Real estate investing can be a great way to diversify your investment portfolio and increase your income. There are many different types of real estate investing, and it’s imperative to find the one that will work best for you and your needs. Two of these types are direct and commercial real estate investing. As with all types of investments, you’ll find pros and cons with both, as well as situations where one works better. What’s the difference between direct real estate investing and commercial real estate investing, and which is right for you?

What Is Direct Real Estate Investing?

a neon sign with the word "real estate"
Image via Flickr by griffithchris

When you purchase a specific property, either residential or commercial, and receive income from that property, you are participating in direct real estate investing. You need to have an ownership interest in the property or the entity that owns the property, such as an office building, shopping center, or apartment complex. The four types of direct real estate investments include:

  • High-risk mortgages.
  • Real estate investment trusts (REITs).
  • Participation certificates.
  • Real estate syndicates/limited partnerships.

With direct real estate investing, you own the property yourself, earning 100% of the future income, having 100% decision-making ability, and taking 100% of the risk all by yourself.

Advantages to Direct Real Estate Investing

Direct real estate investing has several advantages, including:

  • Control. As the owner, you control all decision-making on the property. You can select the type of property, location, and how to finance the property. You also set rental prices, decide how many properties to purchase, and choose the tenants who will rent the property.
  • Appreciation. Property prices generally increase in value or appreciate over time, so you might be able to sell the property later at a much higher price.
  • Cash flow. Investing in property provides you with the opportunity to generate substantial cash flow. You can also take advantage of the various tax breaks to offset your income.

What Are the Disadvantages of Direct Real Estate Investing?

All investments seem to have their advantages and disadvantages, with direct real estate investing being no exception. Disadvantages include:

  • Real estate is not a liquid asset, so you have no access to cash if an emergency arises. You would have to sell the property to collect any money to use in an emergency.
  • You will be more than likely to need a mortgage on the property, and if you can’t find reliable tenants or the real estate market crashes, you may end up defaulting on the loan due to not being able to repay it.
  • As a property owner, you will invest a lot of money, time, and energy. Initially, there will be the money spent on the purchase and repairs to get the property rent-worthy. You may end up dealing with maintenance issues, tenant problems, and liability for any accidents on the property.

What Is Commercial Real Estate Investing?

Investing in commercial real estate means that you’re purchasing a property that is used exclusively for business-related purposes or to provide a workspace. Commercial real estate is often leased to tenants to generate income. You can invest directly or indirectly in commercial real estate. When you invest directly in commercial real estate, you purchase a property and become the landlord to that property through physical ownership. You can also invest in commercial real estate indirectly through ownership of market securities such as exchange-traded funds (ETFs) or real estate investment trusts (REITs) that invest in commercial property-related stocks.

Types of commercial real estate include:

The Pros of Commercial Real Estate Investing

Commercial real estate investing has its advantages, such as:

  • Monthly cash flow. You can generally expect to receive a regular monthly income from commercial real estate, with a higher likelihood of on-time payments.
  • Longer leases. Typically, a business will want to enter into a longer lease length for a commercial property than tenants in a residential property. A longer lease offers you more stability.
  • Capital appreciation. As long as the property is kept up-to-date and maintained, commercial real estate offers the possibility of capital appreciation.

What Are the Disadvantages of Commercial Real Estate Investing?

Once again, when there are advantages to an investment, there are also often disadvantages, such as:

  • Rules and regulations. The requirements in regards to maintenance responsibilities, mechanics of purchasing, and taxes vary from state to state, city to city, and according to industry, size, and zoning. All of these factors make it less enticing to invest in commercial real estate because investors don’t have this highly specialized knowledge.
  • Tenant turnover. Retail closures, expansions, and relocations may leave you without a tenant with very little advance notice.
  • Various needs. A commercial property may need to be remodeled or refurbished to fit the needs of many different tenants. This process may happen more than once as tenants change, and so do the type of business your property is housing.
  • Illiquid asset. Commercial property is not a liquid asset, making it harder to pull cash from your investment in the event of an emergency.

Why Invest in Real Estate?

Investing in real estate, whether direct or commercial, offers you the opportunity to expand your portfolio. You can also enhance the risk-and-return of your portfolio, gaining competitive returns. It provides a predictable cash flow and appreciates in value over time. Real estate investing provides you with tax advantages and a hedge against inflation. Overall, the real estate market tends to have low volatility, making it a safe investment.

When you’re ready to diversify your portfolio through real estate investing, be sure to do your research to determine the type of investment, amount of investment, and level of risk you’re willing to take. Keep your expectations realistic and explore properties prior to investing to ensure you’re getting the best investment opportunity.

Get Hard Money Loans and Fix and Flip Loans from Titan Funding

If you’d like more information on direct and commercial real estate investing, including how to finance your adventure, reach out to the knowledgeable team at Titan Funding. We are available by phone at 855-929-1134, or you can complete our convenient online form, and someone will get back to you as soon as possible. We offer a full range of lending solutions and investment opportunities, and we’d love to discuss them with you.