This article will save you time. If you search online, you might have to read hundreds of lines to understand the differences between residential and commercial real estate!
But if you have ever asked yourself the question: Should I Invest in residential or commercial property?, take a quick look at this table below…
And if you need more details, scroll below it.
I have written everything you need to know about the differences between residential and commercial real estate!
Residential Real Estate v Commercial Real Estate
| Factor | Residential Real Estate | Commercial Real Estate |
| Main Use | Living (homes, apartments) | Business (offices, malls, warehouses) |
| Typical Tenants | Individuals or families | Companies, retail shops, or industries |
| Lease Duration | Short (6–12 months) | Long (3–10 years) |
| Tenant Turnover | Frequent | Low |
| Income Stability | Moderate | High (if occupied) |
| Entry Capital Required | Lower | Higher |
| Maintenance & Management | Owner responsibility | Often passed to tenants |
| Liquidity | Easier to sell | Harder to sell (niche buyers) |
| Risk Exposure | Lower (always demand for housing) | Higher (tied to business cycles) |
| Return Potential | Moderate | High (but with higher risk) |
1. Purpose and Usage
The main difference between residential and commercial real estate is the reason they are built.
Residential real estate is used for living, while commercial real estate is used for business purposes.
Residential real estate contains single-family homes and multiple-bedroom flats. These can come in different forms, including bungalows and duplexes.
Unlike most countries of the world, Nigeria has not fully started the art of housing so many families into one building complexes. This is because of the cost of building condominiums.
Commercial real estate includes office buildings, retail shops, shopping malls, warehouses, and industrial buildings.
Tenants in these buildings are usually businesses, not individuals or families. Because of Nigeria’s population, there are many shops, market stalls, and shopping complexes, especially in town centers.
2. Investment Entry and Financing
If you want to start residential real estate, you may need a little less capital than with commercial real estate. This is because of the location where residential real estate can be built. You can situate it in a more remote area. However, with commercial real estate, your property has to be a developed area because businesses want to be seen. Only warehouses may still use remote areas, but they also have to be accessible by road networks.
Commercial real estate also usually requires a larger upfront investment. They are usually bigger, larger, and more fitted with things like air conditioning and other special needs that businesses may have.
Read: How to Invest in Real Estate in Nigeria
3. Length of Lease
Residential properties are usually rented for 6 – 12 months. As an owner of this kind of property, you tend to have newer tenants more often. This requires a new process of screening the tenants. This is why some people just hire agents to do all the work for them.
Also, because of this, you may have to make renovations more often because of any damage that may have been done to the property.
On the other hand, commercial real estate is usually rented for a longer time, sometimes 3 to 10 years, depending on the type of business. Because of the length of time, you do not have to recycle tenants as much.
While some people may prefer residential properties because they bring more steady income, others may prefer the larger seasonal payments they get from commercial real estate.
This is why some people invest in both at the same time. One supplies regular income, the other brings seasonal income.
4. Income Potential and Risk Profile
Businesses usually earn more than the average person. This makes commercial properties a better option to get higher returns with lesser spend. However, this comes with a higher risk. For example, a warehouse can take months to be occupied. Also, business income may vary, depending on business success and other external factors.
On the other hand, residential properties usually yield lower returns. This is because they are usually in higher demand, especially in areas with a higher population.
So, while commercial properties may offer higher cash returns, they come with a greater risk, being that businesses may fail and the rental income may stop because such a property is harder to occupy.
But like I mentioned earlier, the success of your commercial real estate property is down to the location. If your property is in a place with more population, you might find it easier to get a new tenant compared to when your property is in a place with lower demand.
5. Management and Maintenance
When you have a residential property, you have a greater responsibility to manage and maintain it. While your tenants may make minor repairs, you still have to come in sometimes to take care of major things such as heavy power failures, fire, and poor plumbing that affects many rooms.
This is the same for commercial properties. You might have to handle lots of things. However, many agreements today place a greater burden on the business renting the property to handle much of the maintenance, property taxes, and insurance.
This is because of the kind of clause covering such a lease. Many times, such a contract may be long-term (3 – 10 years), hence, the business tenant is almost like an owner.
So, while commercial properties may sometimes not bring in steady income, you tend to spend less on maintenance costs if you are dealing with a long-term lease.
Read: 14 Mistakes to Avoid As a Real Estate Investor in Nigeria
6. Demand for Properties & Salability
Residential properties are easier to sell. This is because there are more people willing to buy homes than businesses willing to buy office spaces.
Usually, businesses do not buy properties for two reasons. First, they may not have the capital base to do so. Number two, they usually have a preference for the kind of properties that they can use. Banks in Nigeria, for instance, usually prefer a storey building, so a bungalow may not work for them, though it may be good as a satellite office for small-scale bank operations.
So, if you want to invest in either of these properties, you should know that commercial real estate takes a longer time to sell. On the other hand, residential properties are more liquid.
Final Thoughts On The key Differences Between Residential and Commercial Real Estate
Take a look again at the table at the beginning of this article and ask yourself these questions:
- What is my goal for wanting to own a property?
- How much would I give to get this property built?
- How much risk can I take?
- How much debt can my accounts take?
- Do I like to manage directly, or do I prefer people to do so for me?
Your answer will show you whether you prefer a stable, simple, and steady income or a seasonal, riskier, but higher income.
If you still have any questions about residential and commercial real estate investment, send us a message on Instagram or info@possilaproperties.com. We will be glad to guide you!