Investing 101: Difference Between Residential and Commercial Property

In 2020, the Canadian real estate industry generated $58.5 billion in revenues. That figure will grow to $63.7 billion by 2025.

With such colossal returns, it’s no wonder Canadians love to invest their money in real estate. The sector has almost always offered a safe investment that can offer large returns.

When it comes to investing in real estate, there are two major approaches: residential and commercial properties. But how exactly does a residential investment property differ from a commercial investment property?

Keep reading to find out.

Purpose

Generally speaking, residential investment properties are intended for people to live in. This could be a single-family home, an apartment complex, or even a vacation rental property.

On the other hand, commercial investment properties are meant for businesses to operate out of. This could include office space, retail space, or even industrial space.

This difference is significant for many reasons. Chief among them is the type of tenant that you can expect to rent from your investment property. 

If you own a residential property, you’ll likely be renting to families or individuals who are looking for a place to live. If you own a commercial property, you’ll be renting to businesses that need space to operate.

Size

Residential properties are much smaller in size than commercial ones. This means that investors will have to put more money into a commercial property to get the same return on their investment.

Commercial properties also tend to have more space, which makes them more flexible and customizable. However, this extra space also comes with additional costs, such as maintenance and repairs.

Location

Commercial properties are almost always located in areas with high traffic, such as near a busy intersection or in a city center. This can be beneficial for businesses that rely on foot traffic, as it gives them prime real estate for attracting customers. 

However, it also means that commercial properties are often located in noisy areas. These areas may be subject to more crime and vandalism.

In contrast, residential properties are located in quieter neighborhoods with lower crime rates. This makes them more desirable for families and individuals who want to live in a safe community.

The location of a property can have a significant impact on its value, so don’t take it lightly when you invest.

Zoning Restrictions

Zoning restrictions refer to the regulations imposed by local governments that dictate how a piece of land can be used. In most cases, residential properties are zoned for “single-family homes” or “multi-family homes.” This means that they can only be used for housing.

On the other hand, commercial properties can be zoned for a variety of different uses, such as office space, retail space, or manufacturing.

As a result, commercial properties typically offer a wider range of investment opportunities. But because they are subject to different zoning regulations, it’s important to do your homework before you do any real estate investing.

Income Potential

With residential properties, the rental income is typically lower but more stable. Commercial properties can bring in a much higher rental income, but it can be more volatile.

 If you’re looking for a steadier stream of income, then a residential property would be the better choice. But if you’re willing to take on more risk for the chance of a higher return, then a commercial property would be a better option.

In the end, it comes down to what their goals and objectives are for the investment.

Appreciation Potential

With a residential property, appreciation is mostly driven by the market. That is, as the general housing market goes up, so does the value of your property. This can be a slow process, taking anywhere from 5 to 10 years to see significant gains. 

However, it can be a relatively safe investment. That’s because you’re not counting on any one factor like a new business moving in to drive up the value of your property.

Commercial properties have the potential for much faster appreciation. This is because there are often many factors that can affect the value of a commercial property. These include the addition of new businesses or amenities in the area. 

But this also means that commercial properties can be more volatile since a downturn in the economy can cause values to drop quickly.

Borrowing Requirements

Forty percent of Canadians have mortgages, making a mortgage the commonest type of debt across the country. It’s likely you’ll also be looking to take out a loan to finance your real estate investment.

With commercial properties, the down payment requirement is generally much higher than for residential properties. This is because commercial properties are considered to be a higher risk for lenders. As a result, they often require a larger down payment to offset that risk. 

For would-be investors, this difference influences how much money they need to raise in order to make the investment. It may even make flipping houses a more attractive option since buying them requires a smaller down payment.

Potential for Tax Benefits

When it comes to residential properties, the mortgage interest and property taxes paid by the owner are deductible on their personal income tax return. This is not the case with commercial properties.

In most cases, the only tax deduction available for commercial property owners is the depreciation of the property itself. This can make a significant difference when it comes to your overall tax bill.

Consider Investing in the Right Type of Property

Residential investment properties and commercial investment properties are two very different types of investments. Residential investment properties tend to be smaller, less expensive, and less risky than commercial investment properties. However, they also tend to be less profitable, with lower potential for appreciation and income.

When considering which type of investment property to purchase, it is important to weigh all of these factors before investing in either. 

Would you like professional help getting started with real estate investing? Get in touch with us today and learn how we can help.

BECOME A SUCCESSFUL REAL ESTATE INVESTOR TODAY

The Best Investment You Can
Make Is In Yourself

The Council

Providing investors with expert mentorship from those who nderstand the journey you’re on.

Accelerator

6 weeks of explosive growth for a lifetime of success.

Membership

Get access to a strong community and robust course catalogue for learning fundamental skills.

Powered By MemberPress WooCommerce Plus Integration