Lester Parris highlights a few of the differences between commercial and residential real estate investing.

1. DIFFERENCES
BETWEEN
COMMERCIAL AND
RESIDENTIAL REAL
ESTATE INVESTING
LESTERPARRIS.COM
PREPARED BY: LESTER PARRIS

2. L E S T E R P A R R I S . C O M
Some people may say real estate is real estate. Those people probably haven’t invested in both
commercial and residential real estate. There are key difference between the two investment classes.
INTRODUCTION

3. Residential real estate investors have two primary market segments to choose from, which
are single-family homes or multifamily properties. For commercial real estate, the main
market categories are office, industrial, hospitality, and retail.
MARKET
SEGMENTS
L E S T E R P A R R I S . C O M

4. The value of commercial and residential properties are not established in the same way.
The value of a residential property is determined by comparing it to similar nearby
properties. For commercial property, comparisons to similar properties are secondary to
the income the property generates.
DETERMINING THE VALUE OF
PROPERTY
L E S T E R P A R R I S . C O M

5. Typically, residential leases are one-year agreements. They’re also gross
leases. That means the tenant pays a fixed rent every month and the landlord
has responsibility for maintenance and other property expenses. Commercial
leases usually are written for at least three years. Longer leases have the
potential benefit of lower vacancy rates and reduced turnover costs. Often the
commercial leases are net leases. The tenant pays for maintenance and
property expenses while the property owner receives 100 percent net as rent.
LEASES

6. Residential investment properties tend to be easier to finance. For residential properties
that have four units or less, an investor can take out a home loan as an owner-occupant
does. Commercial real estate usually involves commercial loans, which have shorter terms
and higher interest rates than home mortgages. To qualify for a commercial loan,
investors often have to show the lender proof of the income the property generates.
FINANCING
L E S T E R P A R R I S . C O M

7. The legal protections afforded residential tenants can make evicting a non-paying tenant a
long and arduous process. It can mean months of not receiving income from an investment.
Commercial tenants don’t have as many protections, which makes evicting non-paying
tenants easier.
HANDLING NON-
PAYING TENANTS
L E S T E R P A R R I S . C O M

8. Commercial real estate investing requires more diligent recordkeeping than residential.
When an investor is ready to sell a commercial property, that investor needs well-
maintained, comprehensive records to show potential buyers. These records inform
purchase decisions since they show the property’s performance, revenue, and expenses.
RECORDKEEPING
L E S T E R P A R R I S . C O M

9. Commercial real estate brings in higher rents than residential. However,
residential investments have lower vacancy rates during economic downturns
since everyone needs a place to live.PERFORMANCE

10. For more information please visit
LesterParris.com.
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