Commercial vs. Residential Real Estate: Which Should You Invest In?

Commercial vs. Residential Real Estate: Which Should You Invest In?

  • David Passman
  • 11/21/19

What to Know Before Deciding Where You Will Invest in Real Estate

Looking to diversify your portfolio? Well, look no further! Investing in real estate is a smart and durable decision that will reap rewards, but the key to success is being savvy about where you put your money.

Real estate can be divided into two general categories: residential real estate and commercial real estate. Within each category, there is a variety of vast opportunities for investors based on the type of property. So, which is the best for you?

You can decide to invest directly by purchasing residential or commercial spaces, or you can invest in real estate with company stocks or bonds. Whether it’s your first or fifth time investing in real estate, here’s what you need to know before making your decision.

Commercial Real Estate

If you’re thinking about purchasing office buildings, small retail spaces, large shopping complexes, warehouses, mid-rise and high-rise buildings, or raw land—that’s commercial real estate.

Many argue that commercial real estate brings in more money because it’s designed to produce cash flow and higher returns. The earning potential is endless, especially if you’re leasing in a popular city or area (you can charge higher rates). 

An advantage of commercial is what’s called the triple net lease. A common concern anyone has when buying or investing is maintenance costs. In a way, a triple net lease solves that problem for investors since it dictates that all maintenance costs are the responsibility of the business or company leasing the space.

The risk with commercial real estate, though, is that demand must remain high. It also typically takes more than one person to run these large spaces, so be prepared to hire help. 

Residential Real Estate

Residential real estate is considered to be individual and multi-family homes, apartment buildings, condos, complexes, and properties of the sort. 

This type of investment is notoriously less stressful in contrast to commercial real estate. You may have fewer tenants to manage and you don’t need as much money as commercial to get started. There is also a bigger pool of potential tenants and in the face of an economic crisis, residential takes less of a hit than commercial. 

With all that being said, there is still some risk in residential real estate. If a tenant moves out unexpectedly, you are stuck with the costs. However, while cash flow and returns might be lower, with residential real estate you can opt to invest in more properties rather than put all of your eggs in one basket.

As far as maintenance costs go, one blog suggests charging the tenant for the first $250 of any repair and 100% for any negligence. According to these investors, this covers almost all the maintenance costs they came across.

So, What’s Best?

Regardless of whether you decide to invest in commercial real estate or residential real estate, the good news is that real estate investments have a historic track record of surviving even the most devastating market swings. As a whole, the real estate sector has been a leading performer in (and has outperformed) the overall market. This is still true even when factoring in the housing price drops during the 2008 recession. 

When choosing, be sure to consider how much time and risk you want to put into your investment. Whatever you choose will be the right decision for you.

The Passman Group is happy to help you navigate the intricacies of Los Angeles real estate. Please don’t hesitate to reach out to us with any questions or concerns. Be sure to stay up-to-date on all things Los Angeles luxury real estate on our blog!

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