HMW #146: Why Residential Beats Commercial Real Estate Investing

Read Time: 5.75 minutes

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There are a million ways to make a million dollars in real estate, but residential real estate is the clear winner over commercial real estate when it comes to first-generational investing. Residential real estate in this case means 1-4 unit residential properties.

Many beginner investors never actually invest because they are constantly looking and comparing between all the commercial and residential options out there.

So, let me (Alan) make it easy for you and narrow the scope. You should just focus on residential real estate investing. And I need you to agree.

At least you are self-aware. Let's get to what makes residential superior to commercial real estate investing so you come out ahead in the end.

Pro 1: Residential Has 30-Year Fixed Mortgages

Residential real estate is the king of 30-year fixed mortgages. I've blogged before about the ridiculous benefits of 30 year mortgages in detail, but in short, just imagine locking in your biggest expense on any business venture that you have for up to three decades. That's unheard of. 

In contrast, most commercial deals require adjustable rate mortgages that may change your expenses each year or have balloons that force you to refinance every 5, 7, or 10 years (or pay the properties off at that point). You never know what future interest rates will be, and you don't want to be caught off-guard, which happens all the time in commercial investing.

The Great Financial Crisis (GFC) was caused by adjustable rate mortgages (ARMs). The ongoing office crisis is being caused by balloon mortgages. You can avoid both of these catastrophes if you focus residential with it's superior 30-year fixed mortgage loans.

Good, let's continue on then....

Pro 2: Residential Has Lower Down Payments

Commercial loans typically require 20-25% down payment. And typically the best loan products start once you are borrowing over $1,000,000. That's a BIG first step to take in real estate investing.

Residential can be lower if self-occupied. You can turn your single-family residence (when you move out) with a 3.5% down payment FHA loan into an investment property. Or you can house-hack a duplex, triplex, or quadruplex where you in one unit and rent out the others. This can also qualify for 3.5%, 5%, and sometimes 0% down payment loans.

I'm all in for acquiring real estate with as little money as possible on each deal and it doesn't get any better than this!

Good. Are you feeling a sense of relief while you're slowly giving up on evaluating any more commercial deals? I bet you are!

Pro 3: Residential is more liquid and flexible

Imagine your buyer pool is only commercial investors have have deep pockets. You go to sell and you can only hit up one group of people. I hope the timing is right for that group to be ready to buy: when money is cheap and interest rates are low.

Now, imagine selling real estate when you need to sell to not only commercial investors with deep pockets, but also residential investors with smaller pockets of cash, and primary homeowners looking to live in a property for themselves or house hack with a low down payment loan.

This is the best case scenario with residential: pretty much anyone can be a buyer of different investment levels and down payment amounts. You get top dollar when you have widest audience aware of your property and bidding on it.

Residential makes exiting an investment easier. But it also makes pivoting on an investment easier too.  You can switch use from long-term rental to short-term rental to primary use without any issues.  Whatever works for you, you can do it.

Unfortunately, commercial doesn't allow this. They aren't going let you make a property your primary or switch it's tenant base. Your lenders, investors, and insurance brokers will revolt.  

The best investments have options and residential investing gives you the most options. Right?

Nice, welcome to residential real estate! It's the lowest-risk way to building massive wealth.

Summary

• Focus on residential real estate as a beginner investor
• 30-year fixed mortgages are a perk in residential
• Lower down payments will get you farther
• Pivoting and exiting are easier