When investors are considering whether to put their money into multi-family or commercial and retail real estate, there are many factors they must take into account. Aaron Gorin of Cedar Grove Partners LLC in Woodmere, New York, breaks down the process of choosing which type of real estate to invest in and lays out the risks and benefits of each.
Multi-Family Versus Commercial Real Estate
Multi-family real estate, or residential properties with two or more units, falls under the umbrella of commercial real estate. This investment is often secure because rental vacancies are low and prices are on the rise.
In an economy where it is difficult to find new rentals at the right price point, it is less likely that renters will move. During times of great economic growth, it may be better to steer away from multifamily real estate because more people will be buying their own homes and moving out of the rental market.
Commercial real estate is a better investment when business fortunes are high. Businesses with increasing sales may wish to expand and may need more room to do so. Investors must carefully consider lease prices and vacancy rates in their local area before making a purchase.
Risks and Benefits
Buying commercial real estate is thought to be a bigger risk than buying multifamily properties. The market for commercial real estate is more competitive, with the location, amenities, and the potential labor pool in the area making a difference in price.
If an investor buys a subpar property, they may be stuck holding it vacant for an extended period of time. Vacant real estate is a hedge against better economic times, but if the property does not have the features which make it attractive to potential tenants, it will be left by the wayside.
On the other hand, buying less desirable residential real estate can still be a solid investment. Aaron Gorin says that while it is necessary to set rents lower, a multi-family property owner can buy more buildings for a lower cost. They can choose to put money into the property to bring it up to local standards, enhancing the potential lease price.
One benefit of commercial real estate versus residential multi-family properties is that the lease terms for commercial real estate are longer. While residential properties may turn over annually, causing the investor to put money into repairs and enhancements, commercial and retail properties can stay untouched for a longer period of time.
Ways to Maximize Investment
One of the best ways to maximize investment is to make improvements in the property. That will raise the potential rent or lease price that the owner can charge. Keeping properties in good repair enables them to compete favorably in the local market. In the case of residential properties, keeping them up to standard also means that tenants will stay longer.
Making sure that the basics like the roof are up to date will prevent future damages from occurring. Adding amenities like appliances and washer-dryer hookups will make a property more attractive to potential tenants. Finally, putting in landscaping or other elements of curb appeal will drive up the prices.
Final Thoughts
Aaron Gorin of Cedar Grove Partners LLC encourages investors to explore both types of real estate. Since the real estate market is so localized, it is difficult to say which type of real estate is a better investment. Residential multi-family properties and commercial properties can each be a valuable addition to any investor’s portfolio.
Taking local economic indicators into consideration will enable a property owner to set the lease price at the most beneficial level. Helping a property compete with others on the market will also lead to better returns on investment.
