In this article, I will show you why residential real estate investing may not be your best option to grow your wealth. Here are the reasons I believe this to be true.

1. Distress Financing Options. I refer to the financing options as distress financing because of the factors associated with the available options. In order to take advantage of the distress situation, you must be able to close fast. To be able to close fast, you must use short term financing including "Hard Money Loans", Credit Cards and lines of credit. Apart from being short term, these all have one thing in common – they are expensive. The fact that they are short term means you still have to solve the long term issue unless you're going to sell the property fast. The other problem is that these properties have no income and so are classified as "non-performing assets" which further limits you financing options and require a lot of "creative financing".
   
2. In order to rehab the property, you need to secure yet more financing. This is an even greater challenge than acquisition financing and can be the difference between major success and miserable failure. Rehab loans are not only hard to get but represent additional debt beyond the costs of acquisition. Renovation Distress
   
   
3. You have to always be aware of the Holding Costs.  During the rehab or renovation period, the loan still has to be paid and in most cases, you will incur a negative cash flow if you do not request a moratorium on payments.  If your rehab takes longer than expected, that eats into the profit that you're looking to make from the deal and we all know that things never go the way you expect them to go.
   
   
4. Residential Real Estate properties are "ZONED" for personal use. What does this mean for you? It means that once you continue to buy residential zoned properties, you will always have to "qualify" for and "guarantee" the loans because the properties are "designed and zoned for personal use" . Personal use properties will always require personal qualifying and personal guarantees regardless of what you do with the property because the loans are underwritten according to residential lending and underwriting guidelines. [This means that no more than 28 percent of your total monthly income (from all sources and before taxes) can go toward housing, and no more than 36 percent of your monthly income can go toward your total monthly debt (this includes your mortgage payment). The debt they look at includes any longer term loans like car loans, student loans, credit cards, or any other loans that will take a while to pay off.] The only way to eliminate this limitation is to purchase properties that zoned for other than residential use.
   
   
5. Residential property values are subjective. Three appraisers can give you three different values for the same property. This is because the methods used to determine the value of a house differ according to who does the valuation. Tax assessors use millage rates, Realtors use comparable sales, Insurance companies use replacement cost approach. This results in a subjective value.  Appraisers tend to use the comparables method but that means that the value of residential property  is dependent upon the latest selling prices of similar properties within a certain proximity of the property being appraised.

If not residential properties, then what ? If you asked that question, that would be a good question and here is the answer – Buy Commercial Properties.  The reasons follow:

1. Properties are zoned commercial and therefore residential financing guidelines and limits do not apply meaning no credit, no qualifying, no personal guarantees.
   
   
2. Due to the fact that commercial properties produce income, they are considered "Performing Assets" and therefore values are not subjective. They can be objectively calculated according to the income that they produce.
   
   
3. Commercial properties typically are much larger in size and scale than residential properties which means, the return is much larger for the same level of effort. Where it might take you 20 to 40 transactions to accumulate a million dollars in profit doing residential transactions, it will typically take 1 to 5 commercial transactions.
   
   
4. Commercial transactions are easier to do and much more profitable.

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