Adding Real Estate To My Passive Income Flows – Commercial Or Residential?

avatar By: IS
Date posted: 12.11.2012 (4:00 am) | Write a Comment  (9 Comments)

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As I continue towards my goal to be financially independent within a few years (see my progress here), one direction that I intend to take is buying some real estate. I’ve explained some of the reasons why as well as a few of the benefits involved. This week, I took time to look into one critical decision I will be faced with when I do finally end up buying some real estate.:

Residential Or Commercial?

There are a lot of different benefits and downsides involved. The main ones that I was able to find:

Commercial:

-dealing with businesses can involve complex lease contracts that can be intimidating and require legal help
-higher down payments are generally required to get a mortgage/loan
-a lot more can be involved depending on the type of activity performed by the company
-can turn out to be more difficult to rent (while good residential ones will generally rent easily at the “right” price

Residential:

-more difficult to deal with tenants as the landlord must work with many different laws
-process is much more straight forward. Why? I have rented before, know what’s involved, etc
-legislation often limits how prices can be increased every year making more difficult to run profits
-finding key tenants is critical: not only will it determine how reliable they will be in paying but also will take care of the property, hopefully live there for a few years, etc.

I will probably end up buying a condo to start things off. It will provide me with an easier way to become familiar with all of the different aspects of being a landlord. It will also require a smaller investment which is certainly significant. One reason is that I don’t want to invest a million dollars on one building to be lent out to 1 business. It would make me too dependent  I’d much prefer to start off with something smaller and increase my investment by adding new units in different locations. This would provide me with a lot more diversification.

I know that some of you have generate income from real estate holdings, I’d love to hear what types you hold, and what kind of experiences you’ve had. I do know that I’d much prefer renting out at a slightly lower price to a very reliable person than trying to rent at the very top. It will certainly make for very interesting research…

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9 Comments

  1. Comment by Ken — December 11, 2012 @ 11:15 pm
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    I own both commercial and residential real estate. I would say that the number one thing I’ve learned is that you have to buy something that is driving distance from you. Long distance management is much more difficult, even if you hire a property manager. Also, you won’t know a distant market as well to know what’s a bargain and what isn’t.

  2. Comment by IS — December 12, 2012 @ 9:09 pm
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    @Ken – Very true! I’d love to hear more about your investments. How long ago did you make them? What kind of properties and how do you manage them?

  3. Comment by Michel — December 14, 2012 @ 6:04 am
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    I would just buy the REITS. Commercial and/or Residential REITS. No hassles, no worries and no problems.

  4. Comment by Sasha S. — December 14, 2012 @ 8:02 am
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    As I understand, investing in a condo can be a bad test/experience: condos bring lower income-to-expense ratio, so low that it might bring no income at all, except that you’re investing it by paying it off and the place is becoming yours.
    I’m not speaking from experience though, just was considering that too. Multifamily houses seem to bring the best ROI on residential side. Not sure how that compares to commercial.

  5. Comment by IS — December 15, 2012 @ 5:18 am
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    @Michel – It’s not a bad idea but there are benefits to holding the actual real estate.. for example being able to deduct expenses, having better control, etc

  6. Comment by IS — December 15, 2012 @ 5:19 am
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    @Sasha – I would imagine that this would depend on locations and how pricing evolve. I will certainly be looking into this though, thanks for the thoughts

  7. Pingback by The Weekly Hits | The Dividend Guy Blog — December 17, 2012 @ 6:02 am
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    […] 1. Adding Real Estate To My Passive Income Flows – Commercial Or Residential? @ IS. […]

  8. Comment by RA — December 18, 2012 @ 9:25 pm
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    I simply saved up for several years until I had the full purchase price for each of the two 2BR/2BA condo units I own. I find that the income from these two pretty much cover my basic monthly living expenses (which takes away a lot of worry about ‘where the money’s coming from’), and allow me to save a percentage to cover annual taxes.

  9. Comment by IS — December 19, 2012 @ 5:04 am
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    @RA – How long ago did you make that purchase? Any issues since then or it’s gone very well?

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