One of my favorite things about real investment in real estate is the fact that there is no standard method to go about it. You can create an effective business using a variety of ways. There’s one that you’ll encounter however, and that’s whether you should start using residential as well as residential property. Which is the better investment option, residential or commercial?
There isn’t a “better” investment strategy as both commercial and residential real estate come with advantages and disadvantages. Residential real estate is easier to invest in due to the wholesaling process, fix and flips as well as rental properties. Commercial properties earn a higher return on investment, but they require huge sums of capital, and it could be many years before profits are made.
Let’s explore the subject further and discuss about the differences between residential and commercial real estate. Additionally, I’ll offer some tips about ways to break into the residential market and the things you need to know before you dive into investing in commercial real estate. Let’s get started.
WHAT IS COMMERCIAL REAL ESTATE?
The term “commercial real estate” is a broad term that refers to a variety of investment properties. All of them are classified as commercial.
- Warehouses
- Retail Stores
- Mixed-Use (Store at the bottom, and apartments above it)
- Industrial sites (this is kind of a grey area because they’re usually classified in the category of “Industrial” but for the reasons of argument, we’ll leave it at that)
- Office Buildings
- Apartment Complexes
- Storage Units
Furthermore any residential structure which can accommodate at least five families is considered commercial real estate, not residential.
WHAT IS RESIDENTIAL REAL ESTATE?
Commercial real estate can be a broad term that refers to a variety of investment properties. Each of these is classified as commercial.
- Warehouses
- Retail Stores
- Mixed-Use (Store at the bottom, with apartments above it)
- Industrial sites (this is a grey area because they’re usually classified by the term “Industrial” but for the reasons of argument, we’ll leave it at that)
- Office Buildings
- Apartment Complexes
- Storage Units
Furthermore all residential buildings that is able to house up to five households is considered commercial real estate rather than residential.
WHAT IS RESIDENTIAL REAL ESTATE?
Residential real estate is any property that’s:
- Residential zoned by the municipality
- Houses ranging from 1 to 4 families
This is true for duplexes, triplexes and fourplexes, even though they’re employed for commercial use. Single-family houses are also generally considered to be residential even when they are rented out by a company to commercial purposes. The only instance where this may occur is when the property is designated “mixed-use.” If you’ve seen single-family houses with small shops or salons on the main floor , where the living room used to be, then it’s likely to be classified as mixed-use (and hence commercial).
WHICH IS BETTER FOR NEW REAL ESTATE INVESTORS, RESIDENTIAL OR COMMERCIAL?
Which is the best option for you: or the real estate investor? You’ll hate this question, but it’s all relative.
In the majority of cases, real estate in residential areas can be a great method to get into the market. It will require less capital investment but sometimes, you could be able to make it without investing anything. Let’s look at the various ways to use residential real estate to build your portfolio of investments:
Wholesaling
Wholesaling is the term that investors utilize to describe the simplest method of investing in real estate. In essence, you, the investor, purchase the home you want under contract, and then offer that contract to a different investor to earn the possibility of earning a profit. It is unlikely that you will need a loan all the time, since the only thing you’re doing is acting as the intermediary with the buyer and the sellers. the final buyer. This is a great option for anyone with poor credit or may have difficulty getting an ordinary loan.
Fix and Flip
This is the most loved investment strategy on TV! Fix and flip properties are purchased through your (or the company you work for) and then improved and then sold at an increase.
Once you’ve mastered the art of these two strategies After that, you are able to go on with this “lifecycle” of a real estate investor , and grow your portfolio to include:
- Rental Properties – In contrast to fix and flips they remain in your portfolio, and generate an ongoing income stream for your company.
- Hard money lending After you have established an adequate cash flow then you are able to lend money to investors who are seeking gap financing for their properties. The best part about becoming a hard-money lender is the fact you work with very different expectations from traditional lenders: the loans come with a limited period of time and a higher interest rate.
- Moving into commercial Real Estate It is most likely begin as a limited partner , or someone who connects general partners with great deals (more about this later). When your resume is filling with experience, you may be able to progress to being a general partnership that enjoys more control and more profits.
A FEW CONSIDERATIONS BEFORE INVESTING IN COMMERCIAL REAL ESTATE
I warn new investors about starting with commercial property investment instead of residential, as commercial property investment requires greater effort.
In the first place, making investments on commercial property is a huge undertaking that requires large loans that could reach the hundreds of millions of dollars as well as down payments that can make you gasp. It’s definitely an “go big or go home” investment strategy.
Additionally commercial real estate can take more time to make profit. This is due to a variety of factors, but the most important reason is the difficulty it is to find a buyer. Buyers tend to keep commercial properties on the market for several years at a time, while they sell homes within a couple of weeks or even months
The structure of commercial real property investment is also distinct. Residential property owners can create an LLC fast and start working even if there’s only you operating the business. Because there’s a lot of stakes in commercial enterprises, you’ll often find a corporation which has both limited and general partners.
The Limited Partners
Are the ones who contribute the funds to pay their the down payment. The investors have no say in how to manage the property, and they will receive back their deposit along with a small percentage of the proceeds when the property is sold.
General partners
Are the people who sign on the dotted lines for the mortgage. They are more at danger than restricted partners. Therefore, general partners are more in control of managing the company’s operations. run and take a bigger percentage of the profits.
Another thing to mention is that becoming a general partner not an easy or fast process. Lenders require an individual who has been in the business for a while, with a track record that can back up their statement. If getting a general partner position is your goal then you must start with the lowest point and then work your way to build some credibility and demonstrate the proof of a few years of stable, successful real estate investment.
THE REALITY OF REAL ESTATE INVESTING
Whatever method you select or even if there are different routes, I’m here to share some tough facts about investing in real estate. A real estate venture regardless of size is a long-term venture and doesn’t provide immediate outcomes. Many investors operate their businesses as a side-job and still work a full-time job. It can take a long time for any investor to earn enough money to run this business full-time.
Can you be there quicker than others? Sure, but it is contingent on a few variables:
- What is the amount of money you have?
- Do you consider yourself to be an active, or an investor who is passive?
- What time period are you searching for?
FINAL THOUGHTS
Whatever path you decide to pursue for the real estate investment portfolio I would suggest pondering some of these issues first. Both residential and commercial real estate have pros and cons, which is why it’s important to think about the whole picture and determine what’s feasible to your goals in business. The more you are aware of what you’re dealing with and the more chances you’ll succeed as an investor.
