Investing in real estate is a great way to improve your financial outlook. House renovation and flipping in particular have become increasingly popular due to DIY television shows. In the wake of that attention, a plethora of self-anointed real estate gurus have come down from their mountains of cash to supposedly “give back” and guide the noob house flipper.
The Pitfalls of House Flipping
But investors beware. First of all, common sense should prevail in all decisions regarding money, no matter what the opportunity. Many real estate gurus would have you believe that you should throw out the play book when it comes to seizing a “once in a lifetime, never before seen in history chance to make a killing in real estate.” Hang on to your wallet, and put that credit card away. House flipping isn’t nearly as easy or straightforward—or guaranteed—as some people claim. Here are just some pitfalls of house flipping:
1. If you’re not a real estate agent, you’ll need to pay commission on every sale.
2. The best deals are at auctions, where you won’t be able to get a proper inspection before handing over your hard-earned money.
3. Unless you do all the renovation work yourself, a) it’s hard to come up with the cash up front to pay workers and b) reno costs usually cut deep into your profits. So much so that in the end all that effort may not be worth it.
4. While you wait for a picky home buyer to actually come through with an offer, you’re bleeding money paying taxes, grounds maintenance, utilities, insurance and mortgage premiums.
5. Surplus inventory in the market (which you can’t control) can make your house less valuable no matter how awesome you renovated it.
The Pitfalls of Residential Real Estate
So, what about buying and holding, you ask? Good question. Buying and holding residential real estate for rental income is certainly an option. There are many successful residential landlords out there. If you decide to go this route, however, be aware that here, again, there are pitfalls that you won’t hear about on infomercials for systems that teach you about buying with “no money down” and other gimmicks. Most of the genuine residential real estate landlords work very hard seven days a week, and few of them sit on their yachts all day sipping daiquiris. Here are a handful of pitfalls involved with being a residential real estate landlord.
1. Renters can destroy all the work you put into fixing up your rental house. You won’t find out about it until a year later, when the lease is up.
2. Renters can and will do just about anything in your property, including selling and/or using drugs, breeding puppies, and engaging in worse criminal activities that you don’t even want to know about.
3. Unless you’re handy with HVAC systems, you’ll rack up a lot more in repair and maintenance costs than you ever thought possible.
4. If you do all the repairs yourself, you should be prepared to make 4 a.m. house calls to unclog toilets.
5. When your renters disrupt the neighbors, you’ll be the one hearing from the neighborhood or the police.
Are you starting to get the HD picture of what being a residential landlord is really like? There’s a saying that the number of toilets you have in your properties is proportional to the amount of repair calls you’ll receive. Being a residential landlord suits some people, but if these scenarios don’t appeal to you, consider this other option instead.
Why Commercial Real Estate Investing is a Better Option
Commercial real estate investing is a better option for inexperienced real estate investors. It’s also the preferred real estate investment vehicle for those seeking rental income as a side business rather than as a full-time job. If you have other pursuits that take priority in your life, such as a career, education, travel or family, commercial real estate investing might be ideal for your goals. Here are some ways in which commercial real estate investing is appealing:
1. Commercial properties often have single lavatories for employees (for a retail store, office, bank, warehouse, etc.)
2. Commercial properties renters are less likely to drop behind on payments because their business is dependent on that rented space.
3. Commercial properties are often self-advertising. Spots in a strip mall, for instance, already have other commercial tenants advertising for traffic.
4. Commercial properties typically have fewer state and federal restrictions for landlords to adhere to.
5. Commercial properties aren’t commonly destroyed by tenants.
6. Commercial properties aren’t commonly used for nefarious or illegal purposes.
7. You can often visit and check on your commercial property investment if you lease to a retail store.
What Kinds of Commercial Property Make Good Investments?
There are several different kinds of commercial property, and they all can make good investments, depending on your personal preference, capital and goals. Here are some common ones to consider when investing in commercial real estate:
1. Parking garages and lots – Garages are easy as far as landlord maintenance. You might have to pay for signage or painting, but very little else.
2. Laundromats – This property type will have almost daily maintenance costs, and large utility bills, but you won’t have to interact with tenants.
3. Business bays – More people are going into business for themselves, and they need small bays to do manufacturing on a small scale. These bays can be big money makers for a landlord.
4. Self-storage units – This property type almost runs itself, and there’s little to no plumbing involved.
5. Strip mall units – These commercial units are usually relatively inexpensive to purchase, yet can yield reliable rental income for years.
By now, you can see that commercial real estate investing is more appealing for investors who prefer a hands-off approach. Be aware that buying and holding commercial property is a steady, long-term path toward success that could form an economically sound part of your overall investment strategy.