You have to look at the CAPITALIZATION RATE = annual operating income/cost of investment or value
of each investment in a case by case study.
Within commercial properties, there's a big variety of business types...do you want to be an
absentee owner with a triple net lease?
Or do you want to live near your property and be a property manager of your residential property or have the expense of
hiring a property manger and have the CAP RATE decrease somewhat.
Does the property need repairs...this is an expense that can have an effect on the CAP RATE.
If you're looking into residential real estate, you're most likely going to look at purchasing a condo built after June 1979 (with some exceptions for periods around 1996) that is both exempt from rent control and from eviction control. Most of these are built in the Soma and South Beach areas. One-bedrooms will start in the $450-500,000 range with two bedrooms starting in the $600-650,000 range depending. Your goal would be to collect the difference between your carrying costs and rent you receive. Remember you may be able to deduct such items as business losses if you're in the negative each month, homeowner association fees, and many other related assessments or carrying costs including mortgage interest and mortgage insurance premiums. The trick here is to watch out for low down payment purchases. Many lenders for investment properties Require larger down payments if you are an absentee owner. Special programs like the FHA or Census tract loans for example may prohibit you from renting your property out for certain period of time.
If you're looking for commercial property The choice you have now is rather limited. Most of the listings on the market in the Soma area, for example, are large warehouse buildings. Occasionally you'll find a small office space or retail space that is marginally affordable. A search of LoopNet shows that the other types of properties out there are office spaces, retail spaces, and businesses for sale. For these types of opportunities, your general time horizon for most lease relationships should be at least 3 to 5 years. Further, unlike residential real estate, commercial real estate is deemed to be transacted between two relatively sophisticated parties. In other words, lawyers are likely to be involved in negotiations and document preparation at some point.
Your flexibility, however, is greater. You can get a triple net lease where your tenant pays for almost everything. You could get leases where you pay for utilities and provide amenities. How about the situations where the tenant improves the property in exchange for rental credit? Plus, unlike residential real estate with applicable rent and eviction control laws, commercial real estate is much more premised and derivative from contracts executed by individual parties.
In the end, if you're saying that you're unable to secure a loan but instead have cash to purchase something, residential real estate is likely to provide a quicker, potentially smaller, return because most people have their own furniture and are not going to change the space any substantial manner as a commercial tenant would expect to do in most cases. And last, if you're thinking about doing a flipper with cheaply priced fixer properties think again. Fixer properties are also quite expensive in the city as well. The ones with reduced prices often have legacy tenant issues that may require additional cash to transition tenants out of a particular property if it's even at all possible. If you're looking for foreclosed homes, then you would have to have a fair amount of money. Usually the formula works like this: properties purchased for $200 or $300 a square foot in cash and $200 $300 is required for renovations with the hope of selling for more than $500 or $600 per square foot. The issue here is being able to balance the time it takes to bring a property onto the market while also holding the property for longer than 90 days in order to have fully marketable title upon which someone could borrow against.
One is not more profitable than the other. You will likely spend a good deal of time on this investment even if you have it professionally managed so think about which would be more enjoyable for you...commercial tenants or residential tenants.
With income producing real estate you get paid two ways, one is in appreciation and the other is in monthly rent.
Those two means of getting paid will vary widely depending on the quality of investment or said another way depending on the risk level.
And what type of commercial real estate? Triple net leases? Apartment buildings, strip malls?
It would help someone to answer if you were more specific.