If you are considering major investment opportunities, you may find yourself wondering what the main difference between commercial real estate and residential real estate is. It is an understandable point of confusion since both essentially deal with properties.

When determining the differences between commercial real estate and residential real estate, the most important thing to remember that they are entirely separate industries. They are both ruled by completely different market rules, trends, and policies.

The difference is drastic enough that a residential real estate agent cannot advise you about commercial real estate and vice versa. To illustrate the gap between the two, we have created a list of the five major differences between commercial real estate and residential real estate.

1. Property Structure

The first difference between the two is the basic structure of the property. Residential real estate properties are either single-family homes or rental residences with up to four units.

In contrast, commercial real estate extends far beyond just residential properties in its scope. Even within residential properties, commercial real estate properties have a minimum of 5 units for them to be considered a part of commercial property.

2. Cost of Financing

Residential real estate has fewer barriers to entry due to the lower cost of financing. Commercial real estate typically has a higher cost of financing, mostly because it is governed by several more factors compared to residential real estate.

3. Property Valuation

A major difference between commercial real estate and residential real estate is the way they are valued. Residential real estate values are largely determined based on the value of other similar properties.

In contrast, commercial real estate properties are valued based on the estimated income they are likely to generate over their lifetime. The higher the potential income, the more expensive the property. This is especially true for commercial properties like malls and office buildings of the Class A category.

4. Tenancy Policy

Residential real estate policies heavily favor the tenants to avoid exploitation and homelessness. However, the flip side of this is that tenants can sometimes abuse the protection.

Commercial real estate, in contrast, is far more favorable to the investor or property owner, mostly because their dealings are with businesses rather than individual tenants. Therefore, commercial real estate is more investor-friendly.

5. Total Income

While residential real estate has substantially low barriers to entry, their overall income pales compared to the income commercial real estate properties generate.

Commercial real estate investments are more complex and deal with clients with higher security. As an investor or owner, you will also work with commercial real estate brokers. Brokers have a wide resource network and can investigate a potential tenant to determine how financially secure they are.

This provision makes the transaction and agreement far more secure.

Conclusion

Overall, commercial real estate and residential real estate are two completely different industries. Both have their share of pros and cons, and you will have to consider your priorities and goal to determine which one you want to invest in.

If you want to invest in commercial real estate in Rio Grande Valley, please contact our team. The CHRE team has years of experience, and we will help you find the most suitable properties for investment.