Commercial Property vs Residential Property Investments: What Every Investor Needs to Know
Investing in property is one of the best choices a person can make for their financial future. By investing in real estate, you purchase something that can bring an income while you own it and, by growing in value, allow you to turn a profit when you sell.
Real estate investments generally fall into two categories: residential and commercial. The decision to purchase one or the other should take into account many factors, and while both are useful, you may find you are more suited to a certain type.
Commercial Property vs Residential Property Investments
Note: San Diego Purchase Loans is not an investment expert. Before making any decisions on your investment strategies, talk with a qualified professional.
Advantages of Investing in Commercial Property
Longer Lease Terms
One of the main advantages to investing in commercial real estate is that you can often get longer lease deals from your tenants. In many cases, residential leases are on a year-to-year basis, but with commercial property, businesses are often willing to sign leases for five or ten years, or even longer in special cases.
With longer leases, you will have more assurance of a reliable, consistent cashflow, as well as the chance for lower vacancy rates. There can also be lower turnover costs as a result of not needing to advertise the property every year.
Longer lease terms can come with a downside, such as the chance to host a bad tenant for a longer period, but in general most landlords (both commercial and residential), prefer long leases.
Strategic Changes Can Bring Better Profits and Higher Property Value
With residential property, it’s hard to make a significant upgrade on the overall value of the property, at least not without a comparable investment. In general, investing in your currently-owned residential property is a 1-to-1 proposition, or worse. In other words, for every dollar, you’ll only get about a dollar or less in returns on the value of the property, and it may not bring a significant increase to the property’s earning potential.
However, with commercial property you can make more strategic changes that increase the value and the earning potential of your investment. For example, you can make strategic changes to the floor plan to appeal to retailers, then use these changes to charge more in monthly rent.
Commercial Investment is More Complex
When investing in residential property, there are some basic ratios and business concepts that you need to understand, including cash-on-cash return, ROI, and capitalization rate. With commercial properties, you need to understand all of these concepts and more, as they will be crucial to the profitability of the property.
With commercial real estate, the prospect is more like running a business, and you’ll need to focus on many factors, including increasing your net operating income. Before buying, you’ll need detailed records on maintenance, expenses, rental history, and more, as well as profit and loss statements for the property. All of these make commercial investing far more complicated than comparable residential investments.
Investing in Residential Property
Lower Point of Entry
Perhaps the strongest attraction to owning residential property over commercial is the chance to enter into ownership at a lower cost. Yes, you can certainly find extremely expensive residential properties, and there are commercial properties available at low prices, but in general you can buy a residential property for far cheaper. Also, if you are buying a low-cost commercial property, there is a chance that you could be buying a property that is less profitable.
Maintain Consistent Income During Economic Downturns
Economic swings come and go, and while some commercial-property owners may be able to sustain high profits through a financial downturn, residential properties tend to maintain a more consistent performance. Simply put, they’re not as susceptible to the financial swings; after all, even when the economy is slow, people need a roof over their heads. On the other hand, they may not want to invest in a business, reducing your chances of finding a commercial tenant.
Trend is Renting Longer, More Tenants in the Market
Earlier, we discussed that with commercial property you are more likely to have long-term leases. While this remains true, it’s also true that people are renting for far longer periods than in previous decades. Young adults are more mobile, and more likely to move from town to town; this mobility has brought an increase in the overall length a person remains a renter. (Just not a renter in the same place.)
There is also an increase in the overall number of renters. According to a survey by RENTCafé, 22 major cities in the U.S. have more renters than owner-occupants. This suggests that you will have a better chance at finding a tenant for residential property than in years past.
So…Which is the Better Choice?
There is no “better” choice. However, for some people residential property may be preferable, while others will prefer commercial property. If you are simply looking for a place to make a small side investment, a place to diversify your investment portfolio outside of stocks and mutual funds, then residential property may be a good choice. If you’re not interested in taking a hands-on approach for your investment, perhaps you should stick to residential.
However, if you want the chance for major profits, and are willing to commit the time and energy it takes to realize a large profit from your investment, then you may prefer a venture into commercial property.
Commercial Property vs Residential Property Investments: Diversification May Be Best
So far we’ve talked about residential and commercial property as a one-or-the-other situation, but it’s important to note that you can certainly own both. In fact, this may be a good strategy for diversifying your overall investment and property portfolio.
If you are interested in making a real estate investment, San Diego Purchase Loans has many loan products that can help secure appropriate financing, including our minimum-down-payment loans for investment properties. You could also use HomeStyle renovation loans to make purchases of certain residential properties.
Contact our staff today and we’ll take a common-sense approach to underwriting your investment loan.