Why Is Commercial Real Estate A Much Better Investment Than Residential Real Estate?
You could read a newspaper or a magazine and wind up with claims that commercial real estate is a better investment than residential real estate.
This is true in some situations but not for most property owners. In most real estate investing situations, residential real estate is often the better investment vehicle and equity investment when the alternative is to expect a return on investment in the bank. Banks are more conservative in lending on residential real estate and are often conservative in the amount of leverage they will accept; as a result, residential income-producing properties usually will not go as far as they might on a commercial real estate investment.
Sometimes A Residential Real Estate Investment Is Better Than A Commercial Real Estate Investment
Fortunately, since 1980, residential real estate has soared at an amazing rate while commercial real estate has stalled and in some places has actually begun to decline in value because of the poor management of the property. Much of this increase in value can be attributed to people who had the foresight twenty years ago to purchase homes in areas that would become their most desired locations.
Using an example from a small suburban city, I would like to claim that both the better investment in property in the past and the better return on investment in the present makes the purchase of either residential real estate or investment property in either a form of residential real estate a much better long term strategy than the purchase of commercial property or income-producing properties.
While residential housing has appreciated at a rate of 10% to 20% over the past three decades, commercial real estate, on the other hand, has declined and in some locations is completely gone.
The appreciation on the sale of commercial property is commonly much better than residential real estate when you consider the depreciation factor. You will generally break even on the sale of commercial real estate after 10 years on a moderate to strong appreciation.
When you consider the minimal amount of mortgage you will need to buy residential real estate and the long-term liability on a commercial property is virtually always greater, I would hesitate to commit to the purchase of a commercial real estate in most locations.
In the past when you had a sufficient amount of equity in your primary residence, real estate values could rise at a much greater rate than the increase in housing values. I am not referring to an increase in appreciation provided by the fact that some areas of the country continue to experience a stable or even decline in values.
I am referring to a situation in which you had the equity in your home increasing, thereby dividing the cost in housing by the increase in value of your home, without taxation of the increment in value as income in your pocket.
This situation is to be found in many areas where property values have appreciated at a steady 3 to 5% rate per year. At this rate, it is not uncommon to have investment properties have appraised values equal to or greater than the rental income resulting from those properties.
This 10% to 25% increase in value almost always occurs over a number of years and the heavier-handed influences that leading to this increase are mostly outside of your control.
Let’s look at an example. You own a duplex that is worth $200,000. At the time of this writing, you owe about $150,000 against the property. Then the property goes up 10% in value (5% of the original value) on its own within a few years.
At this same meeting, the boards of pages of your local newspaper are running an article about how the local median price for a home has increased by 20%. You, self-employed, make a living, have excellent credit and plenty of equity on your family home, so why isn’t this a good thing?
Let’s take the increase in the value of your home and divide it by the amount of equity you have in your home. You can’t divide the increase in value by 1.5 since that results in a negative number, so instead, leave it off the aforementioned equation altogether.
$150,000/$200,000 = $4,500
Divide by $200,000Key: It’s $4,500, and if you were to sell this piece of property at current market value you would be paying taxes on that $4,500!
That makes a significant difference in what it costs you annually.
There are some situations in which you might want to sell this piece of property if you want to meet certain specific goals, such as:
- College or higher education. An example would be: A student from your old country would be attending a local university. If you took care in doing your taxes correctly, you should be able to claim a tax deduction for the expense of living and related expenses that are connected with riding the bus to and from the university.
- Transracially relocated.
Purchasing a Home
This seems like a very simple question, but it is actually quite complicated. Once you have decided to take the plunge and purchase a residence, there is no going back about it. Here are a few guidelines to assist you on your journey.
A home is something that we should strive for, especially as children. As such, making a decision hastily can have you down a route that you were not meant to go down. While it is best to always trust your instincts, they never can provide a better guide than good research.
Before buying a home, do some research about the immediate area. Do research on schooling and overall wages. Also, take into account the proximity to your place of employment and other places where you can influence your current and future life choices.
Get to know your neighborhood. Talk to as many residents there as you can, and try to get a feel for how they feel about their community. Also, research how the property values have changed over the past few years, see what the values of homes in the neighborhood are, how many properties are for sale, and what are neighborhoods like yours in comparison to others. Remember, regardless of whether you are single or married, having green space is vital to our mental well-being.
It is a very good idea is to always have a list of the pros and cons of moving. On top of everything else, you will be making such a major life decision. It is best to have a list of the pros and cons of renting, working, and all the other reasons that will influence your lifestyle.
When considering purchasing a home at the right price point, you must consider factors involving affordability and rising value. On the other hand, most residents think that the overall prices of homes would appreciate over the years. Overall, it is a gamble, however, generally, the medium price as pegged to the median price has proven to be more reliable.
When looking to buy a property, it is best to first check the home itself. First and foremost, you should have a list of things to see in a home. Does the neighborhood suit you? Is the house large enough for you and your family in the future? Is there an elevator? Also, does the house suit the price point? If the price point is too high for you, it may be better to venture farther away from the location.
When thinking about the price, make sure to first consider the cost of the home that you can afford. Also, do not forget to consider the cost of transportation and ‘maintenance’ fees that will be required when you move in.
‘Maintenance’ in this case means the roof, heating system, property taxes, and any other amenities that will likely build up over the years. These fees can add up, and you will likely need to provide your own budget for improvements as well as one that understands that this is what you pay for as a house owner.
Buy in a neighborhood that you like, and your opinion of the place may open up when you meet other people about the area. More importantly, stand in the neighborhood at different times of the day, at peak traffic times, and then at quieter times to gauge the environment in the neighborhood. Also, find out what it is like to walk out onto your patio and walk to your home. One thing that you should also check is proximity to a bus stop.
Finding a neighborhood that suits you both personally and professionally is very important, and standing by the same street all your working day and collecting your mailbox might not be an easy task. Do research on the neighborhood and its amenities. Restriction can be seen in a neighborhood for older adults, with tight-knit community relationships which do not exist in a quieter neighborhood.
One key thing to remember is that once you’ve found a house that suits your requirements, perform an extended property search in a property that is not your first. Speaking of which, buy a house that you only use for a part of the year and throw away heaps of off-season property that has already been used prior to by several buyers. We seem to have a habit of adding the same property to multiple property lists, which can doom a home to multiple offers not showing the full range of what is on the market.