Over 30 million Americans call apartments their home. The number of tenants is always increasing around the world. In 2018, over 40% of Europeans lived in apartment flats as well.
This begs the question: is an apartment building residential or commercial? What’s the difference between the two?
That’s what we’ll be looking at today. Read on to find out whether apartment buildings are commercial or residential.
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What Is Commercial Real Estate?
So are apartment buildings commercial or residential? Before we discuss, let’s define what those words mean. Commercial real estate is usually for business-related purposes.
This means commercial properties are for business operations rather than for living. But commercial real estate has leases that lend property to tenants who use it to generate income.
As such, businesses work from properties categorized as commercial properties and pay out the rent to another party. These tenants are usually restaurants, offices, healthcare facilities, and other retailers.
Benefits
A lot of real estate investors put their assets into commercial real estate in hopes of getting a higher return. Compared to other properties, commercial real estate often yields great cash flow.
Many see it as an opportunity to earn big once they have a good clientele. It’s also a good way to diversify your portfolio.
Qualified tenants are also a big plus for commercial properties. Clients for these leases will be businesses with credible financial backgrounds. This means you won’t have to worry about untrustworthy tenants in most cases.
Lease terms are also much longer for commercial real estate, especially if you’re working with businesses. With a reliable cash flow, owning commercial real estate becomes a valuable source of steady income.
What is Residential Real Estate?
Residential real estate, on the other hand, are homes owned by an investor and rented out to tenants through some sort of agreement. Residential property is usually zoned specifically for this purpose.
They can be single-unit homes, condos, apartments, and townhomes. Residential property is different from other properties. This is because tenants are usually families or a single person.
Tenants usually sign a lease to live in a residential property. It also provides tax incentives for the investors and owners of the property itself.
Benefits
Residential properties are great, affordable options for those getting into real estate. If you’re one of those people starting out in this world, residential properties are great starting points.
It can be a building block for those looking to build their portfolio. Once you have a few residential properties in your hands, you can move onto more robust real estate investments.
Depending on the type of properties that you invest in, residential real estate can produce a low turnover. If you find tenants who want to consider your property their long-term home, you can turn it into a steady cash source.
Rules and regulations are usually much easier to understand for residential properties than other properties. Also, residential properties have a lower risk of turnover during an economic crisis.
While it’s possible that tenants can terminate their lease during tough times, housing will always be in demand. This safety is what makes residential real estate so valuable for investors.
What is the Difference? Residential vs. Commercial
When comparing the two types, you have to look at things like financial risk and benefits to see why certain investors put their chips into one or the other.
A big difference that we’ve touched on is the higher income yield for commercial real estate compared to residential. Chances are, commercial properties have the higher square footage, meaning more tenants.
Also, businesses and retailers often rent out commercial properties. They usually pay a higher rent than many residential tenants.
However, residential properties are still more reliable as economic assets, especially during hard times. Homes are, as we mentioned, always in demand.
But is an apartment building residential or commercial? How do we classify apartment buildings?
Is an Apartment Building Residential or Commercial?
While this may sound confusing, apartments can be considered both residential and commercial. An apartment getting categorized as one or the other usually depends on the size of the property and who owns it.
Generally speaking, a large apartment complex is considered a commercial property. This is because a planning department decides that the space is leased out as part of a rental business.
Residential apartment buildings are often distinguished as such when they’re smaller units owned by an investor that’s still being rented out to tenants. Apartments don’t have to be big complexes to count as such.
A lot of this comes down to state and local categories for what counts as residential and commercial. For example, Montana has specific parameters for when an apartment building is considered commercial or residential.
They look at whether an apartment building is more than three stories high to categorize it as a commercial or residential property. Residential provisions can also apply to mixed-use buildings as well.
This means that different municipalities might have different definitions for what counts as residential or commercial. With that said, you can expect a large apartment complex to always be seen as a commercial property.
Understanding Residential and Commercial Apartment Buildings
When asking “is an apartment building residential or commercial,” there are a few different things to remember. Use this article to help you understand what distinguishes one from the other when deciding on an investment.
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