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Commercial vs Residential Real Estate Investing: Which is Better?

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In the debate between residential vs commercial real estate investment, many ask, “Which is better?” The answer depends on a variety of factors such as your budget, your existing area of expertise, and your risk tolerance. We’ll explain how each of these factors can help you decide which is better in your case.

Residential or commercial real estate investing is more than just buying a home or looking for an investment property. Do you think it is easy to predict success in a real estate business, where circumstances keep fluctuating now and then? To some extent, the possible hindrances can be controlled with a set of ground rules which you need to implement on your next residential or commercial real estate investing deal.

Benefits of Residential Real Estate Investment

It is far easier to get a loan for residential real estate than commercial real estate because the residential real estate market is considered much more stable. Individuals and families always need a place to live. Businesses can more easily move, and you can lose far more money by picking a bad commercial tenant than a family that misses the rent one month. This means residential vs commercial real estate investing favors residential real estate if you don’t have experience vetting tenants.

People will forgo credit card bills and cut their budgets to avoid being evicted. Commercial tenants may miss the rent for months, and it is difficult to evict them. Furthermore, you could lose commercial tenants whose bankruptcy costs you months of back rent. This means you’re more likely to continue seeing rental income from financially stressed apartment dwellers than commercial tenants.

This makes residential real estate safer than commercial real estate during a financial downturn. It may go down in value and see more skipped payments than before, but it won’t go down in value or cash flow as much as an empty strip mall. Residential real estate may be filled quickly when someone is evicted. Perhaps you put the rental property on a short-term rental site to cater to tourists coming next weekend.

Or you lower the deposit to get a tenant in at the start of the next month. It can be hard to find a new commercial tenant. Residential real estate thus comes with less risk to the landlord that they’ll go months without cash flow from the property. Residential real estate has better long-term average growth. The property value automatically increases with inflation, and rents are easily increased at the rate of inflation, as well.

With commercial tenants, you may be locked into a set rental rate for years based on the contract you signed. In the residential vs commercial real estate investing debate, residential wins if you have limited cash. You can buy one or two houses for less than it takes to buy a strip center or store. The residential vs commercial real estate investing debate is often moot if you end up renting out your old house or inherited property.

The residential vs commercial real estate debate tends to focus on cash flow numbers. However, when you’re deciding between residential vs commercial real estate, recognize that you probably have more expertise transferable to residential real estate investing. Many contractors know how to renovate homes. This makes them qualified to buy fixer-uppers, repair them and sell them for a profit.

All they have to do is get a handle on the financial side and the marketing of property for sale. An apartment manager is better suited for the residential side of the residential vs commercial real estate debate. You already know how to vet tenants, collect rent and handle late-night calls for plumbing repairs. In general, new investors can find more resources for investing in residential real estate than commercial real estate.

You have to be careful not to renovate a property to look like a dream home that’s more expensive than what the market would bear. However, as a resident, you have more understanding of the residential real estate market than the commercial one. You would also be better able to understand the business fundamentals when you loan someone money to rehab a house or invest in a real estate investment trust over buying shares in a new commercial property.

Residential real estate is generally more liquid than commercial real estate. You’ll always have more buyers for a single-family home than a storefront. You’ll have more potential investors for a small triplex or ten-unit apartment building than a strip center.

Tax Benefits of Residential Real Estate Investment

Property taxes do affect profit but it highly depends on whether you are a professional or a passive investor. If you are a professional investor, your losses are fully deductible against all income; otherwise, it is only deductible up to $25000 against your rental income. This incurred loss which exceeds $25000, can be carried forward to the following year.

Operating expenses such as mortgage interest, property management fees, property taxes, and repair & maintenance can all be claimed as deductions against rental income.

Real estate profits are not taxed until you sell the property. For example, if you purchase a home for $150,000 and it appreciates to $200,000, the $50,000 gain is protected from taxes until you sell the property.

Rental property owners may assume that anything they do on their property is a deducible expense, but that is not true according to the IRS. The money you receive for rent is generally considered taxable in the year you receive it, not when it was due or earned; therefore, you must include advance payments as income.

Benefits of Commercial Real Estate Investment

Commercial real estate investment can be much more profitable than residential real estate. For example, you can charge much higher rents per square foot in desirable properties, because the tenants are generating revenue from the property. You may be able to reduce your expenses by offering a modest discount on the rent in exchange for a triple net lease.

If they pay the insurance, property taxes, and rent, you’ve dramatically reduced your bookkeeping labor and your expenses. Just make sure they actually pay the insurance and property taxes. If you already run a commercial business, the commercial side of residential vs commercial real estate investing is the better choice for you. You could start by subleasing offices or a corner of your storefront.

You might lease half of the store to a complementary business. If you move into a larger building, you may get experience in commercial real estate by subleasing space before you use it. This sets you up for success on the commercial side of the residential vs commercial real estate investing debate. Buy your building and sublease it out, and you’re on the commercial side of the residential vs commercial real estate investing argument.

Commercial properties tend to be expensive, whether someone is building an office building or a mega-mall. This leads many commercial property developers to issue shares. This is why you find as many or more commercial property real estate investment trusts as residential ones. Residential real estate investment trusts exist, though they tend to focus on apartments over single-family homes.

Commercial REITs typically have a higher rate of return, and this form of commercial real estate investing is more liquid than either share of a commercial property or ownership of a single-family home. Commercial real estate investment can often give you more flexibility. When you buy commercial REITs, you can choose funds that specialize in medical real estate, office space, or other niches.

And you can choose to focus on a particular niche, as well. Upgrade a storefront and aim at a particular industry when seeking renters. Rehab offices near a hospital and cater to medical service providers. Conversely, you could snap up a building that has a particular purpose such as a restaurant, revamp it, and rent it out to a more successful chain in the same industry. You can choose which industry you cater to by choosing the property.

Should You Invest in Residential or Commercial Real Estate?

If you don’t have experience in real estate investing, we recommend residential real estate. If you have experience managing commercial properties, then commercial wins over residential real estate investing. If you have limited cash or low-risk tolerance, then we recommend residential vs commercial real estate.

Let’s go through the two main guidelines which are inevitable if you wish to succeed in residential real estate investing.

1. Look For a favorable Growth Market

If you are a seasoned real estate investor, you will definitely have importance for a healthy market environment, but if you are a newer investor, you will need to shed some light on this factor. It can go even worse if you have purchased a property with an adjustable-rate mortgage because sometimes the interest rates keep rising and you will end up paying more even if you can’t afford it. Such situations alleviate the demand for the entire real estate market in particular locations.

2. Always Be Particular About The Location of Investment Property

If you find a location with falling interest rates, manageable GDP growth, and good employment rates, then you can start looking for a smart property to invest in. Analyze and research the location before investing in any residential real estate property.

Types of Residential Real Estate Investing

Well, the desired investment is found in an ideal city that is expanding in many different factors related to the real estate market. If after proper analysis, you find the market conditions look vague, it is recommended to play safe by sticking to a particular location that is familiar to you.

1. Fix and Flip

Fix and flip is a great choice if you have been in the business for a long time, or consider consulting a real estate investment adviser to get proper guidance. You need to cherry-pick the best deals from real estate auctions, hire contractors to rehab the properties, and sell them for top dollar to an investor. Rehabbing a property adds value to it.

When you buy a property to fix and flip, the increase in its value is significant and you can profit by selling it immediately. Renovating the property will reap great profit (when you sell it). Most investors don’t have the ability or time to take every necessary step an accomplished fix and flipper can, and will happily pay more to get a property that doesn’t require rehab.

2. Rental Property Investment

Yes, you should go for a single-family rental home if you are looking for a small and affordable investment. It is easy to exit, unlike a multi-family rental property which will make you think twice due to heavy investment. Managing a rental property is quite simple if you hire an efficient property management team around the city.

They not only maintain your property but also help you in finding the best-suited tenant who is vetted and would less likely default on timely rent payment.

Commercial vs Residential Real Estate: The Conclusion

Buying or selling real estate, for a majority of investors, is one of the most important decisions they will make. Choosing a real estate professional/counselor continues to be a vital part of this process.

They are well-informed about critical factors that affect your specific market areas, such as changes in market conditions, market forecasts, consumer attitudes, best locations, timing, and interest rates.

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