One of the first decisions that you have to make as a beginner real estate investor is whether to invest in commercial or residential real estate. This decision is critical since it sets the type of management that you need to have in place and the number of resources that you will have to allocate in order to generate a good return on investment. So what is the ideal option for new real estate investors? And is commercial real estate investing an advisable strategy for someone just starting out in the US housing market? This article will answer these questions and present a case for why residential real estate investing is the ideal choice for beginners.
The Cons of Commercial Real Estate Investing for Beginners
Investing in commercial real estate can yield a decent profit when done properly. After all, the economy is strong and demand for commercial properties is at a healthy level. However, there are also several challenges that can severely impede your ability to turn a profit. Below is a detailed look at the main cons of getting into commercial real estate.
1- Commercial real estate investing requires a big initial investment
The first obstacle that first time real estate investors face with buying commercial properties is the sizable initial investment. In fact, investing in commercial property requires more capital than just the purchase price. The repairs that you have to undertake can send your expenditure soaring and the overall expenses that you need to plan for are fairly numerous relative to residential real estate investing. Repairs and maintenance costs, property management fees, and property insurance are all higher in commercial real estate investing.
2- Managing commercial properties can take up a lot of your time
Time is another factor that makes commercial real estate investing inconvenient for novice real estate investors. Managing commercial properties requires a hands-on approach and creating a passive rental income stream is not an option. This is due to the fact that you will always be dealing with a host of issues that range from public and safety concerns to high maintenance tasks and CAM adjustments.
3- You will need to rely on a third party to manage your investment property
Investing in commercial real estate for beginners comes with a very steep learning curve. As a result, hiring a professional to help manage the investment property is required. The maintenance issues that will invariably arise can be tough to navigate and letting a property management company handle the process for you is your only option. As you would expect, these companies charge property owners high fees that can exceed 10% of their rental income. Needless to say, this can seriously affect your bottom line as well as your ability to generate positive cash flow.
4- Commercial properties can be very risky
A major con of commercial real estate investing is the inherent risk that comes with this venture. When you buy commercial property, you are taking on several risks that are not found in residential real estate investing. For example, commercial real estate is more likely to sustain major damage due to the constant influx of public visitors. Moreover, random acts of minor vandalism are quite common and could end up costing you a lot in repair costs. There are also a number of cases where property owners can be held legally liable for events that are out of their control. These include injuries sustained from falls and even incidents in the parking lot.
As you can see, commercial properties are far from being the best real estate investments for beginners. Let’s now take a look at what residential investing has to offer.
The Pros of Residential Real Estate Investing for Beginners
Investing in residential real estate offers many benefits that are ideal for beginner investors. When comparing commercial vs residential real estate investing, it is easy to notice that the latter is more accessible to a novice. Here are some of the pros that you can expect from a residential real estate investing strategy.
1- Residential real estate investing is more affordable
The most obvious advantage of residential real estate investing is the low price. The barrier to entry is low relative to commercial real estate investing and even investors with little capital can get in on the action thanks to cheap financing and low down payment loans. Moreover, residential property can generate decent rental income without requiring the extra investments that are needed to get a similarly priced commercial property up and running.
2- You will have plenty of financing options to pick from
One of the main perks of residential real estate investing is the sheer amount of investment property financing options that are available to you. Besides traditional bank loans, residential real estate investors can apply for a wide array of financing solutions. For example, first-time buyers can finance a multi family real estate deal (2-4 units) with an FHA loan, a mortgage that requires just 3.5% as a down payment, a credit score of 580, and that the investor live in one unit for a set period of time. You can also use more creative financing options such as seller financing and peer to peer lending.
3- Residential properties are easy to self manage
Unlike commercial real estate investing, opting for residential rental property is a venture that you can tackle on your own. Whether it is single family homes or multi family homes, managing a residential real estate investment is way less time consuming and simpler than handling commercial properties. There are no complex repairs or maintenance to undertake and compliance with regulations is fairly intuitive. And even if you decide to retain the services of a property management company, you will be glad to know that their fees are lower for residential investment properties.
4- Residential property is easy to sell on the market
Another advantage of residential investing is the ease with which you can sell your property. In the case of commercial real estate investing, the specific nature of the demand contributes to longer days on the market. In fact, commercial properties can linger on the market for up to a year. On the other hand, demand for residential properties is consistent and more ubiquitous, which leads to shorter stays on the market. This is critical if you want to earn a quick profit from the sale of your investment property.
How Mashvisor Can Help Your Residential Real Estate Investing Venture
Mashvisor is a real estate platform that provides comprehensive solutions to investors. When it comes to residential investing, we have put at your disposal a number of advanced tools that can help you identify the ideal real estate investment. Below is a look at a few of the tools that you should be using:
- The Real Estate Heatmap: This is a very practical tool that employs a combination of visual cues and property data. Investors can use it to locate the best neighborhoods with homes for sale on a map in a matter of minutes.
- The Property Finder: This is one of the most effective property search tools on the market right now. Thanks to its cutting edge AI technology, machine learning algorithms, and intuitive filters, the property finder is able to zero-in on the most profitable single family and multi family homes in any real estate market.
- The Rental Property Calculator: The key to profitable residential investing is having a clear idea of how a property will perform. This is where the rental property calculator comes in. This tool calculates all the critical metrics that you need: cash flow, cap rate, and cash on cash return.
The Bottom Line
Commercial real estate investing can be a profitable venture. However, the large overhead costs and difficult management process make it a bad option for a beginner. Start investing in residential real estate the moment you feel that you have grasped all the moving parts at play and check out our blog for more valuable tips.
To learn more about how we will help you make faster and smarter real estate investment decisions, click here.