Should You Invest in Commercial or Residential Real Estate?

home-1353389_640When contemplating your investment options, you may have thought about putting some of your money into real estate. By investing in real estate you have the advantage of creating an income source that is steady. In addition, your real estate investment generally increases over time. But when you study all of your options, should you invest in commercial or residential real estate?

Availability

While it is possible to invest in commercial real estate as an option for creating wealth for whatever your future goals are, you must think about availability. There are not always as many commercial properties on the market for you to consider and compare. However, there does seem to be a steady and ongoing turnover in residential properties. You can use this turnover to your advantage by searching for residential properties that fit your criteria for investing among the many available to you. If you don’t find residential properties in your area that fit your requirements, you could look at some in a different location.

Cost

Another advantage to investing in residential properties is the cost. There are some commercial properties that are probably comparable in price to residential ones. Of course, others are not, further limiting the options for commercial real estate investing. If you are a relatively new investor or have limited funds, you may not be able to afford to invest in commercial real estate. However, the number of different residential real estate properties out there can be an advantage when it comes to cost. You could purchase a smaller rental property with a smaller capital outlay. Or, you could think about investing in a larger home or even a multi-unit property if you have more money to invest initially.

Cash Flow

Although it is possible to have a steady cash flow with a commercial real estate investment, it may be a bit riskier. If the company or business renting your commercial property folds or moves to a different location, you could be stuck with a property that sits uninhabited and unrented. Worse yet, you could be forced to sell at a loss in order to get back at least a portion of your investment. Conversely, with residential properties it is possible to invest in turn key rental properties that are practically guaranteed to stay rented. In addition, you can hire a property manager to help you handle any repair or maintenance issues as well as lease agreements and rent payments freeing up your valuable time.

Repairs and Maintenance

Some might argue that commercial real estate investing beats residential when it comes to repairs and maintenance. The triple net leases utilized by the commercial investor make it possible to reduce or greatly eliminate maintenance and repair costs. Basically, when the lessee signs the initial contract, they agree to pay for all maintenance and repair costs. Although this appears to be a great advantage for commercial investors, it doesn’t have to be. As a residential property owner you could make the renter responsible for the first couple of hundred dollars of any repairs to the property. In addition, include a negligence clause that requires them to pay 100% for these types of damages.

As you can see, there are many things to thing about when deciding whether you should invest in commercial or residential real estate. Make sure you consider all of the advantages and disadvantage of each before making your final decision.

Do you feel it is better to invest in commercial or residential real estate?

Kayla is a personal finance blogger in her mid-20s who loves to write about money topics of all kinds.