Should I invest in residential or commercial real estate?

Residential and commercial real estate are two different animals and before you get involved in the real estate game, you should take a look at both and decide which is best for you. Most people who get involved with real estate start with residential and move on to commercial real estate. So if you are a beginner you may want to learn the ropes with residential real estate.

However, in some ways residential real estate can be more problematic than commercial real estate. Business owners are usually more responsible and have more money than people who are rent an apartment or house. Because they are generating income from the business, they should be able to pay the rent without any hassles. People who rent a house might lose their job or have personal problems that make it difficult for them to remain current with their rent payments. If you are counting on the rent to meet a mortgage obligation this could spell big trouble. Generally, business will keep a space well-maintained and may even pay money to upgrade it. They want to present a professional atmosphere to the public, so they can’t afford for something to be broken or dirty. Not so with residential renters, who often don’t care much for the space they are renting and will damage property or leave a mess. If someone just ups and leaves in the middle of a lease, it’s probably a residential renter rather than a business. All of these factors make residential ownership a bigger headache.

What about commercial real estate? Aren’t there any problems associated with it? Of course. For one, if a section of town goes bad and you own a commercial building, then it will be very difficult to lease out space, while residential houses and apartments can rent out in even the worst parts of a town or city. Also, if you have a decent space and the commercial area shifts from one part of the city to another, your space might not be so attractive anymore, especially if the new buildings are newer and nicer. In order to upgrade a commercial building, the cost will generally be much higher than remodeling a home. It also can take longer to lease a commercial building, because there might not be many businesses interested in the area. Residential homes can be rented quickly if the price is right. So you can see that commercial real estate does have its disadvantages as well.

However, the main difference is that commercial real estate is usually more expensive than residential. The amount you will need to get involved (either as a down payment or in an outright purchase) will be much higher than with a house or apartment. Property taxes will be higher as well. You might be able to qualify for a bank loan for a house or a duplex but not for a medium-sized commercial building.

And that is why people start with residential and then move up to commercial real estate. Sure residential has more headaches, but it is easier to enter into, and renting the space is usually easier. By entering into the residential market, you can build up equity. As the renters pay off the mortgage, eventually you will have equity. With this equity and with a proven record of being a successful landlord, it will be much easier to quality for a loan for a commercial building. Then you can make more money with fewer headaches. That is, if you make sure to buy the right building and don’t get stuck in the wrong part of town.

Written for Richbitchitch.com by Rick Hyland

Getting Started In Real Estate Series