Many new investors are drawn to residential real estate because it feels familiar. Most people have either rented or bought a property.
So naturally, when new investors hear about commercial real estate, they assume it’s complicated and hard to understand, and they run the other way without even considering it.
I was in a similar situation until I went on a cross-country RV trip. Every time we stopped at a new RV park, I wondered how much money these parks were making.
After seeing so many parks, I knew I could run one myself. So, during the trip, I found my first deal, got a loan, and closed on that first commercial real estate property as soon as I got home to Tennessee.
I’m so glad I didn’t start by investing in single-family homes, short-term rentals (STRs), or small multifamily properties. After I explain my five reasons why it was easier for me to start investing in commercial real estate, I hope you’ll consider looking into commercial investments yourself.
Reason 1: You Have to Go All In
When I bought my first RV park, I didn’t have time to work a W2 job and operate my park at the same time. I had to go all in on becoming the best RV park owner and operator I could be. There was a lot to learn, but I knew my only options were sink or swim. Because I was able to give the business all my time, energy, and focus, I became competent and confident at an accelerated speed.
If I were to buy a single-family property, I might make a few hundred dollars in cash flow each month, but that’s nowhere near enough to quit my job and go all in. I’d have to buy and manage many rentals, and I would be spread thin across all of them. Instead, I enjoyed focusing on one property that had a higher potential for growth and cash flow.
Reason 2: You Can Scale Faster
If it’s going to take 30 to 60 days to close on an investment, I’d rather close once and acquire 150 units than close on 150 individual residential properties. The only difference between the two is the purchase price, and that can be figured out with money partners, creative financing methods, raising capital, savings accounts, or retirement accounts.
Acquiring so many units at once can feel overwhelming at first, but it forces you to build standard operating procedures from the very beginning. If you can build and master those systems and processes for 150 units, you’ve built scalable systems that you can reuse with your next commercial investment. When you slowly build a residential portfolio, it can be tempting to manage your properties by yourself. That mindset can often be enough to keep residential investors from scaling.
Reason 3: The Value of Commercial Real Estate Is More Controllable
Put simply, residential real estate is valued based on square footage, location, and other comparable properties. This has a big downside.
If you flip a house, you can only increase its value so much before it gets to an unreasonable price for the area. If you’re going to rehab and rent, you can only raise rents so high before tenants laugh at the listing. Basically, you can only control the value and cash flow of your property so much.
On the other hand, commercial real estate is valued based on its cap rate and net income. This means that if you continually increase your property’s income, its value will also increase.
That’s how I’ve increased the value of my first RV park from $3.2 million to $13 million over the course of 10 years. In addition to generating money from rental fees, my park has over 10 revenue streams, including a pizza kitchen, golf cart rentals, the camp store, and glamping tents. The sky’s the limit when it comes to increasing cash flow with certain types of commercial real estate like RV parks, self-storage, and golf courses.
Reason 4: Commercial Real Estate Has Better Lending Options
When residential investors start out, they typically put their properties in their own names, meaning banks will determine their loans based on the investor’s personal income. This might make it more difficult for a beginning investor to get started if they don’t have a job that pays enough to qualify for a decent loan.
Commercial real estate loans are based on the income the property produces, so it doesn’t matter how much money you currently have coming in. It’s based on the performance of your new investment. This doesn’t mean you can get into a commercial investment with nothing out of pocket, but this factor removes a big barrier to entry.
Also, since purchase prices tend to be much higher for commercial properties, investors have gotten creative with funding their deals. Owner financing, subject to, money partners, or raising private money are all great options for getting the funds you need.
Reason 5: It’s Not as Competitive
This may not be true for all commercial real estate, since there are so many different types like retail, apartments, industrial, etc. However, there’s far less competition for certain commercial property types like RV parks and self-storage.
When you invest in residential property, you compete with families, other investors, and big institutional buyers. We all remember the crazy bidding wars that were running rampant just a few years ago.
A vast majority of RV parks are owned by mom-and-pop operators. This is advantageous for investors because:
- Mom and pops are more likely to own their park free and clear, meaning they’re good candidates for owner financing.
- Mom and pops are likely not operating the park to its maximum potential, which leaves room for you to instantly add value.
- You’re not competing with multiple cash offers like you might with residential properties.
All this makes it easier for the beginning investor to find and buy their first commercial property for a realistic price. And if you can just get started, you can start to benefit from all the other advantages I’ve listed.
Final Thoughts
Residential investing has an understandable appeal due to its familiarity. However, investors who want to skip the awkward phase of using real estate as a side hustle should seriously consider investing in commercial real estate. Better lending options and less competition make it easier for new investors to get into. More importantly, the control you have over the value of your property is enough to let you go all in and create the systems and cash flow that will allow you to scale and reach your financial goals much faster than residential investing.
Claim your own piece of a $30B industry.
Tired of chasing crowded mainstream investments? Deliver outsized cash flow and asset appreciation with RV parks, campgrounds, and glamping sites (aka “outdoor hospitality”)—the business niche you’ve been looking for.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
