Commercial vs. Residential Real Estate: Which Is Better?

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When looking at real estate investing, there’s often a question of whether to go with residential or commercial. It depends on your investment goals and risk tolerance.

There are several ways to approach real estate. It encompasses different types of properties. But with today’s high interest rates, you want to invest wisely.

What Is Considered Residential Real Estate?

Any complex that consists of one to four units and where someone can live is considered residential real estate. That includes:

• single-family homes
• duplexes
• condominiums
• triplexes
• quadplexes

This could also include building lots and land intended for a home’s construction.

Residential Real Estate Entry Level

Residential real estate often has a lower barrier to entry. Residential can be an inexpensive investment. It’s all about supply and demand, and if there is an abundance of properties on the market, it can be one of the more affordable forms of real estate.

There is also a familiarity with residential. Most Americans grew up in residential properties, so they know the product. There isn’t much of a learning curve (multifamily dwellings are not residential).

Renting or flipping depends on the prospect pool; most people need housing. Many people prefer living in residential.

Funding for Residential

Residential real estate is easy to finance because of the abundant mortgage programs available. Conventional loans are one of these options.

They are usually simple to obtain with relatively low interest rates if you have a strong credit score. A conventional loan will usually require a 25 percent down payment. Fannie Mae or Freddie Mac guidelines must be met. And although Fannie Mae and Freddie Mac allow up to 10 mortgages, most banks set a limit of around four.

A Veterans Administration loan is also an option for some. These mortgages are available to veterans, eligible spouses, and active-duty members. There is no minimum downpayment. And although there is no minimum credit score, one of the units purchased must be a primary residence.

With a VA loan, you can purchase up to seven units.

A Federal Housing Administration (FHA) loan also is a possibility. Required down payments and credit scores are usually lower than a conventional loan. It is best to use one unit at the primary residence for one year if you want to qualify.

You can also use a blanket loan if you want to purchase several properties and put them under one loan. These loans are usually customized.

Downsides to Residential Real Estate

Since residential leases tend to be six months to one year, there’s a lot of churn. Keeping them rented is a part-time or full-time job. There’s also a high risk of vacancy.

There’s lower profitability with residential. You usually have fewer tenants. They also have the potential of tenants damaging the unit. That and basic maintenance is an ongoing expense.

What Is Considered Commercial Real Estate?

Commercial real estate encompasses several types. They include:

• office
• industrial
• retail
• hospitality
• multifamily

Keep in mind that any real estate intended for business purposes is commercial. There is often more profitability with commercial real estate. And because of longer lease terms, there is potentially a lot less vacancy than with residential real estate.

Commercial Entry Level

Commercial real estate has a higher barrier to entry than residential. There is limited inventory, and since these assets tend to be fewer, there is a high demand to purchase.

There’s more competition from larger firms when looking for profitable commercial property.

Funding for Commercial Real Estate

Raising capital for purchasing commercial real estate can take more work, but there are some loans available.

The Small Business Administration (SBA), for example, is a source for commercial real estate loans. You still must go through a traditional lender, but the SBA backs your loan to the financial institution. There are certain criteria that must be met. To find out about 504 SBA loans, go to its website.

A permanent loan, which means a first mortgage on a commercial property, is also possible. These are fixed-rate or variable loans offered by many commercial lenders.

A private company is an option for a hard money loan. Although these lenders aren’t as concerned that you can pay back the loan, they are concerned about the property’s value.

The approval might be easier, but the interest rate is much higher than a permanent loan, and the terms for the loan are much shorter.

Downsides to Commercial Real Estate

Commercial real estate is more susceptible to economic downturns than residential. Although everyone needs to live somewhere, not everyone needs an office building to work. The shutdown for COVID-19 proved that.

Industrial and retail can both cut back during a downturn. There is more risk with commercial real estate.

Check With a Financial Advisor

It comes down to your goals and risk tolerance. There is always a need for residential real estate, but the profits of residential are lower than commercial estate.

Commercial real estate can provide higher rental income, but it is more expensive and comes with higher risk.

Discuss your goals with a financial advisor to determine which type of real estate is right for your purposes.

The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.