Many new investors are attracted to residential real estate because it feels familiar. Most people have rented or bought property.
So, it’s natural that when new investors hear about commercial real estate, they think it’s complicated and difficult to understand, and they run the other way without even thinking about it.
I’ve been in a similar situation before on my cross-country RV trip. Every time we stop at a new RV park I wonder how much money these parks make.
After visiting so many parks, I knew I could run one of my own. So, while on the road, I found my first deal, got a loan, and closed on my first commercial real estate right after returning to Tennessee.
I’m 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 is easier for me to start investing in commercial real estate, I hope you will consider considering commercial investing for yourself.
Reason 1: You have to give it your all
When I purchased my first RV park, I didn’t have the time to run my park while doing W2 work. I have to put my all into being the best RV park owner and operator I can be. There was a lot to learn, but I knew my only options were to sink or swim. Because I was able to devote all of my time, energy, and focus to the business, I became competent and confident at a much faster rate.
If I were to buy a single-family home, I could probably make a few hundred dollars a month in cash flow, but that’s nowhere near enough to quit my job and go all-in. in all of them. Instead, I like to focus on one type of property with higher growth potential and cash flow.
Reason 2: You can scale faster
If an investment takes 30 to 60 days to complete, I would rather complete it once and buy 150 units than complete 150 single-family residential properties. The only difference between the two is the purchase price, which can be calculated through a monetary partner, creative financing methods, raised funds, savings account or retirement account.
Purchasing so many units at once may feel overwhelming at first, but it forces you to establish standard operating procedures from the start. If you can build and master 150 units of these systems and processes, you’ve built a scalable system that can be reused on your next business venture. As you slowly build a residential portfolio, you may be tempted to manage your properties yourself. This mentality is often enough to deter residential investors from scaling up.
Reason 3: The value of commercial real estate is more controllable
Simply put, residential real estate valuations are based on square footage, location, and other comparable properties. This has a big drawback.
If you flip a house, you can only increase its value so much before it reaches an unreasonable price for the area. If you’re fixing it up and renting it out, you can only raise the rent to the point where the tenants will laugh at the property. Basically, you can only control the value and cash flow of your property.
Commercial real estate, on the other hand, is valued based on its capitalization rate and net profit. This means that if you keep increasing the income from your property, its value will also increase.
In this way, I increased the value of my first RV park from $3.2 million to $13 million in 10 years. In addition to making money through rentals, my park has over 10 revenue streams including a pizza kitchen, golf cart rentals, a camp store, and glamping tents. For certain types of commercial properties, such as RV parks, self-storage, and golf courses, the sky’s the limit when it comes to increasing cash flow.
Reason 4: There are better loan options for commercial real estate
When residential investors start out, they typically put the property in their own name, which means banks will base their loans on the investor’s personal income. If a novice investor doesn’t have a job that pays enough to get a decent loan, this can make it harder for them to get started.
Commercial real estate loans are based on the income the property generates, so no matter how much money you currently have, it’s based on the performance of your new investment. This doesn’t mean you can invest in a business without spending money out of pocket, but this factor removes a significant barrier to entry.
Additionally, because commercial real estate purchase prices tend to be much higher, investors are getting creative in how they fund deals. Owner financing, a funding partner, or raising private capital are all great options for getting the money you need.
Reason 5: Not very competitive
This may not apply to all commercial properties as there are many different types of commercial properties such as retail, apartments, industrial, etc.
When you invest in residential property, you compete with families, other investors, and large institutional buyers. We all remember the crazy bidding wars of a few years ago.
The vast majority of RV parks are owned by mom-and-pop operators. This is good for investors because:
- Mom and dad are more likely to have free and clean parks, which means they are good candidates for owner financing.
- Mom and Dad may not be using the park to its full potential, which leaves you with room to add immediate value.
- You won’t be competing with multiple cash offers like you would with residential properties.
All of this makes it easier for novice investors to find and purchase their first commercial real estate at a realistic price. If you can get started, you can start benefiting from all the other advantages I listed.
final thoughts
Residential investing has understandable appeal because of its familiarity. However, investors who want to skip the awkward stage of pursuing real estate as a side hustle should seriously consider investing in commercial real estate. Better loan options and less competition make it easier for new investors to enter. What’s more, you have enough control over your property’s value to go all out and create a system and cash flow that allows you to scale up and achieve your financial goals faster than residential investing.
A piece of the $30B industry.
Tired of chasing crowded mainstream investments? Providing massive cash flow and asset growth through RV parks, campgrounds and glamping sites (aka “outdoor hotels”) – the business niche you’ve been looking for.
Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.
