Is it worth the hassle to buy commercial real estate over SFH?
I'm looking to diversify my real estate portfolio out of only single family homes. Started looking into multi family 5+ or retail but the entire process is such a headache. I've talked to my bank about it and they said I needed 30% down, environmental reports, inspection reports, appraisals, they want me to set up a holdings company or some corporation, and a bunch more hassles. On top of all of that, the interest rate is not even comparable to residential.

Is it really worth going through all that hassle? It seems like the return wouldn't justify all the work it takes to buy the property. Is there any good reason to choose commercial when buying a few single family homes is much easier?
[{"id": "fnzttr9", "text": "Because commercial tenants don't break the toilet, not tell you, and then steal your appliances.\n\nBecause commercial investments ARE a pain in the ass to set up, meaning you aren't competing against house flippers and real investors who took a three-hour seminar from Instagram. By increasing the entry restrictions you are limiting competition.", "replies": [{"id": "fo0s6o1", "text": "Commercial evictions are way simpler.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fnzvk5l", "text": "Sounds like you need to do a lot more \"looking into\" to understand 1) why all those things are needed 2) why a holding company is important 3) the benefits of investing in CRE 4) Pretty much the entire sector. Honestly sounds like you are more suited towards SFH", "replies": [], "depth": 1}, {"id": "fnzvnrp", "text": "The more difficult it is to get in, the more you can differentiate yourself when it comes to buying/selling", "replies": [], "depth": 1}, {"id": "fnzwo7s", "text": "Managing single-family house tenants is much easier than multifamily tenants, especially in big multifamily buildings. [A local single-family house investor where I'm from lied about his credentials and got other investors to give him $3.5 million to buy 3 apartment buildings which he then ran into the ground because of his management incompetence](https://triad-city-beat.com/as-apartments-fall-into-disrepair-owner-moves-to-next-investment/?amp). It's one thing to find good commercial deals and another to be able to manage them so they continue to be good deals when you own them.", "replies": [{"id": "fnzww2k", "text": "Managing 50 tenants in the same apartment complex is harder than managing 50 tenants in different houses?", "replies": [{"id": "fnzxgr6", "text": "dude you don't understand him,\n\n&amp;#x200B;\n\ninstead of managing one roof on one complex, he wants to drive to 50 roofs all over town and do maintenance, that way he can do more tax write off \n\n&amp;#x200B;\n\n/s", "replies": [{"id": "fnzxm9z", "text": "You get a better deal when you pay someone to mow 50 yards compared to just 1 yard too", "replies": [], "depth": 4}], "depth": 3}, {"id": "fnzzt2y", "text": "Yes, in my opinion. I owned a 184- unit apartment complex and it was a hassle to deal with, even with a full-time management company in place. It was tough to not only find a decent deal but even tougher to sell and I still don't have all my money back since I sold with a seller 2nd mortgage. Also, [when your tenants are close together like in multifamily buildings, it's much easier for them to conspire and cause trouble than if they live in different houses](https://m.facebook.com/story.php?story_fbid=10158394934822052&amp;id=783402051). Also it's a lot easier to get financing for single-family houses or even buy them \"subject to\" so you can use the financing already in place. I now stay with single-family houses.", "replies": [{"id": "fo000eq", "text": "Go buy 184 houses and manage those now.  Tell me which is harder.", "replies": [{"id": "fo00l71", "text": "I'd still buy the individual houses. Here in SC, much of the hassles of SFH rentals can be taken care of in the lease agreement. I manage my houses mainly from home watching TV sitting in my underwear. I much prefer this to when I owned that apartment complex. But feel free to discover for yourself which is preferable, SFH or multifamily.", "replies": [{"id": "fo00omu", "text": "I prefer not to deal with residential tenants at all.", "replies": [{"id": "fo01fqz", "text": "I have friends who sold their apartment buildings and started buying retail strip crew centers from Columbia, SC to Greenville. Our state stopped all evictions and even ongoing eviction proceedings until May 1. Their tenants are now defaulting because of the COVID-19 pandemic and drastic drops in retail business. I've had residential defaults as well but my lease keeps them reasonably in control. Nobody could have predicted this present pandemic and its accompanying issues, but I still prefer residential over commercial tenants given the way SC allows us to handle them.", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "fo0352p", "text": "I agree. We manage our own with a 5.7% cap and get excellent deals via 1031 exchange.", "replies": [{"id": "fo1it6w", "text": "&gt;I agree. We manage our own with a 5.7% cap and get excellent deals via 1031 exchange\n\nWhat does this mean?", "replies": [{"id": "fo1ljvb", "text": "\nWhat is a 1031 exchange and how does it work?\nA 1031 exchange gets its name from Section 1031 of the U.S. Internal Revenue Code, which allows you to avoid paying capital gains taxes when you sell an investment property and reinvest the proceeds from the sale within certain time limits in a property or properties of like kind and equal or greater value.\n\n\nCapitalization rate, commonly known as cap rate, is a rate that helps in evaluating a real estate investment. Cap rate = Net operating income / Current market value (Sales price) of the asset. Capitalization rate shows the potential or actual rate of return on the real estate investment.", "replies": [{"id": "fo3s538", "text": "I meant what information were you trying to convey in respects to the post?   \n\nAll I see if that you pay $17.54 per possible dollar of NOI.", "replies": [{"id": "fo3urqc", "text": "The implication was that self managing allows for significant savings over traditional property management fees.", "replies": [{"id": "fo3vkuz", "text": "Nothing wrong with self managing if you have the skill but that doesn't change the cap rate or have anything to do with a 1031 exchange.", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fo0114q", "text": "What's your IRR target? MOIC? Value-add or income... Have you looked at the T12 NOI?", "replies": [], "depth": 1}, {"id": "fo01px5", "text": "It's definitely a market dependent proposition.  You might have more overhead managing 5 properties that are a few miles away from eachother vs. 1 single building with 5 tenants.  If you are in a market with low rents your management fees (either by paying someone else or your own efforts) might wipe your any income you could potentially make.  Essentially buying yourself a job.  Compared with MF where you'll have lower management fees.\n\nIn SoCal SFR you might not even recoup your taxes on higher end properties buying and renting them.  Even middle class neighborhoods i'm in you would be at appx 2.5-3% cap rate when you can get more like 4-4.5% in MF (pre-covid #'s).\n\nAt the end of the day:\n\n1. Look @ your cap rate / returns after property taxes, insurance, and other costs taken into account.\n2. Don't assume your own labor is worthless.\n3. Make sure you consider maintenance and management costs.\n4. Can / will your tenants pay rent?\n\nYou can make money from any asset class or property type.", "replies": [{"id": "fo0eklo", "text": "&gt;  Even middle class neighborhoods i'm in you would be at appx 2.5-3% cap rate when you can get more like 4-4.5% in MF\n\nThat just means MF is in less demand than SFH.  I'd prefer higher demand,", "replies": [], "depth": 2}], "depth": 1}, {"id": "fo054ic", "text": "What part of the country are you in?  I'm a big fan of \"office\" investments since the turnover and wear and tear is so much less than retail, industrial, residential, etc.  Setting up an LLC is absolutely the right thing to do and isn't difficult.  30% is steep, I'd suggest chatting with other lenders.", "replies": [{"id": "fo06tqi", "text": "TIs and LCs can be massive...much more than residential turnover. Not to mention the downtime to find a new tenant if your office user bails out. Office can be a great investment, but lower turnover costs than multi is just flat wrong.", "replies": [{"id": "fo07356", "text": "Just my opinion, I'd rather invest in offices than the other :)", "replies": [{"id": "fo09lbi", "text": "Re-tenanting and maintenance costs is a matter of cost, not opinion.", "replies": [{"id": "fo0blob", "text": "&gt; Re-tenanting and maintenance costs is a matter of cost, not opinion.\n\nAnd each new tenant is a new negotiation.  How often do you as a landlord foot the bill for a new tenant's TI?  Generally it's a portion of the buildout, not the whole thing, and if it is the whole thing, it's a REALLY long-term lease.  Every deal is a negotiation.  Plus in a commercial tenancy, it's generally NNN, so all the costs are passed on to the tenant anyway.  I'll still stick to my opinion that commercial office investments are the lowest impact from a turnover and wear and tear investment.", "replies": [{"id": "fo2t738", "text": "Speaking to this: cap rates are generally notably higher in office for many reasons but one could argue to partially compensate for this (100-150+ basis points). TI/LC\u2019s vary dramatically market to market but a good amount in a healthy market is usually $3-3.50/FT per year when averaged over a 10-15 year hold on markets w 5 year term. Lease structures vary even more dramatically, if you can find something in a NNN market with a decent return, it\u2019s *infinitely* better than multifamily of any scale from an ownership and asset management standpoint. \n\nSource: own all three, SFH rentals, multifamily, and office buildings.", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fo05pwd", "text": "Short answer - yes, there is much more upside in the commercial world and methods to limit your downside. You also must have a desire to take on larger/more complex projects and the hassles you describe are all to your benefit and measures to CYA. It is a hassle but how can a lender expect you to have the acumen to pull this off if you cannot go through the administrative headache of obtaining a loan.\n\nAlso, you must consider that if a lender is going to offer non-recourse financing (which you should look into if you are not), of course there are more hoops to jump through.", "replies": [], "depth": 1}, {"id": "fo09ft7", "text": "If you aren\u2019t doing all of those things for your SFH then it will bite you in the ass eventually.", "replies": [], "depth": 1}, {"id": "fo0aejo", "text": "Unless it's a superior return, don't do it. For me it all boils down to the specific deal, not the asset type.", "replies": [], "depth": 1}, {"id": "fo0l6hp", "text": "SFH are valued on their most recent sales comparables.  It is therefore difficult to get creative and to increase the value sharply.  Commercial is a different beast.  It will be valued based on the cash flows of the property.  This allows you to get very creative with increasing the value. I would highly recommend you read some books on the subject before you jump in.\n\nThe economies of scales are also a huge factor that elevates commercial.  Most developers and property owners say the same amount of work goes into the process of buying 5 units or 100 units and operating them.  By that logic, if you can get into bigger projects you are going to get a better rate of return on your time and potentially the project.", "replies": [{"id": "fo2cq1t", "text": "&gt;SFH are valued on their most recent sales comparables.\n\nThat is the same for commercial NOI's, recent sales comparables.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fo0mi5w", "text": "It depends if you\u2019re getting a good deal of not. I got a 7 unit building for $390k, 20% down and a $500 environmental report. It\u2019s by far my favorite building among the singles, duplexes, and triplexes I own - which I pay ~$200k for each.", "replies": [], "depth": 1}, {"id": "fo0v13b", "text": "Single family is much more work than multi-family.", "replies": [], "depth": 1}, {"id": "fo0vmoq", "text": "Usually yes. Right now lending is a cluster fuck. Commercial loans are always very annoying, but they underwrite based off of cashflow.  \n\nEven if its for one property I would say yes. But the more you go down the commercial path the more lucrative it is. You can scale faster or collect more units to spread your risk. All good things", "replies": [], "depth": 1}, {"id": "fo17yvz", "text": "What anyone is familiar with will always seem like less of a hassle compared to the unfamiliar.\n\nSFH has its own share of hassles, annoyances, and inconveniences. If that\u2019s your lane, nothing wrong with staying in it. \n\nCRE is less . . . emotional? People view their homes as extensions of themselves, and can get *very emotional* about the littlest issues.", "replies": [], "depth": 1}, {"id": "fo2cbai", "text": "What are you comparing?  I'd rather have 5 one million dollar SFH's  in a HCOL area vs. one $5,000,000 commercial property in any area.  I would take the $5,000,000 commercial over fifty $50,000 SFH's in a LCOL area.\n\nProfitability will depend more on the specific asset than classification.", "replies": [], "depth": 1}]