If you’re new to real estate investing, you’re likely weighing the pros and cons of residential vs. commercial real estate investing. Each one has its advantages and disadvantages and is influenced by many factors, such as the amount of risk you’re able to shoulder and your goals. Neither is inherently better or worse, but it’s important to know what to expect so that you can pick the right investment opportunity for you. Also, know that the one that works for you now may change later.
What Is Residential Real Estate?
Residential real estate encompasses buildings where people reside. Any residential complex with one to four units is considered residential real estate. These include single-family homes, condominiums, duplexes, triplexes, and quadplexes. The property must be used for residential purposes, meaning someone must live there permanently. Residential real estate is zoned as such, allowing only buildings with fewer than five units to reside on the property.
What Are the Benefits of Investing in Residential Real Estate?
Real estate investing has an easier entry point for new investors because you don’t need as much capital to purchase residential real estate. You can also find distressed properties to fix and flip. Additionally, bank-owned foreclosures and wholesale residential property sales can be economical ways to make your first forays into real estate investing. Residential real estate can attract long-term renters, so you can avoid scrambling to find tenants frequently. And, even in times of economic downturn, people still need places to live.
Another benefit of residential real estate investing is the ability to utilize a residential bridge loan. This type of loan is short-term and can be utilized by an individual investor or a company to purchase a second property while the sale of the first property is still in progress. This type of loan helps borrowers buy a new home or property using the equity of the first property to qualify for the loan while waiting for the sale of the first property to go through. Residential bridge loans are also referred to as gap financing, swing loans, and interim financing.
What Are the Disadvantages of Residential Real Estate Investing?
Fewer tenants mean lower profits. If you’re renting out a single-family home, you’re going to make less of a return on investment than if you’re renting out a larger commercial property. You may also be hit with costly repairs, which can affect your bottom line. If your residential property has plumbing, pest control, or HVAC issues, fixing them means those costs will come out of your profits. You’ll also have to deal with any damage renters may cause the property. These issues can plague a first-time investor, resulting in the inability to break even, especially in the beginning.
What Is Commercial Real Estate?
Commercial real estate is defined as any property with five or more units, including office buildings, retail shops, industrial properties, hotels, multifamily residences of five units or more, such as apartment buildings and condos. Some special-purpose buildings are also classified as commercial real estate. These types of buildings have a specific use in mind, for example, a barbershop, hair salon, nail salon, or restaurant. These special-purpose buildings can’t be easily converted for other uses without significant capital to redesign or rebuild the property.
When investing in commercial property, you may want to consider a hard money loan or a commercial bridge loan.
What Are the Benefits of Commercial Real Estate Investing?
One significant advantage of commercial real estate investing is higher returns since you have more opportunities to collect fees. With a larger property and more tenants, you can stand to make more significant profits. You’re more likely to attract qualified tenants when renting to a business. Due to the presence of employees and retail customers, a business has to maintain its space, which means your property will be handled with greater care. Commercial property often has longer lease terms than residential real estate. Your property values can increase based on the cash flow of the business occupying your building.
The benefit of the larger square footage rented to more tenants, which generates higher rental income, also means you can afford to employ full-time or on-site property managers to deal with the day to day operations of the property, leaving you free to seek out other investment properties to expand your business. After all, your goal was to get into real estate investing, not property management. Building a successful commercial real estate investing business means delegating routine aspects of your business to others.
Additionally, there are lease structures that allow you to retain more of your profits. In the case of modified gross or triple net lease structures, you won’t pay for building insurance, property taxes, and common area maintenance, as those are all handled by the commercial tenant. This is a great benefit to you. If you have to handle a major repair in a commercial building, such as an HVAC unit going on the fritz, you won’t take as much of a hit to your profit margin because your tenant is paying for other aspects of building maintenance.
What Are the Disadvantages of Investing in Commercial Real Estate?
The barrier to entering the commercial real estate market is higher. It’s harder to find inexpensive commercial real estate, so you must have more capital to start investing in commercial real estate properties. There are also fewer commercial properties available overall as compared to residential ones. There can be significant disadvantages for the individual investor, and even more so for first-time investors. This is because you’re often competing against firms with more significant capital, more experience, and connections in the field. This disadvantage can mean being bested by powerful players with insider knowledge and ample financial resources.
To learn more about residential and commercial real estate investing and the types of loans that may be available to you, visit Titan Funding. If you’re in the Boca Raton, Florida area, they can directly assist you with all aspects of funding for real estate investing. Reach out to our knowledgeable team by phone at 855-731-6436 or via our convenient online form. A team member would be happy to answer any questions you may have to get you started.