Owning residential real estate is a great investment opportunity that many investors have taken advantage of. However, if you have owned several properties, or invested in multifamily properties, then you understand the difficulties that can come with this type of investment. Additionally, owning more residential properties leads to more management time, increased financial complexity, often times greater risk and often huge tenant headaches – all without a guarantee of higher income.
But what if you could receive similar returns as that of multiple residential properties, with significantly less hassle? Let’s take a look at investing in commercial vs residential real estate.
Investing in commercial properties is certainly different from investing in residential real estate. Here are several reasons why getting started in commercial real estate is easier than you might think.
Commercial is all Business
A disadvantage in residential real estate is that the tenants live on the property which can lead to an emotional situation if something goes wrong. If tenants are late on rent or there are issues, it can be an extremely difficult and long process to evict them. Not to mention the emotional elements of having to push a family out of their living situation.
Commercial real estate, on the other hand, is all business. Leases can be written with a great deal more flexibility and latitude. If a tenant is one day late on the property, the eviction process can begin. While this can still be difficult for the tenant, it is a lot more cut and dry for everyone involved.
Financing Is Easier to Get With Commercial vs Residential Real Estate
While commercial properties can cost significantly more than residential real estate, financing for commercial properties is often much easier to secure. For example, in residential real estate lenders look at the personal credit of the borrower. A benefit of commercial vs residential real estate is that lenders also look at the creditworthiness of the tenants. Commercial real estate investors can turn to private lenders as well, which drastically increases the investor’s ability to scale up.
Another benefit of commercial vs residential real estate is that making a deal in commercial real estate can allow for more creativity. This could include a seller-financed loan or offer to do a build-to-suit, a property built specifically for a particular tenant.
There are numerous ways for you to find a deal that suits your investment goals, and the advisors at Westwood have the experience and expertise to help you achieve them.
What Types of Properties Fall Under Commercial Real Estate?
There are several types of commercial real estate from multifamily properties that are over 4 units, to retail properties such as shopping malls, standalone properties, and more. The type of property you choose will depend on your investment goals and your risk tolerance level. However, one of the easiest properties to transition to is the triple net lease.
Triple net leases offer investors steady returns and are relatively low risk. Tenants tend to be creditworthy and backed by larger companies that can guarantee the lease. Additionally, leases typically range from 10-25 years with options to renew upward of 40 years, providing more stability.
The significant advantage of triple net properties is that they are virtually management and expense (and hassle!) free. Tenants pay for repair and maintenance, including major ones like roof or HVAC repair. They also pay for all expenses as well as the taxes on the property. This means that you as the investor have almost no responsibilities beyond receiving a monthly check.
To Wrap It Up
Investing in residential real estate can be lucrative and is often a starting point for strong investment portfolios. However, when looking at commercial vs residential real estate investment, commercial income properties have many benefits – and are even more powerful when coupled with a 1031 exchange. A triple net lease property has many benefits for a more stable, long-term investment.
