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Commercial vs. Residential Real Estate: Which is Right for Entrepreneurs?
Steve Nabity
Commercial vs. Residential Real Estate: Which is Right for Entrepreneurs?
Entrepreneurs can invest in real estate to create a source of cash flow, support an existing business financially, house an existing business, or build an alternate business altogether. Real estate can be a strategic and powerful tool for entrepreneurs to grow their businesses and/or wealth.
Real estate is a broad asset class. It includes commercial and residential real estate. Commercial real estate covers office, retail, industrial, and warehouse. Emerging areas of commercial real estate include data centers and self-storage facilities. Commercial real estate can be more complex to analyze but can also offer high returns.
Residential real estate includes single-family and multi-family properties. They are viewed as being more stable than commercial real estate, though market cycles can mean otherwise. So which one is right? Commercial vs residential is the topic of discussion for this article. We will explore:
- The characteristics of a commercial real estate investment
- The advantages and challenges of residential real estate
- How to make the right investment choice based on business as well as personal goals
- Some key questions to ask yourself before investing in real estate
Commercial Real Estate: A Business Opportunity
Commercial real estate offers several advantages to investors looking for long-term wealth creation. However, there are challenges along with opportunity. A commercial property with an anchor tenant can mean a stable source of income. A large tenant will most likely be looking to sign a long-term lease. The benefit of such a lease, if executed correctly, is a predictable source of income for years to come. There is no pressure to re-lease or look for a new tenant. Rent escalations built into the lease can offset some if not all of the inflation.
As the income generated from a commercial property increases, so does its value. This leads to capital appreciation. A successful sale at a higher price than the acquisition price can lead to substantial profits, sometimes much more than all the rental income earned throughout the hold period.
Commercial real estate investing also has its challenges. Handling larger tenants with intricate lease agreements can be an expensive and time-consuming process. The economic cycle and downturns affect commercial real estate more than residential real estate. The upfront costs for executing a commercial real estate deal can also be relatively high. Skyline Point Capital has acquired commercial properties in the past and is well-positioned to guide its investors in future deals. A few years ago, it invested in a Class-A industrial property along with business owners and entrepreneurs. The property is in South Carolina and is still part of our portfolio.
Residential Real Estate: A Scalable Entry Point
Residential real estate tends to have lower upfront costs than commercial real estate. So, new investors or those with limited capital can also participate in residential deals. The barriers to entry are relatively lower and one does not have to deal with large tenant entities and intricate lease agreements.
Residential real estate also tends to be less sensitive to the economic cycle and downturns. People always need a place to live and the demand for housing tends to be more consistent than the demand for commercial real estate. A strategically located property with good-quality tenants tends to provide consistent cash flow to investors.
Residential real estate does have its challenges. Firstly, the property owner has to manage tenant relationships and ensure lower turnover. A high vacancy and turnover rate will disrupt the stability of cash flows. Significant time is also required for maintenance and general upkeep of the property. Managing residential real estate tends to be more hands-on than commercial real estate.
Skyline Point Capital has invested in several multifamily properties across geographies. It has done so along with entrepreneurs and business owners who have invested with us with different financial goals in mind. Skyline Point Capital has leveraged its expertise and networks to acquire, manage, and sell residential properties. Our most recent investment was the Cortland Med Center in Houston, a 344-unit property in the heart of Houston.
Aligning Investments with Business Goals
Different business owners will have different expectations from their strategic business investments. If a business requires stability and some shielding from volatility, then the goal of a real estate investment would be to generate stable long-term income. If the goal of a business owner is to house its employees in a safe and well-connected neighborhood or to start the investment journey with small steps, then residential real estate makes sense.
A commercial property like a warehouse, office premises, or retail stores in prominent locations can be great for a brand’s visibility. Long-term leases signed by large tenants provide predictable cash flow for years. Residential real estate is flexible in terms of its uses. It can be an affordable place for employees or business owners to live. The residential real estate can later be sold at a capital gain to fund the growth of a business.
Business owners and entrepreneurs can leverage real estate ownership and integrate such an investment into their longer-term business strategy. Real estate can be viewed either as an investment or an operational asset. Creating an income stream from real estate can provide cash flow for funding growth initiatives. Using real estate for operations or otherwise can lead to lower expenses.
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Key Questions to Help Entrepreneurs Decide
Before investing in real estate, there are some key questions that business owners and entrepreneurs should ask themselves.
What is my budget for the investment?
In order to identify the right investment opportunity, there needs to be clarity on how much capital is available for investment. You need to ask yourself how much capital you are willing to commit and filter out deals accordingly.
How much time can you dedicate to property management?
Going solo on an investment vs working with someone like Skyline Point Capital is another question to ask yourself. If you have the time to manage a business and a property, then going solo could be an option. However, if you cannot dedicate the time or do not have the expertise to manage tenants, property maintenance, and other day-to-day tasks, then it may be best to work with someone experienced.
Are you looking for long-term ability or short-term gains?
The type of property you invest in and the hold period are influenced by your end goal. You need to ask yourself whether you are investing for a capital gain in a short timeframe or whether you are looking for a long-term stream of cash flow.
What level of risk are you comfortable with?
You should be clear about how much risk you are willing to take with your real estate investments. Investors can consider investing in a stable grade-A asset or they can get into a deep value-add asset that requires significant work with high potential returns. The risk levels are completely different.
If you want to discuss these questions or have anything else on your mind regarding real estate, then feel free to schedule a call with us. We will be more than happy to connect.
We encourage you to learn more about real estate investing by checking out our library of complimentary learning resources. The key things to remember are the benefits and challenges offered by commercial and residential real estate. You should also be clear about your goal for investing in real estate. As we have highlighted above, the goal of investing has to be aligned with the strategy for your business.
Lastly, we recommend that you consider joining the Founders Investor Club. It is a community of like-minded entrepreneurs and business owners looking to invest in real estate. The Founders Investor Club is not some email list or an online community. It is a platform where we share live deals that we are currently looking to invest in.
