Q: Is it better to invest in apartments or in commercial real estate like single- or multi-tenant property? --Michael A.
Thanks for the great question, Michael. It's a common question investors ask as they get started in real estate, so I'm sure other readers are appreciative and are wondering the same thing!
My answer may not be exactly what you're looking for, simply because choosing to invest in commercial real estate or residential properties is really determined by the individual investor. There are pros and cons to investing in each asset class that can be weighed and considered, but there are larger factors to think about beyond the advantages and disadvantages for each type of real estate.
For example, the amount of capital you personally have available to invest, or your ability to access capital (such as getting a loan or syndicating), your net worth, knowledge of investing, available time, and the real estate market will all determine which type of real estate investment is best for you. If you're interested in learning more of the pros and cons, these articles compare commercial real estate versus residential or single-family rentals versus apartments.
In the big scheme of things, I think most large investors and companies would vote for commercial property, simply because of economies of scale and the ability to mitigate risk by having multiple streams in one investment.
Right now, the commercial sector is going through a challenging time with retail properties, hotel, and office being hit the hardest by COVID-19. This means those sectors are experiencing dips in revenues and values are decreasing because demand is down. This can be a good time to pick up properties in these asset classes at a discount, but it takes a skilled investor to know how to redevelop or revive the investment to meet current demand.
While commercial real estate (CRE) may win by popular choice, it's important to note that it's often reserved for higher-net-worth individuals or those who have extensive experience in real estate and access to capital because most CRE properties cost more and require skilled professionals to manage and operate them efficiently. This fact shouldn't deter you from focusing on or investing in commercial real estate if you find that type of investing suits you best; just know it will come with additional challenges to overcome as a newer active investor, especially if you don't have your own money to deploy.
This is one of the reasons real estate investment trusts (REITs) are such a popular choice for new investors. They allow investors to participate and invest in institutional-quality commercial properties in a diversified portfolio managed by a professional team.
Residential real estate is still a really great investment choice and definitely the more common choice for investors, especially those just getting started in real estate investing. It's an appealing choice because there are so many creative and accessible ways to get started in residential real estate, even with little money. Right now, there is huge demand for single-family homes, both for purchasing and renting, especially as buyer preferences shift in certain markets for less-populated housing options. Investors who develop, flip, or lease rental properties have a big opportunity to meet demand in a low-supply market.
As you can see, the answer isn't so simple. My suggestion is to determine what you're trying to get out of investing in real estate, how active you want to be, how much money you have available to invest, whether you're comfortable raising capital if needed, and how much time you can commit to your business. Answering those questions in addition to reviewing the pros and cons of each type of real estate will help you determine the best path for you.