In the debate between residential vs commercial real estate investment, many ask, “Which is better?” The answer depends on a variety of factors such as your budget, your existing area of expertise, and your risk tolerance. We’ll explain how each of these factors can help you decide which is better in your case.
Residential or commercial real estate investing is more than just buying a home or looking for an investment property. Do you think it is easy to predict success in a real estate business, where circumstances keep fluctuating now and then? To some extent, the possible hindrances can be controlled with a set of ground rules which you need to implement on your next residential or commercial real estate investing deal.
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Benefits of Residential Real Estate Investment
It is far easier to get a loan for residential real estate than commercial real estate because the residential real estate market is considered much more stable. Individuals and families always need a place to live. Businesses can more easily move, and you can lose far more money by picking a bad commercial tenant than a family that misses the rent one month. This means residential vs commercial real estate investing favors residential real estate if you don’t have experience vetting tenants.
People will forgo credit card bills and cut their budgets to avoid being evicted. Commercial tenants may miss the rent for months, and it is difficult to evict them. Furthermore, you could lose commercial tenants whose bankruptcy costs you months of back rent. This means you’re more likely to continue seeing rental income from financially stressed apartment dwellers than commercial tenants.
This makes residential real estate safer than commercial real estate during a financial downturn. It may go down in value and see more skipped payments than before, but it won’t go down in value or cash flow as much as an empty strip mall. Residential real estate may be filled quickly when someone is evicted. Perhaps you put the rental property on a short-term rental site to cater to tourists coming next weekend.
Or you lower the deposit to get a tenant in at the start of the next month. It can be hard to find a new commercial tenant. Residential real estate thus comes with less risk to the landlord that they’ll go months without cash flow from the property. Residential real estate has better long-term average growth. The property value automatically increases with inflation, and rents are easily increased at the rate of inflation, as well.
With commercial tenants, you may be locked into a set rental rate for years based on the contract you signed. In the residential vs commercial real estate investing debate, residential wins if you have limited cash. You can buy one or two houses for less than it takes to buy a strip center or store. The residential vs commercial real estate investing debate is often moot if you end up renting out your old house or inherited property.
The residential vs commercial real estate debate tends to focus on cash flow numbers. However, when you’re deciding between residential vs commercial real estate, recognize that you probably have more expertise transferable to residential real estate investing. Many contractors know how to renovate homes. This makes them qualified to buy fixer-uppers, repair them and sell them for a profit.
All they have to do is get a handle on the financial side and the marketing of property for sale. An apartment manager is better suited for the residential side of the residential vs commercial real estate debate. You already know how to vet tenants, collect rent and handle late-night calls for plumbing repairs. In general, new investors can find more resources for investing in residential real estate over commercial real estate.
You have to be careful not to renovate a property to look like a dream home that’s more expensive than what the market would bear. However, as a resident, you have more understanding of the residential real estate market than the commercial one. You would also be better able to understand the business fundamentals when you loan someone money to rehab a house or invest in a real estate investment trust over buying shares in a new commercial property.
Residential real estate is generally more liquid than commercial real estate. You’ll always have more buyers for a single-family home than a storefront. You’ll have more potential investors for a small triplex or ten-unit apartment building than for a strip center.
Tax Benefits of Residential Real Estate Investment
Property taxes do affect profit but it highly depends on whether you are a professional or a passive investor. If you are a professional investor, your losses are fully deductible against all income; otherwise, it is only deductible up to $25000 against your rental income. This incurred loss which exceeds $25000, can be carried forward to the following year.
Operating expenses such as mortgage interest, property management fees, property taxes, and repair & maintenance can all be claimed as deductions against rental income.
Real estate profits are not taxed until you sell the property. For example, if you purchase a home for $150,000 and it appreciates to $200,000, the $50,000 gain is protected from taxes until you sell the property.
Rental property owners may assume that anything they do on their property is a deducible expense, but that is not true according to the IRS. The money you receive for rent is generally considered taxable in the year you receive it, not when it was due or earned; therefore, you must include advance payments as income.
Benefits of Commercial Real Estate Investment
Commercial real estate investment can be much more profitable than residential real estate. For example, you can charge much higher rents per square foot in desirable properties, because the tenants are generating revenue from the property. You may be able to reduce your expenses by offering a modest discount on the rent in exchange for a triple net lease.
If they pay the insurance, property taxes, and rent, you’ve dramatically reduced your bookkeeping labor and your expenses. Just make sure they actually pay the insurance and property taxes. If you already run a commercial business, the commercial side of residential vs commercial real estate investing is the better choice for you. You could start by subleasing offices or a corner of your storefront.
You might lease half of the store to a complementary business. If you move into a larger building, you may get experience in commercial real estate by subleasing space before you use it. This sets you up for success on the commercial side of the residential vs commercial real estate investing debate. Buy your building and sublease it out, and you’re on the commercial side of the residential vs commercial real estate investing argument.
Commercial properties tend to be expensive, whether someone is building an office building or mega-mall. This leads many commercial property developers to issue shares. This is why you find as many or more commercial property real estate investment trusts than residential ones. Residential real estate investment trusts exist, though they tend to focus on apartments over single-family homes.
Commercial REITs typically have a higher rate of return, and this form of commercial real estate investing is more liquid than either shares of a commercial property or ownership of a single-family home. Commercial real estate investment can often give you more flexibility. When you buy commercial REITs, you can choose funds that specialize in medical real estate, office space, or other niches.
And you can choose to focus on a particular niche, as well. Upgrade a storefront and aim at a particular industry when seeking renters. Rehab offices near a hospital and cater to medical service providers. Conversely, you could snap up a building that has a particular purpose such as a restaurant, revamp it, and rent it out to a more successful chain in the same industry. You can choose which industry you cater to by choosing the property.
Should You Invest in Residential or Commercial Real Estate?
If you don’t have experience in real estate investing, we recommend residential real estate. If you have experience managing commercial properties, then commercial wins over residential real estate investing. If you have limited cash or low-risk tolerance, then we recommend residential vs commercial real estate.
Let’s go through the two main guidelines which are inevitable if you wish to succeed in residential real estate investing.
1. Look For a favorable Growth Market
If you are a seasoned real estate investor, you will definitely have importance for a healthy market environment, but if you are a newer investor, you will need to shed some light on this factor. It can go even worse if you have purchased a property with an adjustable-rate mortgage because sometimes the interest rates keep rising and you will end up paying more even if you can’t afford it. Such situations alleviate the demand for the entire real estate market in particular locations.
2. Always Be Particular About The Location of Investment Property
If you find a location with falling interest rates, manageable GDP growth, and good employment rates, then you can start looking for a smart property to invest in. Analyze and research the location before investing in any residential real estate property.
Types of Residential Real Estate Investing
Well, the desired investment is found in an ideal city that is expanding in many different factors related to the real estate market. If after proper analysis, you find the market conditions look vague, it is recommended to play safe by sticking to a particular location that is familiar to you.
1. Fix and Flip
Fix and flip is a great choice if you have been in the business for a long time, or consider consulting a real estate investment adviser to get proper guidance. You need to cherry-pick the best deals from real estate auctions, hire contractors to rehab the properties, and sell them for top dollar to an investor. Rehabbing a property adds value to it.
When you buy a property to fix and flip, the increase in its value is significant and you can profit by selling it immediately. Renovating the property will reap great profit (when you sell it). Most investors don't have the ability or time to take every necessary step an accomplished fix and flipper can, and will happily pay more to get a property that doesn't require rehab.
2. Rental Property Investment
Yes, you should go for a single-family rental home if you are looking for a small and affordable investment. It is easy to exit, unlike a multi-family rental property which will make you think twice due to heavy investment. Managing a rental property is quite simple if you hire an efficient property management team around the city.
They not only maintain your property but also help you in finding the best-suited tenant who is vetted and would less likely default on timely rent payment. Click on the link to know How To Buy Rental Properties With No Money Down.
Location is an inevitable factor in the residential real estate investing business it is further linked to various factors like employment opportunities, population, and affordability (which determines profit). Below listed are few locations which will justify this statement and further motivate you to look out for the best location to invest in residential real estate.
Your first investment property can be quite lucrative if you prepare adequately. Before starting in Real Estate Investment, do research all about the property and location a lot. Using a real estate agent can help you a lot in real estate investing. The benefit of using a real estate agent is that they have a formal education, years of experience, and neighborhood knowledge.
An agent will help in price negotiation, give you market conditions and forecasts. A real estate agent will help the buyer in finding the right property at a good price which is a critical factor to succeed in real estate investment. While hiring an agent you must find out how many transactions do they close a month/year. How much is the commission? (If you are a seller. Buyers aren't charged commission.)
How popular is their website and where do they usually get their leads? How long have they been a realtor/agent? It's also very important to check if they can respond to your questions/requests within a reasonable amount of time. Another tip, look at different Realtors in your area and compare them.
You will find their reviews on sites like Zillow.com and Realtor.com. Most real estate agents stay in business because satisfied clients refer them to friends, family, neighbors, and coworkers. Ask the people around you who they have used and ask them to describe their experiences with that real estate agent.
For 2021, real estate market analysts agree that the outlook is very bright, particularly in certain markets. Different experts will give you different opinions on which market is the best, but most top ten lists have many of the same cities listed. For instance, some experts list expensive markets like Sacramento and San Jose Metro Areas as their top picks while some have Las Vegas at the top of its leader board.
Other cities that are lucrative for investing include Dallas, Nashville, Raleigh-Durham, and Salt Lake City. Each city has assets that make it attractive to new residents and new investors. Those assets add up to a very bright future for the real estate market in their specific area. The market information for these cities is based on predictions and forecasts for 2021.
If you are interested in buying rental properties and portfolios at this time, you can choose the Houston Housing Market. Houston has everything: the people, the diversity, the business climate, being world-renowned in energy, medicine, space, and manufacturing, and above all a booming real estate market.
1. Benefits of Residential vs Commercial Real Estate Investing in Las Vegas
Las Vegas is a much lower cost of living area and features very good investment potential as well. Median home prices are at $285,045 with sales growth rising at 4.9% and prices increasing at 6.9%. The economy in Las Vegas is growing at 8.7% compared to 6.4% growth for the rest of the top 100 cities.
The high demand was followed by an increase in population, as well as an overall improvement of the economy in the area. All these factors have had a huge impact on the Las Vegas housing market, which is considered one of the hottest markets in the US at the moment.
Some of this growth is being fueled by California residents who have sold more expensive homes, maybe due to retirement, and are looking to move to a lower cost of living area. They have a lot of cash from the sale of those more expensive homes that they can spend in the Las Vegas real estate market.
2. Benefits of Residential vs Commercial Real Estate Investing in Seattle
Seattle housing market is another area with continued strong growth. Amazon has plans for expansion projects that would occupy 12.8 million square feet by 2022. Other large-scale projects either newly completed or under construction, help explain the 100,000 new residents since 2010, with most of those coming in the last four years.
Those factors help position Seattle with 102,212 job openings to go along with a median household income of $78, 623 and a home value growth forecast of 5.4%. Median home prices are at $650,000, up $200,000 since 2014. Filling those job openings will continue to bring new residents to the Seattle area, which is a good sign for the residential real estate market.
Seattle home prices rose faster in October 2019 than they have for a year. In Seattle, October prices rose 3.3% from a year ago, to $775,000 — the largest percentage increase in 12 months. Tacoma was crowned the nation’s hottest housing market in May. Since then, other midsize cities in Washington state have overtaken their growth.
3. Benefits of Residential vs Commercial Real Estate Investing in Denver
Denver housing market shows attractive investment potential. The Denver real estate market hasn’t fully transitioned into a buyer’s market yet. But it’s shifting in that direction. Despite the big gains in housing stock, the Denver area is still very much a seller’s market. Denver-area home prices are holding steady year-over-year and inventory is increasing significantly.
The number of homes for sale in the Denver metro area was up significantly in April 2019 and the median sold price remained unchanged year-over-year, according to the latest data from the Denver Metro Association of Realtors. The tech industry continues to expand, attracting well-paid employees to fuel the growth of the real estate market. Any time you have an expansion of this nature, it drives residential real estate purchases and helps increase property values.
The median home value in Denver is $422,400. Denver home values have gone up 1.4% over the past year and their Denver real estate market prediction is that the prices will fall -0.3% within the next year. The median list price per square foot in Denver is $375, which is higher than the Denver-Aurora-Lakewood Metro average of $268.
The median price of homes currently listed in Denver is $475,000 while the median price of homes that sold is $420,900. The median rent price in Denver is $2,195, which is higher than the Denver-Aurora-Lakewood Metro median of $2,100.
4. Benefits of Residential vs Commercial Real Estate Investing in Portland
Portland comes in with a median household income of $68,676 and 44,845 job openings. The median home value is at $370,700 with an increase of 3.7% forecast. One of the things that will fuel Seattle’s growth is the development of the Zidell yards.
This 33-acre industrial site in the South Waterfront district is set for redevelopment. Plans include several parks, plazas, 2200 residential units, and a waterfront. Nike is planning a 1.3 million-square-foot expansion and there are other expansion products in the city.
5. Benefits of Residential vs Commercial Real Estate Investing in Dallas
The population of Dallas is expected to double in the next 15 Years. It is one of the leaders in the U.S. for employment and population growth. 52.9% of Dallas rents vs. 33% nationally. You will find newly remodeled REOs (2004 or newer). Turnkey rental properties are available at 5% – 15% below market value with a 3-year appreciation forecast of 11.4%.
You should invest in Dallas real estate because Zillow.com ranked Dallas at number 12 on the list of the best places to live in the country in 2017. Dallas housing market is shaping up to continue the trend of the last few years as one of the strongest markets in the United States.
According to Zillow.com, the median home value in Dallas is currently $213,400. Dallas home values have risen by 8.1% over the past year and their Dallas real estate market forecast is that the prices will continue to rise by 4.5% within the next year.
Dallas’s local economy is a mix of aerospace, computer chips, telecommunications, transport, energy, and healthcare sectors and the Finance and Business Services. These sectors are all providers of good wages which allows for a strong market for Dallas investment properties. For a more in-depth review of the Dallas Real Estate Market, click the link.
6. Benefits of Residential vs Commercial Real Estate Investing in Atlanta
Located in the state of Georgia, the city of Atlanta is a hotspot for any type of real estate investment. Atlanta has shown promising population growth and employment, which are two signs of a healthy real estate market. You can purchase investment properties in Atlanta for as low as $127,000. Comparing that to the national average, which is $152,000, that’s a pretty significant deal!
Atlanta is one of the top rental markets in the U.S. You can get newly rehabbed properties with tenants. The price of the properties starts at $70,000 with up to $750/mo cash flow. 500 people move to Atlanta every day! 2 million more people are expected by 2030. Real estate properties have a 3-year appreciation forecast of 9.3%. For a more in-depth review of the Atlanta Real Estate Market, click on the link.
7. Benefits of Residential vs Commercial Real Estate Investing in San Jose
San Jose looks to have a median household income of $110, 040 and a median home value of $1,128,300 with an increase of 8.9% in home value. Unemployment is extremely low and there is a lot of job availability, making this a very attractive real estate market.
If you are an investor, San Jose real estate has a proven record of being one of the best long-term investments in the country. Based on the last twelve months, real estate investors in San Jose, CA have found very good returns. Any housing market will see a large and generally well-funded population of renters if there is a university in town.
San Jose has several that attract students from around the world. Investors in the San Jose real estate market could buy up properties to rent out to the thousands of engineering and computer graduate majors attending the University of California Berkley campus, UC Santa Cruz, Stanford University, Santa Clara University, and California State University.
8. Benefits of Residential vs Commercial Real Estate Investing in Orlando
Orlando has added more than 1,73,900 jobs since the recession with a growth rate of 3.2% every year for the next 10 years. Over the past 5 years, it has grown 217% faster with the increasing job opportunities. Even if this place is one of the most popular locations which is in demand for real estate, you can still find affordable and spacious houses.
Orlando housing market is shaping up to continue the trend of the last few years as one of the strongest markets in the United States. The Orlando real estate market forecast is that the prices will rise by 8% to 10% in 2021. Orlando is the new hub for many young professionals especially those with various types of technological expertise, including engineers and IT professionals.
This city has experienced annual job growth of around 4.4% and is also one of the fastest-growing metro areas in the country. The city is also set to experience its highest job growth rate in the 10 years to come. A market with high job growth is a great market for real estate investment as well within the next year.
9. Benefits of Residential vs Commercial Real Estate Investing in Tampa
Tampa metro area is considered among the top-performing cities in the US. It is listed in the top 20 fastest-growing metros in the US. It has 4 million people and has the potential to cater to more migrants. Tampa real estate may look a bit pricey, but if you make a detailed analysis before investing you can get hold of deals as low as $90,000. There are several nature parks, landmarks, museums, and eateries for tourists to visit in Tampa.
Tourist influx also means an increase in short-term residential contracts, which is a selling point of the Tampa real estate market in 2018. Main tourist attractions include Big Cat Rescue, Busch Gardens Florida, Eureka Springs Park, and Tampa-Bay History Center among many others. Growing tourism has a tremendously positive effect on the real estate in Tampa FL.
10. Benefits of Residential vs Commercial Real Estate Investing in Jacksonville
Jacksonville, Florida is ranked 3rd in Forbes magazine in terms of job availability. The population has increased 24% since 2000 and continues to grow 2% every year. Here the price is too reasonable and as low as 23% compared to the national average. Hence, Jacksonville is highly recommended for investing in residential real estate.
Commercial vs Residential Real Estate: The Conclusion
Buying or selling real estate, for a majority of investors, is one of the most important decisions they will make. Choosing a real estate professional/counselor continues to be a vital part of this process.
They are well-informed about critical factors that affect your specific market areas, such as changes in market conditions, market forecasts, consumer attitudes, best locations, timing, and interest rates.
NORADA REAL ESTATE INVESTMENTS strives to set the standard for our industry and inspire others by raising the bar on providing exceptional real estate investment opportunities in the U.S. growth markets. We can help you succeed by minimizing risk and maximizing profitability.
This article aimed to educate investors who are keen to invest in residential real estate in 2021. Investing in real estate requires a lot of studies, planning, and budgeting. Not all real estate is solid long-term investments. We always recommend doing your own research and take the help of an expert counselor.
References
- https://www.biggerpockets.com/blog/NNN-deal
- https://www.investopedia.com/articles/mortgages-real-estate/10/real-estate-investment-trust-reit.asp
- https://www.biggerpockets.com/member-blogs/1395/11003-triple-net-lease-properties-returns-are-more-favorable
- https://www.forbes.com/sites/marcprosser/2017/07/19/data-proves-reits-are-better-than-buying-real-estate/#3fe75799d6b7
- https://www.investopedia.com/articles/mortgages-real-estate/09/residential-real-estate-invest.asp?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186
