Understanding the Key Differences Between Residential and Commercial Real Estate and Utilizing Them to Find Success

I’m excited to share with you some valuable insights about the difference between residential real estate and commercial real estate investments, particularly when it comes to self-storage revenue.

When I first started in real estate investing, I thought that the only way to make money was to buy a rental property or a fourplex. However, the more I learned about the industry, the more I realized how many opportunities were available, and that there are more ways to invest in real estate than I initially thought.

Residential Real Estate vs. Commercial Real Estate

Before we delve deeper into the key differences between residential real estate and commercial real estate, let's define each. 

Residential real estate comprises single-family homes, duplexes, triplexes, townhomes, fourplexes, condominiums, and short-term rentals. 

In contrast, commercial real estate encompasses multi-family apartments, office buildings, industrial spaces, self-storage units, flex space, land investments, and more.

Buyers and Financing Options

One of the key differences between the two is the buyers themselves. In commercial real estate, all buyers are investors, and we evaluate the property based on its potential as an investment. With residential real estate, the majority of buyers are users who purchase the property to live in. They’re not buying as an investment opportunity, but out of necessity.

Additionally, financing options differ for investors in commercial real estate and residential real estate. While residential real estate may have good financing options, such as a 30-year mortgage, it can be limited for investors. The financing structure is based on personal guarantees rather than the asset or investment itself, which can be problematic for investors. On the other hand, commercial real estate offers a range of financing options, such as hard money, private money, and traditional financing. We even have non-recourse loans available.

Valuation and Cash Flow

The valuation of commercial real estate and residential real estate also differs, primarily because of their intended use. Residential real estate is valued based on the property's location and its proximity to amenities and schools. Commercial real estate, however, is valued based on its income potential and its ability to produce revenue.

When it comes to cash flow, investing in a residential property may not make sense as a cash-flowing asset because buyers are not looking to generate revenue from the property. In contrast, commercial real estate - particularly self-storage units - has a high potential for cash flow because they are valued based on their income potential.

Structuring the Investment

There are many commercial real estate opportunities that are less expensive than buying houses in today's market. For example, we wholesaled a self-storage facility to an Inner Circle member for $150,000. Even though it was a small facility, that price is still much lower than the current median home price in the U.S. of around $400,000.

Commercial real estate is a team sport, and there are many people involved, including operators, management, and investors. This leaves us with the ability to structure these in syndications, funds, or partnerships. There are many different ways to structure a commercial real estate investment, and everyone is willing to work on it. This is one of the prime advantages of commercial real estate investments.

Opportunity for Growth

When you look at housing, everyone is in that game, trying to own or rent. When you get into commercial real estate, there are many different types, uses, and abilities to be creative with it. The opportunity is multi-layered, and it's also easier to scale in commercial real estate. Starting in very small third-tier markets and small storage facilities that today cost way less than the houses where I live cost, we can scale all the way up to 30 million developments within the same asset class. That's a big opportunity. 

In order to scale up, you will need to move into commercial real estate. I generally don't believe you need to start in residential real estate and move to commercial real estate. There are plenty of opportunities in commercial real estate that are just as cheap as buying single-family homes, yet it's easier to structure to get investors, banks, and experts involved.

The CRE Circle

This was one of the reasons we created the CRE Circle. It's a community of people who want to get into or are already working in commercial real estate investing. It provides education, tools, services, and opportunities. We're very passionate about it and about people saying there are more options than residential real estate.

Investing in real estate can offer numerous opportunities, and there are many ways to invest beyond the traditional rental property or fourplex. Residential and commercial real estate differ in terms of financing options, buyers, valuation, and cash flow. By understanding the difference between the two, you can increase your chances at success significantly.