Real estate has long been considered to be a solid investment vehicle. Plenty of people have purchased houses to flip. However, treating real estate investing as a long-term financial commitment that can build considerable wealth means investing in rental properties that can provide steady cash flow.
Any type of rental property, whether commercial or residential, can present a good investment opportunity. Residential buildings may be a second home, or vacation site purchased as an investment property, small multifamily buildings with two to four units, or larger apartment buildings which may require an onsite manager (i.e., employee). Commercial entities may be a strip mall, shopping complex, or office building.
Interested investors should know that there are distinctive differences in results and requirements for investing in either type of real estate. Commercial real estate has typically offered greater financial rewards and risks.
However, the average annual returns for commercial real estate in the past 10 years was 6.1 percent, whereas the hot stock market saw an S&P 500 Index average annual return at 9.14 percent during the same period.
That does not even tell the whole story. Investing in stocks may present some dividends, but their true increase in value is only realized when they are sold. Real estate investments produce cash flow, equity, and considerable tax write-offs along the way.
Commercial Real Estate vs Residential: Distinct Differences
Before you consider an investment property, however, it is important to know the differences and similarities between commercial and residential real estate investing:
Down payments and credit terms:
Buying commercial property typically requires more upfront capital than is necessary for a residential building even in the same area. Additionally, loans for commercial real estate have tighter credit requirements than loans for residential buildings. You need an excellent credit score for a commercial loan, but much lower ones qualify for residential loans. Seller financing is sometimes available with either type of investment property. With a higher down payment needed on commercial buildings, seller-assisted financing is sometimes used to help offset that requirement. On residential real estate, seller-assisted financing is more common with as an incentive on distressed properties.
Appraising the worth of commercial investment property can be complex and there are different appraisal methods employed. The “cost approach” looks at the cost of the structure alongside the current land value. The “sales comparison approach,” which is more comparable to residential valuation, uses the value of equitable neighboring properties as a primary determining factor. The “income capitalization approach” combines potential revenue that one can generate with operating expenses and the current sale price.
All real estate investment property needs a budget for large capital expenses, like roof repairs or repaving. However, because of greater numbers of visitors, commercial properties typically require more upkeep and ongoing expenses than residential ones. There are multiple leases, common area maintenance costs, routine maintenance expenses, higher insurance needs, and public safety and vandalism concerns.
Commercial and Residential Real Estate: Applicable To Both
Rental property has distinct advantages over other types of investments. Here are some applicable to commercial and residential real estate:
All rental properties offer the ability to generate positive cash flow after the payment of any expenses. The larger the property, the greater the potential for more rental income. Depending on the area, however, vacancy rates and property costs make commercial more lucrative in some areas, but residential rentals the better option in others. This is obviously also true for the property value.
Owning real estate offers investors leverage to acquire more. Consistently paying down the mortgage provides access to equity that can be used when needed.
Landlords have tax advantages over regular homeowners. They can deduct interest, insurance, maintenance expenses and even depreciation as business expenses like those who own commercial real estate investments do. In addition, capital gains taxes can usually be deferred when an investor sells a property and reinvests the proceeds into another one.
Money and time are the two main resources required for investing in real estate, but they need to be used wisely. Like going into any business venture, you need a comprehensive plan and financial projections.
You also need to research the market, be realistic about what you can afford, project income and expenses including repairs and upkeep, and be patient to find the right deal for you. If the game plan is to buy multiple real estate investment properties, you also need to project how much income is needed from the first property before leveraging it to acquire another.
Take advantage of expertise to ensure you make wise choices. LCI Realty offers education on dos and don’ts of commercial and residential investments. They also help their customers manage their real estate assets and help clients who own properties build strategies for leasing and screening tenants and other ownership requirements to help you maximize your investment’s value.
For more information on LCI Realty and how to become a seasoned real estate investor, contact them today!