Real estate is the safest investment opportunity in Pakistan and around the world has a lot of questions and queries attached to it. People are all up for investing in real estate but the question is where exactly to invest in? What segment is going to be more beneficial and how? The two categories are ‘Commercial’ and ‘Residential’. People tend to prefer one over another but why? So in terms of definition, let’s have a look:
Residential property is:
“According to Investopedia, residential property is a type of leased property, containing either a single-family or multifamily structure that is available for occupation for non-business purposes.”
Whereas a commercial property is:
“According to Investopedia, commercial property refers to real estate property that is used for business activities. Commercial property usually refers to buildings that house businesses, but it can also refer to land that is intended to generate a profit, as well as larger residential rental properties.”
Whether you choose the residential or commercial property, you need to consider tolerance to risk, long-term goals, the time you are willing to commit to the project, and the amount of capital available. Real-estate investment can surely yield high returns but as with any industry, success isn’t guaranteed and this is why investors need to consider all the differentiating factors that go into making their desired property worth their while. Since success can’t be predicted in a real-estate business where conditions keep fluctuating every now and then, we are going to be looking at the differentiating factors between residential and commercial properties so possible hindrances to making an informed decision can be prevented.
For residential property, it is still easier to get a loan compared to the commercial property because the residential real estate market is considered much more stable. Since everybody needs a place to stay, the demand for residential property remains high. Besides being affordable, residential property investment is easier to comprehend. Commercial deals, on the other hand, are more intricate and require significantly more evaluation and research. Investors can evaluate residential properties using simple ratios such as capitalization rate, cash on cash return, and return on investment. However, the commercial investment process altogether is probably a headache for many because it requires analyzing many more metrics besides valuation and acquisition ratios such as rental history, maintenance history, and property expenses that property listings don’t usually provide additional information on.
Moreover, buying commercial property places real-estate investors in a higher-risk zone. They may have a longer leasing period but they do not guarantee landlords and investors that their tenants would be in business for the entire duration. Also, regardless of the state of the economy, residential property owners don’t feel economic depression as much as commercial property owners do because at the end of the day everyone needs a home to go to but with the latter, there is always the risk of losing far more money if the business moves or a difficult situation presents itself in the case of a bad commercial tenant. Since there is less risk associated with residential property and it won’t be that the landlord will go months without cash flow from the property then this here makes residential real-estate safer than commercial real-estate during an economic decline.
Additionally, residential property has better long-term average growth. Property value increases automatically with inflation which means rents too increase correspondingly, but with commercial investments, there is no guarantee as you can get stuck with a fixed rental rate based on the contract you have engaged in.
Furthermore, where residential properties are concerned there is generally more freedom as the owner can design and structure their place as they please and have little to do with construction regulations and planning permissions but, in the case of commercial property, the laws and regulations become stricter.
Overall, buying or selling real estate, for many investors, is one of the most important decisions they will make. Before closing the deal, they would need to be well-updated about critical factors such as variations in market conditions and forecasts, consumer attitudes, best locations, timing, and interest rates. Although there is definitely greater return and reward when it comes to commercial property investment, investors can also benefit from diversifying their real-estate investment by just purchasing several residential properties in different areas, distributing the risk, and saving themselves a headache if they aren’t that aware when it comes to real estate as a whole. Then again, residential investment is easier to understand and doesn’t require extensive research.
However, now that we have looked over the benefits of both and we were to decide which is better to invest in then that entirely is based upon the investor’s requirement. Investment in real-estate should be based upon your requirements. If you’re looking to invest in property for the sake of high returns then the commercial property is what you should be looking for but if the need is to build a house or invest your money in a safer bid without having to pay maintenance cost then the residential property should be your go-to option. At the end of the day, whichever property you choose to invest in will pay you well because as the saying goes, “Buy land, they’re not making it anymore.”
