One of the most common questions from people considering real estate investing is whether they should focus on residential or commercial properties. There are many factors to consider when making this decision, but here’s a quick breakdown of some of the significant differences and benefits of both real estate investing avenues.
What Is Residential and Commercial Real Estate?
Residential real estate is all single-family homes and one to four-unit rental residences. Duplexes, townhomes, and quadruplexes all make up residential real estate. These properties are typically leased and sold to individuals and families and often have less tenant turnover. This means that residential real estate can be more predictable but also tends to see lower returns.
Commercial property is anything with five or more units. Retail, industrial, office, self-storage, larger multifamily (of 5+ units), hotel, and others are considered commercial real estate. Commercial properties are typically leased to businesses or corporations and see higher returns at greater risk.
Benefits of Investing in Residential Real Estate
1. Cost to Get Started
Residential real estate is generally more affordable than commercial real estate, allowing anyone the opportunity to invest. This lower cost of entry means investors can develop their businesses and grow their wealth while not taking on a project that requires more capital or experience than they have. Investment clubs allow investors to learn and grow without taking too much risk.
People will always need somewhere to live, right? Investing in residential real estate may let you reach buyers and renters from a large pool to find the best tenant for your rental or the highest bidder for your rehab. With an excellent tenant screening and rental management system, your property can stay rented and cash flow for the long term. And while every investment carries risk, residential real estate performs better than commercial real estate during an economic crisis, as housing is always in demand.
Benefits of Commercial Real Estate Investing
1. Better Returns
The greater the risk, the greater the reward, right? Commercial properties tend to have higher acquisition costs and are more at risk during economic downturns. Properties tend to be larger and more complex, with the success of the investment tied to the success of the businesses that occupy them. However, the opportunity to add value to properties through re-tenanting or redeveloping may generate serious returns through just one deal.
2. Qualified Tenants with Triple Net Leases
Anyone who owns a rental knows that finding tenants who will care for a property like theirs can be a challenge in residential real estate. A commercial property attracts business owners and corporations with a vested interest in their place of business looking its best and tends to respect a property. Commercial real estate lease contracts are often Triple Net Leases, which means the lessee must handle nearly all property expenses, including real estate taxes. This takes the burden of maintaining a property off the plate of the commercial investor.
Deciding between residential and commercial real estate investing is a big decision requiring thoughtful education and planning to succeed. Consider the time you are willing to invest and the risks you can take as you evaluate which investment type is right for you today. Ultimately, residential and commercial real estate are excellent investments that may bring you closer to financial freedom.
Investor Loan Source, a private money lending company, provides high-quality investment property loans to private real estate investors at the lowest costs possible. Our process for providing real estate investors with private lending is unique. We place emphasis on the hard asset and value of the collateral (property) and less on the borrower. Our asset-based real estate investment loan model means we can provide more money lending to more investors than is available from standard bank loan models. At Investor Loan Source, providing real estate investors hard money loans is our business; it’s all we do. We offer several business real estate loan products designed to serve a variety of investors and property profiles, including private money lending for properties to sell on owner finance.