Residential areas encompass a large variety of potential dwellings, from houses to houseboats, and from neighborhoods ranging from the poorest slum to the wealthiest suburban subdivision. Many of these are not specifically real estate, which is a legal definition describing a state of ownership: residential real estate emerges when land sanctioned for residential use is purchased by someone, which becomes real property.
Residential real estate is often the most important financial investment a person owns, and the value of real property on the estate is subject to shifts in the real estate market. Some people purchase real estate in the hope of making money, either by selling it at a profit or leasing it to others and charging them rent. But most people simply live on their property.
First-time buyers of residential real estate frequently finance their purchase with a mortgage, a loan issued by a bank for the sole purpose of buying a home. The more the home is paid off, the more equity it gains.
In some areas, it’s even possible for a residential property to be used as a home-based business, especially if the business operates on an appointment-only schedule, has very few employees, and generates little to no automobile traffic.
Commercial property is real estate that is used for business activities and usually refers to buildings that house businesses but can also refer to land used to generate a profit, as well as large residential rental properties.
The designation of a property as a commercial property has implications for how it is financed, taxed, and how laws are applied to it.
Commercial property can include malls, grocery stores, offices, industrial estates, manufacturing shops, and more. The performance of commercial property, including sales prices, new building rates, and occupancy rates, is often used as a measure for business activity in a given region or economy.
Commercial property has traditionally been seen as a sound investment. Initial investment costs for the building and costs associated with customization for tenants are higher than residential real estate. However, overall returns can be higher, and some common headaches that come with residential tenants aren't present when dealing with a company and clear leases.
Commercial property investors can also utilize the triple net lease, whereby expenses such as real estate taxes, building insurance, and maintenance are borne by the company leasing the premises. This advantage is not available to residential real estate investors.
In addition to favorable leasing terms, commercial property tends to benefit from more straightforward pricing. In residential, a property investor must look at a number of factors, including the emotional appeal of a property to prospective tenants. In contrast, a commercial property investor can rely on the income statement that shows the value of current leases, which can then be compared against the capitalization rate of other commercial property in the area.