Residential vs. Commercial Investments – Which is right for you?
Real estate has been a mainstay for investors for decades for many good reasons. With an excellent rate of return, substantial tax advantages and relatively low risk, investing in property can be an exceptional choice for those looking to build wealth. Beyond investing through a purchase of your own home, you may be looking to diversify your portfolio by purchasing additional property.
Real estate investments are either considered to be residential, which includes single-family homes and multi-family properties such as fourplexes and apartment buildings, or commercial, which can range from shopping centers and offices to warehouses and manufacturing space. Each has its pros and cons, and it’s important to understand how they compare so you can make the right choice for you and your future.
Residential – Less Risk, Less Reward
If you’re a first-time investor, residential properties are generally easier to break into and less stressful to maintain. You’ll be able to purchase lower-cost residential properties without taking out large loans, and you’ll be managing a relationship with just one or a few tenants per property. If you decide to buy a home to flip, you’ll only need to worry about making the initial profit and won’t need to deal with tenants at all. Most residential properties carry one-year leases. You may get lucky and have a reliable tenant for many years, but you run the risk of needing to find new renters and dealing with the cost of a move-out/move-in every year or so. You’ll also be responsible for the total cost of any repairs, whereas
Commercial – Greater Risk, Greater Reward
Commercial properties are bigger and more expensive, requiring much more risk on the front end as you make an initial purchase. You may need to go in on the investment with other partners or take out a hefty loan to fund it yourself. The good news is that as long as the demand for space is high and you can keep your operating expensive reasonable, capitalizing on your investment can prove lucrative in the long run. While you may be capable of managing a few small residential properties on your own, you’ll likely need to hire a professional property manager to handle a commercial property. Providing space to multiple tenants at one time creates better opportunities for higher earning potential and with tenants investing more in space to run their businesses, you’ll enjoy much longer lease terms to ensure ongoing revenue.
Which is best for you? You need to carefully consider the amount you have to put toward a new real estate investment, the risk you are willing to take, and the time you have to devote to managing your investment. We’ve only covered the basics here to help you begin to think about investing in real estate. Some of our agents at Simply Commercial also work on the residential side at our sister company Marshall Walker Real Estate. If you are interested in learning more and discussing what’s right for you, reach out here or better yet, stop in for a coffee so we can begin looking for your ideal investment property and help you reach your financial goals.