Investing in real estate is a great way to grow your money fast, whether in commercial or residential real estate properties. However, these two types of investment are very different; they serve different purposes and have different target tenants. Some might say commercial real estate is a great investment, but most real estate investors agree that investing in the residential real estate (whether renting it out or holding it until it appreciates in value and then selling it for a higher price) is the best investing strategy.
So, you want to become a real estate investor but not sure whether to invest in the residential real estate or a commercial real estate market? Here are the top 6 reasons why investing in the residential real estate housing market is better.
Residential Real Estate Investing: Higher Demand
The first reason why investing in residential real estate properties is the best option is due to the fact that there is a huge demand for them. People will always want a place to live in, and if they’re incapable of buying residential properties, they’ll rent them. Higher demand means more investing opportunities! In addition, most real estate investors and agents are more familiar with investing in residential real estate as it has been around for a very long time. The majority of real estate investors are more acquainted with the usual system of residential properties, like plumbing, electrical, air conditioner, etc.
As for commercial real estate investing, on the other hand, demand is not as high. Not everybody needs to own a store, and businesses don’t move as regularly as people. A commercial property is only high in demand in areas with economic and job growth. Moreover, many real estate investors aren’t familiar with the terms relating to investing in a commercial property. Many beginner real estate investors are attracted to the commercial real estate market. However, if you don’t have the necessary knowledge or are in an area in which demand is low, don’t invest in commercial properties!
Residential Real Estate Investing: More Stable
No one can deny that the housing market is unpredictable and is constantly changing. However, another reason why investing in residential real estate is the best option is the fact that there will always be a larger pool of residential property’s buyers and renters. Therefore, even if the housing market is bad, people will still be renting and buying residential properties because, as we’ve mentioned, they will always need a place to live.
Related: What Are the Expected Residential Real Estate Trends in the US Housing Market for 2018?
In the commercial real estate market, however, this is not the case. A commercial property is vulnerable to economic busts and slumps. If the economy shrinks, people may close their stores, get other jobs, or work from home! In addition, in a bad economy, a commercial real estate investor will have trouble getting a commercial loan, which makes it incredibly difficult to buy or sell a commercial property. Not only that, but a commercial real estate investor may even have to sell or rent an investment property for less money.
Residential Real Estate Investing: Easier to Value
In residential real estate investing, an investment property is valued by determining what other similar properties are selling for – this is called comparative market analysis, or the sales comparison approach. It’s pretty easy to find recently sold residential properties that are similar to the one you own or are looking to buy, and use an investment property calculator to analyze its value.
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On the other hand, we hardly ever use this approach to value commercial properties because it’s almost impossible to find similar recently sold commercial properties. Most commercial properties are valued using the income approach – which is much more difficult than the sales comparison approach.
When using the income approach, we take the income (or profit) which the commercial property generates per year and multiply it by a cap rate to come up with the value of the commercial property. Keep in mind that cap rates are not a set figure, but rather vary in different parts of the country and for different types of properties. This means they are not always easy to figure out if the real estate investor is not experienced in the commercial real estate market. Additionally, if the real estate investor mixes up his/her numbers or forgets a few expenses, the commercial property will look much more valuable than it actually is. This further makes the process of valuing the commercial property much more difficult than residential real estate properties.
Residential Real Estate Investing: Easier to Sell and Buy
The process of selling and buying residential real estate properties is pretty simple once you, as a real estate investor, learn your sales and understand the housing market. All you need to know is how much the house costs, how much repairs will cost, how much it will be worth after repairs, and how much to rent it for. This may take time, but it’s pretty simple when comparing to commercial real estate.
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Selling and buying residential real estate is a much simpler process than selling and buying commercial properties. First, since demand is not as high as in the residential real estate market, there is a lot less competition for commercial properties, therefore commercial real estate investors might not even be able to find buyers or renters. Second, you need to know the same numbers for selling and buying residential real estate properties in the housing market, but the calculation process is much more difficult as there are more numbers involved like income statements and expense reports. As you can see, we sell a commercial property in the real estate market in a different way.
Residential Real Estate Investing: Easier to Finance
Financing an investment property is a huge concern for real estate investors, whether in the commercial or residential real estate market. However, gaining financing for the residential properties is actually not that difficult. There are numerous methods for financing including a traditional mortgage, private money lenders, hard money, line of credit, building partnerships with other real estate investors, and many more! Typically, you can get a 15 or 30-year loan with 20% down payment. In addition, there are times when buying residential real estate properties with little or no money at all, and also buying residential properties below housing market value, is possible.
Related: Here Is Your Guide to Investment Property Financing
With commercial real estate properties, getting financing has higher requirements. Down payments are usually 30-35%, mortgage rates are higher, you need to be willing to put personal guarantees on an investment property, and the loan will have a balloon payment, meaning the entire balance of the loan is paid off after a certain amount of time (5 or 10 years), which is not always easy. Many commercial real estate investors consider refinancing their loans when a balloon payment is coming due. However, this is not always possible.
Residential Real Estate Investing: Lower Vacancy Risks
This benefit of investing in a residential real estate is a no-brainer. Considering the higher demand, more investment opportunities, and the fact that people always need a place to live, this results in increasing the number of potential tenants. Thus, the risk of facing vacancies is lower in the residential real estate housing market. Even if a real estate investor does face a vacancy, with good marketing and advertising he/she will be able to find another tenant right away.
Related: How to Deal With Vacancies When Owning an Investment Property
Finding tenants for commercial properties is trickier. These investment properties are rented for longer periods of time, therefore, commercial real estate investors have to carefully select tenants. Otherwise, once these properties are vacant, they tend to stay vacant for a long time, which is obviously something that no real estate investor desires.
Residential Real Estate Investing: Conclusion
In the real estate business, investing in residential properties is much more beneficial than investing in commercial properties. For most real estate investors (especially beginners), residential real estate investing is much simpler and easier to understand. It takes a lot of time and experience to understand the commercial real estate market and how it works. In addition, commercial real estate investments are riskier than residential properties regarding stability, financing, vacancies, and the process of selling and buying residential properties.
To find out more about residential real estate properties (where to find them, how to purchase them, the many ways real estate investors make money through them, etc.), visit Mashvisor!