3 Reasons to Switch From Residential to Commercial Real Estate

by | BiggerPockets.com

With the constant fluctuation of the stock market and an uncertain future that some say could lead to a recession (some 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.

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 401k, 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.

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.

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

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.

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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.

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.

Related: 4 Ways Technology is Shaking Up Commercial Real Estate (& Why Multifamily Will Pull Ahead)

Commercial real estate takes a more sensible approach to value assessment because 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.

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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 malls, office complexes, and shopping centers, 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!

About Author

Larry Alton

Larry Alton is a professional blogger, writer and researcher who contributes to online media outlets and news sources. A graduate of Des Moines University, he still lives in Iowa as a full-time freelance writer and avid news hound. In addition to journalism, technical writing and in-depth research, he’s also active in his community and spends weekends volunteering with a local non-profit literacy organization and rock climbing.

4 Comments

  1. Jerome Kaidor

    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.

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