Commercial Real Estate

3 Reasons to Switch From Residential to Commercial Real Estate

Expertise: Landlording & Rental Properties, Real Estate Investing Basics, Personal Finance, Real Estate News & Commentary, Business Management, Real Estate Deal Analysis & Advice, Real Estate Marketing, Mortgages & Creative Financing
102 Articles Written
Storage facilities with blue doors. Interior units. 3d rendering

With the constant fluctuation of the stock market and an uncertain future that some say could lead to a recession (others say we’re already experiencing one), it’s time for you to get serious about investing in assets that will help you secure your future—like real estate.

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It’s not that real estate isn’t affected by market fluctuations; it is. But its tangibility provides an extra layer of protection you don’t get with stocks. With a 401(k), you could spend your entire life pouring money into your account. Then, by the time you reach retirement age, if the market crashes, you could lose it all.

On the other hand, if the market drops or completely crashes, your real estate property doesn’t just disappear. You may have to wait years to sell it, sell for a lower price, or adjust the amount of rent you charge your tenants, but your asset still exists in the physical world.

This alone is the best reason to start investing in real estate—specifically commercial real estate. Here’s why.

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3 Reasons to Switch From Residential to Commercial Real Estate

1. Commercial real estate provides a larger ROI than residential.

As an investor, commercial real estate properties can provide you with a significant amount of extra yearly income, greatly adding to your net worth. Commercial properties can also be a better option than residential properties for a few reasons. Many people assert that it’s easier for them to secure large amounts of capital for a commercial deal than to generate lower amounts for a residential deal.

This is because residential investors are limited to traditional financing and private lenders. Commercial real estate investors, on the other hand, tend to pool their capital resources, and many small firms and financial companies are more likely to help in a joint venture because there’s more in it for them.

Related: A Look at the Pros & Cons of Investing in Commercial Real Estate

2. Some commercial properties virtually guarantee ROI.

Of course, nothing in life is absolutely guaranteed, but there are some types of commercial property that are better investments than others, simply due to the nature of the business conducted on the property. For example, the self-storage industry thrives in every season, and revenue doesn’t usually diminish when the market drops. There are millions of self-storage facilities across the United States, which means there are plenty of opportunities to invest.

Sometimes a drop in the market can actually increase revenue for self-storage facilities, because when people undergo foreclosure, sell their homes, or downsize to apartments, they need somewhere to store their property.

With self-storage facilities, since the entire building is custom built to accommodate the industry, no matter how many times the business changes hands, it will still be a self-storage facility. The demand for this business is almost always high. And while storage facilities can turn over ownership, they rarely go out of business, making the risk of having a vacant building extremely low.

Getting Organized Will Make You A Better Investor

3. You can increase the value of your commercial property.

Property value for residential properties is determined by a fairly arbitrary process based on the average comps of surrounding properties. So even if you’ve completely renovated your home with massive upgrades, tile imported from Italy, a personal Jacuzzi in every bathroom, and walls lined with gold trim, your property will be valued comparatively with the neighborhood properties.

Commercial real estate takes a more sensible approach to value assessment. While the local comps are still considered, the overall value is based on the amount of revenue generated by the property.

Generally speaking, the higher the revenue, the higher the value. This means you can actually stimulate the appreciation of your property by finding ways to increase revenue.

But like any investment, you’ll want to do your due diligence before jumping into an investment. There are many mistakes you could make while investing in commercial real estate. It’s best to learn how to avoid these mistakes from someone who has decades of experience.

Related: The Top 10 Commercial Real Estate Due Diligence Mistakes (From a 31-Year Veteran Investor!)

Increase Your Net Worth More Rapidly With Commercial Property

Investing in commercial real estate is a lucrative business decision for anyone serious about increasing their net worth and expanding their portfolio with tangible assets. And since our entire society is built around the existence of shopping centers, office complexes, and so on, investing in commercial real estate is a great way to secure your future for years to come.

What do you think? Do you prefer residential or commercial real estate—and why?

Leave your comments below!

 

Larry is an independent, full-time writer and consultant. His writing covers a broad range of topics including business, investment and technology. His contributions include Entrepreneur Media, TechCrunch, and Inc.com. When he is not writing, Larry assists both entrepreneurs and mid-market businesses in optimizing strategies for growth, cost cutting, and operational optimization. As an avid real estate investor, Larry cut his teeth in the early 2000s buying land and small single family properties. He has since acquired and flipped over 30 parcels and small homes across the United States. While Larry’s real estate investing experience is a side passion, he will affirm his experience and know-how in real estate investing is derived more from his failures than his successes.

When he is not writing, Larry assists both entrepreneurs and mid-market businesses in optimizing strategies for growth, cost cutting, and operational optimization. As an avid real estate investor, Larry cut his teeth in the early 2000s buying land and small single family properties. He has since acquired and flipped over 30 parcels and small homes across the United States. While Larry’s real estate investing experience is a side passion, he will affirm his experience and know-how in real estate investing is derived more from his failures than his successes.

    Kris Patel Investor from Arroyo Grande, California
    Replied over 2 years ago
    Commercial in retirement, no headache, NNN deal.
    Nathan Lindley from Hillsboro, Oregon
    Replied over 2 years ago
    I’m currently researching Commercial deals to transition to from my 4-Plex. Residential has been good to me, but I’m ready to grow. Looking at light industrial in Houston as a way to play the building boom.
    Jerome Kaidor Investor from Hayward, California
    Replied over 2 years ago
    I was going to buy a mixed-use property a few years ago. Beauty parlor in the front, apartments in the back. Unfortunately, my due diligence showed me that half the building was illegal. The original permit showed TWO buildings – someone had filled in the space between them with another apartment. And built an illegal 2nd floor apartment over the garage in the back. That owner was a big fish in our town – he owned at least a couple city blocks. The day I went down to the Building department, he emailed me a bunch of data – almost as if somebody there had called him. I’m guessing that the City wasn’t bothering him about such trivia. I did not know, however, if their forbearance would extend to ME. So I passed on the deal. Then there was that little strip mall. It was anchored by a coin laundry at one end, and a closed & boarded up bar at the other end. The bar was being rented by a motorcycle club. Sounded strange to me – how does a motorcycle club come up with $2400/month rent? Passed on that too. In general, I would be wary of retail sales type properties, except for things that can not be taken over by the Internet.
    Dan Frey Lender from Mesa, Arizona
    Replied over 2 years ago
    Thank you for the great article, Larry. What is your take on the affect that e-commerce and the “digital nomad” (working from home) movement will have on the commercial sector?
    Kevin Keithley Developer from Menlo Park, CA
    Replied about 2 years ago
    This is a great post. You might also like to read this. http://info.trepp.com/trepptalk/5-largest-cmbs-loan-losses-september-2017?utm_campaign=TreppTalk%20Subscription&utm_source=hs_email&utm_medium=email&utm_content=57013382&_hsenc=p2ANqtz-_p7svSiindT7WavtenH3x0cLtku5TNfwlA4yEsZjkXv5iq3ESYJ2UQDXbj4zH3prJg9leC5vXmVjjRd4hCr9xu_M6UFQ&_hsmi=57013382 I don’t work for TREPP but think this article is interesting and thought you might too.
    Ruth Lyons Realtor from Highland, MD
    Replied 7 months ago
    Thanks for the information Larry!
    Terry Lowe
    Replied 3 months ago
    We own one commercial property, residential properties and have a 401K. You can loose money in Real Estate just as easily as the stock market. Both require due diligence. Having all your eggs in one basket is the riskiest of all financial plans. I do love my commercial property. It is in a small resort town and it’s been rented to the same person for nearly 15 years. Because it is NNN, the tenant pays for utilities, taxes and HOA dues. And they are responsible for all interior repairs! It is the most passive Real Estate investment we own. It has been a great money maker for us. Very glad we have it in our portfolio. Gotta love it!