Buy Residential Rental or Commercial?

Question

Does anyone have suggestions?  I have some money saved up from flipping and now possibly looking into putting money into residential rentals (which is low risk since I have experience), or go into commercial?  I know this is a vague question, but any advice would be grateful.  Thanks.

McKellar Newsom · Answer

When I started out, I thought I wanted to purchase multifamily properties.  I ended up buying a single family rental and have 27 currently.

I'd buy a multifamily if the numbers were right.  The problem for me is that I don't like the loan terms right now on multifamily properties.   I like to play with balloons with my girls not my loans.

You could try a single family to get some buy and hold experience then decide which to pursue for your second buy and hold deal.

Don Konipol · Answer

I started out as a residential investor 33 years ago.  About 25 years ago I moved exclusively to commercial - basically free standing retail, warehouse, auto repair, etc.  I moved from Texas to Arizona last year with the thought of investing in commercial property in Arizona and taking advantage of the Arizona property price crash.

However, finding replacement tenants for many retail or office properties looks iffy at best.  I found some significant bargains in very high end high rise condos, and ended up investing prox $1 million of my capital in them.  Since I forsee the possibility of extremely high inflation in the near future, I like the fact that rents can be increased to mirror the inflation rate in 12 months, rather than the 5 years or more of locked in rental rates in commercial properties.  Of course apartment complexes offer the same inflation hedge, but they require catering to a lower end tenant that this late in my investment career I choose not to deal with.

Vincent D. · Answer

31SFR and growing.

Greg P. · Answer

How many rentals does everyone here approx own if you don't mind me asking?

Tony Licen · Answer

I think its fair to say it all depends. I have owned many residential homes throughout my years, some being nothing but headaches, others running pretty smoothly. Regardless, small residential homes (legal 2 families) are some what of a job, yes you could delegate some of the work but that is defeating the purpose, the ROI gets too low IMO. I have a few friends who get mailbox money from their commercial rentals and do not deal with tenants while maintaining a nice return and i truly am jealous. Obviously it can go both ways with commercial as well, it may be "the grass is always greener on the other side" syndrome telling me i want commercial though.

Vincent D. · Answer

Greg, I've done very well with single fam rentals.  Interestingly, i'm just now in consideration of making a move into apartment ownership.

These are two vastly different arenas, start to finish.  SFR is certainly more finite and easier for controlling risk, and the CF can be beautiful, especially when you've successfully added some bulk to your portfolio.  It has a nice way of building itself thru reinvestment when done properly, but you should know up front what you're getting into.

Peace.

Nathan Emmert · Answer

I'd like to see your data on that... while I don't disagree that SFHs have some advantages... at least from a cash on cash return POV, MFHs tend to cash flow better and thus have higher CoC returns.  Unless you're throwing in some long term appreciation advantage on the SFHs, I'm not sure where this claim comes from.

As to the OP, I believe residential is easier and lower risk.  As the previous poster said, being able to get long term fixed rate money takes a LOT of risk out of investments.  You can more or less do the entire analysis at purchase and know what you have for the better part of the next 30 years.  With commercial and variable rates with shorter terms, things get much harder to project and as such are inherently more risky.

Mike H. · Answer

I still believe that the best deals right now are on residential (SFH)- at least while you can continue getting conventional financing at 5% for investment properties (i.e. up to 10 properties).

I think the management is a lot easier for sfh's since you have less turnover on house rentals than apartments.

Now, if you had enough money for a large complex that the numbers would include onsite management than I guess that would make it easier to manage the multifamily properties.  Aside from that though, houses have to be easier to manage.

Better returns and easier to manage, to me, equal SFH's being better right now.  And, when you go to sell at some point, you can sell on a house by house basis to an end buyer. The multifamily building is only going to be sold to another investor. I think that gives sfh another advantage as well. More flexible exit strategy (wanna sell one or two houses to get some cash? You can do that with houses. A lot tougher to sell a percentage of an apt building.

Buy Residential Rental or Commercial?

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