Residential versus Commercial Real Estate Investing, which is better for you?


Residential versus commercial real estate investing, which is better for you?

Many investors are evaluating whether or not to get out of paper assets (Tertiary wealth), and transition into real estate (primary and secondary wealth). With the ongoing fluctuation and volatility in the stock market more and more investors are taking a serious look at their investments and wanting to know which best investment class to get into, Residential or Commercial real estate. As most people do, they turn to the internet for answers and often wind up finding a real estate Sherpa like myself and asking questions.

Living in the information age we see a plethora of information coming at us every day. Investors try to make sense out of the constant flow of information and try to separate opinion from fact. One thing I have learned is that most things we are inundated with is opinion and being sold to you as fact.

Just look at social media, (if you have the stomach to do so). See how political opinion rapidly turns info banter and then into people retrying to sell their opinion as fact.

I don’t usually fall prey to this banter, I sit back and listen, extrapolate the pros and cons from each side and arrive at my own beliefs.

To this point, I use this belief when people ask me which is better to invest in, commercial or residential real estate. Investing in a product you believe in and are passionate about will be your best most lucrative investment. So instead of me telling people which is best (my opinion) I like to help create self-discovery and encourage investors to own their investment decisions.

Let’s look at both investment classes and you can make a list as to which of these attributes represents a pro or a con for you. This exercise perhaps will help you decide which the best investment strategy is for you 

1)     Emotions versus analytics

Residential real estate investors: tend to make emotional based decisions: As a Buyer or Seller of residential investments (typically single family homes) you often put a lot of emotions in the buying and selling process. If you renovate you put your own emotional taste into the décor. You typically will rent to tenants who make decisions based on emotions (as this is their home). Then when you go to sell, as investors you typically sell to the end user who will buy on emotions. 

Commercial real estate investors: tend to make analytical based decisions. You buy and sell properties based strictly on the numbers (Pro-forma) and the logistics of the property. You rent to tenants who are business people who also make analytical based decisions. At the time of sale this too is also analytical based.

Q) Do you work better with emotional based decisions or Analytical based decisions?

Q) Which investment do you believe, makes the best return on investments emotional based or logical based decisions?

2) Ease or sophistication;

Residential real estate investments: tend to just be simpler. There are a number of real estate investment clubs that for the most part cater to residential real estate investors. So you have lots of support and sounding boards available to you to learn from and see what works and does not work.

Commercial real estate investments:  tend to be more sophisticated, depending on what exactly you are looking to invest in, but due diligence tends to be in depth and of course analytical. As each commercial property tends to be more unique and less cookie cutter style as residential investment property is you want to be very prudent in your diligence.  

 Q) What is most appealing to you, ease and simplicity of an investment or prestige and sophistication of an Investment?

3) Financing residential versus commercial

Residential real estate investments: The financing is pretty straight forward similarly to financing a home and can be financed through a variety of sources such as regular mortgage lenders, private money joint ventures etc. Lenders will typically use (at least in large part) your personal income to qualify you which of course will affect your credit score.  Private money lending tends to be more expensive however it does not get recorded on your personal credit score which is a plus.

Commercial real estate investments:  Financing a commercial property rarely affects your personal credit. Commercial loans typically finance the property (the businesses) not you the person. It qualifies the income generated from the business and utilizes the financial picture of the property as opposed to your personal credit worthiness. These loans do not affect your credit scores

Q) When considering your long-term investment goals which loans will be more sustainable to accomplishing your long term investment plans.

4) Ability to manufacture growth.

(Perhaps one of my most favorite parts of real estate investing is the ability to increase the value of a property).

Residential value play: In real estate the best way to increase a property value is with the quintessential value play. Simply stated add value by improving the property,

Commercial value play: You can improve the property as a means to increase value. As commercial properties tend to allow for a larger variety of buildings or businesses within the zoning of the property you can often convert a property to a higher and best use of the property. For example convert a dated drive in Movie Theater into a town home complex of perhaps a manufacturing facility or mini storage complex depending on zoning regulations.

Q) Where is your comfort level in converting to higher and best use? Are you willing to step up of your comfort zone in the spirit of increasing your investment picture?

Q) Are you willing to be an active investor? These strategies are for people who want to do some more diligence and be personally involved in growing of your portfolio. These are not for a strict passive investor

I trust you are starting to see a trend here. I am not one to preach single family is better than multifamily. Or that Residential is better than commercial. Each of these investment classes has their pros and cons. I have invested on each of these investment classes. For me I started in multi-family then transitioned into single family and now am into investing into businesses and within the commercial class.

Lot of this has to do with investing within my passions and investing within market conditions. My opinion is there is nothing factual about any investment class. The only thing you want to concern yourself with is what is best for you and your long term sustainable investment plan.