2 Categories in Real Estate Investment
There are many types of real estate houses: villas, apartments, office buildings, hotels, shops, factories, etc. All these can be divided into two categories: residential property and commercial property. The term, residential real estate, is more comfortable for investors because the houses we live in are residential real estate. Commercial real estate is more inclined to experienced investors, partially due to the more significant investment put upfront and more. Compared to residential property, commercial real estate is relatively stable in generating cash flow, and moreover, potential to bring more equity after the mortgage is paid off.
Investing in residential property
“I have tried several short-term investments; now I want to save for retirement and my child, maybe it’s time to make a long-term investment.” If residential real estate investment came across your mind, continue reading! A study from Gallup shows an increasing number of Americans think real estate is an excellent long-term investment. A steady increase in real estate sales price from Historical data also unveils the reason.
*U.S. Census Bureau and U.S. Department of Housing and Urban Development, Average Sales Price of Houses Sold for the United States [ASPUS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/ASPUS, March 1, 2021.
Investors do not need to have a lot of investment experience to invest in residential properties, and the net rate of return is 5% to 10%. Generally, a typical 3-bedroom house in middle-class communities sells for 150,000 to 250,000 dollars, and the annual rental income is 5 to 8%.
Besides, condos or apartment suites are also popular options for investors. Typically, there will be a real estate investment group (REIG) taking care of these types of properties and maintaining the apartment. The average price of condominiums is around 50,000 to 150,000 dollars, with a 6-10% net return.
Investing in commercial property
If investors have sufficient funds on hand, investing in commercial real estate is more advantageous than investing in residential real estate. Built-in more prosperous areas, the commercial rental property creates relatively large room for appreciation. Another “secret” of steady growth comes from relatively long lease terms. While residential housing is generally signed for one year, a commercial real estate lease might go up to 25 years.
More steady on the one hand, more expenditure on the other hand. Commercial real estate is generally much more expensive than residential real estate due to relatively larger spaces and more complicated facilities. In the commercial investment setting, investors pay for the operation and maintenance of the property. Although the expenditure (e.g., time and money) is vast, commercial real estate property fees are actually lower than those of residential real estate. Another good thing is that there is only minimal inflationary pressure on commercial properties. And again, after paying off the mortgage, it leads to more equity. Investors could enjoy tax benefits through mortgage and currency depreciation.
Large-scale commercial properties at better locations are generally purchased by investment groups, with a return of 5%. The return mainly comes from capital appreciation and leverage, for example, 5 to 15 years of mortgage loans. As we said before, commercial property is generally more expensive than residential property due to several reasons, but there are still some properties on the market that are less than $150,000. For example, the average price is between 140,000 and 160,000 dollars for hair salons, health clinics, real estate company offices, etc. The typical contract period is 5 years for these commercial properties, and the return is about 9%.