Commercial Rental Property Vs. Residential Rental Property

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After deciding that you will pursue real estate as an investment, you need to choose if you will start with a residential or commercial rental property. Understanding the difference is important to predicting your level of success. You must determine how much money you need, how much time you have to spend managing your property and what your long-term goals are.

Property Types

Houses of four units or less are normally considered residential properties. Commercial properties are businesses, and include general types of apartment and office buildings, retail strips and industrial buildings. Categories under these types are properties such as restaurants, motels, senior living facilities and warehouses. Regardless of the type that you choose to pursue, it is safest to purchase a property within driving distance of where you live. Managing single-family homes is simpler than running a commercial property by yourself. Whether you will have a professional property management company or not for your building, you still will need to be available to respond to the manager's concerns or questions and to supervise the overall operation of your investment.

Purchase Differences

You may be able to purchase a residential rental property with nothing or very little down. This will be difficult to qualify for, but it is possible. However, to purchase commercial property, you must have a large amount of cash available. Some commercial loans require a 30-percent down payment and come with a higher percentage rate than those for non-owner-occupied houses. Most commercial loans take the building into account in determining approval, while residential property mortgage lenders care about your credit history and rating. Commercial lenders also may want you to have prior landlord experience before they are willing to give you money to manage a business in the form of an investment property. Once you close the transaction on a commercial building, you may need reserve funds to take care of the many expenses required to run a commercial property.

Leases

Tenants living in a residential property use it as a home and normally sign a lease of up to one year. Commercial tenant leases can be as long as five years, with provisions for the rent to rise a certain percentage every year. Owners of residential real estate pay property taxes and insurance, as well as pay for most maintenance items. However, many commercial property tenant leases for businesses include an amount to cover the common area maintenance and the space's share of taxes and insurance.

Selling

Commercial real estate must be sold to another investor or investment group, while a residential rental property may be sold to a person who intends to occupy it or to another investor. To make a commercial property attractive to a buyer, it should be profitable and capital repairs, such as to a roof, should be completed. It could be expensive to ensure that the building continually earns an income. Investors will want to see at least two years of income and expense reports. On the other hand, a residential rental property is sold just like any other house. The condition will determine how quickly it sells, but you do not have to prove that it is an income-producing business as you do with a commercial property.

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