The path to becoming a successful investor is filled with tough decisions and high-risk situations. One of the dilemmas real estate investors face early on is deciding between investing in commercial real estate and residential. Each path offers its own set of pros and cons. Read on to find out which type of real estate suits your preferences.
First, a definition of terms
Residential properties are buildings or units of no more than four that are used primarily as dwellings. They consist of the following:
- Single-family homes
- Apartments
- Condominiums
- Individual mobile homes
- Duplexes
- Triplexes
- Quadruplexes
- Cooperatives
- Townhomes
Commercial property, on the other hand, is any piece of real estate or structure with five or more units designed to house businesses or offices. They include:
- Apartment complexes
- Retail spaces
- Multifamily buildings
- Office buildings
- Manufacturing facilities
- Warehouses
- Hotels
- Vacant lots with high investment potential
Benefits of investing in residential properties
- Lower cost of entry
Investing in a residential property is more affordable for the average newbie investor. One strategy investors can follow is to build up a good portfolio of cash flow-producing residential properties before investing in commercial properties. - Performs better in times of crisis
When it comes to the effects of a wide scale economic crisis, businesses are usually the first to take a blow. Residential properties are in no way immune to economic pressure, but generally speaking, residential housing is always in demand. - Less frequent tenant turnover
Since residential housing is always in demand, investors can reasonably expect to have lower tenant turnover. Longer stays are definitely possible if you apply a more rigid screening process. - More potential buyers
Everyone needs a place to call home, but not everyone goes into business. This means there is a larger pool of residential occupants than there are commercial tenants. Recent times have also seen the rise of remote work, which makes it more challenging to attract commercial leaseholders.
Benefits of investing in commercial properties
- Higher returns
The bigger the risk, the bigger the reward, and this applies to investing in commercial properties. If an investor plays their cards right, cash flow from commercial real estate can be way more attractive than residential properties. - Increasing property value
With the right tenants, an investor can see a hike in value compared to residential housing. This is due to how the amount of cash flow a property generates directly affects its value. - More qualified tenants
Especially when it comes to newer developments, businesses wishing to occupy an office or a retail store may undergo a stricter screening process. Therefore, they are more likely to abide by the rules of occupancy, which includes renovating the space and keeping it well maintained. In most cases, handling commercial lessees is easier and more straightforward.
Loan approval
When deciding which type of property to invest in, investors should ask themselves one question: what do you want to gain? Those looking to profit while having an easier time should go for residential properties, while those who are willing to risk a bigger payday should go for commercial properties.
Need more real estate assistance?
When it comes to real estate investment opportunities in St. Louis, Missouri, there’s no better team to help you than the Cardinal Realty Group. Give them a call at 636.225.0385 or send them an email at Hal(at)CardinalRealtyGroup(dotted)com.