Commercial/residential purchase strategy

[Jason Miller]

I'm looking to diversify from a pure equity portfolio and go into real estate. I don't have much time to hands-on manage due to an existing consulting business. This has prevented me from getting into residential and drawn me more towards commercial, maybe that is a false assumption. I have about 700k to invest either as a cash offer or down payment.

The following are a few different strategies/perceptions I have and I am curious what everyone's thoughts are. I am interested in cash flow as a way to support my consulting business during a downturn and help diversify my overall retirement portfolio that very large in equities.  Long-term appreciation is big because I wouldn't intend to sell anything until retirement (30+ years from now) I am also in a very high tax bracket and hopeful that real estate investments may enable more deductions.

Commercial:

1) I've shied away from retail strips due to feedback from banks desire to not lend there and overall amazon impact

2) Looking primarily at small office complexes (2-4 unit) with service businesses - anything to look at for with office buildings?

3) The few banks I spoke to informally appear to be uninterested in writing a loan unless the tenants in the property have long leases that practically exceeded the loan term. I get the feeling that current tenant leases will have a huge impact on any commercial loan and as a result, there are not a lot of good deals on properties that have solid tenants. Why would anyone sell in that situation? The properties I feel that have some value-add are the ones that a bank wouldn't lend on, such as a property where leases are coming up and I have opportunity to increase, etc. I feel trapped a it as purchasing a commercial property that would underwrite with a bank doesn't appear to be great value-add potential and it typically just super expensive. Thoughts?

4) As a result, this has made me rethink my price point and finance strategy. If I were looking to finance a property I could play in the 2.5M price point which is a much larger 10k sq/ft office building. Otherwise, I can look at cash offer properties that would get me a better deal in the 800-900k price point (5k sq/ft). My idea here would be to offer and purchase a smaller property (2-3 office) with cash and attempt delayed financing down the road. I feel that this may avoid a lot of the sticking points that banks have with first-time commercial real estate owners. I could also get a better deal with an initial cash offer. Any experiences here? For a newbie is it safer to deal with a cash offer on the first property, seems to be a bit of downside protection to not having loan payments at the start. I could buy a property with less than ideal tenants and hopefully improve that situation as a value-add. The obvious downside to investing in a small commercial office building (2-3 tenants) is the lack of large value-add, there just isn't space.

5) If I purchase office space I could lease-back some of it to my consulting business and draw a little tax free money out of the company.

Residential:

Let's get this out of the way, I'm familiar with BRRR and I know folks doing it.

1) If I go residential I would be purchasing 2 or 3 properties in the 300k price range. These are local to me and in most cases, in a nice suburb Chicago area, a 300k house is typically 2k sq/ft and rents around 2k/month. Property taxes are high in IL and therefore returns (without a mortgage) are only about 5% after property taxes. With a mortgage, I'm not sure what that would look, not good.

2) I get the feeling that long-term appreciation of residential homes seems to exceed commercial in these areas. My understanding is that commercial properties tend to depreciate over time, only to be propped up with cashflow, and if you lose a tenant resale value tanks. That is obviously not the case with residential homes in good areas. As a result, residential is probably a safer investment, but I would rather take some risks and pickup some tax efficiencies with my current business that may be enabled through commercial investments. Thoughts?

3) Is residential a better long-term appreciation strategy whereas commercial's cashflow benefits are better for post-retirement? Is there a situation where commercial properties may cashflow well and appreciate due to other factors?

Thank you for any replies.