What is the best type of real estate to own for a beginner investor: commercial or residential? As a current owner of both types, here is what my experience has been like.
I don’t think everyone should own investment property. But I do think that just about anybody can do it. I have considerable experience buying, selling, renovating, and managing investment property, and while real estate makes up the bulk of my net worth, I’m a middle-class guy that sees the tremendous value of owning investment real estate. It’s one of the reasons I became attracted to property management.
Generally speaking, residential rentals typically require more management. There are more moving pieces and parts to a residence and the potential is there for more little things to go wrong. A faucet leaks…the stove isn’t working…the AC doesn’t blow cold air…etc. There are little elements that can nickel and dime your monthly cash flow. BUT…and this is a big but…residential rentals are in high demand in Nevada and Placer County! Even during a recession, everyone still needs a place to live. Rents can possibly be reduced, but the demand for this type of rental remains. Especially here in the Western Nevada County area, specifically, Grass Valley and Nevada City. We have an issue with supply and demand with demand outstripping supply. Our company, Barrett Property Management, Inc. saw a clear and steep increase in housing demand from displacement the CARR and Paradise fires. Our Vacation Property rentals have also seen higher occupancy recently often from workers assisting in the clean up. Assuming you have a clean, functional rental home, residential rentals may require a little more effort, but the demand should remain strong in any economic climate.
Commercial rentals are a different animal. I own a commercial complex downtown Grass Valley with 4 units rented to multiple women-owned businesses, and a nice parking lot. What I love about these rentals is that I rarely hear from the tenants. Our lease agreements are set up so that the repairs for many aspects inside the rentals are the responsibility of the tenant. For example, the HAVC systems. Because of the commercial usage of the systems, it could be disastrous for my cash flow if I have to pay for routine maintenance and for repairs to the system. It’s generally more expensive to work on these commercial systems. So when there’s a problem, the tenant usually lets me know, but it’s on them to get it repaired. Because they are commercial rentals, there are no kitchens so, no sinks to clog or faucets to break. Just bathrooms. But again, if they the sink, they are responsible for calling and paying for the plumber. As the owner/landlord, I do cover outside maintenance and roof issues, but some commercial leases are written where those aspects of the property are still the responsibility of the tenant, such as triple-net leases. The potential downside of commercial rentals is…the economy. During economic downturns, some businesses suffer. People are reluctant to start new businesses, sometimes prolonging a vacancy. Commercial rentals are more sensitive to what’s happening in the local and national economy. Like I mentioned, everyone needs a place to live…but not everyone needs a commercial space.
I love all of my rental properties and recognize not everyone has the emotional make-up to do day-to-day land-lording. That’s where it’s key to find a competent and caring property manager that’s been there, and done that to look after your investment property. If you’re in need of a practical and experienced property manager, let’s talk. I love managing rental property Western Nevada County, Grass Valley, Nevada City, Penn Valley and Auburn.
Adapted from previous blog dated October 10, 2017, Real Estate Real Talk, by Justin Gross, Broker Associate with Barrett Property Management, Inc.
