A Guide to Residential vs. Commercial Real Estate in Florida
Florida is the third-largest state in the US by population. With an expected 845 new residents each day by 2025, purchasing real estate in Florida is one of the most innovative ways to spend your money in 2022. From Downtown Miami to the hundreds of miles of beaches, Florida boasts hundreds of investment opportunities.
If you’re considering pooling your money into Florida’s real estate scene, you need to ensure you make the right decision. After all, it’s one of the most expensive transactions you will ever make. To help you make your decision, read our guide.
What Are the Differences Between Residential and Commercial Real Estate?
Residential real estate opportunities are usually single-family homes, townhouses, condos, or duplex structures. Commercial real estate refers to multi-family dwellings (e.g., apartment blocks), industrial, office, or retail properties. Typically, investors rent commercial properties to businesses. The transactions are more extensive than residential, but they are more lucrative investments.
Costs of Residential Property
Generally speaking, Florida investors rent out their investment for profit. However, many real estate investors find their profits hindered by costs. Depending on the type of property you purchase, you might find yourself paying significant expenses.
Rental properties must adhere to all sorts of regulations. For example, if you’re purchasing with a mortgage, the lender will require a deposit. Plus, while there are no requirements for landlord insurance, it’s a good idea to protect yourself and your investment. Yet, it can eat away at your profit margin.
Moreover, renting a residential property requires far more maintenance. Depending on your tenants, you might have to make costly repairs and replacements more often than you would like. On average, landlords find themselves paying about half of their gross annual income on operating expenses.
As if this wasn’t enough—residential properties are less secure. Tenants might stay a year or ten, but the turnover is far higher than commercial real estate. Consider how you will manage costs when your property is empty.
Location Is Everything
Fortunately, the good thing about buying real estate in Florida is that it is a hugely populous state. You’re unlikely to find yourself with an empty property for any length of time. However, choosing the perfect location is crucial to maximizing your profit potential.
Quite simply, the more demand for the area, the more expensive the property. While upfront costs could be huge, it translates to a higher rental yield. Palm Beach, Bal Harbour, and Pinecrest are some of the most affluent Florida neighborhoods. However, the trick is to purchase a relatively affordable residential home in an up-and-coming area.
Neighborhoods such as Kissimmee, South Sarasota, and East Venice are all experiencing soaring capital growth. It’s vital you research your options. Just because a property sits at the heart of Downtown Miami, will it make as much money overall as some of the lesser-known areas in Florida?
Additionally, remember who your target market is. If you’re renting to families, ensure your property is near good schools and other amenities. However, if you’re targeting younger individuals, find a central property.
Diversify Your Portfolio
The optimum way to make money on residential real estate investments is to broaden and diversify your portfolio. One rental property might offer a nice bit of pocket money. However, spreading your investment costs throughout multiple properties is the best way to maximize profits. It can take time to build up a residential real estate portfolio if you're just starting out.
A diverse portfolio aims to mitigate risk. Say one neighborhood in Florida suffered severely in floods; you’ll lose a hefty sum paying for renovations and repairs. Moreover, in the time it takes to rebuild your investment, the home will sit empty. You’ll earn no income. Yet, if just one of five of your assets is damaged, the hit will be less catastrophic.
Steadier Income With Commercial real estate
Residential contracts tend to last up to 12 months or run on a rolling monthly basis. While this provides flexibility for the tenant, it means less security for the landlord. Commercial real estates provide steadier income as tenants generally have longer-lasting, more robust agreements. Businesses want to establish themselves in one area—they’re more likely to stick around.
Can You Get Finance?
On the other hand, commercial real estate requires a different kind of loan agreement. It’s more challenging to get approval for a commercial real estate loan right off the bat because they are larger transactions.
If you’re eager to begin investing in commercial real estate, it’s best to build up your portfolio with residential properties. You’ll gain experience and improve your chances with commercial real estate lenders. However, if you already own a few residential properties and are keen to diversify, commercial real estate could be the perfect next step.