When you decide to invest in real estate, it can be tough to decide whether commercial or residential investing makes the most sense for your financial goals. Investing always carries risk, and it’s important that you fully understand what type of investing is the correct choice for your situation. Joe Fairless is sharing his top tips for deciding which type of real estate investing is the right fit for you.
Pros and Cons of Investing In Commercial Real Estate
Thinking about investing in an office building or business space? Investing in commercial real estate can be a smart move, Joe Fairless explains. Commercial real estate is a riskier investment than residential real estate, but it can result in greater returns for investors.
In times of economic downturn, it can be hard to decide what tenants will be likely to be able to pay their rent for a commercial space over time. Typically, commercial real estate investors have fewer issues collecting rent payments from businesses than a residential real estate investor would have collecting rent from tenants. A caveat to consider: if a business fails, it’s unlikely that paying up on the remainder of its lease will be at the top of its priority list.
Commercial real estate investors also have the option of creating triple net leases. A triple net lease allows a company to transfer all the expenses of maintaining the property to the company leasing the building. This means that the investor only has to worry about paying the mortgage on the property rather than paying for utilities and maintenance. This option can be a good fit for large companies that have a tried-and-true maintenance and upkeep plan for their buildings.
Pros and Cons of Investing In Residential Real Estate
Joe Fairless goes on to say that, as mentioned above, residential real estate carries a lower risk than commercial real estate. This can also mean lower returns, but a dependable income may be worth it for some investors. Residential real estate investors may have trouble vetting potential renters, as it can be more difficult to vet a person than to vet a business in commercial real estate.
Upkeep in rental properties may be easier than upkeep in a commercial space. Repairs in residential buildings are often small and not urgent (for example, fixing chipping paint or replacing an outdated window frame). In commercial real estate, a business may depend on the look of their space to bring customers in, which may result in more frequent and urgent repair and maintenance requests.
Residential real estate investors may find that it’s easier to find long-term tenants than commercial real estate investors. While businesses tend to move and change with time, long-term renters are happy to stay in their space for years–and in some cases, decades.
What’s the Best Fit For You? Joe Fairless Explains
If you’re deciding whether to enter into the commercial or residential real estate market, Joe Fairless recommends considering both your risk comfort level and your financial goals. Comfortable with risk? Have big goals? Commercial real estate likely makes sense. If you prefer lower risk and have more conservative goals, you’ll want to stick with residential real estate investing.