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Deciding to Invest in Commercial or Residential Real Estate.



Should I invest in commercial or residential investment real estate? This is a great question, one in which the answer will vary according to the investor’s personality, financial strength and motivations. Below we’ll analyze what we feel are the biggest pros and cons of commercial and residential investment real estate.


Commercial Real Estate

The Cons

Commercial Real Estate is often more difficult to get into due to more stringent financing policies and terms. Typically 25% down is a common required amount and the investor must have a financial worth of, or at least near, the value of the investment. Good credit, along with high debt coverage ratios, is typically required and underwriters don't give much thought to potential. Depending on the uniqueness of the property under consideration, the appraisal may be difficult to get with a correct value assessment. Along with being more difficult for investors to get into, property management also gets more complicated as business structures and leases have to be negotiated rather than just set. The last negative aspect of commercial real estate is that properties are typically harder to fill upon vacancy than residential, primarily because many structures were built for specific purposes with limited uses.


The Pros

While commercial real estate may be a little more difficult to get in to, in most cases the rewards are more valuable than the cost of jumping through the initial hoops. In many cases lease structures are long term; while more complicated, they typically relieve the landlord of more work than in residential management. Returns have to be higher to cover debt coverage ratios, so the overall rate of return is generally in the investor's best interest. Commercial properties historically average higher capitalization rates than do residential. Management fees in commercial real estate are typically much less than those in residential, meaning that more of the cash flow actually stays in the investor’s pocket.

 

Residential Real Estate




The Cons

Most people know the cons of residential real estate investment because there are ten critics for every investor. Difficult tenant situations, high management fees, maintenance issues and more frequent vacancies all add up to create problems that can make investors want to steer clear of investment real estate for the rest of their lives.


The Pros

Residential real estate is fairly easy and cheap to get into. There are multiple methods to investing in residential real estate and sweat equity is fairly easy to create. There is a large tenant base to market to, it's easier to fill vacancies and you won’t go bankrupt if you do have one. The owner can control what they offer as amenities, which can bump cash flow and create a higher value for the property as well. Overall, if a person is just looking at getting into real estate investment and doesn’t have a lot of money, residential is typically the place for them to start. Good returns can be found in residential real estate, but guidance from an investment professional is recommended, especially on your first investment. Know what types of problems to expect with each type of property.



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