Residential vs Commercial Real Estate

[Coty B Lunn]

Hello everyone,

Today, I'd like to open up a discussion about a topic that often sparks a lot of debate among real estate investors: commercial versus residential properties. Both avenues offer unique opportunities and challenges, so choosing the right path depends on various factors that are specific to your financial goals and risk tolerance.

Investing in Residential Real Estate:

Residential real estate is typically the more familiar option for many investors. Here are some key points to consider:

1. Accessibility: Residential properties are often more accessible to individual investors, especially those starting out with smaller capital.
2. Tenant Stability: While turnover can occur, residential leases tend to have shorter terms, offering more flexibility if you want to adjust rents or change tenants.
3. Market Liquidity: Generally, residential properties are easier to buy and sell due to higher demand from individual homebuyers and investors alike.
4. Emotional Appeal: Homes and apartments can have a strong emotional appeal to buyers and renters, which can influence demand and pricing stability.
5. Purchasing: Residential real estate will require a down payment of at least 10% of the purchase price. In this case, we are considering residential real estate 1-4 units. This is through a conventional, no PMI loan.

Investing in Commercial Real Estate:

Commercial properties include office buildings, retail spaces, warehouses, and more. Here are some considerations for commercial real estate:

1. Higher Income Potential: Commercial properties often generate higher rental income compared to residential properties, especially in prime locations.
2. Longer Leases: Commercial leases tend to be longer (5-10 years or more), providing more stable cash flow and less frequent turnover.
3. Tenant Diversity: Depending on the property type, you can diversify your tenant base, spreading risk across multiple businesses or corporations.
4. Market Dynamics: Commercial real estate can be more sensitive to economic cycles and local market conditions, requiring a deeper understanding of business trends and tenant industries.
5. Purchasing: Generally, commercial real estate will require 20% down.

Choosing Between the Two:

When deciding between commercial and residential real estate, consider these factors:

1. Investment Goals: Are you looking for steady rental income, long-term appreciation, or both?
2. Risk Tolerance: Commercial real estate often involves larger investments and higher risks, but potentially higher rewards.
3. Expertise and Resources: Commercial properties may require more specialized knowledge in leasing, property management, and market analysis.
4. Market Conditions: Local market dynamics, including vacancy rates, rental trends, and economic forecasts, should influence your decision.

Ultimately, both commercial and residential real estate can be profitable investments when approached wisely. It's essential to conduct thorough research, possibly consult with experts, and align your investment strategy with your financial objectives and risk tolerance.

What are your thoughts on this topic? Do you prefer commercial or residential real estate? Why? I look forward to hearing your insights and experiences!

Disclaimer:  This is in the upstate, NY area and information may be local to this area.

[Stephanie Jacobson]

This is a great post! As a multifamily specialist, I'll keep my thoughts on that specific group.

 I tend to prefer working with multifamily under 15 units, but it depends on the investor. Some investors want a truly hands-off approach, and in that case the more units under one roof, the better. But many people like having a feel for what's going on at their property, and find controlling their reputation and product is easier with small or mid-sized buildings. Either approach is good when it comes to multifamily. The key to success seems to be aiming for growth while maintaining a good product, whether that means buying bigger buildings or focusing on a niche of small-to-mid-sized buildings. 

One thing I don't love seeing is single family portfolios. They have too many roofs, too many lawns and driveways, too many complications, and are hard to liquidate. The only exception I'd make here is a group of successful STR properties with solid rental histories. But for long-term rentals, I try to avoid advising people to collect a group of single family homes to rent.

[Alecia Loveless]

@Coty B Lunn I’m primarily a smaller multi family investor with most of my buildings being between 2-10 units. This is the dynamic that is available in my target market.

For me I’ve found the lower cost to entry to be more desirable in the residential market. Most commercial properties in my area have a higher price point to entry than a residential property.

I think for many this is a good starting point. Then once you have some cash flow coming in and some experience you can look to commercial properties.