Commercial or Residential?

In general, would you rather invest in commercial or residential real estate? Which one would likely be more profitable? Pros and cons for each?

I’ve been focusing more on residential investing recently (duplexes, to be specific), but I just received word from a friend that I can get a commercial property for $450,000 that grosses $54,000/year, with a triple net lease. It seems like this would be much more lucrative than the duplexes I’ve been looking at, but I’m a newbie when it comes to knowing anything about commercial real estate.

Looking for some guidance here.

Generally speaking the more units you can leverage the faster you can increase your cash flow/equity/wealth.

However, each project is unique. This one may NOT be better than a duplex.

Several factors come into play specifically including utility liabilities, age, location, demand, and the list goes on. Not to mention any value-added elements in a given project. Or the level of forced appreciation.

You can force the appreciation on a duplex by buying low and in poor condition, and selling higher in great condition.

Can you do that with this project, or is it already running at it’s highest operating temperature?

The only way to compare this project with a duplex is to analyze and compare the numbers side by side. Otherwise, its anyone’s guess whether this is better/worse than a duplex.


Thanks for the reply, Javipa. Do you, personally, prefer residential or commercial? And why?

I understand that each project is unique but, generally speaking, which type of property are you more apt to be interested in?

My goals will be different from anyone else’s goals. So, it depends.

I used to invest in cash-flowing junker houses, because I thought I wanted cash-flow, instead of appreciation (forced appreciation or otherwise). It was a buy-and-hold-until-Moses-comes-back strategy. I got over that idea.

I literally jumped directly into multifamily residential. Same ghetto-environment, but more leverage into more units at a time.

I went from a few hundred in net monthly cash flow, to a few thousand in monthly net cash flow …in one move. I also made more than a quarter million dollars in equity in less time than I had been investing in ghetto houses.

Both were management intensive situations, but the leverage of my time, energy and money was incomparable.

That all said, I’m an active house financier. I buy houses that I can offer financing on. I’m effectively invested in these deals for about five years, or less. I make money up front from down payments, money on the payment spread, and back-end profits when i’m paid off in full.

It’s very much like apartment investing. I get rent up front, I make money on the monthly spread, and after I’ve increased the value of the project I sell to realize my back-end equity profit.

I would say more, but I gotta go.

Thanks. You’ve been a big help. As mentioned above, I am also interested in multifamily properties. I am curious about one thing you said though…you said you like to go for “ghetto” properties. What is the advantage in that? I’m a newbie in all of this, but my initial thought would be to buy a bit newer and a bit pricier in a nicer neighborhood, thereby keeping maintenance and repairs down. The monthly rent would be higher than a low end property in theory as well. All that said, I would think that you would be better off investing in ‘nicer’ properties? Am I wrong?

I’m not sure if I’m explaining my question well enough. I wrote 2 examples below. The first is an analysis of a low end property, and the second is a nicer property. These are numbers I got from actual existing properties on I’m hoping you can help me understand or enlighten me.

Duplex #1 (ghetto)

Asking Price: $100,000
P&I after 20% down (4.5% interest): $405
Taxes/Insurance: $155
Maintenance/Repair (10%): $100
Vacancy (5%): $50
Monthly Income: $1,000

Net: $290/month

Duplex #2 (nicer duplex ~15 years old)

Asking price: $215,000
P&I after 20% down (4.5% interest): $872
Taxes/Insurance: $360
Maintenance/Repair (10%): $200
Vacancy (5%): $100
Monthly Income: $2,150

Net: $618/month

Could you please explain to me why the first deal is more attractive than the second? I understand that you would need to put twice as much down, but you would also be getting (in theory, of course), twice the monthly income. I’m sure I’m missing something here, but I don’t know what. Hopefully, you can find the time to explain this to me. Again, I appreciate your time.

Whoa! That’s a lot of mathiness…

Generally speaking, start by noting the rent/price ratio. If they’re the same, so will the return (subject to the varying financing terms). Just saying

All things being equal, which they never are …we assume 50% overhead. Period. Then we let the seller prove otherwise.

Now, if the rent/price ratio is 2%, we know that the expenses are not 50% of that rent. How much less is a matter of history and speculation.

When I ask to compare two properties side by side, I meant multifamily with a duplex, not a duplex with a duplex.

BTW, duplexes are not really considered “multifamily residential” for financing purposes. Five units and above would be.

Show me a duplex with a 2% rent/price ratio, and compare that with either of the duplexes you listed, and see what the returns are (minus the financing quotes).

I think this would illustrate the contrasts much better.


Check out this analysis of your two deals “Dup. 1 and Dup 2” against “Dup. 3” with a higher rent/price ratio.

Rent/price ratios make a HUGE difference in return, even if everything else is the same percentage-wise.

Frankly, in the time I had, I couldn’t figure out how you arrived at the better returns on the “nicer” duplex, so I re-analyzed them, and the following illustration is what I came up with.

Thank you for taking the time to type all that out, Javipa! I understand what you’re saying. I guess the only thing that I’m concerned about is what can be expected from rent/price ratios in my area. In your example #3, you are assuming that you would bring in $900/month from each unit on a $125,000 duplex. I can tell you that I haven’t seen that around here. Here, a $125,000 duplex would generate closer to $700 per month, each side (and that’s being very optimistic). So, if you plug in the new numbers, your cash flow would be closer to $2,300, your ROI would be 9.2%, and rent/price ratio would be 1.1%. The two examples I gave are actual properties for sale in my area.

I’m not trying to argue with you here. I’m really just trying to learn and understand what makes low end properties more viable?? I know you’re probably busy, but I would appreciate an explanation at your convenience.


Low end properties are only more valuable, IF you are looking for cash flow. Otherwise, they’re just management intensive, hell holes, for the most part.

Otherwise, if we’re looking for appreciation, eventual cash-flow, and anything else, we’ll invest in ‘nicer’ (bread and butter) properties.

There’s both a cycle and sweet spot to any investment, where the investment remains in most demand, the rents are going up, appreciation is happening, and there’s resultant equity growth. That’s mostly described as a ‘bread and butter’ property (single family, duplex, etc.).

If you’re investing for appreciation, or trying to catch a wave of appreciation, you look for the growing edges of your area, and attempt to invest into that growing edge, so that by the time the area grows up around your investment, you’ll have captured the most appreciation possible. The next step for some investors is take their new equity and move it into “units.”

That’s pretty much the opposite of investing in fully developed, demographically flat, interior zones, for cash flow.

Meantime, deals are negotiated. They don’t fall off the MLS ready to go.

Whatever you decide to go after, you’ve got to know rents and values.

I knew the rents I could get in the ‘hood’ and the prices I needed to achieve the cash flow I wanted. So, I negotiated those prices, and focused on the sellers that didn’t care as much about their price as they did about getting out from under their hell holes. That is, I kept making offers that made sense to my cash flow objectives.

As an aside, it’s amazing to me, how many investor wanna-bies mess around with sellers who flat out tell them, “I’m not in a hurry to sell.” Or “I’m not desperate.”

Really? Anyone who tells me that and they might as well tell me they have full blown, bleeding ebola virus coming out their nose, cuz I’m GONE.

Anyway, look at the rents. Compare them with the prices, and make offers on the ones that seem closer to your goals.

Bottom line is that my example may not exist in your market. But the principle of higher rent/price ratios work everywhere. If you can’t get a 1.5% RPR, then you don’t. But where you can negotiate that, you’re in business. Maybe you can only achieve that by buying severe fixers? I don’t know.

The adage that you make your money when you buy is pretty much true.

Now, we haven’t talked at all about what I actually suggested. That was buying apartments (units) (multifamily residential) like 10, 15, 30 units.

Here you’ll look at the average rents per door, per month, and compare that with the average per door price, and come up with a rent/price ratio.

The principle is the same when looking at the rent/price ratio on apartments.

Hope I answered your question.