Residential vs. Commercial?

Question

I've been trying to touch base with as many people around me that I know to help get some guidance on where to go with real estate going forward.  One friend mentioned that he has been purchasing commerical properties for the last 5-10 years and was selling me on the benefits of it vs. residential.  My question to everyone here is if you do residential, why vs. commericial?

Jessie Niu · Answer

Economies of scale.

Virgil Nethercott · Answer

Thats a good point Frank

Frank Chin · Answer

You're right, commercial is a lot more hands off. The major drawback is vacancies as it can takes 6 months to a year to fill. You'll need reserves during these vacancies. But here in NYC, commercial rents rose faster than residential.

Frank Chin · Answer

Rules and regulations vary with jurisdictions. But there is a world of difference between the two.

First, for residential, in most jurisdictions, there's regulations that protect tenants. You have to supply heat, it has to be set above a certain temperature, In commercial, the landlord is not required to supply heat. There are regulations on evictions and so forth, that does not apply to commercial. So are pest control issues. The list goes on and on.

For instance, my dad owns a mixed use property in a residential neighborhood, meaning a mix of residential and commercial tenants. When you get a good commercial tenant, they stay around for 10 to 20 years or more. Residential tenants come and go. Commercial tenants usually handle their own repairs, so if a toilet is clogged, it's not your problem. Some even put up new storefronts for you.

The one thing to watch out for is insurance. It costs a lot more when you rent to a restaurant or fast food business, and a lot less when you rent to a law office.

Problem is neighborhoods and trends change, and what once was a good commercial area and longer is. You have the option in some cases changing it to residential. I was searching for commercial properties for a while, and notice lots of empty commercial properties along major routes. In most cases, they built newer attractive strip malls nearby. But I hear malls are going out of style in the age of online shopping.

You also have the problem of toxic waste if former tenants are dry cleaners or auto repair shops. You're stuck with costly environmental cleanup if you get one of these.

Virgil Nethercott · Answer

I sell commercial real estate and have a lot of clients who have tried multi family and commercial. They ultimately end up selling the multi family and sticking with commercial because it is a lot more hands off. If a space doesn't look nice inside it, the future tenants either fix it at their cost, or negotiate with the landlord on a TI allowance or rent abatement. I prefer the rent abatement as there is no money out of the pocket to do there repairs. Its also a good way to test their solvency as a company.