Real Estate Investing – Residential or Commercial?

Some real estate investment advisors believe that if you are just beginning real estate investing you should avoid commercial real estate, such as office buildings, shopping centers, and warehouses for the following reasons:

It’s more complicated and does require a greater knowledge of law, zoning and leasing regulations, financing etc. Residential apartment buildings also fall into this category even though they’re used as residential property for the tenants it’s still a commercial enterprise for the investor and since it is a multi-tenant commercial building on land zoned for that purpose it will differ greatly from residential property in it’s maintaining, leasing, valuing, financing, and a host of other things.

According to a study in The Economist, residential property investment was $48 trillion and commercial real estate investment was $14 trillion. There are a lot more potential renters in the residential market than in the commercial one. During economic recessions which can occur every 5 to 10 years, marginal businesses fail at a faster rate. This can mean negative cash flow for you because of high vacancy rates if your tenants are included in these volatile businesses. Although residential rental demand also goes through these cycles, there is always a greater number of potential renters for house and condos than there is for commercial properties.

The profitability rewards are bigger but so is the learning curve. Mortgages are structured differently and building insurance is more expensive. Also to consider are the costs of fire suppression, security, and air-conditioning systems along with telephone and internet facilities.

Consider the right type of residential properties.
Location, price and condition. Do your research and find a property in an appreciating neighbourhood. Remember, properties appreciate for only two reasons: inflation and increased demand.

About 70% of Americans live in 3 bedroom dwellings so 3 or 4 bedroom houses or condos should be your target as they are the easiest to sell, the toughest to sell are 1 and 2 bedroom homes. Only consider properties that are in good condition also unless you want a job as a handyman. Fixer-uppers are only good if you have the extra time or are in the home remodeling business which then would make good sense.

Living in it or renting it?
When buying a property as a rental investment, stick to the lower end of the price spectrum. Rental properties should be about 20% lower than the average home price for an area. The best rental market is for moderately priced but attractive houses because if most renters could afford to buy, they would. The goal for rental properties should be for neutral to positive cash flow whereas the goal for a personal residence is affordable payments.

Choose a property with up to 4 units.
A duplex or fourplex can be a great investment because your tenants will be making your mortgage payments for you and you can live in one of the suites. Now some investors will say this is not a good idea and they would never do it because the tenants would always be bothering them for something. I have done this with great success and without any headaches. You just need to make sure everything is kept up and you need to have a good read for people that you allow to be your tenants. So, up to 4 units is great but anything over that starts to get a bit hectic and closer to the commercial side of investing, which for the novice, isn’t recommended.

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