Commercial Vs Residential Real Estate: A Comparative Study

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• October 22, 2021
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The nature of buying and selling in the real estate industry is guided by the adage “something is only worth that which someone is willing to pay for it”. This is only partially true in the case of real estate as the amount which investors are willing to pay for a property might just be well below the ‘fair market value’. Now, this conception begs the question of how is fair market value determined.

It is an assessment that is carried out by a third-party expert who is adept in various property valuation methods. Furthermore, due to their significant differences, there are different ways of valuing residential and commercial real estate in Ballarat. With that being said, let’s dive into the study conducted in this blog concerning the same.

Key Takeaways:

• Residential real estate includes single and multi-family properties while Commercial real estate includes retail stores, offices and industrial properties.
• Residential properties are in high demand and offer easy financing and reliable performance.
• Commercial properties offer high income, tax exemptions, and insurance benefits and cater to an organization instead of an individual.
• Residential real estate puts more pressure on the landlord.
• Commercial real estate involves a high cost of acquisition and recessional turbulence.

Defining Commercial and Residential Real Estate

The following definitions should give a clear idea of how the features and faculties of commercial and residential real estate are evaluated;

Residential Real Estate

Residential real estate is comprised of all such properties which are either owner-occupied or rented out. The units of residential complexes or the space within a household are primarily meant for inhabitation and not for holding any business.

The following types of real-estate assets are considered Residential;

• Townhomes
• Single-family Homes
• Apartments
• Duplexes
• Mobile Homes

Other than the above, some properties that may seem residential are not classified as such. for instance apartment buildings that exceed 4 units, hotels and Airbnbs, all fall under commercial real estate. There are also mixed properties of which the first couple of floors are commercially rented out while the remaining units on the upper floors are residential.

Commercial Real Estate

Commercial real estate refers to all such properties where business is conducted. These can either be owner-occupied or rented out to other businesses, for example, cloud kitchens, bank branches and startups. The entire property can be rented out to large commercial enterprises such as a shopping centre.

The following is comprised the most common types of commercial properties;

• Retail Stores
• Offices
• Multifamily Units
• Industrial
• Warehouse
• Hospitality

Few properties are meant for diverse businesses of commercial real estate, for example, casinos, resorts, sports stadiums, religious facilities, and government offices.

The Differences between Commercial and Residential Real Estate

Commercial and Residential properties differ exponentially in terms of managerial obligations and architectural characteristics. The following are a few key differences;

Tenant Expenses

When it comes to residential properties, the owner barely has any obligations other than paying the rent on time. In some cases, they may need to cover some of their utility costs such as water, electricity, and gas bills. Few properties offer tenants a gross rent that covers all these utilities. Commercial properties have far more comprehensive tonight expenses.

These typically include insurance, tax, and maintenance expenses which are all calculated under Triple-Net leases. If the property involves a gross release, it means the owner would have to bear these expenses. A modified-net lease enables both the tenant and the owner to cover expenses like property tax and insurance together.

Managerial Aspects 

The most commonly experienced nightmare which keeps property managers awake at night is having to take care of maintenance tasks in the dead of night. Residential properties indeed require 24/7 maintenance but it is not always necessary for the manager to stay on-site.

Commercial properties on the other hand involve a lot of maintained-related tasks and emergencies. This would mean that the manager will need to be present after hours. Rarely does this mean that they have to stay even after the tenant has left for the day.

Lease Characteristics

It is fairly easy for most residential property owners to manage their property on their own. This is because the legal instruments and terminologies involved in residential property are fairly easy for the owner to understand. Whereas in the context of commercial properties, multiple variables must be considered such as longer leasing periods, built-in variable rent increases, as well as several termination clauses. The success of a commercial lease relies on the attention dedicated to these details.

Legal Applications

The tenants living in residential properties are protected by a series of consumer protection laws and federal laws and anti-discrimination statutes. Failure to adhere to these legal obligations can put the manager or property owner under significant legal peril. Commercial property owners and tenants enjoy more flexibility in their leasing arrangements. However, it does become easier by hiring a savvy real estate professional.

End-User Needs

The needs of end-users have a significant role to play in the performance of different real estate properties. Supposedly, residential real-estate end users are looking for a place of shelter and security where they can retire at the end of the day. Commercial real estate end users expect a place to make profits and conduct business, which benefits both them and all of their stakeholders. Although several aspects are involved, property owners and managers make important decisions regarding their property, keeping the end user’s needs at its core.

Eviction Procedure

Commercial evictions are typically less hassle-some than residential evictions. This is because commercial leasing contracts have crystal clear clauses concerning eviction. Residential tenants however find savvy ways to game the system given the degree of government protection they own such as rent control.

Price Valuation

In the case of residential properties, price evaluations are calculated using comparative and qualitative data. Price comparisons play a significant role for sure, but other intrinsic aspects like the area where the property is located, and the quality of features installed all make the price rise a step higher.

The buyers and sellers of commercial properties only consider income statements and prevailing cap rates in the market when negotiating rent.

Invested Risk

No venture where profit is involved is devoid of risk. The same can be said about real estate. For example, residential property owners have to worry about aspects like damages due to tenant activities, loss of income or natural disasters. Whereas commercial property owners need to worry about all that and more, such as wall graffiti, parking incidents and lawsuits.

All the differences that have been established between Commercial and Residential real estate properties come into play, especially during their valuations. Property valuations like market value, sales comparisons and wide-ranging insurance valuations in Geelong all take into account the features that separate the commercial from residential. These factors contribute to the fluctuating prices of real estate properties.