What is Better – Commercial Real Estate Investing Or Residential Real Estate Investing?

My wife, Julie, and I often wonder if commercial real estate investing is the way to go. We’ve always focused on residential real estate – and it’s been very lucrative. But, my parents previously developed, owned, and managed a mobile home park along with owning a variety of residential properties. Julie’s parents have owned (and still own) a variety of commercial properties. And, we’ve watched them all make money, sometimes lots of money, from those investments.

We are often pulled towards the commercial side of things, not only because of what our parents have been involved with, but also due to our fascination with all things real estate. So, what’s better – commercial or residential investing? Below I have noted a far from exhaustive list of pros and cons for both types of real estate investment. One type of investment may be better suited towards your own objectives and goals.

For the sake of simplicity, we’ll consider commercial as office/retail/light industrial vs. residential which are smaller properties with less than 10 units used for the purposes of living only (not conducting business).

Residential Real Estate Investing – Pros

• Simpler, easier to understand (we all have to live somewhere).
• If it’s a quality property (especially single family home) that’s moderately priced, it will have a larger market of willing buyers when you do decide to sell it.
• Generally, don’t require a large down payment to own.
• Finding tenants is a simpler process than finding a commercial tenant.
• Lots of tax write-offs.

Residential Real Estate Investing – Cons

• Legislation in most places heavily favours the tenants not the landlords.
• It takes months to evict problem or non-paying tenants.
• Generally speaking, positive cash flow is limited when it comes to single family residential properties.
• Cannot charge landlord expenses back to tenants including management, taxes, insurance, etc..
• 1 year leases are the norm – but tenants can easily break them with little consequence.

Commercial Real Estate Investing – Pros

• Can have Triple Net Rent – tenants pay rent plus landlord expenses (tax, insurance, management, etc.).
• Long-term leases (3-5+ years) are common.
• No rent increase restrictions.
• Non-paying tenant, in many cases, can be locked out swiftly.
• Less emphasis is placed on person to qualify for financing. More weight is placed on the building quality, tenants, and leases (revenue from the leases).

Commercial Real Estate Investing – Cons

• Generally require a larger % towards down payment (25-35% of the purchase price down is fairly standard).
• If financing a commercial property, there are many hoops to jump through, and with that, many associated costs.
• Not dissimilar to residential properties, if a unit becomes available, you may need to spend considerable dollars renovating it to suit your new tenant – to a larger scale than with residential (in some cases).
• Often takes much longer to fill a commercial unit than a residential (may take months vs. only weeks).
• Vacancy rates are traditionally higher for commercial properties.

Unfortunately, the above lists have probably just left you with more questions and not enough answers. I know that’s what it does to me when I consider them!

Every investment vehicle has it’s good points and bad points. This goes for stocks, bonds, businesses and real estate. The thing to do is figure out what vehicles suit your objectives, and then do your research.