Commercial Real Estate vs. Residential: Where to Invest

Once investors add real estate to their portfolio, part of their decision on how to make a good investment will be choosing whether to seek commercial or residential real estate.

To decide where to invest, it is important to first understand the difference between both.

Commercial real estate is any property used for business that has the potential to generate income. This could include office, retail, restaurant, hotel, multifamily or industrial space. This also encompasses property used for strip malls, shopping centers, gas stations, medical facilities and vacant land that could be developed.

Residential real estate includes property used for living space, including buildings with up to four apartment units, and the property is categorized into classes according to varying characteristics:

  • Class A. A top-quality property in terms of factors such as age, design and construction and location.
  • Class B. A property that needs some improvements.
  • Class C. A property is typically more than 20 years old, located in a less desirable area and in need of renovations to bring it up to date.

Choosing to Invest in Real Estate

Many investors turn to real estate as an investment option as its performance is more predictable and less volatile than some other alternatives, such as the stock market. Real estate can be a reliable income-producing property that appreciates in value over years, as long as it is maintained. Market conditions also play an important role. 

Investors also can choose how much control they want over their investment. Some people rely on a strategy of being solely an investor who acquires a portfolio of properties. Other investors might prefer to also develop residential or commercial properties.

Investment Strategies

Investing in real estate can be part of a short- or long-term plan.

Some investors look to flip real estate by buying, updating or improving it, then quickly selling it for a profit. Improvements can quickly boost the resale value of a property.

Other investors might look to real estate as a longer investment that can consistently generate income.

An investor also might choose to contribute to a fund that invests in real estate rather than being a sole investor.

Investors often own the property and lease it, collecting rent from whatever business or individual that occupies the space. The investor might hire a property manager to oversee a property, collect rent and ensure that it is leased or does not remain vacant too long between tenants. The economy will be a key determining factor in the value of your real estate investment.

Commercial vs. Residential Investing

Both commercial and residential real estate investments carry the potential to generate revenue, but investors must decide where to invest and which type of property would be the best for their plans.

Residential real estate typically is a less-expensive investment option than commercial real estate. Some investors might also find it easier to manage and understand as many people have rented an apartment or house.

Investing in commercial real estate typically takes more funding and research to evaluate the market and the potential for the property to be profitable. Many factors go into deciding what property would be an optimal investment, including location, vacancy and occupancy rates, and cap rates.

The difference between residential and commercial real estate is broad, but both can be good investment options. Investors should consider their experience and investment goals before deciding which type of property would be the best choice.