Advantages of Commercial over Residential -- Feedback Requested

[Louis A.]

Hello Fellow BP Gurus! As the subject suggests, I'm trying to determine whether to dip my feet into Commercial. I've gone back and forth with the debate -- At the end of the day, I have ultimately stayed on the residential side. 

As background: I have 4 multi-unit properties, each with 4 units or less.
I would consider them all to be "B" grade properties with very decent / respectable returns.
What I love most is that they all qualify for Freddie/Fanny financing -- Rates are incredibly low and I love the long-term predictability cash-flow requirements for a 30 year fixed mortgage. It also helps me achieve one of my goals .... 20% or higher Cash on Cash returns. 

I understand that Cap rates can be a bit more attractive for commercial. What scares me the most however are the limited term loans (often 5 years) that are based on a 20 year amortization schedule -- Also, the relative uncertainty of being at the mercy of what the prevailing rates are when it comes time to refinance is a bit hard to stomach for me.

So many here are proponents of Commercial, and I trust for good reason. Clearly many of you have overcome what I perceive to be sticking points .... I'm interested with how you all have done so. Perhaps there are other reasons which I've not contemplated -- Appreciate your feedback there too.

All the best and thank you all in the advance for your feedback!

[Arlen Chou]

@Amit M. thanks for bringing me into this discussion. I am not sure if my perspective will help, but it might be entertaining for a few...

@Louis A.

My personal time horizon is measured in decades and generations, so take the following with a grain of salt.

There are many good reasons to be on either side of this fence. I personally came up through house hacking, then SFR's, then a light industrial building, then some small multi-families, and most recently into "commercial" residential. There are many good reasons to focus on any one of these market segments. Each market niche has its strengths and weaknesses. I believe that matching your personal strengths and weaknesses to the niches is how you will find the right strategy for yourself. Although maximizing things like COC and the best interest rates are extremely important, I think a strategy that fits your lifestyle/personality is more important.

My personal philosophy is to always be a noobie, so I push my boundaries to test myself and see what I like and dislike and invest in several arenas. I will eventually focus on a single strategy once I either find one I really like or get to tired and need to settle for a market that works on paper.

I cannot really comment on what might be the best strategy, because as others have said it depends on your goals and timelines. What I can tell you is that I have found through the various market niches is that the common denominator is financing... If you can figure this piece out for yourself, you will be able delve into different market niche and jump back out if you find that a space is not to your liking. At least that is what I am doing. The physical analysis process for the different types of buildings might be slightly different, but the basic principles apply to all properties. On the financial side, I am strong believer in forced appreciation. This can be accomplished in both types of MFR's, the way you justify the new "value" of the property and the way the "value" is capped is just different.

On the topic of scale, I have found very little scale delta between a 4 plex or a 6 plex.  I made the move knowing that I would not see a real advantage, but it was an easy way to test the financial side of my investment strategy and also to further build up my investment resume. I don't plan to get into many, if any more of the small commercial residential buildings.  I personally think the real advantages of scale start to kick in after 10 doors per building.

I guess that was a long winded way of me saying, try it out and if you don't like it you can easily get out... IF you bought correctly in the first place.

Good luck to you and let us know what you decide to do!

-Arlen