While purchasing a property, we are faced with largely two broad categories of the same distinguished by their function and purpose. These categories are known as residential and commercial properties respectively. It is essential to have cognizance of the purpose and type of the concerned property before making an investment decision. In this article, we attempt to simplify these terms for you and list some of the key differences between the two.
See also: Why invest in commercial property?
Understanding the terms
Property can be broadly divided into residential and commercial based on its purpose and potential use. Following are the basic definitions of the two:
Residential property
These properties are meant for people to live in and employ for their personal use. Primarily occupied by individuals or families, this category might include single family homes, apartments, condominiums and townhouses.
Commercial property
As the name suggests, the primary use of such properties revolves around business reasons. The zoning regulations, financing options and leasing terms of such properties are governed by highly different factors than residential properties. Such properties might include office buildings, retail stores, hotels, warehouses and more.
Differentiating between residential and commercial properties
Residential and commercial properties differ in their key features, thereby helping us to distinguish between the two. Let us have a look at some of the areas in which they differ from each other to understand the terms better:
| Feature | Residential properties | Commercial properties |
| Purpose of use | They are primarily designed for people to live in or as accommodation for individuals or families; include single family homes, apartments, condominiums and more. | Primary use involves business activities such as office work, retail sales, manufacturing and storage work, or provision of services; include office buildings, shopping malls, industrial warehouses, hotels and restaurants. |
| Zoning regulations | Such properties are often located in neighbourhoods or localities designated for residential use and might therefore have restrictions on commercial activities since the features are largely focussed on providing convenient accommodation. | Located in solely commercial or mixed-use areas, they are designated for conveniently carrying out various business activities and might have restrictions on commercial use. |
| Building design and features | These prioritise amenities and layouts that enhance comfortable living, featuring bedrooms, bathrooms, kitchen, living areas and outdoor spaces. | They are designed keeping in mind commercial functions and business needs; characterised by open floor plans for offices, large display windows for retail stores, high ceilings for warehouses and appropriate storage for specialised equipment in manufacturing facilities. |
| Leasing and ownership | The ownership lies with individuals or families for personal use or investment purposes; lease agreements of rental properties are structured around residential terms, focusing on fixed term leases or monthly agreements. | The purpose of ownership revolves around commercial real estate investment or development; lease agreements are structures around commercial terms like triple net or percentage leases. |
| Financial considerations | Such properties can be easily financed with the help of residential mortgages or home loans; their valuation can be carried out through comparable sales analysis. | Financing options available here include commercial mortgages, loans or investment partnerships and the valuation is done by income capitalisation approaches based on rental income and expenses incurred during operation. |
| Market dynamic | The market is influenced by population demographics, employment opportunities, mortgage rates and housing rates; these factors are subject to local housing demand in the region. | The market is influenced by economic trends, business growth and the demand for specific types of commercial spaces; these factors generally depend on sector, location and industry trends. |
How to check if the property is residential or commercial?
Once you are sure of the purpose of your investment, the next step is to confirm whether the property you are considering is suited for it. Here is a brief checklist you can refer to in order to verify if the property is residential or commercial:
Intended use
Evaluate the primary purpose designated to the property. If it is meant to provide accommodation, it is likely a residential property. However, if the space is designed to facilitate business activities like retail or industrial operations, it is a commercial property.Â
Zoning designation
Zoning laws govern the ways land can be used and what type of structures can it house. Residential zoning involves stringent regulations surrounding commercial activities and largely permits solely housing purposes. Similarly, commercial zoning is formulated so as to enhance business-related uses.
Building features and layout
Carefully observe the design, features and layout of the building. A property housing spaces conducive to residential living, such as bedrooms, bathrooms, kitchens and living area, is a residential property. On the other hand, commercial properties have large open spaces or retail storefronts, more viable for business needs.
Ownership and leasing agreements
Residential properties are generally owned by individuals or families and are used for personal accommodation or generation of rental income. However, commercial properties are owned by investors, developers or businesses who lease them out to tenants for conducting business activities.
Financial considerationsÂ
Reviewing the financial options and valuation methods available is highly crucial. For residential properties, residential mortgages and suitable rental agreements can be availed and their valuation can be done by comparable sales analysis. Commercial properties are generally financed by means of commercial mortgages and leases drawn on commercial terms. Valuation methods include income capitalisation approaches.
Local market dynamics
Assess the local real estate market and economic factors that influence the demand and usage of the property. Take into account the population demographics, employment opportunities and housing affordability in case of residential property. For commercial properties, consider the economic trends, business growth and demand for the type of space.
FAQs
What is the primary purpose of commercial properties?
Commercial property, including retail stores, office spaces and industrial facilities, are spaces used for business purposes.
What is the difference in leasing terms between commercial and residential properties?
Commercial property leases largely comprise clauses related to business operations and maintenance responsibilities, with typically longer terms than residential leases.
What are the differences in property management for commercial and residential properties?
Commercial property management involves multiple tenants, handling maintenance for specialised equipment and adherence to zoning and safety regulations while residential property management prioritises tenant satisfaction and routine maintenance.
What factors influence property valuation in commercial and residential real estate?
Location, property size, appreciation potential and the income generated by the tenants are the factors influencing the value of commercial property. For residential property, comparable home sales, location desirability, condition of the property and local market trend are considered.
How do zoning regulations differ for commercial and residential properties?
While commercial zoning might allow for a wide range of business and related activities and higher building densities, residential zoning prioritises the comfort of the residents.
What are the different financing options for commercial and residential properties?
Since financing commercial properties requires larger down payments, they have higher interest rates and stringent terms. Residential properties may be eligible for government-backed loans or loans for financial institutions at lower interest rates.
What are the differences in tax implications of owning commercial and residential properties?
Taxes levied on commercial properties include property taxes, income taxes on rental income and capital gains tax upon sale. Residential properties are also subject to property taxes but might have deductions on interest rates.
| Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com |
