We all hear this often from real estate investors: “What’s the smarter move? Household or commercial investment property? ” It should come as no surprise that there isn’t an one-word reply to this question. You will reach your best choice — the the one that boosts your chances for success — by working through a decision process that features some “global” issues, some local and some that are totally personal. Richard Weldon Crowder
Let’s start with some terminology. For the purposes of our discussion, we will define as residential any property that derives all or practically all of its income from house units. Single-family homes, multi-families, apartment buildings, condos, co-ops are all residential. (FYI, the tax code classifies any property through which a majority or more of the gross income comes from dwelling units as home, so many mixed-use properties can be classified as residential for tax purposes. )
For commercial property, we’ll use a typical layman’s definition: property that derives its income from non-residential sources, such as offices, retail space and professional tenants.
Why do I say that this is the layman’s explanation? Because appraisers and lenders would consider large (> 4 unit) apartment structures to be commercial investment property since they are bought and sold purely for their ability to produce income and not as a potential personal residence for the owner/investor. However, it will suit our discussion better to treat all apartment complexes as homes.
What are a global issues that should impact your selection to buy home or commercial property? The state of the Circumstance. S. economy certainly covers checklist. If you consider we are in or are on the edge of a recession, then it is smart to be cautious regarding commercial property. You will have to rely on businesses to occupy your commercial space, and if they’re unable to survive or simply deferring their plans to expand, then rental rates may soften and demand for space decline. Changing a lost tenant — especially one lost at any time (in the midst of a rent, or the core night) because of a fragile economy — can take longer than it might in unstressed monetary times. When the economy and employment are strong, obviously, you are likely to see the opposite. Services businesses need more space, retailers open more stores, distributors need more facilities.
Another issue is the cost and accessibility to financing. Interest rates are always important to buyers, but there exists one situation that may strike you as counter-intuitive. When home loans are readily available and mortgage rates drop, it’s not unusual to see an increase in apartment vacancies, making apartment buildings less desirable as investments. The reason? Low mortgage rates and easy credit often show that individuals can own a home at a monthly cost which is same — or less, after taxes — than renting. So part of your potential renter pool may be lost by ownership.