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Commercial vs Residential Real Estate: What Is the Difference?

How commercial and residential property differ in value, leases, loans, tenants and risk, so you can choose the right kind of investment.

Updated

What counts as each

Residential property is where people live: single-family homes, condos, townhouses and small apartment buildings. Commercial property is used for business or sold for the income it earns: offices, shops, warehouses, hotels, and larger apartment buildings.

How the value is set

A home is mostly valued by comparing it with similar homes that recently sold. A commercial property is mostly valued by the income it earns, using measures such as net operating income and the cap rate. That is why two buildings of the same size can be worth very different amounts.

Leases and tenants

Home leases are short, often a year. Commercial leases are often longer, can run for many years, and can shift costs such as taxes, insurance and upkeep to the tenant. A strong tenant on a long lease can make a property more valuable, and an empty building can be costly.

Financing

Home loans are standardized and long. Commercial loans are negotiated, judged mainly on the property's income, and often have shorter terms with a larger final payment. Down payments are usually larger.

Risk and effort

Commercial property can offer higher returns per dollar but can also bring larger swings, longer empty periods and more complex deals. Residential investing is usually simpler to start. Think about how much time, money and risk you can take on.

Common questions

Neither is better for everyone. Commercial property is valued by income and often has longer leases, but deals are larger and more complex. Residential property is simpler and more familiar. The better choice depends on your money, your time and your goals.

Lenders and valuers generally treat buildings of five or more units as commercial property, because they are valued by the income they earn. Smaller buildings are usually treated as residential. Ask your lender how it classifies a specific property.

This guide gives general information, not legal, tax or financial advice. Laws, rates and practices differ by state and by deal, so talk to a licensed professional before you decide.