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Differences between Investing in Residential and Commercial Real Estate

Published: 08-23-21 Category: Investing

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

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This article was updated on 7/25/2023.

A major difference between investing in residential real estate versus investing in commercial real estate lies in cost of entry. While, as a new investor, you can certainly obtain commercial real estate loans, the idea of doing so may be too overwhelming.

At least in the beginning, the overall cost of entry for investing in residential real estate is lower. It's more likely that a new investor will have enough savings to put a down payment on a single-family home rather than on a commercial property, and investing in residential real estate over time may provide enough experience and capital to the new investor to begin their foray into commercial real estate investing.

Investing in Residential Real Estate

Residential real estate investing is a good place to start for new investors and is classified as any complex with one to four units, including:

Triplexes;
Duplexes;
Condos;
Single-Family Housing; and
Quadplexes.

Because of local zoning ordinance, you won't be seeing any kind of commercial or industrial activity around residential real estate, as residential properties are strictly for living purposes.

Investing in residential properties typically requires less capital than investing in their commercial counterparts. Residential properties tend to be far more familiar with most Americans than commercial properties, and when you take into account just how many residential properties there are in the United States alone, your starting options expand even more.

Some other benefits of investing in residential real estate include:

More prospects. There's always someone who needs a place to live. There are many free tools available that potential prospects can use to try and find a home. As a result, investing in residential real estate, especially single-family homes, often comes with larger buyer pools.
More reliable during phases of economic decline. Even during a recession or depression, you'll often find that many people would rather shut down their own businesses before selling their homes. This means fewer ups and downs and more stability throughout your investment journey, should you choose to invest in residential real estate.

Some detriments to investing in residential real estate include:

Lower profitability. With residential real estate, you're dealing with fewer tenants than you would be dealing with in a commercial real estate investment. Therefore, the potential for things to go wrong and costs to rise increases. Think of the three T's: Tenants, Toilets, Termites. Plumbing problems and insect infestations are not cheap to fix, and all it takes is one to drain your profits (pun intended).
Risk of higher vacancy. More quantity of an asset means less value. Potential tenants these days are picky and have tons of residential options to choose from.

When investigating residential real estate opportunities, make sure you purchase in an area that's high in demand; “hot” parts of town are hard for tenants to leave once they move in.

Investing in Commercial Real Estate

Commercial real estate investing is a little more complex, yet yields greater potential for higher reward than residential real estate investing. Commercial real estate consists of property types like:

Office spaces;
Industrial properties
Warehouses;
Retail spaces;
Multifamily housing;
Specialty real estate;
Health care and medical properties;
Commercial land and lots
And more

Finding commercial real estate properties for sale or for lease is just as easy as finding residential real estate properties with a tool like MyEListing's free search engine for commercial real estate listings.

You're essentially dealing with many of the opposites of residential properties when you invest commercially. Some of the benefits of investing commercially include:

Longer-term leases. Residential leases tend to deal in months; commercial leases deal in years, several years. It's not uncommon to see commercial leases spanning terms of 20 years or more. This creates more reliable cash flow for the investor, as the tenant is agreeing to pay rent on the property for a longer, fixed period of time. Be careful, though, and vet your potential tenants well. It can be expensive and exhausting trying to evict a bad tenant from a commercial property.
Higher profitability potential. You're dealing with larger properties and plots of land when you invest commercially, meaning more space is available for rent. The more tenants you have, the more help you can hire; moreover, depending on the lease structure, your tenants may be responsible for paying for common area maintenance as well as building insurance and property taxes, leaving you, the property owner, with little to no expenses.

Some things you should watch out for, however, when investing commercially include:

Higher volatility during economic decline. When a recession or depression hits, the business sector often suffers the most. When a business goes down, so does the commercial real estate it's renting, as it's likely they can no longer afford their rent payments.
Greater barrier to entry. It's hard to find inexpensive commercial real estate. The quantity of commercial properties is less than the quantity of residential properties, requiring more capital to make a commercial purchase. The competition also goes up when you go commercial.

Expect to compete with the experience and access that crowdfunds, seasoned investors, and REITs have at their disposal.

Find Commercial Properties for Sale or for Lease With MyEListing!

Now that you know what to expect when investing in commercial real estate, it's time to get started!

Use MyEListing's free search engine to start locating commercial real estate properties for sale and for lease or to start listing your own commercial properties today!