Commercial vs Multifamily real estate

Multi-Family and Apartment Investing
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Commercial vs Multifamily real estate

Stephen Jones
Rental Property Investor · IL · Member since 2019 · 285 posts · 137 votes

BP,

For the last 10+ years I have drove one vehicle, Multifamily RE. I have roughly 200 units in my portfolio currently.

A commercial property came across my desk and I currently have it under contract and am in the due diligence period right now.

Can investors who own both MF and Commercial property tell me their experiences? Which one do you prefer? Pros? Cons? Etc.

I will have to sell 35 units to acquire this property, needing a 1.4 million dollar down payment.

This property is in an unbeatable area but it doesn’t cash flow as good as the 35 multi units.

I know this is a little bit of a loaded question, but I just wanted to get a take on everybody’s experience with the commercial side due to me being so inexperienced and new to it. Thanks!

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Frank PyleBusiness Member
Specialist · USA · Member since 2024 · 279 posts · 130 votes
9mo

I've owned mostly small multifamily too and the biggest shift with commercial is you stop underwriting like a "unit" deal and start underwriting like a business with more moving parts. The upside is usually better location and bigger long term value if you can grow NOI, but the downside is vacancy risk hits harder and tenant rollover can get lumpy, plus financing and exit liquidity can feel tighter depending on the asset type.

If you're giving up 35 doors that cash flow better, I'd be really clear on what you are buying instead of cash flow. Is it NOI growth, rent bumps on existing leases, expense cuts, or a big appreciation story in that unbeatable area. I'd also stress test a couple bad scenarios like one big tenant leaves or rates stay higher longer and see if you still sleep at night after selling those units.

What type of commercial is it and how many tenants. What are the current rents, lease terms, and your plan to force NOI the first 12 to 24 months.

[email protected]317-501-3467
Frank Pyle at ExP Realty
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NEXA Lending- Investors Edge Concierge
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  • Charles Seaman
    Apartment Syndicator · Charleston, SC · Member since 2017 · 519 posts · 631 votes
    9mo

    @Stephen Jones Commercial properties tend to be much easier to manage.  In general, commercial properties cash flow better and appreciate less than multifamily because they have smaller buyer pools (but this obviously varies depending on the details, as with any investment property).

    The biggest adjustment you'll notice going from multifamily to commercial is that it takes much longer to get a vacant space leased, so you'll need to have adequate cash reserves to cover any costs while the property is vacant and/or occupancy is down.  Leasing to good tenants is far more important than it is with multifamily, so it's important to be diligent with your screening on the front end.  In most localities, tenant/landlord laws also have less impact because very few local or state governments give commercial tenants the same treatment that they do residential tenants.

    Overall, I like both asset classes, but I find commercial better for cash flow and ease of management and multifamily better for appreciation.

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  • Frank PyleBusiness Member
    Specialist · USA · Member since 2024 · 279 posts · 130 votes
    9mo

    I've owned mostly small multifamily too and the biggest shift with commercial is you stop underwriting like a "unit" deal and start underwriting like a business with more moving parts. The upside is usually better location and bigger long term value if you can grow NOI, but the downside is vacancy risk hits harder and tenant rollover can get lumpy, plus financing and exit liquidity can feel tighter depending on the asset type.

    If you're giving up 35 doors that cash flow better, I'd be really clear on what you are buying instead of cash flow. Is it NOI growth, rent bumps on existing leases, expense cuts, or a big appreciation story in that unbeatable area. I'd also stress test a couple bad scenarios like one big tenant leaves or rates stay higher longer and see if you still sleep at night after selling those units.

    What type of commercial is it and how many tenants. What are the current rents, lease terms, and your plan to force NOI the first 12 to 24 months.

    [email protected]317-501-3467
    Frank Pyle at ExP Realty
    WebsiteView Page
    NEXA Lending- Investors Edge Concierge
    View Page
    1Reply
  • Stuart UdisPro Member
    Attorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
    9mo

    You’re not going to get meaningful insight from a generic poll asking whether investors “prefer” commercial or multifamily. That question strips out the variables that actually matter. Location, asset type, asset quality, basis, capital stack, tenant profile, lease structure, and tenant demand. One investors Pros and Cons will differ from another investor's experiences solely dependent on the real estate they own whether its multi-family or commercial.

    [email protected]
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