Commercial Investment Property vs Residential Investment Property
Florida Commercial Investment Property Vs. Residential Investment Property Pros and Cons
We did the research, so you don’t have to! Capitalizing on Commercial or Residential properties in Florida, the positives and negatives.
Homeownership rates in the United States peaked in the mid-2000s, reaching over 69 percent. After the recession in the second half of the decade, homeownership rates dropped to an all-time low especially in Florida. Ownership would see an uptick in 2020, but hasn't quite reached the highs of the mid 2000s.
As a result, there have been more people renting homes instead of buying, as well as those buying commercial property to rent. This has been advantageous for those who have gotten into rental property investing, with the average monthly rent price continuing to rise yearly. For those that want to expand their income opportunities by investing in property, there are things that you need to know. Those at the beginner property investment level should be aware that there are advantages to rental investment but also some drawbacks. Here are the pros and cons of investing in rentals.
Residential Investment Property Pros:
Passive Cash Flow:
We’ll touch on how much time you have to invest to become a landlord in just a bit, but for now we’ll focus on how you can earn money each month without having to take on a traditional job. If you have multiple rental properties that are churning a profit each month, you can make that your full-time position without having to work a standard 9 to 5 in an office, making it an ideal situation for a lot of potential landlords.
Ability to Sell:
Let’s say that you purchased your investment rental property below market value and got a good interest rate. If the market turns to the point where it becomes advantageous to sell the house outright for cash, you can do just that. During the height of the COVID-19 pandemic, many landlords were selling their homes for massive profits. Depending on your state, it requires a certain amount of time to have a tenant vacate before a sale can be finalized.
Though property taxes are due on your rental home each year, there are plenty of tax breaks that you can receive through being a landlord. Between mortgage interest, insurance, depreciation, and operating expenses, you’ll be able to get more tax breaks than you probably thought when first getting into investing in rental property. Landlords should work closely with their accountants to get the maximum amount of tax breaks each year.
No matter what the economy’s status is, investment rental property owners are typically safe from feeling the worst of a recession. Though homes can be difficult to purchase during a time of recession, those that have already made the investment will have plenty of potential tenants looking to rent a home and ride out the lows of the economy. Again, investment properties are long-term, so landlords usually come out on top despite economic downturns.
Commercial Investment Property Pros:
Higher Earning Potential:
You can earn money from tenants with higher earning potential due to more spots to be filled in one building. Your equity also continues to build with commercial rentals, while you enjoy the same tax breaks on interest and an appreciation in value.
Appreciation in Value:
Just like purchasing a home that you plan on living in, purchasing a rental property is also an investment that will pay dividends in the long-term. Real estate will almost always appreciate in value, allowing you to continue to make money as a property owner and will likely turn a profit when it comes time to eventually sell.
Now that you’ve seen how beneficial rental property investment can be, there are a few things that you need to be aware of that could be potential drawbacks. Before you invest in rentals, make sure that you’re fully prepared for these cons of renting out a home.
Residential Investment Property Cons:
Possible Tenant Issues:
While a potential tenant could pass every background and credit check that you can come up with and even leave a good first impression, that doesn’t mean that they’re going to be the perfect tenant. There could be some unseen problems upon first glance that a tenant didn’t disclose. Will they throw parties every night that bug the neighbors, sneak in roommates, smoke, or just make a general mess? Most investment rental property owners may not know until it’s too late. Therefore, do yourself a favor and ensure you have a tenant screening service in place to protect yourself and your investment.
If there is no tenant in your rental property, then you’re losing money every month. That’s because you still have to pay taxes and insurance while also making sure that the house is being maintained well. Even if there is a tenant, a rental property can rack up bills pretty quickly that the tenant won’t be on the hook for. From replacing water heaters to roofing, there are a lot of standard house expenses that fall on the landlord to maintain, and those bills can add up quickly.
A lot of people who get into owning investment rental properties think that once they find a tenant they can just kick back, relax and let the money flow in. However, becoming a landlord is a major time investment, especially when you’re in the process of finding a tenant and preparing the home for move-in. Once you have a tenant, you’ll have to manage billing, maintenance/repairs, and act as the point of contact for all tenants.
Change in Neighborhood Status:
Not every neighborhood in the country will see real estate values increase on a yearly basis. If the neighborhood surrounding your rental property sees crime rates rise, buildings becoming run down or one of many other factors, it can severely decrease your rental property’s value. Though rare, it’s something to keep an eye on.
Dependency on Real Estate Market:
The ideal situation for a first-time landlord is to purchase a rental property when mortgage rates are at their lowest and home prices haven’t reached their peak yet. This keeps mortgage payments low and allows the monthly rent from a tenant to pay for the mortgage. However, in a buyer’s market, there may be fewer opportunities to rent a property with more people buying homes. You’re very much tied to the real estate market on how much you can charge for rent.
Commercial Investment Property Cons:
The biggest drawback for buying investment property for commercial use is the entry price. The typical commercial property is going to be much more expensive than a residential one, which also makes it more difficult to qualify for a loan.
Commercial properties also require substantial liability insurance coverage. The larger the building and more tenants, the higher the premiums.
Finally, liquidity can be fleeting. When unloading a commercial property, it can be difficult to make a quick sale for the price that you purchased the property.
Investment property management is a big time commitment and isn’t for everybody. However, if you have the ability to purchase an investment house or a commercial property, the benefits will far outweigh the negatives in the long run. Rent is expected to grow, and if you’re able to find a good tenant, they’re more likely to become long-term renters to make it all worthwhile. The real estate market never stays the same for too long, so pouncing at the right time will be most beneficial for your bottom line.