Commercial vs. Residential Real Estate

Although both can be great investments and yield significant returns, investing in commercial real estate may be a better investment than investing in residential real estate for various reasons. One benefit it less competition which can lead to greater returns and makes it easier to obtain the property you want.

Access To Additional Capital  

In comparison to residential deals, commercial deals can raise larger amounts of capital. Access to capital is limited for residential investors due to traditional financing and investors – banks and individual investors. If you cannot access the necessary capital through one of these paths, you may be forced to resort to owner financing. This requires you to give up greater investment opportunities where creative financing techniques do not raise enough capital.

When it comes to commercial real estate, investors often pool money together and syndicate deals. Joint venture projects are also a popular option for commercial deals and create substantial capital. Commercial investors can also raise capital though hedge funds, investment groups, private REITs and even smaller private equity firms.

Eliminate Some Competition

Many investors go for residential properties which results in the market being more competitive than the commercial market. It can be advantageous to utilize similar marketing tactics used in residential real estate for commercial deals. With less competition for a certain property, you are more likely to score an amazing deal.

The Additional Benefit of Forced Appreciation

Unlike residential real estate, commercial real estate uses the revenue a property generates to determine the value of the property. Therefore, if a property generates a lot of revenue, it will be worth a lot. The value of residential property is often determined based on properties with similar characteristics that have sold around it. This can be hard to accept if you have invested a lot of money in additional features in the property. Forced appreciation is not an option.

To force the appreciation of a commercial property, you simply need to increase the revenue the property generates. Even a small increase in revenue can have tremendous effects on the value depending on capitalization rates in the area.

Choosing to invest in commercial real estate over residential properties can have numerous advantages including access to additional capital, less competition and forced appreciation. Since investors often pool money together for commercial deals and your chances of obtaining the necessary funds to invest are far greater than with residential deals. Additionally, forced appreciation can be advantageous because increasing the revenue a property generates can significantly increase the value of the property.

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