Is residential real estate the better option for investment, or commercial? Generalities aside, there really cannot be a definitive answer to this entreaty;
Why is investing in commercial real estate better than investing in residential real estate?
It isn’t necessarily better to invest in commercial properties, it’s just different. I know people that only invest in residential. I know people that only invest in multi-family, or that will only invest in office buildings, or only in RV Parks, or trailer parks, or there are people that will invest in anything and everything.
I like commercial properties much more than residential properties simply because:
Commercial units can lease for more per foot.
Commercial tenants improve properties because it helps their business, while residential tenants tend to damage residential properties because they don’t care about your property the way you do.
Commercial tenants only call you if something tragic has happened. Residential tenants call about anything and everything.
Commercial tenants tend to lease for much longer terms than residential tenants. Some of my commercial tenants have been in their spaces for decades… since 1991, or since 2000. Think about that: I’ve had a commercial tenant in my property since the day I bought it in 1991…. 27 years ago. Other commercial tenants are more short term, like three to five years, but they are just starting their businesses. Residential tenants tend to move out in one year to three years.
I just heard from one commercial tenant yesterday (she pays her rent about three days to a week early every month… yesterday was the 27th) that her company “never” plans to leave my property. Her high-end hair salon business is doing extremely well in my property and she only pays $3,000 a month in rent. The property is paid off. Every 18-months I am paid as much in rent, as the property originally cost me.
The downside of investing in commercial units is that residential units typically lease faster. A commercial property may be vacant for a year, or a few years before it’s leased, while residential units may be vacant for a month or two before leasing.
I just leased a space to a small restaurant in one of my properties this week. It had been vacant for just over a year. They signed a $52,524 lease per year for six years with 1.5% annual increases. They pay their own utilities, and they cover the cost of NNN: property taxes, insurance and maintenance.
Lease terms like those are much harder to achieve with residential properties.