If you talk to any real estate professional about investing in commercial vs. residential properties, you will likely start a long debate. Professionals do agree that both models add diversity to your investment portfolio, but the argument always tilts toward which investing style brings the most cash flow and the biggest payoffs. Here is a quick look at the pros and cons of each investing approach.
Investing in commercial properties offers plenty of earning potential. You can generate an annual return of 6 to 12 percent based on the purchase price alone. Another important benefit is your ability to deduct a portion of your commercial property’s depreciation. You can deduct depreciation as an expense, and if you plan on financing additional properties, mortgage lenders add depreciation back into your income when determining your ability to repay.
However, investing in commercial properties is not something you should dive into if you have little to no experience. Since the majority of your tenants are business owners, you will need to hire a property management company to handle lease agreements, address day-to-day matters and oversee your properties maintenance needs. You will also need a large upfront payment before you can purchase a commercial property.
Most residential investors deal with far less stress than commercial investors. When you invest in a single-family property, you only deal with one tenant. Maintenance costs on single-family units are much lower than commercial properties, and if you decide to try the fix and flip approach, there is no need to worry about maintenance costs or finding tenants. If you are a new investor, it is far easier to enter the residential investment market since upfront costs are lower than commercial properties.
The biggest argument among real estate professionals is the cash flow residential properties generate. You may need to own multiple residential properties to generate the annual cash flow that you can generate from one commercial property. However, strong annual returns from your properties may not be your investment goal. If you want to build equity in your properties for a long-term payoff, residential properties can provide that goal.
Whether you should invest in commercial or residential properties all depends on what you hope to gain from buying real estate. If you want to generate cash flow, commercial properties can help you achieve passive income. If you are thinking about investing on a smaller scale then residential properties are a solid choice.