Is it Better to Invest in Commercial or Residential Real Estate?

  • Mark-

    I’ve been reading your articles for awhile now, and just purchased my first residential property. I’m also very interested and opinionated in terms of the direction that the US economy is headed.

    In my personal opinion, I believe that central bank policy is re-inflating housing values w/ ultra low interest rates that cannot be sustained. We are at historically low rates which is helping money flow back into residential and US markets. However, if that changes and we see another downturn, I think things could get a little frothy in residential housing market, yet again.

    My question is, what, if any, steps do you take to protect yourself (hedge) against another housing downturn?

    What if you are in the middle of flipping a handful of houses, and the market dips 10%, 15%, 20%? Do you attempt to protect yourself against something like that? If so, how?

    I enjoy reading your blog. The best Resi real estate blog I’ve found online thus far! -Britt

    • Britt, thank you for the comment!

      If you flip fast enough a down turn wont hurt you. I flipped all through the last down turn in the housing market and still made money. A flip should take about six months. Our market never saw more than a 5% down turn in a 6 month time period. All my flips have enough room in them to withstand a 5% down turn and still make good money. THe best way to protect yourself is to make sure you are valuing properties based on current market conditions and not what you think prices will do and to complete them fast.

  • Hey Mark!

    You ask the question – “What is better, mult or SFR”, and then you formulate the answer in terms of personal preference. All of us have preferences, but the fact is that the reason for your preference – what drives your preference, is your marketplace. The answer to the question is Marketplace…

    P.S. I know many people who got stuck in the middle of a rehab during last down-turn. In my opinion, the best thing you can do to protect yourself is in fact discounting current market conditions for the possibility of the market turning 🙂

    • Hi Ben, I agree about the market place in terms of multi vs SFR. I think commercial vs residential is another question all together. I think most people that got caught flipping in the down turn were betting on appreciation continuing and not basing numbers on current market conditions. A 5 or 10 % decrease in market values would still leave me a profit. I flipped all through the last down turn and kept making money.

  • The benefit of investing in commercial property is that it is characterized by longer leasing covenants than residential property – typically three, five or 10 years – with fixed or CPI annual increases and the added benefit of the tenant meeting the cost of all outgoings, including land tax if the tenant is publicly listed. I will personally recommend as they provide excellent services for such investments and are cost effective.

  • very well written article, even I think that one should invest in commercial real estate rather than investing in residential property.

    • Mark Ferguson says:

      Thank you, I think commercial has opportunity, but you really need to know what you are doing.