Real estate investing has always been a common choice to increase your wealth and save for retirement. For the beginner, though, there’s a lot to learn so you can avoid making costly mistakes. If you’re considering jumping on the bandwagon yourself, it’s essential you do your homework.
Real estate investing is divided into two major categories: residential and commercial. There are pros and cons to both, and we’ll discuss them below.
The Up and Downside to Commercial Real Estate Investing
From a profit standpoint, commercial real estate generally gives a steady and reliable return on your investment. There’s always someone looking for commercial real estate for lease, especially if yours happens to be an office building in a prime location. Even if you own a piece of vacant land designated for commercial use, a developer will be more than happy to pay a reasonable price to take it off your hands.
The downside to owning commercial property is the higher cost of purchase. Many investors aren’t in a position to buy commercial property individually, which is where real estate investment trusts (REITs) come in. REITs are corporations who own commercial properties and sell off shares to individual investors, making it possible for the average Joe to take part in the profits.
As a shareholder in a REIT, you aren’t responsible for upkeep and maintenance on the property, but if you own a commercial property on your own, you may be. This expense cuts into your profits, so you have to be sure the risk is worth it. Commercial real estate is also more susceptible to market fluctuations, as businesses fail or downsize during tough times, but people always need somewhere to live.
Residential Real Estate Investing
Compared to the commercial market, the entry point for residential real estate is more accessible to the average investor. You also generally only need to deal with one tenant, while as the landlord of the commercial property, you may deal with multiple. And if you choose the fix-and-flip route, you’ll never have to deal with tenants at all!
On the flip side, residential lease terms are much shorter than commercial leases, and residential owners are responsible for all maintenance costs, as well as insurance, council rates, and strata fees.
Getting started in residential real estate investing is much easier than getting started in commercial investing because you don’t need as much money upfront. On the downside of this, however, is the fact that there’s a lot more risk involved if you only have one tenant. If that tenant moves out, you’re stuck with making the mortgage payments and monthly utility bills out of pocket until you find another tenant for your property.
Ultimately, you can’t expect the kind of returns on a residential investment that you can on a commercial one. If your residential property requires constant maintenance or the property taxes rise sharply, you could find yourself in the red rather quickly.
Which is Better – Commercial or Residential?
The answer to this question depends on your personal goals and your timeframe. If you want to make money quickly and are comfortable with large-scale projects, commercial real estate investing might be for you. If, on the other hand, your budget is more suited to a smaller scale and you are comfortable with a steady income, investigate the residential market.
If you’re still not sure which is right for you, talk with a financial advisor. They will ask you a few questions and look into your specific situation to help you determine which type of investing will be most beneficial for you.