brrrr-strategy-guide): Which Is Right for You?

Two of the most common questions from new real estate investors: "Should I focus on residential or commercial?" and "Is commercial real estate better?" The truth is there's no universal answer — the best choice depends on your capital, risk tolerance, management preferences, and investment goals.

This guide gives you a comprehensive comparison across every dimension that matters: valuation methods, financing, risk profile, tenant dynamics, tax treatment, management intensity, and paths to entry.

Defining the Asset Classes

Residential Real Estate

Single-family homes (1 unit)
Small multifamily: duplexes, triplexes, fourplexes (2–4 units)
Large multifamily: apartment buildings (5+ units — this is also commercially classified)
Vacation rentals, short-term rentals
Student housing (residential-style)

Commercial Real Estate

Office: Medical, professional, corporate campuses
Retail: Strip centers, power centers, triple-net single-tenant
Industrial: Warehouses, distribution centers, light manufacturing, flex space
Multifamily (5+ units): Classified commercially despite housing residential tenants
Hospitality: Hotels, motels, vacation rental portfolios
Self-storage: Climate-controlled and standard storage facilities
Healthcare: Medical office, skilled nursing, assisted living
Mixed-use: Combination of retail, office, and residential

Valuation Methods: How Each Asset Class Is Priced

This is one of the most important differences between residential and commercial investing, and it affects strategy profoundly.

Residential: Comparable Sales (Comps)

Residential properties are valued primarily by comparing recent sales of similar properties in the same area. A 3-bedroom, 2-bath house in Charlotte is worth what other similar 3/2 houses in that neighborhood have recently sold for.

Key implication: The value of a residential rental is largely independent of how much rent it generates. A house generating $2,000/month in rent and a house generating $1,500/month in rent may have the same value if the comps are similar.

This means you cannot force appreciation through increased rents in the same way you can in commercial real estate.

Commercial: Income Capitalization (Cap Rate)

Commercial properties are valued primarily on their income. The formula:

Value = Net Operating Income (NOI) ÷ Cap Rate

This means if you can increase a commercial property's NOI, you directly increase its value.

Example: A multifamily property generating $100,000/year in NOI in a 7% cap rate market is worth $100,000 ÷ 0.07 = $1,428,571.

If you renovate units, raise rents, and increase NOI to $130,000, the property is now worth $130,000 ÷ 0.07 = $1,857,143 — a $429,000 increase in value from a $100,000 NOI increase.

Key implication: Value-add commercial investing offers direct income-to-value leverage that residential investing doesn't. This is the foundation of the value-add commercial strategy.

Financing: Very Different Worlds

Residential Financing (1–4 Units)

Residential properties (1–4 units) qualify for conventional financing:

Conventional loans: Conforming loan limits apply (~$806,500 in most markets, 2026)
FHA loans: 3.5% down, owner-occupancy required for investment hack (FHA on a duplex or fourplex where you occupy one unit)
VA loans: 0% down for eligible veterans on owner-occupied multifamily
[DSCR loans](/blog/best-dscr-lenders-2026): Investment-focused loans underwritten on rental income, no personal income verification

Residential financing is well-developed, competitive, and easier to access for most investors.

Commercial Financing (5+ Units, Non-Residential)

Commercial real estate requires different financing:

Conventional commercial loans: Typically 20–30% down, full recourse, 20–25 year amortization with 5–10 year balloon payments
SBA loans: 504 and 7(a) programs for owner-occupied commercial properties
Bridge loans: Short-term financing for value-add deals during [renovation](/blog/bathroom-renovation-cost-guide) and lease-up
Agency debt (Fannie Mae/Freddie Mac): Multifamily (5+ unit) specific; excellent rates and terms for stabilized assets
CMBS loans: [Commercial mortgage](/blog/commercial-mortgage-guide)-backed securities for larger commercial deals
DSCR loans: Available for many commercial and multifamily property types

Key difference: Commercial financing is more complex, often involves personally recourse debt, and typically requires more equity (25–35% down). However, for larger deals, agency and CMBS financing can offer competitive rates.

Learn about DSCR loans for commercial property →

Lease Structures: Short-Term Residential vs. Long-Term Commercial

Residential Leases

Typically 12-month terms (month-to-month after expiration)
Rent controlled in some markets
Extensive tenant protections (eviction moratoriums, notice requirements vary by state)
Tenant generally pays utilities (structure varies)
Landlord responsible for maintenance and repairs
Lease renewal is at landlord's option but complicated by tenant protection laws

Implication: High turnover costs, frequent vacancy risk, significant landlord maintenance obligations.

Commercial Leases

Much greater variety and negotiability:

Gross lease: Tenant pays fixed rent; landlord pays expenses
Modified gross: Tenant pays base rent + some expenses (taxes, insurance, or utilities)
NNN (Triple-Net): Tenant pays base rent + all property taxes, insurance, and maintenance
Absolute NNN (Bondable): Tenant responsible for absolutely everything, including structural repairs

Commercial lease terms are typically 3–10+ years for retail/office, 10–25 years for NNN, and 1+ year for industrial.

Implication: Long-term leases provide income stability and predictability. The tenant often has more responsibilities, reducing landlord management burden (especially in NNN). However, if the market improves dramatically, you're locked into below-market rents until renewal.

Risk Profile Comparison

Residential Real Estate Risks

Tenant quality and turnover: Individual tenant financial situations vary dramatically. A single job loss or divorce can turn a good tenant into a non-paying problem.

Market dependency: Residential values are tightly correlated with local economic conditions, employment, and comparable sales.

Regulatory risk: Eviction moratoriums, rent control expansion, and tenant protection laws have significantly increased the operational complexity of residential landlording in some markets.

Single-tenant concentration: A single-family rental has no income until rented. Vacancy = 100% income loss.

Interest rate sensitivity: As rates rise, home values fall (buyers can afford less). This affects exit pricing.

Commercial Real Estate Risks

Longer vacancy periods: Commercial space often sits vacant for months between tenants; lease-up time is longer than residential.

Higher capital requirements: Both acquisition and ongoing capital improvements require more capital than residential.

Economic cycle sensitivity: Office and retail in particular are highly correlated with economic cycles. The post-COVID office vacancy crisis demonstrated how dramatically commercial demand can shift.

Specialized knowledge required: Analyzing a retail strip center, understanding lease structures, evaluating anchor tenant risk — these require more specialized expertise than residential.

Larger individual deals: A vacant commercial space of 5,000 sq ft has far more impact on a small portfolio than a single vacant apartment.

Risk Management Strategies

Residential risk mitigation:

Strong [tenant screening](/blog/best-property-management-software-2026) (see our tenant screening guide)
Diversification across multiple units/markets
Adequate cash reserves

Commercial risk mitigation:

Tenant credit analysis (critical for NNN)
Long-term leases with creditworthy tenants
Diversified tenant mix (multi-tenant strip center vs. single-tenant)

Management Intensity

Residential: Relatively High Maintenance

Even with a property manager, residential investing involves:

Frequent tenant turnover (average tenancy: 2–3 years for renters)
Ongoing maintenance (appliances, HVAC, plumbing)
Legal compliance with habitability standards
Handling tenant disputes and issue

With property management: 8–12% of gross rents monthly, plus leasing fees (50–100% of first month's rent per placement)

Commercial: Varies by Property Type

NNN properties: Extremely low management intensity — the tenant handles virtually everything. You collect a check. Ideal for truly passive investors.

Value-add multifamily (5+ units): High management intensity during renovation and lease-up; moderate once stabilized with a professional management company.

Retail strip center: Moderate management — multiple tenants, lease administration, CAM reconciliations, tenant improvement work.

Industrial: Generally low management — tenants are businesses with long leases and handle their own space needs.

Tax Treatment

Both residential and commercial investment properties qualify for depreciation deductions, mortgage interest deductions, and [1031 exchange](/blog/1031-exchange-guide) treatment. Key differences:

Depreciation Periods

Residential rental property: Depreciated over 27.5 years
Commercial property: Depreciated over 39 years

Shorter depreciation life = larger annual deductions for residential.

[Cost Segregation](/blog/depreciation-real-estate-guide) Benefits

Both asset classes benefit from cost segregation studies that reclassify components to shorter depreciation lives. Commercial properties with more complex infrastructure often yield more components for reclassification.

1031 Exchange Compatibility

Residential and commercial properties can be exchanged for each other in a 1031 exchange. A single-family portfolio can be exchanged up into a multifamily complex; a strip mall can be exchanged down into residential properties. They must simply be "like-kind" — i.e., investment property for investment property.

Learn how 1031 exchanges work →

Entry Points and Getting Started

Starting with Residential

Most investors start with residential for good reasons:

Lower entry price per unit
More accessible financing
Easier to understand
Strong resource community (BiggerPockets, local investors)

Typical path: Single-family or duplex → small multifamily (2–4 units) → 5–10 unit apartments → larger commercial

House hacking: One of the best residential entry strategies — live in one unit of a duplex/fourplex while renting the others. See our house hacking guide →

Starting with Commercial

Commercial real estate is typically a later-stage move, but there are entry paths:

Crowdfunding platforms: Invest passively in commercial deals with $5,000–$25,000 through platforms like CrowdStreet or Realty Mogul. See our crowdfunding platform comparison →.

REITs: Publicly traded REITs provide instant commercial real estate exposure with stock-like liquidity.

Small commercial: Some investors start with small NNN properties ($500,000–$1,500,000), small retail strip centers, or self-storage facilities. These are smaller scale but commercially underwritten.

Real estate syndications: Passive LP position in a commercial deal, typically $25,000–$100,000 minimum.

Which Is Right for You?

Choose residential if:

You're starting out with limited capital ($50,000–$200,000)
You want to manage properties yourself
You value the learning curve of hands-on management
You're comfortable with shorter leases and higher turnover
You're using FHA or VA financing for a house hack

Choose commercial if:

You have more capital ($200,000+) or are investing passively through a platform/syndication
You want longer-term, more stable leases
You're attracted to the value-add model of forcing appreciation through NOI growth
You're comfortable with specialized knowledge requirements
You prefer lower management intensity (NNN particularly)

Use both if:

You want true portfolio diversification
You've built residential equity and want to exchange up into commercial
You're building toward financial independence with multiple income streams

Commercial Real Estate for Beginners
Triple-Net Lease Investing Guide
House Hacking Complete Guide
[[BRRRR Method](/blog/brrrr-method-explained) Explained](/blog/brrrr-method-explained)
Real Estate Crowdfunding Platforms Compared
DSCR Loan for Commercial Property

Commercial vs. Residential Real Estate Investing: Which Is Right for You?

Key Takeaways