Investing in Real Estate: Commercial Property VS Residential Dwellings

By | December 26, 2017

Diversifying Your Real Estate Investments

Real estate investors focus on a large amount of information dedicated to each property investment transaction. Simultaneously, they find ways to maximize their investment opportunities. In the search for allocating better investment opportunities, you may come to find that single-family dwellings may not always be enough for your real estate portfolio.

One of the ways most real estate investors mitigate this dilemma is by diversifying their real estate assets with commercial properties. There are many benefits of diversifying and investing a portion of your assets into commercial real estate endeavors.  From limiting the initial investment risk associated with your capital injections, through a development or property management group; to substantially increasing your passive income for commercial endeavors you undertake as an individual investor or business.

Passive Income Through Single-Family Dwellings

Being informed on the benefits of property investing is just as important as knowing the hurdles you should expect along the way. In many cases, knowing the hurdles will help you more, you get to see them coming and avoid them. Investing in single family homes has both great incentives and downsides that most investors can easily live with.

  • Possible Lack of Cash Flow:
    • If you’re purchasing an investment property with a high LTV and little down payment, you can expect to wait a while before you are able to generate a considerable monthly profit from your rental. Here’s more details on LTV loan parameters.
    • On the other hand, with a good down payment and if the debt on the property is low, the monthly cash flow could be in your favor.
  • Inherent Lack of Growth:
    • A single-family dwelling carries only one tenant whom you can charge a rental fee, while carrying an array of high cost repairs that may arise in the future through wear and tear, such as a swimming pool or a roof damage.
    • However, diversifying your investments can abolish this minor problem, shift some assets into commercial real estate properties for a little equilibrium in your portfolio.
  • Management of Maintenance Cost: You have two options when managing and maintain an investment property. You can do it yourself, or you can pay a fee to have a property management company do it for you.
    • With enough down payment during purchase, the property could have enough monthly cashflow to get the work off your hands and mind to focused on the next property.
    • Otherwise, you can expect to grease your elbows from time to time to get items fixed or replaced with your own sweat equity.
  • Market Dependency:
    • In a single-family home, your growth is dependent on the real estate market in your region.
    • Commercial real estate properties on the other hand, is not dependent on the market. Instead, the property value is connected to the property’s Net Operating Income (NOI).

These are both challenges and some solutions provided that can help you better ascertain whether investing in residential real estate homes is the right choice for you. In most cases, with the right management team by your side, you will not fail. If you’re a new or aspiring residential property investor looking to maximize your knowledge, this article “Passive Income for First Time Real Estate Investors – The Pro & The Pitfalls” may help you pick up where we are leaving off.

The Alternative to Single-Family Dwelling Passive Income

Once you become comfortable with investing in real estate properties, betting your financial future and growth on passive income; you can start taking a leap towards your next investment milestone, commercial real estate with a real estate broker like Kashmiri Realty.

When this comfort sinks in, look at shifting some of your assets into commercial real estate investments; such as high rises, malls, small plaza to lease the units, etc. You name it!

Investing in commercial real estate has benefits that can lower your overall risk, increase your profits, improve your portfolio and open new doors to relationships you could have never expected. Below we have outlined some important benefits to entrepreneurs when choosing to invest in commercial real estate.

  • Coop with Developers & Management Groups:
    • As a new investor it’s cumbersome to jump into a commercial real estate investment endeavor all by yourself.
    • Co-opting to work as a limited liability investor will help you learn the ropes before you bite off more than you can chew.
  • Mitigate Your Loses:
    • By working with a management or development group, you can limit your losses to only what you invested and no more.
  • Diversify Your Assets:
    • Even as a small investor, commercial properties provide a bigger pie to share so diversifying your assets in this market can generate a substantially larger return on investment.
  • Value of Investment is Connected to Net Operating Income:
    • As the number one reason why, commercial real estate investing is the way to go (VI -> NOI). The value of the investment is directly connected to the value of the Net Operating Income of said property.

Don’t think of investing in properties as an investment but as a business. When you focus on property investments with a business mindset, you can create a sense of urgency towards your business’ goals & overall success. Whether they’re lofty goals or not.

Another form of commercial property investment that’s outside the realm of conventional co-op and into the 21st century realm of technology; are online investment platforms like Realty Share and Fundrise. This is a bit tricky if you have not delved into this market yet. It is not a topic we will get into in this article but you can find articles related to this type of commercial real estate opportunity at this realty blog.  One we recommend will help you defer your taxes through a 1031 exchange that can keep the IRS at bay until it is time to sell and cash in.

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