If you’re new to investing in real estate, you aren’t alone. Both commercial and residential real estate is red hot, and markets like Jacksonville are only seeing record-breaking growth in both sectors. Typically, new investors start with residential real estate and move to commercial once they’re more established. However there’s no real rhyme or reason for starting with residential, nor is there a right or wrong answer on which is better. If you’re thinking of investing in real estate and not sure which sector to immerse yourself in, there are a number of things to consider.
Residential Can Seem More Familiar but Comes with More Potential for Risk
One of the reasons why rookie investors seek out residential real estate is because it’s more familiar. Odds are they’ve purchased their own home before and understand a little better how to navigate the waters. House flipping, popular before the great recession, is back in full force. While there’s plenty to learn about being a landlord, renting in the residential landscape is something even a novice can do fairly easily.
However, in residential, you don’t always know what kind of tenant you’re going to get. All the background checks, credit checks and your own internet checks can never fully prepare you for the kind of renter you will get. Some people can have a credit score of 850, but might be messy and trash the place. Others may be a little more aggressive with appliances. As we learned, a sudden change like a pandemic can leave you without that rental income, even though you still have to pay the mortgage each month.
While commercial real estate can be a more complicated sector, the tenants are typically much safer. Commercial tenants tend to be established businesses, corporations, or well-known retail companies. That backing gives you a sense of security. And businesses are more likely to respect the property that they call home. Nothing is ever full-proof, but in cases of real estate investing, sometimes trusting an established business over an individual gives you piece of mind.
Commercial Has a Higher Earning Potential & More Consistency
Commercial real estate investments have an annual return of 12.7% compared to the S&P 500. Over the past 15 years, commercial real estate investors have seen an annual return average of 8.8%. Depending on the market you’re investing in, residential can cap out around 8-12%. But, you’ll also have more consistent cash flow and less turnover than renting out a residential space. While residential renters typically sign a 12 month lease, it’s common for commercial real estate rental agreements to span multiple years. Typical commercial lease agreements are anywhere from 3-5 years. Even leases up to 10 years are not uncommon. Lower turnover and vacancy rates give you steadiness, even in economic downturns.
Commercial Deals are Complicated to Analyze
Typically, commercial real estate deals can contain much more legal jargon than their residential counterparts. In residential, there are a number of ways to make money, from simple cash flow to equity buildup. Commercial real estate requires a more hands on approach. Many experts consider commercial real estate investing to be more like owning a small business. Keeping records like maintenance improvements, operational ratios and analysis and other records. Having an experienced commercial broker to navigate all of these issues will help make your life a lot easier.
Commercial Real Estate Values are Easier to Increase
Even in today’s red hot residential real estate market, it’s easier to increase the value of commercial real estate. That’s because commercial real estate value is determined by its revenue. The amount of cash flow coming in, the higher the value of the property. Finding the right commercial real estate client can increase the value of the property much faster than residential. That’s because residential property values are appraised based on comparable property.
Work With an Experienced Team
While investing in residential real estate can often be a solo effort, in the commercial real estate world, it makes sense to work with a broker. Teams like Landmark can deal with the paperwork and all the legal responsibilities, giving you piece of mind every step of the way. If you’re interested in learning more, contact us today for more information!