Real estate, both historically and currently, presents as one of the safest asset classes for investment. Now that the first collection of millennials are starting to break away from their student debts and the effects of the Great Recession, it looks like real estate may even get a bump over the next decade. The return on investment in real estate is not as clean as people might have you believe, you’re obviously impacted by necessary payments such as property tax, maintenance and upkeep, and potential fees. Regardless, the property remains a safe and steady long-term investment precisely because land and housing are commodities everyone needs, whether to live or to work. Further, the government tends to benefit from land ownership, so it provides tax incentives to all property owners. With that in mind, there are two versions of real estate investment you should be researching if you want to enter the market; commercial real estate and residential real estate. The general difference: residential real estate investment is more accessible to beginners, commercial real estate requires some deeper level of knowledge and success in the real estate market.
Commercial real estate is a property you purchase to lease to companies. By definition, it is a property with five or more units or any property used for business purposes. Everything from a North Dakota funeral home to a New York City skyscraping business office falls within the realm of commercial property, assuming business takes place there. Leases on commercial spaces tend to be at least ten years (though there are, of course, exceptions), so once you’ve signed a tenant, you have a steady source of income from your property every month for a decade. Commercial leases also tend to be more expensive, and you can evict a commercial tenant who isn’t paying rent far more quickly than a residential tenant. Commercial real estate tends to have its own unique issues compared to residential real estate. Ensure you keep extensive notes on expenses, income, and return: a history of strong returns keeps buyers interested. The property management of commercial real estate is far more intensive than residential real estate. It’s usually best to hire a full-time property manager. Zoning laws are more specific and stringent as well at the commercial level. Finally, a major note when thinking about the commercial property: investing is a group effort. Commercial real estate splits into four main spheres: retail, office, industrial, and hospitality. Each one of these requires its own specific skill sets and knowledge–so the best thing you can do in commercial real estate is making connections and build up a team that can work together to find the best possible investment. Finding a commercial real estate loan is particularly tricky–they are primarily determined by your assets’ projected net operating income and property performance.
Residential real estate tends to be a much different game. Consistently residential property investors will tell you that tenants purchase off of things like “feel.” Residential real estate is defined as real estate between 1 and 4 units and is meant to house families or individuals. Residential real estate in many ways can be a simpler proposition. You generally have less maintenance or upkeep, and that maintenance is rarely specialized like you might need for a restaurant or dentist’s office. Also, residential loans tend to be easier to obtain for an average investor, the best-liked being a 30 year fixed rate mortgage–just remember that a longer mortgage means greater amounts of interest. On the flip side, your tenants are typically signing leases that are only a year-long at most, which means there is more concern about consistently keeping your property rented.