Commercial vs Residentials Investments

6 Replies

Is renting single family properties just as challenging as owning a commercial property? Is obtaining either similar or does commercial invest have more moving parts to it? Is starting off REI head first into commercial properties more riskier ?

@Julian Rivera

"Commercial proprieties" include many different asset classes; office, retail, self-storage, 5+ multifamily, industrial etc. What asset class are you referring to? The main real difference for a beginner with commercial is that there are no FHA 3.5% down payment programs for commercial properties. That is a great benefit for starting with 1-4 unit properties.

Houses tend to be the starting point because most people are familiar with them and in general, it's perceived as a lower risk. 

I'd recommend partnering on a few deals or lending to a great operator/investor so you can get familiar with the asset class you want to be in and get paid while learning. That's how I got started.

Alternatively, you can spend a lot of time reading/learning, you can buy a guru coaching class, or you can jump in without knowing what you don't know.

If by commercial you mean retail/office type property then one of the large differences that makes it slightly more complicated is setting a rent that you will be happy receiving into the future as typically you would want to lock in longer term leases. The challenge with that is pricing appropriately to take into consideration rising insurance, maintenance, and capital improvements. I am running into that now as my insurance on my retail plaza has been been jumping 25%/year the past couple years - but without provisions (or even with those provisions) in my leases it is difficult to go to tenants and ask them to increase their rent. In all of the leases I have done since taking ownership I do put regular rent increases in, but now I'm wondering if I made them enough.

Typically with a home/apartment you are only leasing for a year so you can bump up the rent faster with rising costs and general inflation.

@Julian Rivera . As was stated above, almost everybody starts out in residential. I did. And I only do commercial now and would never plan to go back.  but residential is certainly the easiest place to launch from. 

PM me and I’ll be glad to wake you up with a five part three eBook directs planes the similarities and differences between residential and commercial investing. Best of luck!

@Julian Rivera

A comparison with the educational system would be that investing in residential properties (. 1-4 units) is high school diploma thru bachelors degree. Commercial property is bachelors thru PhD.

Commercial can have a much higher entry point.

Most NNN STNL in strong suburban location the starting point with an investment grade tenant is 2 million with 600k down and 50k closing costs.

Most STNL properties are 2 to 10 million price range with a few outside that range.

There are smaller properties such as retail condo's and mom and pop commercial that local banks like to lend on. The national NNN lenders for credit tenants do not want that stuff. They lend the best rates on strong locations, national tenants, strong borrowers. Typically nobody can touch their rates if it fits into their lending box.

If tenant is not investment grade then typical is 35% down or more for STNL.

STNL is more passive yield with fixed rental increases. Typically 5 to 6% cash on cash going in and 10% annual IRR or better with mortgage paydown.

Remember active yield you are having to work for the investment to drive returns.

So why would someone buy NNN? Simple they own a business, or a doctor surgeon, or high level corporate exec, sold a business, etc.

These people already have tons of income and money they just want something more safe and passive to outpace inflation and park the money.