Should I buy a commercial property or a residential property?

This is a tough question and every person that you ask will have a different opinion.  And the right answer might be different for each person as well.  For that reason, we will just lay out the pros and cons for each option to help you make an informed decision for yourself.

Commercial Property Pros

-Lenders for commercial deals are typically not as concerned about the borrowers financial situation (within reason) as they are about the deal.  They want to know that the deal makes sense and that it can support itself.  I was recently looking to get funding for a commercial and a residential deal at the same time and the commercial deal with the much larger purchase price was way less of a headache!
-Dealing with commercial tenants is much easier than residential.  Tenants look after their own maintenance except for major repairs.
-Triple net leases are common in commercial real estate which means that the tenant pays for all utilities, property tax, insurance, and any other expense.
-Minimum 5 year leases are the norm in commercial real estate.

Commercial Property Cons

-You need a larger downpayment.  Purchase prices are usually higher than a small residential deal, and lenders will only lend up to 80% LTV max (unless you are purchasing a n apartment and getting CMHC involved)
-Interest rates are higher with commercial property (again, unless you are looking at multi family and you can get CMHC loans)
-Vacancy can be scary, as it can be hard to find a new tenant for your building when the existing one moves out.

Residential Property Pros

-Residential seems easier at first glance.  There are way more properties for sale.  Smaller purchase price looks easier to handle
-You can get cheaper interest rates and longer amortizations making your monthly payments lower

Residential Property Cons

-The banks are much more concerned about your personal financial situation even if the property would support itself.
-Dealing with residential tenants can be much more difficult than commercial tenants.

 

So there are the majority of the pros and cons to each option.  Most real estate investor’s goal is to eventually get into commercial real estate, however, neither option is the wrong option.  The only wrong answer in this situation is to not invest at all!  Research your market and that may help you with your decision.  Either way, pick one and go for it!

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December 6, 2018

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