At over $20 trillion in size, the residential real estate market has a substantial influence on the U.S. economy. In fact, the single-family home market is several times larger than the entire commercial real estate industry.
But investors often ask whether residential real estate investing is better than investing in commercial real estate?
The answer is – it depends.
Each investor has a different skill set as well as vastly different financial resources. In addition, investors have varying backgrounds and interests. Money can be made with both. The investor needs to do what works best for them. Residential real estate investing may be the best choice for many, but not all investors.
There are many advocates of commercial real estate investing, but there are a couple of reasons that I generally favor residential real estate investing over commercial real estate.
First of all, an important factor that distinguishes residential real estate investing as compared to investing in commercial real estate is that the pricing of single-family homes is often driven by inefficient information. This means that pricing and market data is incorporated at a slower rate into the marketplace as compared to commercial real estate. This can enable the astute investor to better analyze price movements and allow for improved market forecasting.
Residential real estate investing is largely dominated by single-family residences that have fewer sophisticated buyers and sellers. With commercial properties, there are many more institutional investors with extensive market experience. Accordingly, locating a good deal may be much more difficult in commercial real estate as compared to residential real estate. Investing in commercial real estate is generally dominated by skilled professionals, who have more financial resources than the individual investor.
In addition, the demand for residential real estate continues to increase. This demand has been fueled by many factors, including population growth and baby boomers. The population is growing while available land remains relatively constant.
The Baby Boomers, which consists of people born between 1946 and 1964, are reaching their peak earnings age and have more disposable income than any previous generation. This population, measured at approximately 80 million people, continues to increase demand for housing (including second homes) in cities that offer many desirable amenities including affordable health care, a favorable climate and cultural and recreational activities.
Now I’m not saying that money cannot be made in commercial real estate. But for the average investor, residential real estate investing is generally a better investment vehicle. The investor needs to look past the current residential real estate slowdown and realize that in certain markets now is a great time to be investing in residential real estate.