Head of People

Content Writer, Stacker

Head Of In-Lease Experience

Journalist, Stacker

There's a big difference between investing in commercial real estate vs residential real estate, learn what would best suit your portfolio and investment style

Is it Better to Invest in Residential or Commercial Real Estate?

Is it better to invest in a commercial or residential property? The answer isn’t as straightforward as choosing to rent out a business or home. Each type of property investment comes with its own risks, tenancy options, financing and tax implications to consider.

What is “better” ultimately depends on your financial situation and what kind of investments suit your portfolio. In this article, we’ll take a look at the difference between investing in commercial real estate vs residential real estate so you can consider what’s right for you. 

Note: This article is for personal education purposes only. Always speak to a financial advisor or tax professional to get personalized advice for your situation before making any decisions about where to invest your money. 

Investing in commercial vs residential real estate — what’s the difference?

Residential real estate is any property or unit used as a home, such as single-family rentals, condos, or apartments. It requires purchasing (or inheriting) a home and then renting it for monthly income, usually under a lease agreement of around 12 months. This is the preferred type of investment for most individuals because obtaining finance to buy an investment home is fairly straightforward, with a lot less red tape to contend with than commercial finance. Most houses also appreciate well over time and it even gives you the option of returning to the home to live in yourself one day. 

In a recent article, Roofstock reported that single-family rentals (SFRs) have provided nearly identical returns to the stock market — but with far less volatility. This makes owning a rental property an attractive investment option to build or diversify your portfolio. 

Investing in residential real estate might suit you if:

You are new to real estate investing or are looking for a stable, less complex investment type

You want flexibility, with an option to adjust rental prices and sell the home or return to live in it yourself one day 

You want control over your asset, with the option to manage the property yourself or choose a company you trust to work with, such as Belong or a property management company

You want to take advantage of the tax benefits for landlords, such as deductions for expenses and mortgage interest or deferring capital gains

Residential real estate investing is also a great option for people who want to own property, but can’t afford home ownership in the area they want to live. Known as ‘rentvesting’, it involves buying an investment property in a more affordable, up-and-coming area and renting it out, while continuing to rent your primary residence in your preferred location or home type. 

In commercial real estate, the tenants renting from you are using the space to conduct business. The leases are much longer (around 5-10 years is common) and instead of attracting a monthly rate based on how many rooms the property offers, they are typically quoted as a yearly rate based on the square footage available to the business. The workload of managing a commercial property will vary greatly depending on the type of space and leasing business/es. For example the tenants' needs in an office space will differ to a business operating a restaurant or even a hotel, which is a 24/7 business. 

Investing in commercial properties is usually recommended to more experienced investors. This is because the process is complex, it takes a lot of capital, and there are more hoops to jump through to get finance. Commercial real estate is often owned by other corporations or a group of investors, but it is possible for individuals to own commercial real estate for investment purposes.

Investing in commercial real estate might suit you if:

You are an experienced real estate investor looking for a long-term investment option with higher risk and higher reward potential

You are a high-net worth individual or are working with a group of investors, since investing in commercial real estate requires more capital than residential real estate

You can afford the higher maintenance and running costs of operating a commercial property, especially if a change in tenants requires reconfiguring the space

You want to take advantage of tax benefits such as depreciation, mortgage interest deductions, and 1031 exchanges

You have a good team of professionals to guide you through the legalities and regulations of investing in commercial real estate

A popular alternative for individuals interested in commercial real estate is to buy shares in a publicly traded Real Estate Investment Trust (REIT). These companies own, operate or finance the properties to generate income on behalf of investors, so you won’t need the same specialist expertise — but you also won’t own the property or benefit from capital appreciation. 

How investing in residential real estate makes money

Investing in residential real estate can make money in three ways:

Appreciation of the property over time or ‘flipping’ the home after it’s been renovated

Tax deductions and benefits such as depreciation and deductions for mortgage interest and expenses

For most investors, positive cash flow is the goal — owning a home that earns more than it costs to own and operate. How much you earn on a rental after expenses is known as ‘net operating income’ or NOI. This involves taking your gross rental income and subtracting your gross operating expenses and debt liabilities. You can learn more about how to do an accurate cash flow analysis on a rental property here.  

The alternative is negative cash flow on a rental property means that the home doesn’t produce enough cash to cover the cost of the asset. While the name makes it sound, well, negative — this can sometimes be a strategic move. Known as ‘negative gearing’, some real estate investors will take on a property knowing that the rental income won’t cover costs of expenses in the short term. This is because the asset will appreciate and may produce more money in the long term. Negative gearing can also reduce tax liability, with losses claimed against other sources of income.

This is a riskier strategy than positive cash flow, as it requires investing more of your own money for the larger payout in the end. There are also capital gains considerations on the profits if you sell the property without reinvesting the money into another similar home. 

How investing in commercial real estate makes money

If you are a direct investor in commercial real estate — that is, owning the physical property — you can also make money in the same three ways, but on a different scale:

Through annual rent from your commercial tenants, with a steady income on long leasing arrangements

Through appreciation of the property as its value increases over time, delivering capital gains when sold

By reducing your tax liability, as commercial real estate has similar tax benefits to residential such as depreciation, mortgage interest deductions and 1031 exchanges

If you choose to invest in a Real Estate Investment Trust (REIT), the above won’t apply. That is because you will not own any commercial real estate as an individual, nor can you access capital appreciation or tax strategies that real estate ownership attracts.

There are three types of REITs for investors:

Equity REITS: Companies that own and manage real estate, generating income through rent.

Mortgage REITS: Lenders that finance real estate projects through mortgages and loans, generating income from interest.

Hybrid REITS: Companies that offer a mix of both equity and mortgage REITS.

The main benefit of investing in an REIT is that shares remain liquid as they don’t rely on you owning, maintaining and buying/selling a physical property. But that benefit can also be a drawback if you’re looking to take advantage of the benefits of real estate investing. If you invest in property, you can access monthly rental income, you’ll own an appreciating asset that can be sold down the track, and you can take advantage of tax strategies to reduce your tax liability each year.

How Belong is simplifying residential real estate investing

If you’re considering an REIT over investing in real estate because you’re put off by the amount of work it takes to manage and maintain a property, you’re not alone. But there’s also another option to consider: letting Belong take care of everything.

Belong wants to bring residential real estate investment back into the hands of individual investors, helping homeowners to achieve financial freedom. We do this by making the process of managing a rental home and achieving passive income much easier, where homeowners don’t have to lift a finger. Our homeowners even get asset management advice, helping to optimize your investments and get the highest ROI. 

So whether you’re ready to try your hand at investing in residential real estate or are looking for better ways to optimize your rental’s cash flow, learn more about Belong’s new approach  and see if your home is eligible here.

Most landlords want positive cash flow, but to do an accurate rental property cash flow analysis, you’ll need a spreadsheet and these important calculations.

How To Do An Accurate Rental Property Cash Flow Analysis

Calculating cash flow on a rental property isn’t quite as simple as the amount you earn in rental income. Nor is it as straightforward as rental income, less your mortgage repayments. To do an accurate rental property cash flow analysis, you’re going to need a spreadsheet and the following information.

What is positive cash flow on a rental property?

When your rental home makes more money than it costs to run, you have positive cash flow. This can also be referred to as passive income — money that comes from an investment rather than you actively working for it, as you would in regular employment. When you have low mortgage repayments (from low interest rates or high equity in the home) on a home that is in good repair, it’s easier to maintain positive cash flow.

Keeping your cash flow as high as possible is the goal for most homeowners with 1-2 rental properties, contributing towards financial stability and ensuring there are enough funds to cover any unexpected expenses that may arise. 

What is negative cash flow on a rental property?

Negative cash flow on a rental property means that the home doesn’t produce enough cash to cover the cost of the asset. While the name makes it sound, well, negative — this can sometimes be a strategic move. 

Known as ‘negative gearing’, some real estate investors will take on a property knowing that the rental income won’t cover costs of expenses in the short term. This is because the asset will appreciate and may produce more money in the long term. Negative gearing can also reduce tax liability, with losses claimed against other sources of income.

How do I calculate my rental home’s cash flow?

To determine if your home is achieving positive or negative cash flow, you need to do an accurate rental property cash flow analysis. This involves calculating the net operating income of the property, less any debt service. To work out these formulas accurately, here is the breakdown of income and costs to account for. 

1. Determine the total gross income of your rental property

First, comes the easy part. Take a look at all sources of income relevant to your rental home and determine your gross cash flow on the property. 

This should be pretty straightforward — your rental income. If you self-manage the home and charge for any extras such as furniture rental, storage or services, include this too. 

For example, if you charge $2,000 per month for rent, your gross income for the year would be $24,000. If it’s $3,000, it would be $36,000 per annum. 

There’s also the matter of vacancies. When your home is on a lease agreement, you will have rental income, but when it’s empty, this will reduce your gross income. So if your home is vacant for a month, your rental income will reduce. 

To recap, the final formula is: rental income + additional income – vacancy rate = gross rental income. 

2. Determine your home’s gross operating expenses

Homes don’t run themselves. You may have management services in place (such as Belong or a property management company) and there’s also the cost of maintenance, insurance and taxes on the home. If you are self-managing the property, you will need to factor the DIY costs such as marketing, photography, legal fees for lease agreements, traveling for inspections and tours and so forth. 

Most homeowners and investors also put money aside regularly for capital expenditures, that is, improvements made to the home that increase the value or avoid major repair expenses such as adding a new deck or replacing the HVAC. These expenses do not qualify for immediate tax deductions, but you can offset the depreciation against capital gains. 

Property management fees (usually around 6 - 10%) or DIY marketing and management costs

Lease renewal or reletting fees (if charged)

Regular services such as lawn care or snow removal

Savings for capital expenditures or improvements

Landlord’s insurance and/or mortgage insurance

Local services and utilities such as garbage collection or water and sewage

A final tally of these expenses will be your gross operating expenses. 

3. Calculate how much you earn after expenses

How much you earn on a rental after expenses is known as ‘net operating income’ or NOI. This involves taking your figure from step one (gross rental income) and subtracting your figures from step two (gross operating expenses). 

If for example, your gross rental income is $36,000 and your gross operating expenses are $4,000, your net operating income = $32,000 per annum. 

To recap, the formula is gross rental income - gross operating expenses = net operating income (NOI). 

If you own your property outright, such as inheriting a property, this figure will determine your cash flow. If you have any debts to service, such as a mortgage or home equity loan, you will have one final step to complete your rental property cash flow analysis, outlined below.  

4. Account for any debts or financial liabilities

The final step in your rental property cash flow analysis is the amount of debt you need to repay against the home. This could be your mortgage repayments for the year or home equity loan repayments. 

For this example, let’s continue the same figures used above (NOI of $32,000) and assume the mortgage repayments are $1,500 a month on a fixed interest rate. There are 12 months in the year, so your annual repayments would be $18,000.

$32,000 (NOI) - $18,000 (debt service) = $14,000. This would make $14,000 your annual positive cash flow, or $1,166.66 in monthly cash flow. 

If you had a variable mortgage repayment and interest rates rise, you would need to adjust the cost to determine your monthly cash flow. For example, if your mortgage repayment went up to $1,696 per month, your annual debt would rise to $20,352. This would make your annual positive cash flow $11,648 or $970.66 per month. 

How to increase your cash flow on a rental property

Now that you have done the math, how do you increase your cash flow? This is a simple matter of either increasing your rental income and/or decreasing your operating expenses and debt. This will alter the final figure or cash flow on your rental home. 

Increasing the rent is one way, but if you price your home too high or have too many increases, you could find yourself with a higher vacancy rate and diminishing profits. 

An alternative is to reduce your operating expenses and vacancies, by switching to a better alternative to self-managing or property management. 

Belong homeowners enjoy access to our data-driven pricing analysis, and have a team of professionals to help them price their home for maximum profit, with minimal vacancies. Belong homes find the perfect residents within 19 days, on average. That’s 66% faster than average! 

Belong supports your rental cash flow by providing reliable, guaranteed rent every month (regardless of when your resident pays). Homeowners are also approved for innovative finance options such as Split It, which allows you to spread costs (such as unexpected maintenance or even a full kitchen renovation!) over the term of your residents’ lease agreement, keeping your monthly cash flow positive. 

Where are the most recession-proof housing markets? We take a look at the data for 2023 and how to protect your real estate investment on the rental market.

Where are the Most Recession-Proof Housing Markets in 2023?

Recessions are unpredictable. In fact, experts can’t seem to agree on whether the US is or isn’t headed for recession in 2023. This uncertainty itself can bring instability to the real estate market, with many people waiting to see what happens before they put their money in a home. 

In the past, recessions have often triggered dramatic drops in housing prices, which can be good news for homebuyers, but bad news for homeowners, mortgage holders and anyone without good job security. 

Thankfully the housing market looks very different now than it did in 2008, when the Great Recession hit. There’s been a shift in supply/demand and more homeowners have had an opportunity to build equity in their homes off the back of historically low interest rates. This has made the market less fragile and many areas have even held quite strong despite rising interest rates. 

But where are the strongest markets in the US? Which states will be most resistant to huge drops or deemed to be “recession-proof” housing markets? While no one can be certain, many real estate analysts have weighed in on this topic recently. In this article, we’ll give you a brief overview of some of this data. 

Which housing markets are at risk during a recession?

Recession or not, we already know that the housing market shifted in 2022 from years prior. Interest rates spiked from historic lows and after a pandemic fueled buying frenzy in regional markets, prices began to slow and settle. Supply is starting to open up as homes stay on the market longer. 

Real estate researchers at Redfin noted that some of the pandemic’s hottest markets are the ones most likely to experience a downturn. After outpacing other markets in price growth and migration, they are now at risk of losing the value gained since 2020. 

Redfin predicts the top 10 housing markets most at risk of a downturn in 2023 are:

Most of these markets are now facing either unaffordability with interest rates rising on top of high prices, or people returning back to other regions after moving during the pandemic. 

Which housing markets are tipped to be the most resilient in a recession? 

The same Redfin data lists markets that are still affordable in Rust Belt metropolitan areas as the most resilient housing markets. 

Redfin predicts the top 10 most resilient housing markets of 2023 will be:

This list is based on a risk assessment of the markets with the lowest chance of a housing downfall if the US enters a recession. Factors influencing these scores include lower price volatility, low debt-to-income ratio and affordable housing. When houses remain affordable, they are more likely to attract buyers and investors. 

Boston is a notable outlier on this list, however price growth didn’t hit this area quite as hard when many migrated out during the pandemic, pushing up prices in other regions. 

Single family homes are resilient real estate assets

Housing markets play a big role in the price and value of homes, but the type of home plays a part too. There’s no such thing as a “recession-proof investment”, but in terms of real estate, single family homes can hold tremendous value. 

Large single-family homes, particularly in spread-out neighborhoods, typically remain in high demand and are more likely to hold their value in a recession (or any kind of economic downturn). 

Single-family rentals can make for resilient investments too. In a recent article, Roofstock reported that single-family rentals (SFRs) have provided nearly identical returns to the stock market — but with far less volatility. This makes owning a single family home an attractive investment option to build or diversify your portfolio. 

If you own a single-family home in a market affected by a downturn, you won’t get much in the way of appreciation on your home until things bounce back. However, if there’s scarcity for single-family homes and you can offer good space in a nice neighborhood, it’s likely that demand will remain steady for your home on the rental market and price decreases won’t hit as hard as the apartment market.  

In fact, when homeownership declines, people are likely to stay renting for longer, opting for a single-family home with more space to stay long-term and even grow their family, rather than choosing a cramped apartment. 

Protecting your real estate investment during a recession

There are two key ways to protect yourself during a recession: 

1. Have a stable source of income (positive cash flow)

When interest rates rise and the risk of residents falling behind in rent increases, this might bring little peace of mind to owners of rental properties.

Belong is turning this around and making it easier for homeowners to protect their single-family home investments during a recession. For starters, we’ll ensure your rental income is stable and predictable, by optimizing the rental price for your market and guaranteeing rent every month. Regardless of when your residents pay, you’ll always know exactly how much income will be coming in and when. 

When it comes to debt, you’ll always know where you stand too. Unlike traditional property managers, Belong never charges hidden fees for the essentials in taking care of your home. If unexpected costs do arise, such as maintenance or repairs, there’s no need to max out your credit cards. All Belong homeowners are pre-approved for our innovative Split It financing option. This allows you to access our extensive vendor network and spread the cost over the term of your lease agreement, keeping your cash flow positive and debt down. 

Discover Belong PRO, the best alternative to Property Management in Seattle, Redmond, Oakland, and many more cities across California, Florida and Washington State.

These regular and seasonal maintenance jobs are key to keeping your rental property profitable and in good shape all year.

The Annual Maintenance Checklist for Rental Homes in Florida

The Florida rental market has heated up like no other, making places like Miami and Tampa ideal locations to own an investment property. But a home in disrepair isn’t going to attract good residents or the right price for the market. Regular maintenance on a rental is key to keeping the home profitable and in good shape — identifying any issues or necessary repairs before they become costly headaches. 

While Florida really only experiences two seasons a year (hot and less hot), it’s not immune to wild weather. This annual maintenance calendar will give you an idea of the kind of repair, prevention and maintenance items you should cross off your list every season for a rental home in the Sunshine State. Some of these items you can ask your residents to manage, but some you will need to check for yourself in annual or quarterly inspections. Or, if your home is looked after by Belong, we can handle the lot — from speaking with the residents about issues to making repairs with our extensive network of professional contractors. 

Homeowners should also be aware of their obligations under Florida’s landlord-tenant statute to keep the property in good repair and ensure the home is habitable. If you fail to do so, your resident has the right to withhold rent, provided they issue you with a notice of their intent. You will be given seven-days notice to correct the defect/s and the resident can’t be forced to pay rent or threatened with eviction during this period. 

Spring Maintenance Checklist for Florida Rental Homes

Spring is the end of the dry season in Florida, which makes it the perfect time to tackle any maintenance issues and inspect for any leaks or cracks before the wet season begins. Servicing your HVAC or air conditioning unit and cleaning out filters is another must, before the mercury rises and contractors get busier (and more expensive!). 

It’s also a good time to do an annual inspection of smoke alarms, plus any fire extinguishers, CO detectors, and sprinklers to make sure they are working properly. 

Check the HVAC or air conditioning unit and clean filters before summer hits 

Inspect and test any fire safety systems such as fire extinguishers, CO detectors and sprinklers 

Mow the laws and remove any weeds as they start to appear

For homes with pools, have the water checked and cleaned to prepare for summer

Hose down any decks — if they need maintenance, now is a good time to reseal and treat for rot 

Check for leaks in the ceiling or any signs of water damage to repair before summer and fall rains set in and problems deepen 

Summer Maintenance for Florida Rental Homes

May to October is the wet season in Florida, making summer hot and humid. When the moisture and humidity rises, so too does the mold so be sure to make sure there’s no damp spots or moisture damage in the home and that rooms are being kept well ventilated. You can recommend that residents use basic moisture absorbers (such as DampRid) in dark areas that attract mold, like closets and laundry rooms.

If your home is prone to infestation, or your residents have concerns, now is the time to inspect for insects and rodents after the spring breeding season. 

Florida is also prone to severe storms and hurricanes, with the season peaking around August - September. You can check your address on FEMA’s Flood Map to find your flood zone category and risk of property damage during summer and fall. If you are at risk, check your insurance coverage and look at the National Flood Insurance Program. 

If your home has hurricane shutters installed, be sure to check their condition and make sure any electrical systems are functioning or hand-cranks are moving easily. If you don’t have any installed, now would be a great time to consider them to protect windows from flying debris. They also offer great insulation and protection from burglaries for your residents.  

Inspect and control any pest infestations such as insects and rodents

Check any supplied appliances such as refrigerators and washing machines

Check insurance coverage before hurricanes and storms set in 

Check property for any damage or loose fittings that could become an issue during storm season

Fall Maintenance for Florida Rental Homes

If your rental home has a lawn and yard, the big dose of sun and rain may have encouraged it to get a little unruly. Your trees may have also been damaged during summer storms. Fall in Florida is a good time to give gardens some love to ensure you maintain curb appeal and function. 

While you won’t see the traditional colors of fall the way you would in Vermont, there are Floridian trees that will drop their leaves and clog your gutters. If your home has one, make sure gutters are cleared as clogs can saturate your roof and cause leaks. 

Inspect roof and gutters, clearing out any debris 

Check bathroom caulk and grout for any potential issues and leaks before winter

Check garbage disposals as these get frequently clogged and lead to repair issues

Check insulation and drafts around windows and doors to fix before winter

Winter Maintenance Checklist for Florida Rental Homes

No need to worry about snow plows or frosty pipes, winters in Florida are the mildest in the US. However, as a homeowner you still have a responsibility to your residents to provide heat, especially hot water. Don’t neglect the water heater in your rental home — a yearly flush can prevent pipes from bursting and let you identify problems or leaks before they get worse. No hot running water gives residents cause to stop paying rent, an outcome far more expensive than maintenance. 

Florida rental owners take note: These regular and seasonal maintenance jobs are key to keeping your rental property profitable and in good shape all year.

Melanie Kershaw

Mel Kershaw is a Content Lead at Belong. With an extensive background working with technology companies including Eventbrite and Yelp, she’s always looking for ways to create educational and informative articles that simplifies tech and solves problems for her audience.

Flora Fiorillo

Andrea Vale

Tamara Epelbaum

Annalise Mantz

Lauren Slagter

Flora Fiorillo

Andrea Vale

Tamara Epelbaum

Annalise Mantz

Lauren Slagter