As a real estate investor, you have an opportunity to diversify your portfolio and generate more passive income by investing in different property types. But first, you must distinguish between commercial and residential properties regarding property management.
It goes without saying that residential and commercial real estate investing is vastly different from an investor’s perspective, with one being for business use and the other being a place for people to live. However, there are several considerations you must make towards the different ways they must be managed to decide which type of property is right for you.
Understanding Residential and Commercial Real Estate
When investing in commercial real estate, you’ll typically need more capital to invest in the property. Since commercial properties tend to be larger, attract higher rent values and are used for business, the market for them is more competitive. These properties include:
- Office buildings
- Retail properties
- Industrial Complexes
Residential real estate investing tends to be seen as the standard option. It’s more accessible in terms of its availability and required costs. Residential real estate refers to:
- Multifamily apartments
- Single-family property
- Townhouses
- Apartments
On the other hand, residential leases are frequently short-term contracts compared to commercial real estate. Commercial leases last up to 3 to 10 years, while residential leases tend to last one year or can even be month-to-month.
Property Management Differences
Both commercial and residential properties involve not just buying a property, but also running its day-to-day operations and handling tenant needs. Investing in one requires a solid decision-making process and an understanding of the key differences between each category.
Tenant Expenses and Responsibilities
In Virginia, tenant responsibilities vary significantly between residential leases and commercial leases.
Commercial Property Tenant Responsibilities
With broader financial responsibility comes a greater scope of obligations for commercial tenants. This includes property taxes, insurance requirements, and maintenance costs that residential tenants don’t have to worry about.
These obligations are outlined in lease agreements to maintain the property in top condition. Some lease structures you can choose from are:
- Triple-Net (NNN) Leases: long-term leases that require tenants to cover insurance, maintenance, and taxes.
- Gross Leases: compel landlords to cover the expenses to simplify tenant obligations.
These leases are less regulated in Virginia real estate law, allowing extensive customization of benefits for landlords and tenants.
Residential Property Tenant Responsibilities
In contrast, residential tenants in Virginia generally have fewer responsibilities. They primarily focus on paying rent and some utilities. Landlords are typically responsible for property taxes, insurance, and structural maintenance.
Virginia’s Landlord and Tenant Act (VRLTA) provides additional protections for residential tenants and requires landlords to ensure basic property maintenance and habitability.
As opposed to commercial property owners, residential property owners have less complicated lease terms and built-in variable rent increases. This is one of the big reasons why residential real estate investments have a lower barrier to entry.
Financial Considerations
Commercial properties enjoy greater freedom in leasing arrangements than residential because of their fewer legal restrictions. When investing in either of the two, there are pros and cons to look out for:
Potential for Growth
Commercial real estate brings higher returns, elevated rental rates, and longer lease terms that diversify opportunities. A commercial property depreciates for over 40 years, allowing gradual tax deductions but increasing market fluctuations.
Residential properties tend to be more predictable in the rental market because of consistent housing demand. Its depreciation goes about 27.5 years and can be accelerated through a cost segregation study. For investors, a residential property offers simpler management and fewer fluctuations.
Overall, commercial properties offer higher risk yet higher rewards. If you are seeking less intensive management, a residential property is better suited for a steady cash flow.
Commercial vs. Residential Real Estate
Now that you’ve seen the distinction between the commercial and residential real estate business, you’ll be able to decide which property type suits you best.
Curious about how running a real estate investment will look for you after your purchase? Start exploring your options with dedicated property managers at GEM Realy Group, LLC. We’re committed to fostering strong relationships to help you succeed in the long game.
Contact us to start making smart investments today!
Additional Resources
Discovering the Hidden Gems: Real Estate Opportunities in Virginia
Navigating Homebuying: Avoid These 4 Common Pitfalls with GEM Realty
Which Up And Coming Neighborhoods In Fredericksburg, VA Should You Be Investing In Now?
