Which investment type is best?

Blog March 2024

Residential vs. commercial real estate

Real estate investing can be incredibly lucrative but it can be very difficult to navigate. One of the most fundamental questions is which type of investment is best for you – residential or commercial real estate? Keep reading to find out what is the main difference, what are the benefits of each type, and how to choose between the two!

What is the difference between residential and commercial property?

Many find themselves wondering whether commercial or residential real estate investment is the better choice. But before you decide on the type, you first need to go over what exactly is the difference between the two investing options. Residential real estate investing is the process of buying, renting, or reselling properties that are residential in nature.

Some of the most common examples of residential properties are:

  • Single-family homes
  • 4-unit condos
  • Apartments
  • Duplexes
  • Triplexes

While residential real estate is a type of investing that is easy to define and includes apartments or homes, commercial properties are different. Commercial properties are a wide concept that includes multiple types of properties. These are usually leasable properties of 5 or more units that are used for commercial purposes.

Here are a few examples of what a commercial real estate investment can be:

Here are a few examples of what a commercial real estate investment can be:

  • Hotel space
  • Office space
  • Retail stores
  • Manufacturing
  • Warehouse facilities
  • Multi-family residentials

Benefits of commercial real estate investing

When it comes to commercial vs residential real estate investing, both options have their unique benefits. Commercial properties in particular have a few big advantages:

  • Long-term leasing agreements
  • Fewer tenant obligations
  • Easier to increase property value
  • Higher rate of return

Let’s break this down further. Commercial real estate investing is different from residential in that the property is often rented for commercial purposes – generally to a business. Due to this, agreements are signed for relatively longer timeframes. This is very advantageous to the investor because of the guaranteed sizable income. Another important effect of working with businesses is that commercial real estate does not have as many laws intended for protecting tenants, giving investors more flexibility.

Additionally, the advantage of commercial investment over residential real estate is that its value is not determined by the values of other buildings or neighborhoods but by the cash flow of the property itself. This makes it easier for investors to increase their value and thus their own returns. This is added to the already higher-than-average rate of return that commercial properties caused by the sheer size of the property. The more space you have, the more you can rent out!

Benefits of residential real estate investing

Residential real estate investing, on the other hand, has a number of advantages that commercial properties simply can’t offer. Above all else, there is the simple fact of people needing homes. Due to this, residential properties will always be in demand, regardless of economic downturns.

Here are the main benefits of investing in residential real estate:

  • Lower barrier of entry
  • Different investment strategies
  • Steady demand
  • Consistent returns

The market of residential investment is incomparably easier to navigate. Investing in residential real estate is simply less complicated due to working with either tenants or buyers. This leads us to the next benefit of residential real estate investing – the possibility of utilizing multiple investment strategies. With residential properties, you can both buy and rent to tenants as well as buy and refurbish to flip the property later. Both strategies are technically possible with commercial properties too, but it’s a much faster and easier process with residentials.

The remaining benefits of investing in residential real estate are the most important factors – the consistency of demand and income. Residential investment is incredibly beneficial simply due to the fact that homes or apartments are always needed. Young families, couples, and families moving locations – they all need some place to live. Some will be willing and able to buy homes, while others will seek rental arrangements.

Regardless of the circumstances, residential properties will always be in demand and your investment will pay off. This same factor also guarantees a steady cash flow – even in times of crisis! Investors who choose residential properties will always have income.

Commercial vs. residential real estate investing  

When choosing between commercial or residential real estate investment, we generally recommend opting for residential to beginners. Commercial properties can be highly profitable due to their sheer size, but investing in residential real estate has the most important advantage for a novice investor – consistency. Even if your returns are great, you cannot manage your other projects properly if you can’t rely on a consistent income. Investing in residential real estate gives you that consistency.

When it comes to seeing through other investment projects, residential properties give you the edge – a steady income to lean on while you manage other deals and properties. When it comes down to a strict choice as a novice investor – commercial vs residential real estate investing, residential real estate investment gives you a great advantage – control. Thanks to the size and volatility of the asset, it’s much easier to control, rent, and manage. The only downside is that the edge is smaller – if your investment is not rented or sold, it gets stuck. Commercial, on the other hand, is significantly larger in size, meaning that achieving inertia is a struggle. But once achieved, it brings in enormous returns, and the valuation becomes dependent on cash flow and not the environment, as is the case with residential real estate investing. Of course, if you can – do both! Investing in both types of properties will combine all of their advantages.

How to invest in residential real estate

Now, you might be wondering how to invest in residential real estate. Well, there are a few ways you can about it:

  • Invest yourself
  • REITs & REIGs
  • Equity funds

When it comes to how you can invest in residential real estate, doing it yourself is a traditional choice. Opt for US rising cities and locations such as Sacramento, Detroit, New York and its surroundings. If doing it yourself is too time-consuming for you, there are other options. If you aren’t specifically in the investment business, you will have to invest your own time into this in order to succeed. So, for those who want a passive income in addition to their full-time endeavors, this option won’t do. REITs or REIGs are a well-known option but they have a major downside – most of the profit goes to the organization. You will only receive a small portion of it. The best option is investing with private equities. Equities bypass many issues which would otherwise cut down your profit such as taxes.

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Any questions

What is affordable housing?

Affordable housing refers to housing units designed to be accessible to low- and moderate-income families, typically costing no more than 30% of their gross income.

The definition of “affordable” typically varies depending on location and income levels but generally encompasses rent or purchase prices that don’t exceed a certain percentage of a household’s income.

What is Section 8 housing in the US?

Section 8 is a federal rental assistance program in the US run by the Department of Housing and Urban Development (HUD) that helps low-income families and individuals afford decent and safe housing in the private market. 

The program provides eligible households housing choice vouchers that cover a portion of the rent directly to the landlord, with the tenant paying the remaining amount. Property owners who participate in Section 8 agree to rent units to qualified individuals and families at a rate approved by the program.

How can I invest in Section 8 housing?

There are several ways to invest in Section 8 housing:

  1. Direct ownership: You can purchase a property approved for Section 8 and rent it to a qualified tenant using a voucher and receive rent subsidized by the government.
  2. Real estate investment trusts (REITs): REITs pool investor funds to purchase and manage income-producing real estate, including affordable housing.
  3. Limited partnerships: Limited Liability Companies (LLCs) offer another option for investors to pool resources and invest in affordable housing projects.
What is the difference between multi-family and single-family properties?

Single-family property: This refers to a standalone house or unit designed for and rented to one household.

Multi-family property: This refers to a property containing multiple dwelling units, such as a duplex, apartment building, or condominium complex. Multi-family properties offer the potential for higher rental income but typically require different management strategies and considerations compared to single-family homes.

What is the difference between buying and flipping houses?

Buying and holding: This involves purchasing a property to keep it as a long-term investment, generating rental income and potentially appreciating in value over time.

Flipping: This involves buying a property, renovating it to increase its value, and then selling it quickly for a profit. This is a more hands-on strategy with higher risks and rewards compared to buying and holding.

How much do I need to start investing in affordable housing real estate?

The minimum investment required varies depending on the chosen method. Direct ownership typically requires a higher initial investment for the property purchase, and renovation up to Section 8 standards, while other options like REITs might have lower minimum investment amounts.

Do I need to be a US citizen to invest and own the property?

No, US citizenship is not a mandatory requirement for investing in affordable housing in the US. However, specific restrictions or regulations might apply depending on the investment method and your residency status.

It’s crucial to consult with a professional to understand the legal and tax implications for non-citizens.

Do I need to pay US tax as an overseas investor?

This depends on the type of investment, your residency status, and any applicable tax treaties between your home country and the US.

Consulting with a tax professional specializing in international investments is highly recommended.