Let me start by saying that when I refer to residential, I am referring to both single-family and multifamily property. This covers houses and all size and shape of apartment buildings. By commercial I mean strip shopping centers, warehouses, mid-rise and high-rise buildings.
Each has its merits and can be very profitable. In fact, while we chose residential as our target deal, I by no means mean to suggest that commercial isn’t great. When you see the number one reason we chose residential, this will all make more sense.
I will only look at two supposed advantages and show you why they really are not.
Advantage Commercial: The triple net lease.
One of the big fears people have about real estate investing is the maintenance costs. People will argue that the triple net lease solves that problem.
The triple net lease basically says that all maintenance costs are the responsibility of the company leasing the property. Effectively eliminating the maintenance costs.
But realize that we have almost no maintenance cost on our single-family homes too. By using the “Best Product, Best Price” business model, we put together a perfect property and then make the tenant responsible for the first $250 of any repair and 100% responsible for any negligence. This covers almost all of the maintenance costs.
On multifamily, we budget for the maintenance costs before we ever buy it. So they really have no affect on the cash flow either.
So the triple net lease is really not an advantage.
Advantage Residential: People always need a place to live.
Another one of the big fears people have about investing in real estate is the thought that they won’t be able to lease the property.
The argument is that residential is better because people always need a place to live. But think about it. Don’t they also need a place to work? Of course they do.
Commercial property leases just as effectively as residential. When they get a good anchor tenant, the owner’s doors are knocked down with people wanting to lease to be near the anchor tenant.
So the fact that people always need a place to live is not an advantage either.
Then why did we choose residential?
One reason stands out. I had a mentor that was willing to teach me the ins and outs of residential real estate. He knew the best practices and best business model to most effectively invest.
The most important part was his willingness to teach it to me. That made all the difference.
To this date I have never met a person who was in commercial real estate that was willing to teach me the business model and best practices. I’ve never found a business willing to teach it either.
Simply put, I am not willing to take the risk involved with a “trial and error” method of learning the commercial business model. I believe in life you simply find someone that is doing something effectively and imitate them.
So the reason we chose residential is that simple. It’s because we know the best practices and business model to maximize our profits.
I recommend this for you too. Find a mentor and do what works.