Real Estate Investing

While residential real estate investing gets the most mainstream attention, commercial real estate investing is a major profit avenue in its own right. Make no mistake — both investment options can be very profitable and neither are easy. However, the best option for you depends on your personal preferences.

Here are the pros and cons of residential real estate:

PROS

-These units are generally easier and quicker to rent than commercial property.

-There are plenty of tax breaks available.

-Residential units are fairly easy to finance.

-With multi-unit housing, you can not only diversify your income to soften the blow if a tenant moves out, but you can also live on site and keep a closer eye on the property.

CONS

-With single-family property, one lost tenant is a significant blow to the monthly income.

-The lease terms are typically shorter, which means you spend a lot of time marketing and looking for new clients.

-These properties can be extremely time- and labor-intensive. Unless you hire a property manager, you are essentially “on call” for emergencies at any hour of the day or night.

Here are the pros and cons of commercial property:

PROS

-Longer leases mean more stable income.

-There are tax breaks here, too.

-Management requirements are much less demanding, and facilities are typically not open 24 hours.

Often, tenant will pay a “pro-rata” share of expenses like maintenance and upkeep or property taxes.

CONS

Downpayment requirements and interest rates tend to be higher for commercial financing.

Finding tenants can be a more difficult task.

Process of obtaining financing is much more complicated.

Chicago Tribune editors must read this blog! Just kidding, their article about investing in student housing actually ran one day before my recent post on the topic.

In the news article, readers learn how Illinois-based Prime Properties increased revenues eightfold over three years and landed on the Inc. 500 list of America’s fastest-growing privately held companies. All this success came after the company broadened its spectrum to include student housing.

Indeed, money hasn’t been the problem for Prime Properties. After all, the company has 1,544 beds in 56 buildings worth $60 million and plenty of investors waiting in the wings at the ready. Instead, one of Prime Properties’ true challenges has been keeping apartments full despite the turnover each fall, the article states.

Chicago-based Scion Group was having such success in the student housing market that it recently teamed with ASB Capital Management. The joint venture agreement tripled the size of Scion’s workforce and bolstered its buying power. Scion’s main challenge: time.

“We are limited far more by time than anything,” says Scion founder and CEO Rob Bronstein. “A building with 500 students is a complicated business. Literally every day, decisions need to be made by the manager and owner.”

Scion’s strategy: Plan multi-million dollar capital improvements like eco-friendly upgrades, pool tables and plasma screen televisions, with cost spread out over at least about five years. Don’t overlook community colleges and junior colleges. These schools are also interested in having student housing within close proximity, a niche that helped Scion get its start. Above all, remember that money alone does not ensure success. Experts recommend doing the research, knowing the “lay of the land,” carefully selecting tenants and studying up on management skills.

Plenty of landlords avoid renting to college students, envisioning drunken all-night boozefests, a rotating door of overnight guests and extensive property damage. But seriously, why overlook a perfectly good market because of a certain percentage of bad apples? College student housing is one of the most stable and reliable investments a person could hope for. The market is constantly being replenished with more demand so the availability of renters is never in question, no matter the condition of the housing market.

In some cases, there is simply nowhere near enough on-campus housing to meet demand and nowhere near enough money to build more. Colleges often encourage their older students to migrate off-campus, thus making room for incoming freshmen on campus. For instance, look at the University of Florida, where about 80 percent of the student body lives off campus. Nearby residential complexes can charge up to 30 percent higher rent than similar facilities farther away from campus. In fact, some parents in that area are plunking down anywhere from $125,000 to $500,000 to purchase condos for their college students, the Palm Beach Post reports. This from one area real estate agent, who gets 75 percent of his sales off student housing deals:

“I’ve shown parents a (smaller) condo, and they say, ‘My God, my child cannot share a bathroom!’ ” says Don Daley, a Coldwell Banker real-estate agent in Gainesville. “That just shows you (a change) from 30 years ago.”

The drawbacks to managing student housing: Rents can be harder to collect, students tend to be very transient and property wear and tear tends to be higher.

The bright side of managing student housing: Higher rents, property quality is less crucial and the investment is generally recession-proof.

Add to that the facts that the current generation of college students are staying in school longer and college enrollment is expected to increase 11 percent from 2003 to 2013, according to the Los Angeles Times. While it’s certainly not for the faint of heart or the exceedingly busy, student housing can be very lucrative. Be willing to invest the time needed to oversee property and protect your assets, and follow the general landlord rule of thumb - screen tenants, check backgrounds and follow your heart.