Residential and Commercial Real Estate Agents: What's the Difference?
Is a commercial real estate license different from a residential license?
Absolutely not! There’s a big misconception that you have to obtain a different license for commercial real estate. When you get your real estate license, it allows you to practice in both sectors of the field.
This is one of the advantages of having your license. You are not limited to one or the other. You can practice residential or commercial real estate and some people decide to do both.
3 Big Differences Between Residential and Commercial Real Estate Agents
While you are still helping people buy and sell real estate, other business-related factors will be different. Let’s compare the actual differences between residential and commercial real estate and what agents deal with.
Different Property Types
With residential real estate, agents focus on selling properties for residential use. Single-family homes, condominiums, and any multi-unit building up to 4 units are common property types. This will also include duplexes or triplexes.
Commercial real estate is focused on properties that will have a return on investment for their clients. A typical commercial agent will focus on negotiating properties such as office buildings, entire apartment complexes, strip malls, and retail locations.
Size in Commission Checks
The average price of a home in residential real estate can vary depending on the area and market. For instance, the current median price of a home in California is about $800,000. The average commission percentage is 3% per side.
While the commission percentage is the same, the size of the commission check in commercial real estate is substantially more. That’s because the price point of a commercial building exceeds the price of the average single-family home in comparison.
The Clients You Work With
When working in residential, a majority of your business will come from your sphere of influence, or the people you know. Referrals from your past clients will also make up a portion of your client list. Because all people need a place to live, there is no limit to who you can target as a lead.
Commercial agents deal with companies and investors as their clients. Commercial clients expect agents to be informed about data such as cap rates and gross rent multipliers. They tend to be less emotional and more data-driven.
Is Residential Real Estate Better Than Commercial Real Estate?
Is residential better?
That’s relative depending on what you consider a priority when practicing real estate. Let’s compare some of the advantages in the field of residential.
Working with People
It has often been said that real estate is a “people business.” Buying a home can be very emotional for buyers. If you love working with people and making meaningful connections with your clients, then residential is the right field for you.
Again, commercial agents are dealing with investors. These people tend to be more interested in data, react less to emotion, and are more analytical.
A commercial investor is not as concerned with moving in by the end of summer or falling in love with a dream kitchen. They think in terms of numbers, rent schedules, and insurance rates more than anything else.
The average time it takes to sell a home can be anywhere from 30-70 days. That’s an advantage in residential real estate. You have more opportunities to close deals and make more in commissions.
While commercial real estate can get you more in commissions, the transactions can take longer to close. This is simply because there is more research and data that has to be done on a commercial deal. Some commercial deals can take a year or longer depending on the property and the market.
Can a Residential REALTOR® Sell Commercial Property?
Can you do both commercial and residential real estate?
Absolutely. As we mentioned before, your real estate license allows you to practice in both sectors. Although, most agents will specialize in one or the other.
Each area of real estate will have different methods of lead generation, marketing, and training. Becoming familiar with commercial practices will help you close more deals.
In terms of marketing, while residential agents might reach out to potential leads through social media and mailers, commercial agents are much more likely to formally present data and numbers to their clients.
Commercial Real Estate Agents Should Know These Terms
Because commercial real estate is focused on investment return, it relies more on hard numbers. If you are a residential agent interested in getting into commercial, here is some of the terminology you should understand and get familiar with:
- Cap Rate (Capitalization Rate) - the ratio between the annual rental income produced by a real estate asset to its current market value.
- Gross Rent Multiplier - it is the number of years the property would take to pay for itself in gross received rent.
- Monthly ROI (Return on Investment) - a ratio between net income and investment.
You must be more adept at calculations and realize that your clients are looking for a good investment. Learning how to evaluate and interpret the data based on these calculations, will help identify the appropriate properties.
When you work in commercial, there’s a much greater risk but often a greater possibility of a larger financial reward.
Final Thoughts on Residential vs Commercial Real Estate Agents
Residential real estate allows you to work with people and make connections. Your initial leads are the people you know. You can potentially close your first deal within 3 to 6 months if you work your database.
Residential transactions have fairly quick closings allowing for more earning potential.
As a commercial agent, your commissions may be 10x as large, but they definitely don’t come as frequently. There is typically less of a turnover rate on a commercial sale since investors tend to hold on to their buildings for many times longer than people usually stay in their homes.
That's why it’s important to save money for living expenses–even more so than a residential agent–and be able to weather the storm if nothing sells within a year or more.
Commercial agents need to know the data and how to interpret it. They also need to be patient, confident, and persistent to succeed in the competitive field of commercial real estate.
If you are a newly licensed agent, you may be asking yourself whether you should practice residential or commercial. With each sector, there will be advantages and disadvantages. The most important question to ask yourself?
“Which is better for me?”
Real Estate Agent and Trainer, Robert Rico, explains the difference between Commercial Real Estate and Residential Real Estate. Do you want to see more video blogs? Subscribe here!