Weighing Your Options: Residential vs. Commercial Real Estate

Posted by Chris Clothier on Sat, Jul 27, 2013

residential vs commercialThe world of real estate can be confusing-- downright scary, even-- for people who are just getting their feet wet. In some respects, it can be similar to a new relationship. When you're just getting started out, you're this mishmash of excited and scared. You have ideas and opinions and are sure to get plenty of "advice" from everyone around you.  You have high hopes, but at the same time, you don't want to get burned. The potential rewards are great, but the potential for disaster can make you gun-shy. She wants to go to the opera; you've already bought tickets to an MMA bout.

So that metaphor may be a bit of a reach, but it does help to explain some of the feelings that we all go through when we start a new venture or relationship and real estate investing is no different.  With so many investors choosing to buy out-of-area, the relationship becomes even more important and the opinions will come even faster and even more hardened.

One of the most important questions beginning real estate investors face is one they face pretty much immediately: which type of real estate should I invest in--residential or commercial?

As with most things in life, there's no easy answer to this one. There is no, "This option is best." It's much more a case of, "Which option is right for you?" There are a number of different factors to consider when deciding on residential vs. commercial real estate, and your Memphis real estate advice-giver is here to briefly address just a couple of them.

Start-Up Costs

The start-up cost can be a deciding factor when it comes to deciding which type of real estate investing to get involved in. The costs are usually significantly lower with residential real estate. The primary reason is fairly straightforward: commercial real estate tends to be pricier. Since it costs more, it takes more capital to purchase it, which means a bigger down payment. To make matters worse, the interest rates tend to be higher with commercial real estate.

There are also other options that we will go into with another blog post, such as REIT's and partnerships that most investors choose when going the commercial route.  DIY with commercial is so difficult and comes with an entry price much higher than residential real estate.  That difficulty is only magnified with commercial real estate purchases, which is definitely a mitigating factor when considering commercial real estate investing versus residential real estate investing.

How Involved Will You Be With Your Real Estate Investments?

A vital question for a real estate investor to ask is, "How involved in my investment do I want to be?" In other words, " How much of a hassle am I willing to deal with to make money doing this?"

If you're looking to take a very hands-on approach to your real estate investing, then residential real estate may be perfect for you. If you're the type who doesn't mind dealing with emergency repair issues in the middle of the night or dealing with difficult tenant issues if it gives you a higher return on investment, then residential may be the way to go.  This is definitely the route that many first-time real estate investors go not only because of the hands-on approach, but also because of the nearly instant satisfaction factor.  It is easy to see the fruits of your real estate investing labors very quickly.  

If however, you prefer a more businesslike, hands-off approach, commercial investing may be for you. You're generally dealing with long-term tenants, so the potential for drama is significantly reduced.  We already went over the entry level costs being higher, but day to day aggravation of owning, operating and dealing in general with the headaches of investing are reduced...somewhat.  Actually dealing with your investment will always be there, but the amount of time and workload spent on small problems will not be as heavy.

Residential Real Estate Investing Without Being Hands-On

And not to worry: if you prefer residential but don't WANT to be as hands-on, there is a "best of both worlds" approach (or as close as you can hope for). You can use a property management company. Sure, your ROI won't be as high as it would be if you did it all yourself, but letting someone else take care of the day-to-day hassles for you frees up time for big-picture aspects of investing, like deciding which property to purchase next.

Deciding which type of investing is a very important decision, so read as much as you can about the different types. Talk to experienced investors in both forms of investing and evaluate what's going to work best for you. If it works for you, great! If not, try something else. And remember-- nobody said it has to be an either/or thing in the long run.

If you're an experienced investor, what factors did you use to decide the residential vs. commercial investing dilemma when starting out?

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Topics: Memphis real estate, residential vs commercial, residential real estate, commercial real estate