In this post, I’ll explain in detail why I picked commercial properties for my real estate investments and not residential properties. But before I do that, I want you to learn that there are many types of investments that fall under residential and commercial. First, let’s learn what types of properties fall under “residential investments” and what types of properties fall under “commercial investments”.
Residential Properties:
Residential are properties where people live in, where people have their bed and pillow to sleep on at night, so it’s not only single family homes, it’s also duplexes, triplexes, fourplexes, mobile home parks, multi family properties like apartment buildings, high rises, lofts, student housing, and senior housing – and each of these categories have their own pros and cons! Also, each of these categories can be good or bad investments depending on the state that you invest in because of things like property prices, local economy, and state and city laws (for example some states have laws that benefit the tenants and you cannot kick them out, some states have laws that benefit the property owners, so if a tenant doesn’t pay the rent, they are out of the property within days).
Commercial properties:
There are several types of commercial properties that you could focus on:
1. Industrial: distribution center, warehousing, or manufacturing
2. Office: you can have a regular office that you lease it out to several companies, lawyers, etc, or you could have a medical office building (for example) where you lease to a hospital, or to dentists, dermatologists, psychologists, etc
3. Retail: within retail you can have a single tenant building, for example in the downtown area of where you live, you can own a building that is leased out to a coffee shop for instance, or you could have a restaurant in your building, so that’s a single tenant retail. Another type of retail is the small neighborhood service center, like the places that have 5-10 tenants where you go to the dry cleaner, and there’s also a nail salon, or a cash advance business for example. Another type of retail can be a strip mall with let’s say 20-40 tenants, like the place where you go grocery shopping and they also have a bank as a tenant, some food places like Burger King, etc. Or it can be a big box shopping center where they’ll have a Target, Macy’s, a food court, etc
4. Storage units: this is where people pay you a monthly fee to keep things they’ll never need in your building, and within storage you could focus on storing wine for instance, because people like to collect, but don’t have a lot of space to have a temperature controlled storage at home. If you have a lot of courage, you could store gold for people!
5. Land: you could lease your land to all kinds of businesses. For example: for agricultural purposes, to wind farms, for RV’s to park for a few days, for truck drivers to park their trucks when they’re on the road, and many other things.
Now that you know all kinds of investments you could focus on, let me explain why I decided to focus on commercial, and specifically in retail and office.
Why commercial and not residential?
First and foremost, part of it is that I don’t like dealing with people, and yes, you can have a property manager deal with people for you, but I really just don’t want to be in that world. Over my career in sales, I realized that when people are paying for anything out of their own pocket, they get a lot more sensitive and that can lead to more complaints and upset people, than when their company is paying for something. So that’s one of the main reasons why I picked commercial – because I’ll be dealing with people that are working within an organization, and they don’t take things to heart as much as someone paying out of their own pocket.
Also, I live in California where the tenant basically rules, if they don’t pay rent it can take months to get them out of your building, AND the state of California will very likely implement rent control statewide, rent control laws are getting passed in several cities here in California, and it’s just a matter of time when the entire state has rent control laws. I recently met a couple that owns quite a few single family homes in California, and they said that they’ll be selling all of their homes as soon as their tenants leave just because of the rent control laws.
Secondly, I also just landed in commercial real estate by chance because my mentor has been investing in retail for over 20 years, so that’s what I have been learning from him.
Other reasons for choosing commercial are:
1. NNN: this means that your tenants will pay for property taxes, insurance and common area maintenance (also known as CAM), this doesn’t happen in residential
2. With commercial properties you also get better tenants, you can get big companies such as Jack in the Box, or a bank, or a supermarket, and if you can get big name tenants to lease from you, you can increase the value of your property significantly. Why? Because these big companies are unlikely to out of business and the rent is pretty much guaranteed to come in, and the next investor buying your commercial property values that.
3. Commercial tenants also sign longer leases: commercial leases can vary from 10-20 years, and sometimes more, and yes, there are yearly price increases that are negotiated on those leases, the leases typically start to get increased after year 5 for commercial properties.
As a conclusion, part of it can be personal preference. Most investors focus on a specific area, and they end up becoming experts in that area, and some other investors adjust their strategy based on the market. For example I met someone recently who typically does multi-family investments, but because the market is so hot with multi-family properties, these properties are very expensive, and he changed his strategy to retail where he can get a 2% higher return than with multi-family projects. So you can be flexible on your strategy as well.
And flexibility is important, another example, my mentor recently purchased an office building to leverage his retail properties because there’s a lot of fear in retail nowadays. Personally, I think that retail won’t go away for many reasons, but they will be on sale when the economy takes a hit, AND they will be on sale as more big box stores go out of business because of the internet (hello Sears), and until these properties get repurposed for another use, I think you’ll be able to find good deals in retail. Also, when the economy takes a hit (which a lot of people are predicting will happen anytime soon, and some people are saying it already started) we will have many opportunities to buy real estate – SO if you are here learning all you can – KUDOS to you because you’ll be ready to go on a shopping spree when the time arrives.
I hope this gives you clarity on why I personally picked commercial. If you’re learning something, make sure to subscribe to this podcast, and if you could please do me a favor and write a review I’ll be very grateful because only when we have enough good reviews they will show our podcast when people search for commercial real estate advice.
It is better to be prepared than to get ready
Will Smith