Commercal vs. Multi-Famialy

[Kyle Bentz]

What is better commerical or multi famialy? Which one is more profitable? To me it would seem that commerical is more profitable because you dont have much expenses compared to a multi famialy aprtment complex. Is this correct? When i say commerical i mean retail and office propertys.

[Steve Olafson]

It really depends on your situation.  I would say that you could find a better cap rate on a commercial deal these days.  There is a lot of interest in multi-family which is driving the cap rates.

There are different ways to invest in both multi-fam and commercial.  You could be going for value add or simply for cash flow. 

If cash flow is your game then you would probably want a stable commercial building.  The more stability that is built into the odds, the lower the cap rate.  If you have a national credit tenant, you are probably going to pay a high price with a low cap rate.  If you have a business leasing that has little business experience and little money in reserves, you will probably pay a lot less.  But you could have high vacancy real fast.

The cost of turning a vacant into an occupied unit can be pretty high in commercial.

There are many ways to look at this.  I personally like to buy all properties with vacancies.  This usually leads to better pricing but adds challenges like negative cash flow and difficulty with financing.

Both can be very profitable.  It depends on the game that you want to play and where everything is within the real estate cycles.