Let’s face it, commercial real estate has a lot of advantages over residential real estate. First and foremost, you are dealing with a type of tenant who is more eager to pay on time every time. After all, the commercial tenant’s continued income depends on you not kicking his or her business out. Second, the commercial tenant has a lot more at stake and would be more than accommodating whenever issues arise. Third, commercial tenants normally have more capital and this gives you peace of mind in terms of collecting the rent.
Given all the advantages above, why would real estate investors even think of venturing into residential rentals? While it would be nice to start at the level of commercial real estate, not all real estate investors have enough capital to start at that level of the game. Also, many investors appreciate the fact that there is a higher demand for residential rentals. Finally, some investors are looking for a better way to keep pace with rent increases in a specific rental area. The guide below walks you through these advantages of residential real estate rental property.
There are more consumers than business owners. There are more people looking for a place to live than businesses looking for a location to do business from. Put these two factors together and you can see that there is a higher demand for residential rental properties. Since the demand is higher, the market is bigger and the opportunities to meet this market’s needs are more prevalent.
As mentioned above, even though residential rentals do have a lot of things going against them, the mere fact that there is so much demand for them helps push many investors off the fence in terms of investment choice. The problem with the higher demand is that while there is a lot more demand, the margins are also lower. Many investors offset this lower return by increasing the volume of rental units they own.
Lower Initial Capital Required
Let’s face it-not everyone has the cash to lay out on a decent-sized commercial property in a nice location that is sure to attract quality commercial tenants. Either you are faced with smaller odd lot commercial spaces with low rents or large complexes that come with a nasty price tag. Residential rental properties, on the other hand, require less money than most commercial properties.
There is also a large and diverse range of choices. You can pick out a residential package that best fits your budget. You normally can’t do this with commercial properties unless you assume lots of debt or take on shareholders or partners.
Faster Turnover Means More Frequent Rent Increases
One key advantage residential rentals have is the fact that the life of an average lease is shorter than many commercial leases. It is not unheard of for commercial leases to reach into five or ten-year terms. For residential rentals, you can go month to month if you’d like. Why is this good news for you?
The value of your rent must depend on the underlying value of the land and the rental demand in the area where your property is located. If you lock in residents for a long period of time and they don’t leave, you are locked in at a low rental value-even if you factor escalation costs and inflation adjustments.
Simply put, long residential leases leave a lot of money on the table. By using shorter leases, you can recalculate leases and your income keeps pace with the property’s rent demand level and land values. You can’t do this with retail leases that span five to ten or fifteen years.