Should I invest in Residential or Commercial property?

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Comparing commercial real estate Investments to residential real estate is like comparing apples to bicycles. This guide shows you general descriptions of the two types of real estate:

  • Commercial real estate is usually business-focused, involving property that is sold, rented or used to achieve a pre-planned business objective, as an investment to achieve a rate of return (ROI, or Yield) on the money invested.
  • Residential real estate revolves around the wants and needs of a homeowner and their family, involving property bought for individual use, most often to provide housing for families.

The selling process for commercial real estate depends on income and return-on-investment calculations. Residential real estate is usually not so straightforward and is often an emotional purchase. Many buyers make decisions based on the fact that the property ‘feels’ right to them. The key factor is the return on investment.

What is residential real estate?

Residential real estate is often focused on personal use. Mainly residential agents represent the buyers/ sellers of single-family for primary homes. Within the residential real estate arena, agents also engage in the following specialities:

  • Selling second homes to people seeking a “home-away-from-home”. The second home market is growing in Romania, especially after the 2020 pandemic
  • Working exclusively for a Constructor of new homes, sometimes by serving as the on-site salesperson for a new home community. In this role, the agent sells only the Constructor’s homes. If buyers need to sell an existing home outside of that community, usually another agent handles that sale.
  • Representing residential real estate investors who are looking to increase wealth through the ownership of houses and apartments.

What is commercial real estate?

Commercial real estate focuses on business or investment use of real estate.

In commercial real estate, you can buy, sell, rent as a lessor (the person who owns the property for rent, or lease, ie the Landlord), rent as a lessee (the person who rents the property for their use, ie the Tenant), syndicate, joint venture, develop, option, and invest in a wide range of commercial real estate categories, including retail, office, industrial, shops, restaurants, hotels, apartments, investments, and land leasing.

Commercial real estate agents are usually familiar with many of the commercial real estate areas, but they might specialize in one of the following areas or disciplines:

  • Representing tenants or lessees by finding, selecting, and negotiating new space for client businesses.
  • Representing building owners or lessors by working to lease out a building space for the highest possible price and with the most favourable terms. Frequently a commercial agent represents one owner or even one building exclusively in order to ensure the building is leased to capacity.
  • Representing investors who want to buy and sell the commercial property by finding opportunities that offer the lowest risk to the client, the best return on investment, and the best capitalization rate, ROI, or yoied, which is the net operating income of the property divided by the sales price or value of the property.

Advantages/ disadvantages of investing in commercial real estate?

When market conditions are stable and the property is managed correctly, both residential and commercial properties can be strong investment opportunities.

Residential property landlords usually take responsibility for the ongoing maintenance and changes to the property. Returns are currently up to 6%, along with the cost of Residential mortgages. Voids are usually lower, assuming location, value for money (rent should be max 6% of the resale value per year) and property condition are attractive to the tenant.

Commercial property investment typically has higher risk, longer and more expensive vacant periods but higher reward (yield is typically 8-10% in Romania along with the cost of commercial borrowing at the time of writing). Potential investors should consider commercial and residential property sectors separately, or their investment strategy could become unbalanced.

In 2018, we sold a commercial building in north Bucharest for euro 31mil, which has a hospital as a tenant, with an 18-year unbreakable contract offering 8.5%. This means the investor has a hands-off, low maintenance property, with minimal responsibilities until 2036, with a guaranteed income. Such an acquisition is a dream for institutional investors.

For those interested in investing in commercial real estate without the hassle of managing a property, White Mountain Property offers investors the opportunity to own commercial real estate while we manage it for them.

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