Hey everybody, Joseph Gozlan with Eureka Business Group here again with you. And today we’re going to talk about choosing between residential and commercial real estate for your investments. I get that a lot. I get a lot of investors that have historically invested in small residential, single family condos, apartments, and so on, looking into quote, graduating into commercial real estate.

The And they’re asking, well, what’s the difference? How do I know if it’s right for me to move from residential to commercial as one of my investment vehicles? So let’s look at it on the residential side. What do we have? We have something that everybody understands. It’s a single house or a duplex or whatever it is for that matter, a small residential property where we put a tenant, they pay us rent, The contract is pretty simple.

The investment is most of the time, not too large and very manageable. I can get 30 year fixed mortgage, and it’s just a lot easier to handle because if I have a plumbing issue, I know how to call a plumber. If I have a roof issue, I know how to get a roofer because a lot of the time it will be the same vendors that I’ve used on my own home.

When I’m looking at commercial real estate for an investment vehicle, it’s a little bit like, what do I do here? Uh, is it the same kind of roofer? Is it the same kind of plumber? Uh, the answer is pretty much yes. A plumber is a plumber. Uh, some of them might not know how to deal with commercial. So you find the ones that say they know how to do commercial.

Uh, it’s different types of groups in commercial. Sometimes it’ll be flat roofs, DPOs and so on. Uh, but you just got to find the right vendor. It’s not that much different. The deals are larger. The deals are more complicated. And it requires a little bit more hand holding in the first few transactions than you would in residential.

And we do that a lot. We work with investors that are on their path and on their journey going from residential to commercial. And we do a lot of education, a lot of hand holding, a lot of explanations. And we extend, of course, our network of contacts, whether it’s a commercial lender or a commercial title or the vendors that can help with the inspections.

We extend all of our relationships to our client to make it a little bit easier for them. One of the things that I love about commercial real estate compared to residential real estate is I don’t have to deal with tenants and toilets. And the pain and misery I’ve been through in my life with residential tenants goes away.

It’s a different kind of clientele. You no longer work with a family or a single person or so on. You’re dealing with a business owner and they’re a little bit easier to work with. They understand the importance of paying your bills on time and making sure that your business keeps operating. A lot of the time they would have business budget and the rent would be one of the highest priority on that list.

You don’t also have to deal with In most cases, let’s talk retail. For example, if in most retail transactions, the commercial retail lease says that everything inside the unit is the responsibility of the tenant and everything outside, it might be the responsibility of the landlord and sometimes not even that.

So what does that mean? It means if the light bulbs go out, if the toilet is clogged, if the electric outlet is not working, if there was a, uh, a leak under the sink, all these things. Are the responsibility of the tenant. I don’t get the phone call. So when do I get the phone calls? Well, if I have a single tenant, triple net kind of lease, I might never get the phone call, right?

A lot of those deals are structured as don’t call me unless the building is on fire. And then, in some of those cases, the landlord might be responsible of the exterior maintenance, which means parking lot roof, if there’s any roof leak structural issues. exterior lights, but that’s about it. So it makes the management and the operation of a property a lot easier because I don’t have to deal with the insides and the small things.

I don’t get bothered with the little things. So that’s one huge benefit to commercial real estate. The commercial real estate, like I mentioned earlier, usually the transactions will be a little bit larger, which means more zeros, which means the equity I’m building every month by having a tenant pay my mortgage is larger.

I get more zeros into my net worth. Every month, the loans are a little bit different, which means I might have to go through a little bit more complicated process to get them. But if on the residential side, it’s all about my debt to income ratio. On the commercial side, it’s more focused on the investment property.

What is the property? What is, who is the tenant? How much are they paying? What are we getting in returns from the property? The heavier focus from the bank and the lender is on the property less about me as a borrower. Of course, me as a borrower is a factor in the decision, but it’s not. It’s not the only factor like it is in residential.

One more benefit that I see in commercial real estate compared to residential real estate is that I am not as easily impacted by short term sales comps. What does that mean on my property, my resident home? If I live in a house, let’s say all the houses in the street are 500, 000 and then One day there’s a new pool guy showing up and it causes a lot of havoc in the neighborhood.

Everybody gets divorced. All of a sudden, all the houses in the neighborhood are selling for 400, 000. I didn’t do anything. My house was not impacted. Yet my house value just dropped by 100, 000 because everybody on the street were selling for 400, 000. And that’s out of my control. I have nothing I can do about it.

It’s all about the comps of sales in the area within the last. 90 days, 180 days on commercial, the valuation formula is about what is the property generating. It’s NOI divided by capital. That’s what my value is. We have a video. We’ll put a link down below in the comments so you can go see how we value commercial real estate.

But that means that I have a lot more control over the valuation of my property. Than I would in residential. And these things are more long-term, a commercial real estate valuation is much broader. So the only thing I don’t have control over in the valuation of commercial real estate is the local cap rate.

What am I getting in the area in the. market for that asset class. So I don’t have control over that, but it’s spread across a lot more properties in a much wider area than just my immediate neighborhood for the immediate 90 days. So that’s why when we look at valuation of commercial real estate, we find that much more stable and much more in our control than residential.

The, we talked about earlier that we’re working with business owners. If you’re working with a retail or industrial or even office commercial real estate, even medical, Whatever asset class it is, there’s a good chance you’ll be dealing with a business owner that is more than just a mom and pop. It can be a regional, somebody that has four or five, 20 stores.

And it can also be a corporate level thing. Like I’m working with McDonald’s. I’m working with a, one of the biggest manufacturers of something in the U S and so on. So I can get a corporate guarantee, which means I sleep better at night, knowing that the guarantor of the lease is something way bigger.

Way more important and way more stable than somebody that might lose their job tomorrow and have challenges with payment. One more thing that is important to look at is the protection the tenant has. From government entities, which means on residential, we’ve all been through. We’ve seen that there was a moratorium on evictions and even if they couldn’t pay and they didn’t get a system, even if they could pay and they chose not to landlords could not evict.

Landlords could not do a lot of things and all of those restrictions were imposed on the residential side. Not on the commercial side. Same thing with rent control. The White House right now, 2024, if you go look at the whitehouse. gov, there are rent control initiatives that they are trying to push. And again, all those limitations are limited to residential properties on the commercial side.

They don’t have those restrictions. They don’t have those government protections. They don’t have those things where they tell the landlord. Well, you cannot do this. You cannot do that, which means you have a lot more control over your property and a lot less risk dealing with such restriction coming from the outside, blocking you from being able to handle your business.

That also extends into the little bit less fun part of own real estate is evicted in the tenant with residential. You have to go through a certain process, which is set in the law. You have to go through the court system. You have to go through the marshal to get them out. You have to give them proper notices and get a judge to sign off on the eviction in many of the commercial real estate contracts.

We have. They don’t have that process. They don’t have that protection. It literally says if you don’t pay your rent, I can lock you out. And then if you still don’t pay your rent, I can have you evicted and removed from the property within a very short period of time. Everybody in their own contracts.

That’s going to defer. Obviously, we’re talking about Texas and the contracts that we’re using in Texas. Some other states might be different. Make sure you always look at your local state and local government. Restrictions so you’ll know how to handle your business Obviously if you haven’t picked up so far on the common theme of this video, we heavily prefer commercial estate over residential Not that it’s bad if you’re starting and you don’t have a lot to invest in residential real estate is definitely a great way to start.

But as you get larger, if the choice is between having 10 or 15 residential properties versus 1 or 2 larger commercial properties. We can definitely talk and explain to you what we feel is better to do commercial properties. We touched on a few points in this video, but there is a lot more. And we invite everybody to ask questions in the comments below.

And we invite everybody to reach out to us directly. We always share our contact information in the comments and in the video description. So feel free to reach out to us, call, text, email. We’re happy to have those conversations with investors every day. So that’s about it. Hope it was hopeful. My name is Joseph.

I’m with Eureka Business Group. We specialize in commercial real estate and we cater to the Dallas Fort Worth Metroplex in Texas. We also do commercial property management, which means we understand how these properties operate. And if there’s any way we can bring value, please don’t hesitate to reach out to us.

Thank you and we’ll see you in the next video.