Power of Residential Property Investment

Residential real estate investment is comparatively less daunting than commercial real estate when starting out your journey because everyone knows what constitutes a home that some could live in. You will straight away notice absence of a bathroom and a kitchen or if the property suffered from poor ventilation.

Commercial residential property investment on the other hand is far more complex to understand. Each type of property be it office space, retail, industrial or hospitality has its own complexities. In addition you have to deal with contracts and leases that can affect the price of the property.

Residential real estate investment as the name suggests is investing in property that people use primarily for residential accommodation. These include apartments, town houses, free-standing homes, duplexes, condominiums and apartment buildings.

Let us examine some of the salient features of residential property.

Tenants

In residential real estate investment you are essentially dealing with people. Unfortunately people can be source of problems. Your tenant will ring you up at all times of day and night with even the smallest of complaints. At times the rent is not paid in time, the lawns are not mowed or they will not keep the property clean. In worst cases they damage your property.

Residential tenants have little or no interest in maintaining your property.
Click Here to read about the Murphys Law on Tenants

If the tenant is not complaining then you will find the neighbor is complaining about the tenant for making too much noise or children running into the neighbor’s property. So you need people skills to manage your property or you will need to employ a property manager.

Vacancy Rate

The biggest advantage of residential real state investment is that it is fairly easy to find a new tenant once your property becomes vacant. This reduces the vacancy rate and there is always cash flow coming from your investment.

There is only one reason if your property remains vacant for too long. Your rents are too high for that location at the particular time. If you drop the rent by five to ten percent you will normally find a tenant. This is because people have to live somewhere at affordable costs.

In commercial real estate properties are far more specialized and in case of a vacancy you may not find a tenant for months or even a few years. This is a huge risk for a new investor who is not familiar with real estate investment.

Rate of Return

The rate of return on residential real estate investment is much lower when compared to a commercial property. This is because in residential property the owner has to pay all the out going expenses such as property rates, insurance and maintenance costs.

In commercial real estate it is the responsibility of the tenant to pay these costs thereby increasing net returns.

Property Leases

Residential property leases tend to be very short when compared to commercial leases that can run for several years. As discussed earlier it is much easier to find a tenant for vacant residential property.

Real Estate Finance

In general commercial properties are more expensive than residential properties. Banks will lend up to 90 % or more on residential properties and only up to 50% to 70% on commercial property. This reflects the risk that banks associate with commercial residential property investment.
You will require much lesser seed capital to start with residential real estate investment. You will also be able to leverage your money better when buying residential property.

The cost of borrowing for residential real estate investment is cheaper than funding a commercial property. This to some extent negates the higher rate of return on commercial property.

Government Laws

Government laws with respect to residential property are far more stringent and can override anything that you may have written in the rental agreement with the tenant. Politicians and bureaucrats put these protections in place so that residential tenants are not exploited.

In some countries and states the laws are so much in favor of the tenant that you can not evict them even in case they are behind on their rents.

In the case of commercial properties you can insert any clauses in the lease agreement without any interference from the governing agencies.

In commercial property you tend to deal with contracts where as in residential real estate investment you tend to deal with people.

Property Management Costs

Residential real estate investment management takes time and effort because you deal people. Once you have several residential investments it can become a full time job.

Residential property managers charge anywhere from 6% to 8% of the rent collected towards the management fee.

Commercial properties on the other hand do not require much of your time in managing them. Commercial tenants usually stay in the property for many years and it is in their best interest to maintain and make improvements to the property due to business reasons.

Commercial property management fees reflect the reduced work involved and charges range from 2% to 4% of the rent collected. The best part is that you can charge the management cost to tenant as a part of the out goings. If you choose to manage the property then the management charges become payable to you thereby increasing the return from the property.

For a new investor it is much easier and less riskier to get started with residential real estate investing because of the easy in understanding residential property, getting the finances, leveraging the money and managing vacancies.

If you are planning to buy your first investment then it is important that you read the Beginner Investing Guide to learn the basics of buying an investment property. Beginner investing can be confusing because there are so many questions that flood your mind. Should you first buy an investment property or a house to live in? Which is the best neighborhood to buy an investment property? How should I will I find the right property. Beginner Investing Guide will answer most of your questions.

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