Investing in Real Estate is a great financial decision. Lands and properties are usually in high demand and as such the generated interest are usually satisfactory albeit with risks. There are various kinds of properties ranging from commercial properties to residential properties and with each class; there are different opportunities and investment prospects. In this article, we examine which one of these broad classes is the preferred choice.
How do Residential Properties Differ from Commercial Properties
Residential properties primarily differ from commercial properties in the type of tenant each building attracts. The tenants of a residential property are families and individuals staying there as accommodation. On the other hand, commercial properties are lent out to businesses primarily. Residential properties are usually duplexes, condos etc. Commercial properties on the other hand feature offices, industries, hotels and the likes.
Commercial properties are essentially used for business purposes while residential properties are for living purposes. Residential properties are designed in such a manner that accommodates daily living practices and give the feeling of home.
Benefits of Investing In Commercial Properties
· It is easier to carry out checks
Unlike residential apartments, it is increasingly difficult to find an exact background on who you’ll be taking in as a tenant. Commercial properties are on the other hand easier to research on. This is usually because businesses need to be registered and licensed to operate. You can get in touch with or search the internet for the regulatory companies and get information that corresponds or proves wrong what you have been told. On the internet, companies also get to list their addresses as supposed to residential properties listing that are not always found.
· Higher Yields
Many commercial properties are leased out for more than residential companies. This makes it easier to get higher returns on the property than just any residential location.
· Easier to Manage
Commercial properties are much easier to manage and as such investors rarely make avoidable losses. There’s minimal responsibility in managing the property as opposed to residential properties.
Benefits of Investing In Residential Properties
· Steady Income
Residential properties offer a sense of stability ensuring that an interest is made consistently.
· Long term appreciation
Residential properties increase in value with time and as such, their appreciation rate makes them a great choice in investments.
Commercial vs. Residential Properties, Which is the best investment?
A number of findings have been carried out on select locations across the country to ascertain which is the more profitable investment – commercial or residential properties. In Ilorin for example, a comparative analysis of residential and retail commercial property investments in Ilorin, was carried out. The comparative analysis of the performance of residential and retail commercial property investments within the period of year 2000 and 2005, focusing on average return, risk adjusted return, income growth and capital appreciation was carried out. The results showed that retail commercial property investments performed better than residential property investments with a mean annual return of 12.8% as against 9.3%. In addition, commercial property investments performed better in terms of risk adjusted return with a sharp index of 0.47 as against 0.32 for residential property investments. In terms of income and capital growth, the performance of commercial property investments was also higher during the period of measurement. The study concluded that while both residential and commercial property investments performed well with positive mean returns and risk adjusted returns, commercial property outperformed residential property investments.
This result is also consistent with results obtained from a study in Ibadan. Office and shop properties in the management portfolios of all the 56 registered estate surveying and valuation firms in Ibadan, where the rental income and capital values of office and shop properties over a time frame of 2009 and 2018 were evaluated. Findings from the study revealed that the return profile of commercial properties in the study area have experienced some level of volatility, with the shop property type outperforming the office property type. Both property types provided positive income, capital and holding period returns with mean values of 3.96%, 5.16% and 9.1% respectively for office properties and 10.68%, 7.59% and 18.27% respectively for shop property type, indicating that the shop property type outperformed the former and residential properties within the study period.
In Enugu, the results of the study of commercial property investment performed better than residential property investment within the period studied with an annual return of 19% as against 17% for residential property investment. On the contrary, residential property investment performed better in terms of risk-return profiles within the period under study with 11.34% of risk and 0.67 risk-returns as against 15.88% of risk and 0.84% risk-return for commercial property investment. The performance indicators as shown by this parameter indicate that property investments in Onitsha are very viable but that commercial property investments perform better in return than residential property investment. The study concluded that a risk averse investor will prefer to invest in residential property properties than commercial properties, whereas, an investor who is a risk taker will choose to invest in commercial properties than residential properties not minding the higher risk involved as shown in this work. Investors in commercial properties are sure of their rents as at when due as tenants in commercial properties will prefer to protect their goodwill than vacating the premises; unlike tenants in residential properties who have no goodwill to protect in such premises and so become troublesome in paying their subsequent rents after the first rent has been collected.
The findings across the three states are consistently in the favor of commercial properties, it is for this reason that commercial properties are the better investment choice for an investor with a high risk appetite. If however you have a low risk appetite, residential properties are the way to go.
In conclusion, the right investment choice is one that suits exactly what you want out of an investment.