Residential vs Commercial Real Estate

8 Replies

I’m looking into residential vs commercial real estate properties. Does anybody have a preference to one versus the other? What are the pros and cons of each? What are the expenses associated with commercial as opposed to residential?

Mason,

All depends on what type of properties when you compare the two options.  One of the things is taxes which can be a lot higher on the commercial side without caps.  You also have liability and property/Hazzard insurance which will always be higher on the commercial side in most cases.  In terms of longevity I would rather have a Duplex or a Tri-plex in an average area than have a commercial building with similar square footage.  Just my opinion in most cases you will always have a larger demand for livable space rather than a demand for commercial work space.

When times get tough people will always need a roof over their head and not so much keep an office rent paid. Now flip the script and say you purchased a coin laundry facility where it was open 24/7. You may argue ROI on that would be higher again depending on the area. There are a lot of back and forth plays on pro's and cons so do you have an example?

@Mason Jenkins If you compare residential vs commercial Multifamily, I will say commercial is your best bet. Just think about this; let's say you have a single family home and your tenant leaves, you are left with a full mortgage to pay. In commercial Multifamily (5+ units), you still have other tenants that can pay your mortgage. The other benefit about commercial is that you have full control of how much your property is worth. Commercial property is actually valued based on Net Operating Income (NOI), whereas residential is valued based on comps around the area. No matter what you do, residential will always be controlled by comps. Some people say you have to graduate from residential to move to commercial but that is totally a myth. I started in Commercial Multifamily and so far on my first year of taking action, I have bought 10 doors and I am under contract for another 12. IM me if you have any further questions, happy to talk a bit further

@Mason Jenkins

I do both Commercial and Residential lending.  Many good points have already been brought up in the responses above.  Here are my additions or corrections:

Commercial

Possibly higher taxes, higher insurances

Loan costs will be much higher (rates, closing costs, origination fees, etc...)

Most lenders require you have a formed business entity such as an LLC

Lenders will have more flexibility with terms and conditions as they are not bound by Fannie Mae or Freddie Mac.

No special licenses needed to originate or broker commercial loans in most states. Higher costs and little to no regulation for borrowers.

Blanket Loans (some call Portfolio Loans) - Multiple properties under one contract and closing

Residential

Property value can also be valued based on Cash Flow. You don't have to be an LLC or in a commercial loan to get this benefit.

Restricted to certain building types (E.g. 1-4 units, SFR, Condos, Mixed Use Res/Comm) I have a lender who will do up to 8 units as residential, but costs are higher.

Lenders and brokers are far more regulated than with commercial, which means better rates, lower closing costs, more transparency, etc...

Secondary market and broker competition, keeps costs down for borrowers

I am sure there are many other things that could be added. But the main questions are really about what are your goals? Once you determine your goals, both short and long term, then determine the path in which to get there. Many begin with a SFR then build to Multi-Unit, then up to Multi-Family. Some even change classes all together and go into warehouses or mobile home parks. Many start with a goal in mind then that goal changes along the journey. There are ways to flip back and forth and change direction, but be sure you do you homework and have a good CPA to help guide you.

Good Luck!

Nick Belsky

Mason,

From an Insurance perspective, if you get into commercial properties (5+ apartments, Retail, office, mixed use, etc.) I would strongly recommend using an Independent Agent that represents multiple Insurance carriers.  We insure a lot of different types of properties and businesses.  Often, out of the 50+ insurers we have for commercial policies, only a handful will be truly competitive for an account.   You want someone who can handle this purchase as well as future ones that may be different.  This is still good advise on the 1-4 family properties as well.

@Mason Jenkins Commercial can mean a pretty wide variety of property types. Ultimately it comes down to your goals and where you are starting from.

@Nick Belsky did a great job of giving the top level differences. One thing I would add as someone who does both commercial (retail/office plaza) and residential (singles and doubles) is that while the lenders will give your LLC or entity a commercial loan, they will often make you sign personally for it especially if you are new. Exception being large multi family that is eligible for Fannie/Freddie non-recourse loans.

There's a lot to unpack and I have a great video on YT coming on this topic.

  1. Commercial real estate and residential real estate are two sides of the same coin, the primary difference is going to be based on investor goals.
  2. Commercial real estate has a higher barrier to entry (more $$$), more complex acquisition and management, but much higher returns.

Residential is easier to start with more plentiful financing and more liquidity. Most people (think) can self-manage residential rentals.

As an investor, evaluate what is important to you:

  1. Costs
  2. Returns
  3. Team
  4. Risk
  5. Forced rent vs appreciation

Conclusion: Ultimately both classes offer different strengths, determining your own goals will decide what's best for you, then come talk to us for a free consultation