Probing Property: Commercial or Residential: Which is the Best Investment Option for You?

Probing Property - Commercial or Residential: Which is the Best Investment Option for You?

You may have heard the financial guidelines of investing – be aggressive in your youth, purchase property in your thirties, and reduce your risk as you approach retirement. However, if have substantial funds now, and are thinking seriously about diversifying your financial portfolio and investing in real estate, the most pressing choice you need to make is whether commercial or residential is the best option for you. Below are some things to consider as you evaluate your choices.

Probing Property - Commercial or Residential: Which is the Best Investment Option for You?
[ Photo by Francisco Moreno on Unsplash]

Commercial Real Estate

If you are considering a commercial real estate investment because of the higher incomes it is capable of generating; you need to be aware that it also typically requires a more significant investment upfront. Commercial real estate usually requires a team effort, including brokers and underwriters, and often the best sales occur as a result of a reliable network. Additionally, commercial properties are valued by their annual income and require meticulous record-keeping.

The benefit of commercial real estate investment is that tenants cover all their maintenance and upkeep costs, and those who don’t pay their rent are easily removed. Also, there are more sectors of commercial real estate to choose from, allowing for greater variety in your portfolio.

Residential Real Estate

There are multiple ways to pursue investing in residential real estate. You can purchase a home to live in, to rent, to improve and flip or to flip without any improvement. Each level brings with it additional risk and a potential for high returns.

If you purchase a house to live in, you are banking on the value of the property rising over time, meaning you’ll make your money if and when you decide to sell it in the future. 

If you rent property, you will need to ensure you have sufficient funds to cover things such as the mortgage during vacant months, damage done by tenants during their stay, and any issues with the property that may arise for your tenants such as a plumbing or HVAC problems.

If you are interested in flipping properties, you will need to pay attention to housing market conditions so that you are selling at the appropriate time. Also, if improvements are needed and you plan to do them yourself, you will be investing significantly beyond the price of the house, including both monetarily and with your labor. If the upgrades go well, you can reap a large financial reward, but if they go poorly or over budget, you could find yourself losing money.

Real Estate Investment Trusts

Depending on where you live, you may benefit the most from putting your money into a Real Estate Investment Trust (REIT) because of tax laws. A REIT also offers many options. It can be specialized or broad in scope and can cover commercial or residential real estate. 

The benefit of REITs is that they are more liquid than traditional real estate investments because they’re publicly traded, similar to stocks. They also spare you the headaches of being a landlord because you function only as an investor, so you avoid daily ownership issues.

It’s always an excellent idea to diversify your financial portfolio, and real estate offers a wide variety of options to do so. If you have a large amount of capital and are looking to make more substantial returns, commercial real estate may be more attractive. 

If you have significant money but lack a strong network or a comfort level with commercial valuations, you may want to invest in residential real estate. And if you're interested in dabbling in both worlds as an investor, a REIT could be your ideal choice.

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