With our cyclical real estate market, conditionals are continually changing. And as we see shifts play out in real-time, it’s common to reevaluate our real estate investment strategies.
One question we often get is: Which is better: commercial or residential real estate investing?
The short answer is that neither is inherently better or worse than the other. However, there are several differences between the two that can make one option the better choice for you.
Let’s compare commercial vs. residential real estate investing so you can choose your path forward in today’s market.
Commercial vs. Residential Real Estate: What’s the Difference
You may think of residential real estate as single-family homes, which is partially correct. And you may think of commercial real estate as office buildings, retail storefronts, and shopping centers, which is also partially correct. But there’s a nuance that many people aren’t aware of.
Specifically, residential properties are defined as homes with up to four units. So residential real estate can be duplexes, triplexes, and four-plexes in addition to single-family homes. Each unit is purchased or rented with the intention of housing people.
Commercial properties do include the office buildings, retail storefronts, and shopping centers listed above, but they also include any property that contains five or more units. That’s right, apartments are considered a commercial real estate investment rather than a residential investment if they have five or more units. Even though large apartment buildings provide housing for residents, they are still considered commercial property.
Commercial vs. Residential Real Estate: Differences in Norms
Another important difference regarding the commercial vs. residential real estate question is about industry norms. For example, the cost of entry is typically higher in commercial real estate than in the residential market, because commercial properties are usually of higher value than homes and small apartment complexes. The higher price tag can create potentially higher risk.
The customary lease terms are also different when analyzing commercial vs. residential real estate. Residential leases often run for 12 months or less, perhaps even being offered on a month-to-month basis. Obviously, that creates a higher risk for the residential investor, as turning over tenants creates costs and higher vacancy rates. Commercial leases tend to run much longer, with many ranging between five and 10 years.
Commercial vs. Residential Real Estate: Differences in Valuation
Perhaps the biggest difference regarding commercial vs. residential real estate investing pertains to how the properties are valued.
The value of a residential property is determined by recent sales of nearby homes, adjusted for several factors, including:
- Location
- Age
- Condition
- Upgrades
- Size
- Lot size
- Amenities
- Views
Commercial real estate, on the other hand, is valued almost completely by the amount of revenue the property generates. For example, a big, beautiful, brand-new commercial property at half capacity is not going to command as high a sales price as an older building that’s been fully rented for years and generates consistent revenue.
Commercial vs Residential Real Estate Investing: Current Conditions
Commercial real estate has gotten a bad reputation in recent years due to the declining demand for office and retail space. But when you remember that multi-family buildings with 5+ units are considered commercial real estate, the picture changes.
Multi-family developments are lucrative investments with substantial growth potential. In the second quarter of 2024, the quarterly demand totaled 161,707 units, representing a 102.0% year-over-year surge. This increase in demand underscores the robust growth and strong market dynamics within the multifamily sector.
Importantly, as commercial real estate, these multi-family buildings are valued based on the income they generate. This makes them less susceptible to sudden market changes that can result in dipping home values.
The Gatsby Investment Difference
Gatsby Investment is a real estate investment firm that has produced enormously positive results for several consecutive years.
We are keenly aware of changing market conditions and stay ahead of trends. When we plan our next investment steps, we don’t just look at property types that have historically made money. Instead, we look at what’s working RIGHT NOW. For instance, there is a serious shortage of housing in Los Angeles. So multi-family developments are in high demand. We focus on smaller multi-family buildings because they are quicker to build and easier to sell. That’s why our approach continues to do well even when the market is sluggish.
Are you looking to invest with an experienced real estate investment firm? With our syndicated real estate investment opportunities, you can buy into a multi-family development with as little as $25K.
Don’t limit yourself to traditional single-family rentals. Invest with Gatsby to take advantage of the commercial opportunities in multi-family housing!