4 Factors to Consider Before Investing
Considering getting into the real estate game? It can be a great strategy for earning extra income and expanding your investment portfolio. When deciding between investing in commercial real estate or residential real estate, there are some major differences to keep in mind. Let’s take a look.
Economic Resilience
In general, commercial real estate properties are seen as higher-risk investments compared to their residential counterparts. However, higher risk can translate into higher reward (more on that later). So as you consider which real estate investment path to take, you’ll need to take into account your starting capital, your long-term goals, and your individual tolerance for risk.
Since commercial properties house businesses, they are more vulnerable to economic downturns, from major recessions to smaller marketplace-specific shifts. If business tenants have difficulty getting customers through their doors, they may decide to downsize by moving to a different location. Or worse, they may need to close up shop. This opens you as the commercial property owner to a sudden vacancy and loss of rental income. Replacing that income isn’t easy. Finding quality commercial tenants can be a lengthy process, even more so during an economic downturn.
Investments in residential properties, on the other hand, tend to be more stable since there is a larger pool of buyers and renters. Everyone needs a place to live. While the residential market does respond to more significant economic disasters, such as recessions, overall, it tends to be more stable during minor economic shifts.
Lifetime Income and Property Value
Overall, commercial properties offer higher profit potential since the value of a commercial property is based on the net operating income generated by the building. A larger commercial facility renting out several retail or office units has more individual sources of rent income. In addition, commercial leases often have fixed annual rent increases built in.
Typically, residential property values are based on the price per square foot of comparable properties in your area. While there are strategies you can employ to boost your overall property value, your future earning potential depends on an upswing in the residential market. In addition, managing a residential property means you are only collecting rent from a limited number of tenants. While small annual rent increases are often expected, they tend to be lower percentages in order to keep residential rental rates competitive.
Managing Tenants
Becoming a landlord can add a big responsibility to your day-to-day life, whether it’s in the commercial or residential space. But there are some key differences to keep in mind as you weigh your options.
For commercial properties, one benefit is that most of your tenants will be active during regular business hours, meaning it’s less likely you will receive a request or complaint after hours. Typically, larger commercial properties have established contracts with a security company and a full-service property management company. The costs associated with these contracts can be built into your rental rates, helping you provide quality service to your tenants while effectively managing those extra costs. In addition, if an emergency occurs after hours, you are typically not on the hook to handle the situation. In general, commercial tenants tend to be more invested in caring for the property since they are running a business and trying to attract and retain their own customers.
If a residential property needs a repair day or night, you, as the landlord, will be responsible for the fix unless you have a property management company contract set up. For specific emergency fixes that may jeopardize health and safety, such as loss of heat in the winter or loss of running water, landlords have short timeframes dictated by law by which they must respond.
Invest in What Matters
At NAI Mid Michigan, we know each property, owner, and tenant is unique. Our local team has experience managing property sales and management across every industry in our community. We have the expertise and connections to help you get the most out of your investment property. Contact us today to find out how we can help.
