New real estate investors often start with residential real estate and switch to commercial investing once they become more experienced. It doesn't always happen that way; some investors jump right into commercial investing, but that's not the norm, probably because the reasons new investors should start with residential investing are compelling.
Most people are more familiar with residential property than with commercial property; after all, people live in residential property, which could be a single-family home, condo, townhouse, duplex, triplex, or quadplex. Property with five or more units (like an apartment building) is commercial property, as are hotels, retail space, warehouses, and vacant land.
Although there is plenty to learn about being a landlord, it doesn't take a lot of experience to be successful. To invest in commercial real estate, you should know the industry well -- as well as you likely know residential -- and you should have the experience to make a wise purchase decision.
Higher level of difficulty
Commercial property has challenges that residential doesn't, such as maintenance. Residential property needs maintenance, although it's probably nothing you're not already familiar with. A commercial building, on the other hand, needs a higher level of maintenance and typically requires a professional property management company.
New investors also need to be able to analyze the complexity of commercial deals and to understand unfamiliar concepts, such as a triple net lease (where the tenant pays all the expenses) and how that works.
Cost of entry
It's usually more expensive to invest in commercial real estate than in residential: Buildings cost more than single-family homes. It's common for commercial real estate investments to require a 25% down payment. On a $2 million property, that would be $500,000. With residential, you can often start with a $200,000 property (or less), and even if you had to put down 25% there as well (which you might not), it would be much more affordable at $50,000 or less.
Commercial real estate investing is generally riskier than residential. Case in point: COVID-19.
In a normal economic climate, when there's a downturn, businesses are usually the first to be negatively affected. But add pandemic lockdowns to the mix and we are, tragically, seeing businesses going under right and left.
Residential real estate took a hit as well, but not as much: People still need a place to live no matter what. For that reason, residential typically weathers bad times better than commercial does.
It's never easy to deal with an investment that's going badly, but seasoned investors are generally better able to handle challenges than are new investors just starting out.