A Basic Comparison Between Commercial and Residential Real Estate

By: Illusive Photography

Commercial real estate and residential real estate are two dramatically different businesses. They both involve the buying and selling of property, but that’s virtually the only similarity between the two. Here are a pair of quick working definitions:

  • Commercial real estate and commercial property agents are focused solely on businesses. The property bought, sold, leased, and used here is an asset employed to reach business objectives. From a buyers’ point of view, commercial real estate represents an investment that is expected to deliver a predictable profit on the financial resources invested in purchasing it.
  • Residential real estate is focused on the needs and wants of homeowners and families. Properties bought in this market are intended for private use, and the housing of individual families is the obvious end goal of the process.

Selling commercial real estate is about careful calculation and estimation of return on investment. Buying and selling decisions in the residential real estate are much more emotional and individual. More than a few buyers in the residential market end up making their buying decisions based on gut instincts. This is much rarer in the world of the commercial real estate.

Residential Real Estate In Further Depth

As noted above, the single factor that sets residential real estate apart is the private use. Agents who represent buyers and sellers in residential real estate are generally dealing with people trading in properties used as primary residences. Agents working in residential real estate also deal with the following special cases:

  • Secondary homes. Agents assist buyers who are looking for vacation homes, work homes, or other second residences. The market for second homes is currently experiencing a major boom. Over 21 percent of the homes sold in 2004 went to private buyers who were looking for either a second home or an investment.
  • Selling new communities. Some agents partner with developers and contractors building new homes in order to sell individual properties (and the community as a whole) to interested buyers. Buyers who need to sell off a previous home before moving to the new community are generalled matched up with a different agent to handle the sale.
  • Small-scale real estate investment. Investors who are interested in safeguarding their wealth and turning a profit by owning multiple homes or small-scale multiplexes (residential buildings with four or fewer units) work closely with residential real estate agents to find the properties they buy. There are two reasons these investment properties trade on the residential market rather than the commercial one: First, the purchaser often ends up living within an investment multiplex after he or she buys it, and second, multiplexes of up to four units can be purchased with a conventional (non-commercial) mortgage.

Residential agents don’t typically get involved with multiplex deals where the properties being bought or sold have more than four units. Buying these properties requires commercial real estate loans, which impose restrictive conditions on borrowers. Commercial loans typically call for shorter amortization schedules, higher interest rates and large down payments or equity positions.

Commercial Real Estate In Greater Depth

The commercial real estate market features a wider range of players and options than the residential one. Properties are bought, sold and leased, auctioned, developed and more. Actors on this stage include syndicates, joint ventures, and corporations in addition to single investors.

Agents who go into commercial real estate typically focus on one of the following specialities:

  • Tenant representation. These agents work for businesses, finding them the spaces they need and negotiating for favourable purchase/lease conditions.
  • Owner representation. These agents operate on the other side of the equation, representing owners and working to find them the very best deals when they buy or lease out their property. Single commercial agents might be entirely devoted to representing a single owner or even a single building.
  • Investor representation. These agents represent investors seeking to minimize risk and maximize profit in buying and selling commercial property. Their goal is to deliver the best possible capitalization rate – i.e., the operating income of a property divided by its value or sale price.