In today’s economy, does it make sense to invest in residential or commercial real estate? Or, maybe keep out of the real estate market all together. If you subscribe to many economic “experts” they believe that in some markets, we’ve hit the bottom and are starting to move back to a normalized market. In the commercial real estate market, some experts are predicting the bubble has yet to burst. They are predicting the commercial real estate market will start to have a downturn within the next 12 months. So, based on “expert” opinion, what’s an investor to do?
The first thing you need to do is take a look at your market. If you’re in Phoenix, any city in Florida, or Detroit, you may want to take your excess cash and put it in a coffee can and bury it in your back yard for a few years. These markets have been hit the hardest and I wouldn’t expect a big turnaround anytime soon in either commercial or residential real estate. That being said, of course you wouldn’t pass up on a nice, fully leased commercial property in a prime spot at 50% of its’ previous value with a $20,000 per month cash flow. However, if you’re looking for appreciation, you may look elsewhere.
Some markets, like Dallas, Austin and San Antonio, TX, Seattle, WA, etc., are all decent markets that have not had the 40% – 50% swings that the other markets have had. I would consider them somewhat normalized. Typical valuations and analysis used would apply in these markets.
If you are looking for an investment and trying to decide on a piece of commercial real estate, or a piece of residential real estate, here are a few things to consider. Do you like managing tenants? Are you okay with tenant turnover? Are you looking for appreciation vs. cash flow? What’s your risk tolerance? What’s your tax situation? What’s your exit strategy?
For commercial property, you may face longer periods of vacancy. However, once you have a tenant, they are typically in place for 5 to 10 years. A residential tenant is most likely to move every 2 to 3 years. They are also more likely to cause damage and you’ll have to recarpet, paint, etc., You will get fewer complaints from neighbors on a commercial property vs. a residential investment. Commercial property also have leases that are called “Triple Net”. That is, the tenant pays for the property taxes, insurance and maintenance. In residential, you pay these expenses yourself. You will typically have better appreciation on a residential property. There may be cases where a commercial property appreciates just as much as residential. Commercial property typically has better cash flow. Residential property can typically be sold within 60 to 90 days. Commercial property can take between 12 to 24 months.
So, the answer on residential vs. commercial depends on your sistuation. If you enjoy appreciation vs. cash flow and have the time to manage properties, residential real estate may be the vehicle you’d like to choose. If you are looking for cash flow and a better tax situation, then commercial property may be the route for you. Either way and in any market, due diligence and sound analysis are fundamental for a winning investment. Remember, you make money on the buy, not on the sell.