I don’t need to tell you that there are a lot of different ways to make money in real estate investing. And as you start getting more successful at house flipping, you’re probably going to start looking into different avenues to diversify your portfolio and make more passive income in real estate, along with your house flips. As you learn about some of the options available to you, you might get interested in commercial real estate (CRE) investing.
Now, CRE investing can be really lucrative, but it can also be a huge nightmare. There’s a reason, over my long career in real estate investing, that I’ve stuck to house flipping and rental real estate investments. While you might want to consider CRE at some point, there are a few reasons to stick to residential fix-and-flip properties.
House Flipping Is Recession-Proof – CRE Is Not
According to some financial experts, we’re due for another recession any day now. Unlike almost any other form of investing, house flipping is recession-proof. In hard economic times, more people find themselves in financial distress and willing to sell their homes for cash. At the same time, others are looking for good deals on homes for their families, and house flippers can provide those.
That’s not the case for commercial real estate. CRE investments are almost always directly tied to local and national economic performance. If another recession occurs, a new retail or entertainment development could go under before it’s even completed.
Vacancies Can Be Long and Devastating
If you won a commercial property and you have a current tenant, their lease could go on for 10, 15, or 20 years (or even longer). When their lease is up, though, it can be difficult to find another tenant. Thus, you’ll have to consider whether you can afford to maintain the property until you get a new tenant or if you’ll have to sell it (potentially at a loss) to make ends meet.
Commercial Markets Are Really Volatile
Have you ever watched as a new shopping development went in just down the road from an older one? After the new one opens, the old one loses more and more tenants, and fewer and fewer people visit it. Before long, the owners are practically begging new investors to buy it. This is just one way that the CRE market can be volatile and unpredictable. You never know where the next trendy area or development will be, or if your development will benefit from it or suffer because of it.
Financing Can Be a Problem
All that is assuming that you’re able to finance a CRE property in the first place. I have the best moneyman in the business working with me, and if I told him I needed the kind of cash it takes to buy most commercial properties today, I don’t know what he’d say to me.
When you’re borrowing enough capital to pay for a flip house and its rehab work, finding funding really isn’t that hard. Finding funding to rehab a shopping development, on the other hand, especially in an area that may or may not ever have a boom again, can be next to impossible.
Keep these things in mind as you start to spread your real estate investing wings. There are other ways besides flipping houses to make great money in real estate, but some are definitely more stable than others.