Commercial vs. residential, Tug-of-War

[Dori Arazi]

I have a couple of rental properties in California that I "stumbled into" as I purchased primary residences and moved. This is going to be my first attempt at taking REI more seriously. I have a good career that allowed me to put enough cash aside to give this a real go (along with equity from my current investments). The question now is, commercial or residential? I've posed this question to a few people (with biases) and have read a few books on the subject and I'm still undetermined. Everyone seems to have an agenda. Be it "Be the next best seller", or "pay me for being your guru". I am not planning to quit my job before I can financially lean on my portfolio, and I don't expect that to happen for another decade (at least), so that time availability should be part of the consideration. I'm not looking to get rich quick, but I am looking to win at this chess game. Like any compounded growth model, the first move has the strongest impact on the "domino effect". And I'm having a hard time figuring this first move out.

Would love to hear your thoughts. 

[Chris Mason]

Originally posted by @Dori Arazi:

I have a couple of rental properties in California that I "stumbled into" as I purchased primary residences and moved. This is going to be my first attempt at taking REI more seriously. I have a good career that allowed me to put enough cash aside to give this a real go (along with equity from my current investments). The question now is, commercial or residential? I've posed this question to a few people (with biases) and have read a few books on the subject and I'm still undetermined. Everyone seems to have an agenda. Be it "Be the next best seller", or "pay me for being your guru". I am not planning to quit my job before I can financially lean on my portfolio, and I don't expect that to happen for another decade (at least), so that time availability should be part of the consideration. I'm not looking to get rich quick, but I am looking to win at this chess game. Like any compounded growth model, the first move has the strongest impact on the "domino effect". And I'm having a hard time figuring this first move out.

Would love to hear your thoughts. 

 I'd say the most common path folks take is to start with smaller properties, and build up over time. Probably because this is the path of least resistance -- a commercial lender might be much more likely to lend, and at higher LTVs and lower rates, after you've got a few residential 2-4 unit properties under your belt. And then there's also 1031 exchanges, of course. There's no preapproval letter expected for commercial since the framework does not exist, so listing agents do some screening of how likely they feel you are to get commercial financing, meaning it's easier for a new investor to even get something residential under contract. None of these are reasons why you "should" or "shouldn't" start off commercial or residential, but why most people "end up" starting in the 1-4 unit residential space, and then moving up over time. 

You could of course blow all that up and find an off market high rise commercial office building with seller financing at 95% LTV and show up the lot of us, and power to you if you do!