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Should You Invest In Commercial Or Residential Real Estate?

Commercial and residential real estates are two similar property investments. They both generate stable cash flow. Yet, they’re still very different in some ways. What are these differences? Read below to help you decide which venture to invest in. Spoiler alert: You’ll find the best advice once you’re done reading!

Advantages of Commercial Real Estate (CRE)

1. High-income return

CREs are high-risk and high-return property investments. If you spend more to increase tenant capacity, the better the revenue that is generated. However, this only happens if you keep your rental property at almost full to fully occupied.

2. Potential for higher property value

The market value of CRE is determined by the generated revenue. This means the more tenants and higher the income return is, the higher you can resell the property in the far future.

3. More tenants equal fewer financial risks

Worried about financial losses due to low vacancies? Don’t worry, you won’t lose a dime. This is because your fair pricing on the other remaining tenants will still help you cover operating costs. Possibly even more than that!

4. Long term leases

The leases of commercial real estate are typically longer than their residential counterparts. For CREs leases could last up to 10 years, whereas RREs could last only from half a year into two. This guarantees continuous cash flow.

5. Bank leverages increase returns exponentially

Banks are more likely to favor you in applying for CRE investment leverage. This is because CREs have an assured and stable income flow. So if you intend to borrow from a bank, you can ask for money enough to buy and build a standard CRE property. Once your property is up, running, and fully occupied, your revenue will exceed your amortization costs. This means you’re not just debt-free, but you also get to keep some large sums of money for yourself!

Advantages of Residential Real Estate (RRE)

1. More customers look for residential properties

As Millennial renters start having their own families, the market demand for single and multiple-family homes increases. This is because living together in tight commercial spaces is no longer enough. Also, commercial properties take six months or more to find a tenant whereas residential properties take a month or less.

2. Performs better during economic crises

Retailers and commercial renters are primary victims of economic downturns. Residential renters aren’t. This is because residential renters mostly have stable jobs with proper savings. Commercial tenants don’t as most live on a monthly-to-monthly salary basis. The same goes for retail tenants. If business is bad, there’s no assurance they’ll stay for longer.

3. Lower entry costs

RRE properties are mostly inexpensive. So investors will find it easier to save up for a single-family home or multi-family home. Considering this venture, you can try house-flipping - the act of buying a home, making improvements or small renovations, and sell it higher than the total costs. However, do pay attention to housing market changes.

4. Fewer entry barriers

Buying residential real estate properties are relatively easy to understand and faster to process. There are only three procedures to gain profit: buy, pay the loan, then sell or let it be rented. You can even do the latter two together without any bank breathing down your neck. CREs require a lot of research and evaluation from both you and the bank before you can own one.

5. Lesser management stress

For RREs, you can only hold one tenant accountable for your property’s condition. Compared to CREs where you have to manage multiple tenants. The nature of CRE’s long-term leases also puts its landlord in a bind especially if a signed tenant becomes a problem. This is because it is harder to make a long-term tenant leave while the lease is still valid.

Which Is Best For You?

In terms of cash flow stability, both CRE and RRE properties are equal.

If you intend to invest in a simpler with lesser stress real estate, choose residential.

If you want a high-risk and a high-reward investment, choose commercial. Also, make sure you have a solid credit score. 

Personally, I’d advise you to invest in multiple residential properties. Because they’re less stressful, cheaper, and multiple units are close to a CRE in terms of profit.

If you’re ready, make Landlord Prep your go-to resource for landlording education. Here, we offer a complete DIY landlording course to get you on the right track. Join our academy today. If you want, you can check out Flavia’s real estate investing webinar first!