces, warehouses, industrial facilities, and land zoned for commercial use.

Types of Commercial Property

• Retail Buildings

  These are places where people shop. They include small shopping centres, grocery stores, big shopping centres known as power malls, and restaurants.

• Office Buildings

  These are places where professionals work. They can be small office buildings, big skyscrapers in downtown areas, or buildings for a single company.

• Multi-family Buildings

  These are buildings where many families live together. They can be tall apartment buildings or complexes with several units.

• Land

  This refers to pieces of ground that are not yet built on or developed. They might become commercial properties in the future.

• Miscellaneous

  This category covers all other types of commercial buildings. It includes places like hotels, self-storage facilities, medical offices, and more.

Difference Between Residential and Commercial Property

Loans

A residential property loan is typically granted to an individual owner, whereas a commercial property loan is extended to a corporate entity. The process and paperwork involved in obtaining a commercial property loan are thorough, encompassing various documents detailing loan repayment responsibilities, additional maintenance expenses, loan duration, and other related aspects.

Electricity Bill

Even though residential and commercial properties both draw electricity from the same source, the pricing structures for their electricity usage vary. Certain businesses buy electricity in large quantities for their operations and may receive tax advantages on their bills as a result.

Investment Opportunities

Each type of real estate offers unique investment opportunities. Residential properties are primarily for living or renting out. Eventually, you can sell your property to make a profit. On the other hand, commercial properties are solely for business and trade. Shops and offices serve as centres for business activities, catering to various commercial purposes.

Maintenance Cost

Maintaining residential properties tends to be less costly because tenants typically use the building less frequently, resulting in fewer issues and lower repair expenses. On the other hand, commercial properties often incur higher maintenance costs due to the presence of larger machinery and equipment.

Contract

For both residential and commercial properties, you must agree to rental or lease contracts to use the space. In residential properties, rental agreements are typically short-term and less intricate. On the contrary, commercial property leases are detailed and complex, often following accounting standard 19 guidelines, and are typically signed for long periods.

Customers

There is a large group of individuals searching for residential properties, making it easier for you to sell or rent out your house. Hence, the demand for residential properties, including houses, exceeds that for office spaces and shops.

On the other hand, the demand for office spaces and shops depends on market trends and the country's overall economic situation. If the market is thriving and the country's economic conditions are favourable, you'll find it relatively easy to rent out your space at a favourable price.

During the Financial Crisis

Residential properties usually maintain their value well during financial downturns. Their demand tends to remain stable regardless of external economic factors. Conversely, the demand for commercial properties is closely tied to the country's overall economic and financial stability. As a result, their prices can be more volatile.

Site

In the case of a commercial building, its location holds significant importance as factors like transportation, access to water, amenities, and more can greatly influence business operations. Unlike residential properties, which are primarily intended for living purposes, commercial properties often require a prime location to thrive.

Taxation

Income generated from renting out both commercial and residential properties is liable to be taxed. However, according to Sections 24 and 80C of the Income-Tax Act, real estate purchased with a home loan qualifies for certain tax benefits.

Purchase Difficulty

Buying residential properties is simpler compared to purchasing commercial properties. Commercial property owners need to conduct thorough research and investigation before making any investment decisions.

Primary Purpose

Residential properties, as their name implies, are typically designed to accommodate nuclear or joint families. Their primary function is to provide living spaces for personal use or renting out. Residential property is viewed as a fundamental need rather than a business venture or an investment opportunity.

In contrast, commercial properties are obtained with business and investment objectives in mind. For instance, individuals acquire office spaces and shops to generate monthly income.

Legal Difficulty

In residential settings, tenant rights often receive more favorable treatment than property owners' rights, making evicting renters challenging. Conversely, the lease or rental agreements for commercial properties are established through mutually agreed-upon contracts between both parties under contract law principles.

Capital Required

Residential properties generally demand less initial investment compared to commercial real estate. Factors like location, size, and purpose of the property influence prices, but residential properties are typically more affordable than commercial ones.

Laws and Regulations

Residential laws tend to favour tenants over landlords, making it challenging to remove tenants from a property. In contrast, commercial leases are governed by contractual agreements that are mutually agreed upon by both parties.

Lease Time

Commercial properties typically have longer lease durations compared to residential properties. While individuals generally seek to buy or rent residential properties, they often opt to lease out commercial spaces for extended periods.

Vacant period

Commercial properties tend to experience longer periods of vacancy. For instance, certain suburban areas in the city may have lower demand, resulting in commercial properties remaining vacant for extended periods. In contrast, residential properties are consistently in demand since people always require homes to live in. Therefore, the demand for residential properties remains consistently high.

Rental yields

As stated by Mortgage Choice, rental yield represents the profit generated from an investment property. It's determined by comparing the total expenses with the rental income received from leasing out the property. A greater rental yield signifies increased returns on the investment. Commercial properties typically yield between 5% and 12% in rental income, whereas residential properties generally yield around 3% to 4%.

Annual Rents

In numerous locations, residential properties often don't have set yearly rents. For instance, homeowners might not raise house rents every year. In contrast, commercial properties typically have fixed annual rents that tend to increase annually.

Finances

Investing in commercial properties typically involves greater risks compared to residential investments. Simply put, the residential market tends to be more stable than the commercial sector. Consequently, the terms for loans on residential and commercial properties vary significantly.

For instance, many banks typically mandate a minimum deposit of 30% for commercial property loans. In contrast, loans for residential investors often require smaller deposits and more favourable terms and conditions.

Structure and Design

The expenses involved in building a residential property are distinct from those associated with constructing a commercial property. Unlike commercial properties, a house or apartment's architectural layout and interior design vary significantly, resulting in differing costs.

Commercial properties, on the other hand, encompass a range of expenses. For example, there are expenses related to warehouses, plumbing, electrical wiring, and so on.

Difference Between Investing in Residential and Commercial Property

Barriers to Entry

Investing in commercial property can be challenging due to higher barriers to entry compared to residential property. Banks often lend less money for commercial ventures, requiring investors to put in more of their own money. Additionally, commercial properties require more extensive investigations before investment, including evaluations of tenant covenants, operational efficiency, and building conditions.

Returns Profile

Commercial properties typically offer higher returns compared to residential ones. This is because commercial leases are usually long-term, providing stable rental income over extended periods. Furthermore, commercial properties often allow for opportunities to increase rental income through active asset management. In contrast, residential rents are tied to household incomes, resulting in lower potential returns.

Risk Profile

Commercial property generally offers more stable cash flows than residential property due to longer lease terms. Residential leases tend to be shorter and offer tenants more flexibility to leave, posing higher risks for investors. Additionally, commercial leases often require tenants to take responsibility for repairs and maintenance, reducing the burden on property owners.

Valuation Methods

Valuing residential property can be influenced by sentiment and comparable properties in the area, leading to greater volatility. Conversely, commercial property valuations are more determined by fundamentals such as income streams. Movements in interest rates can impact both sectors, but commercial property tends to be more resilient due to its diverse market segments.

Conclusion

What is a residential property?

A residential property is a place where people live, such as houses, townhouses, or apartments. It's not intended for businesses or industries.

Types of residential property

• Stand-alone House
• Mobile Homes
• Multi-family Residential
• Duplexes

What is a commercial property?

A commercial property is a real estate used for business purposes, such as offices, retail spaces, warehouses, and industrial facilities, generating income through leasing to tenants.

Types of commercial property

• Retail Buildings
• Office Buildings
• Multi-family Buildings
• Land
• Miscellaneous

Difference between residential and commercial property

• Loan
• Electricity bill
• Investment opportunities
• Maintenance cost
• Contract
• Customers
• During the financial crisis
• Site
• Taxation
• Purchase difficulty
• Primary purpose
• Legal difficulty
• Opportunities
• Capital required
• Laws and regulations
• Lease time
• Vacant period
• Rental yields
• Annual rents
• Finances
• Structure and design

Difference between investing in residential and commercial property

• Barriers to entry
• Returns profile
• Risk profile
• Valuation methods