Real estate has historically been one of the best investments anyone can make. Whether that’s a single-family home, a condo, an apartment building, or a skyscraper in a bustling downtown core, real estate is often a wise investment vehicle over the long term. There are two primary real estate investment types: commercial and residential real estate investing. Having these two primary investment types leads prospective investors to question, in commercial vs. residential real estate investing, which one is better?
When it comes to investing in real estate, there is no one-size-fits-all answer. Different strategies work better for different individuals, and it can be difficult to determine what path is right for you. By looking at the ins and outs of both commercial and residential investments, however, you can gain a better understanding of the pros and cons of each and decide which option is best for your lifestyle and goals.
Commercial vs. Residential Real Estate Investing: What’s the Difference?
To explore why one type of real estate investing is better than the other, it’s worth first reviewing what each type of real estate investment encompasses.
Residential Real Estate Investing
When most people think of investing in real estate, this is likely the type of investment they are picturing. Residential investing usually involves buying a single-family home or condo. Typically, although only sometimes, the investor is the sole owner of the property and, therefore, has complete control over what happens to it.
There are two primary ways to make money off these types of properties. The first is to buy the property, renovate it as necessary, and rent it out. As many call this, the BRRR strategy, Buy, Rehab, Rent, Repeat! People renting out property can take advantage of generous tax benefits, monthly income, and capital appreciation in the land and building themselves. The second way is to buy fixer-uppers, renovate them, and make a profit selling them back on the real estate market and using that capital to roll over and buy your next deal! You have likely seen TV shows that feature this type of residential investing!
Commercial Real Estate Investing
Commercial real estate investing is slightly misleading as it encompasses more than people would typically think of as “commercial.” Typically, most people think of commercial as including office buildings, malls, warehouses, and similar structures. That’s all part of commercial real estate investing; however, any residential unit holding more than four families is also typically considered commercial. Apartment buildings and other multifamily dwellings are commercial real estate investing ventures.
While many commercial investments are millions of dollars, one person seldom buys the entire building. Instead, groups of investors, called “syndications,” pool money together to buy these commercial buildings for 5-10 years. These syndications aim to renovate existing buildings, boost rents, and sell them later for a profit at a much larger scale than residential real estate.
Syndications typically have minimum investments of $50,000, and the actual investment is 100% passive, so investing in commercial buildings (including multifamily dwellings) is very doable!
Which Investment Type Is Better- Residential Vs. Commercial Real Estate?
When considering commercial vs. residential real estate investing, it’s important to remember that both types of investments share a lot in common. Both investment categories typically have capital appreciation and tax benefits and often result in positive monthly cash flow, meaning there is no wrong answer. If you are investing in real estate, you are ahead of the game and on the right track! There are many ways to make money in real estate and lots of ways to take. When it comes to commercial vs residential, let’s walk through some primary reasons we at Disrupt Equity favor commercial investments:
Pros for Commercial Real Estate Investing:
1. Lower Minimum Investments
Buying a single-family home to rent in Austin, TX, for example, will set you back at least $120k given average cost of a single-family dwelling in Austin, TX is 600k and assuming you put 80% of the $600k property on a mortgage– and this is not factoring in your closing costs, the capital you will need to renovate the property, market it for lease or the costs associated with day-to-day operations of the property.
When it comes to commercial investing through real estate syndications – even in high-cost-of-living areas, commercial real estate ventures typically have minimum investments of $50,000 or $75,000 – and you don’t need income and credit score to qualify for a second mortgage, nor do you have to assume that liability! (We go over this and other cons of investing in single-family homes here.)
Of course, you can buy single-family homes in less expensive areas, but you must also do significant due diligence to see if the location and investment will be favorable in the long run.
Ever wonder about the minimum investment for multifamily or commercial real estate investment opportunities through a real estate syndication?
With multifamily and commercial investments, syndications typically have minimums of around $50,000 – $75,000, so they often require less capital than residential real estate investing to get started, and in almost all cases, no unexpected costs will arise throughout the hold of your investment.
To qualify for commercial investments, you must be either a sophisticated investor or an accredited investor– depending on the offering. If you are looking to invest in commercial real estate, the minimum amount can vary from offering to offering but typically lands in the $50-70k range. But you could save more money and not worry about any unexpected costs if you decide to invest commercially.
2. Potentially Bigger and More Stable Returns
Please note that past performance is no guarantee of future returns, and all the following scenarios are hypothetical. With that mini-disclaimer out of the way, commercial investing can potentially create significant and stable returns.
Residential real estate typically involves buying one home and renting it out to one tenant. If you have trouble finding a tenant or if you have a lot of tenant turnover, you could have many months without income. Furthermore, if that one house is in an area with less demand, you could find that you don’t have as much capital appreciation as you would have liked.
Commercial real estate often has tens, hundreds, or even thousands of tenants. While occupancy may never be 100% in a large enough building, it will never be 0%. There will always be monthly rent to help cover your costs.
And commercial real estate pricing works quite a bit differently than residential. The value of a commercial building is proportional to the rent it receives. A building earning $1 million a month is worth more than one making $100k.
Therefore, if you make enough improvements, you can raise the rents, which virtually assures capital appreciation.
Indeed, over five years, it’s not uncommon to earn 8% per year in rent and have 50% appreciation at the time of sale. That means many commercial investments double over five years – that’s hard to do in residential real estate!
3. Commercial Real Estate Is Truly Passive
While you can get a property management company for residential real estate, real estate in the commercial realm is even more passive. With residential real estate (even those run by a property management company), there are a lot of decisions. For example, you may need to determine which company to use, which tenants to select, whether to authorize a repair, etc. Residential investments are passive but not passive to the same degree as stocks.
Commercial real estate is truly passive real estate investing. It’s as passive as owning stocks or bonds. Once you cut the check and make the investment into the LLC, all you need to do is receive updates regarding your investment. You don’t need to find the property management company, tenants, etc. The general partners all take care of that for you!
Commercial vs. Residential Real Estate: One Has the Edge!
Although there are a variety of ways to earn great money in real estate, commercial real estate is more accessible for accredited or sophisticated investors, has lower minimums, has more stable returns, and is 100% passive income. You can even invest in commercial real estate while working another full-time job. Residential real estate is also good but tends to have higher risk and requires more work. Please note, as mentioned earlier, there are many ways to make money in real estate – choose the path that works best for you, your family, and your lifestyle!