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Which Type Of Real Estate Should You Invest In?
When people first think about real estate investing, flipping or renting single-family homes are often what comes to mind. However, there are higher quality opportunities to be found in the commercial real estate market, and it may be easier to get involved than you think.
Let’s take a minute to cover the differences between commercial and residential properties, along with the reasons why you might choose one over the other. Also, we’ll unpack how you can get started, and whether or not a real estate investment fund may be a good fit for you.
What’s The Difference Between Commercial and Residential Real Estate?
What Traits Make A Property Commercial?
At the foundational level, commercial property is typically an asset that is used to generate business or produce goods. Beyond this simple concept, a critical factor in determining the classification of an investment property is how it’s zoned. Generally, certain commercial and residential real estate types aren’t intermingled—rarely are factories built in residential areas.
But sometimes, the definitions of properties are blurred, as with multifamily residential rental properties, which are commercially-zoned properties that serve a residential function. These properties are still classified as commercial because they’re multi-unit complexes that are built and sold to generate income for the property owners. Generally speaking, there are five categories of commercial property to invest in:
Commercial Property Types
There are five core property types that primarily make up commercial real estate. Each of these property types comes with merits and drawbacks that may suit some investment goals better than others. The five core types of commercial property include:
- Industrial
- Multifamily
- Office
- Retail
- Special Purpose
Benefits of Commercial Real Estate Investing
- Multiple tenants within a single property reduce investor risk
- Higher-value properties can mean economies of scale
- Longer lease terms offer more stable income streams
- Higher credit operators typically provide more stability
What Makes A Property Residential?
The primary way a property is classified as residential is by city zoning at the local level. These ordinances dictate that the property can only be used for housing purposes and not business. Of course, the lines are blurred sometimes, as with multi-family properties like duplexes, which aren’t technically commercial property despite mostly being purchased as income-producing real estate. The distinction between residential and commercial properties is typically 4 units; at 5 units or more, the property is zoned commercial.
For most real estate investors’ purposes, residential properties are single-family residences, often flipped or rented to tenants one deal at a time. With that said, some real estate investments like shares in trust deed funds may enable you to invest in a pool of residential property assets, spreading your risk exposure.
Benefits of Residential Real Estate Investing
Residential real estate investing often has the benefit of tenants that have a strong incentive to pay their rent every month. Loans on properties also are typically easier to acquire, and with more favorable terms. There’s also considerably higher deal volume and shorter market times for residential property compared with commercial property. If real estate investors want to flip multiple properties per year, residential real estate can provide many more opportunities than commercial. That said, deal sizes are considerably smaller, and the risk of losing your capital is greater.
Which Property Type Is Right For You?
Depending on your investment goals, there may be reasons one particular class of property is a better choice than the other.
For investors who don’t mind more involvement in their real estate properties and don’t mind more direct contact with tenants, residential is often the route they choose. Keep in mind, these properties come with a higher degree of risk but can also produce fast, high-yield returns on capital in some instances.
Investors who’d prefer less risk, more stability, and less involvement in their real estate investments’ daily operations may find that commercial real estate funds are a more attractive alternative to residential properties for their goals.
Where Should You Invest In Real Estate?
Investing in real estate doesn’t have to be limited to your local real estate market. Fortunately, you can take advantage of opportunities across the country through real estate investment funds.
Maximizing your ROI means locating properties with some key desirable traits:
- High occupancy rates, indicating a favorable local housing supply for investors
- High rentals rates compared with rental property loan payments
- Low tenant default rates for a steady stream of rental revenues
- Rapidly/Steadily increasing population due to business and job growth
Do You Have To Become A Landlord To Invest In Real Estate?
Thankfully, you don’t have to become a landlord yourself to experience the benefits of real estate. Some investors opt for investing in a REIT, while many others have found the value of investing in a real estate fund like those offered by Saint Investment Group.
While REITs have been around for some time now, they don’t usually provide as much insight into the underlying properties being invested in by the trust. Alternatively, real estate funds run by seasoned experts deliver detailed reporting on a regular basis, along with far more insight into the assets that the fund selects.
For those wanting the most stable, secure returns that real estate can provide, investing in a fund can provide more peace of mind by meeting expectations more reliably. Invest online with Saint Investment Group when you would prefer avoiding the headaches of being a landlord. When solid returns, passive income, and an expert asset management team is essential, give us a call.
Not Sure Which Property Type Is Right For You?
When your mission is portfolio diversification, it can be hard figuring out which real estate investment is right. Saint Investment Group takes the guesswork out of the equation, providing expert insight into the best real estate for your investment objectives. Call (323) 483-0291 today and talk with a seasoned real estate investing professional to learn what options are available to you.
Frequently Asked Questions:
Residential real estate includes homes, apartments, and condominiums, whereas commercial real estate includes office buildings, retail spaces, and industrial sites. Commercial real estate creates money through rental payments, whereas residential real estate does so through appreciation or rental payments. Commercial and residential real estate have varied financial, regulatory, and economic issues.
When choosing to invest in commercial or residential real estate, it is important to consider several factors such as location, property type and condition, market demand and supply, economic conditions, and potential for appreciation or rental income. Additionally, it is important to evaluate the investment’s risk level and expected return, as well as the costs associated with financing, ownership, and management. You may also want to consider the level of your expertise and experience in real estate investing and whether you want to actively manage the property or invest passively through a real estate investment trust (REIT) or other structure.
The location of a commercial or residential property may have a substantial effect on its value, since it affects the property’s accessibility, visibility, and appeal to potential tenants, purchasers, or renters. Properties located in prominent regions with high demand and excellent market circumstances often fetch higher prices and have the potential for larger returns on investment. Alternatively, homes located in regions with low demand, economic difficulties, or high crime rates may be more difficult to lease or sell and have a lower value. Other location based considerations, such as closeness to public transit, schools, retail, and leisure, can also influence the value of a property.
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President of Saint Investment Group
Nic is a two decade seasoned expert in investing and capital raising, specializing in Real Estate and debt markets. With Saint Investment Group, he leads large-scale distressed asset purchases and innovative syndications for investors.
