Why invest in commercial real estate?

[Sue T.]

Hi,
I am a new investor trying to figure out if I should focus on investing in apartment properties or commercial real estate (retail prop., strip centers,etc).
Suppose you can make a true 14% cap rate (includes 50% maintence + property mgmt expense) on a apartment; why or is there a reason to invest in commercial real estate when most commercial cap rate is less than 10%? Not only that, aren't interest rates for commercial real estate higher than interest rates for apartments?
I often hear that one advantage of investing in commercial re vs. apartments is less management; but doesn't that advantage seem moot if you can hire property management and still have a higher cap rate?
Another thing I hear is that commercial re appreciates faster than apartments? Is that true?
Also, with apartments the leases are generally shorter term so you can take advantage of market pricing..but I guess that can go both ways.
Having said all that, a part of me still wants to invest in commercial real estate...don't know why? :) Hoping someone can convince me one way or the other.

Appreciate your thoughts. Thanks.

[Don Konipol]

I have found investing in apartments to be much more difficult than in many areas of commercial real estate. Price competition seems to be much stronger, non payment and eviction much more likely, good property management much more difficult to find, operating costs much higher, tenant problems much greater with much more frequency and net operating income much more volitile.

Commercial real estate covers a huge area, many investments differ so greatly from each other I hesitate to categorize them the same. I have had a lot of success with single tenant property - have had many properties that had same tenant for 10 years or more, CPI rent increases, tenant taking care of all repairs and even improvements, rent check always on time, and no tenant complaints or requests. If I can get a 10 cap on a good condition property in a growth area with CPI rent increases I'd grab it - long term great ROI with few problems.

Apartments CAN be put on auto pilot with management, but to do so requires a large apartment complex - 250 plus units - and in the A or B category. Most investors are looking at much smaller complexes in the C or D category. These do not attract the best property managers, require much more of an investment in time and supervision from the investor, have much higher operating expenses as a percentage of income, carry higher financing costs, and are subject to much more income volitility.

I suspect that the apartment complexes for sale with a 14 cap are the ones with deferred maintenance issues, in low income areas, with little appreciation potential, high turnover, high eviction, and plenty of intense management "opportunities".