Residential vs. Commercial Real Estate Investing: Why we chose residential

real-estate

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.

Comments

  1. Boyce Wilson says:

    Question for Steve, I am 66 and took my 401 k and purchased two rent homes, one for 70,000 and 156,000 Rented them both in lest than 2 months.
    one for 1,100 and the other for 1,600 months after taxes and insurance I am clearing 1,930 each month. By question is you say don’t put your money in the homes let the bank carry the note. But they will charge 4 to 5 % I am getting that interest my self. Where am I going wrong.

    • Steve Davis says:

      First off, congrats on your first two deals.

      On your question, look at your rate of return. You get about $24,000 on $226,000 invested. That is a little over a 10% rate of return. If you had taken that $226,000 and bought 10 houses with leverage, you would be making around $4,000 a month or a 21% rate of return. Who cares if you pay the bank 4 or 5%?

      The other thing to think about is you could have bought a small apartment with that much money and made even more money.

      Thanks,
      Steve

  2. Hi Steve,

    From your calculation is making sense with the condition that we could rent out all properties. What if we could not rent them out and we have to pay the maintenance and loans from our own pocket? We could lose all investment, couldn’t we?

    • Susan,

      There is risk in any and all types of investments. However, real estate has some of the lowest risk since you control it.

      If you have a property go more than two weeks without a tenant, you don’t know what you are doing. You control that. On the maintenance, that is all part of an effective business model. We do all of our maintenance up front and you should too.

      You should never have to make a mortgage payment out of your own income if you know what you are doing.

      The key is investing some time and money up front to learn the correct best practices and the complete business model before you ever write your first offer.

      Hope this helps.

      Steve

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