5 Advantages of Choosing Commercial Real Estate as a First Investment

Many new investors gravitate towards residential real estate because it feels familiar, given that most people have either rented or bought a home. However, when they hear about commercial real estate, they often perceive it as complex and challenging, causing them to shy away without considering its potential.

I was in a similar position until a cross-country RV trip sparked my interest. At every RV park we visited, I wondered about their profitability. This curiosity led me to realize that I could run an RV park myself. By the end of the trip, I had found my first deal, secured a loan, and closed on a commercial property in Tennessee.

I’m grateful I didn’t start with single-family homes, short-term rentals (STRs), or small multifamily properties. Here are five reasons why starting with commercial real estate was easier for me, and why you might consider it too.

Reason 1: Commitment Leads to Mastery

When I bought my first RV park, I couldn’t balance a full-time job with managing the park. I had to commit fully to becoming the best RV park owner and operator I could be. This intense focus allowed me to learn quickly and build competence and confidence rapidly.

In contrast, buying a single-family home might generate a modest cash flow, insufficient to quit a job and focus entirely on real estate. Managing multiple rentals would spread me thin, whereas concentrating on one high-potential property facilitated significant growth and cash flow.

Reason 2: Faster Scaling Opportunities

Closing on a commercial property with multiple units is more efficient than acquiring numerous individual residential properties. Although the purchase price is higher, it can be managed with creative financing, partnerships, or savings.

Handling many units initially might seem daunting, but it forces the development of effective standard operating procedures. Once mastered, these systems can be replicated for future investments, unlike the slow, incremental growth often seen in residential portfolios.

Reason 3: Greater Control Over Property Value

Residential real estate values are determined by factors like square footage and comparable properties, limiting your control over value increases.

Conversely, commercial real estate is valued based on cap rate and net income. Increasing your property’s income directly boosts its value. For example, my RV park’s value grew from $3.2 million to $13 million over 10 years due to diverse revenue streams like a pizza kitchen and golf cart rentals.

Reason 4: Favorable Lending Options

Residential investors often rely on their personal income for loans, which can be a barrier if their income is insufficient. In contrast, commercial real estate loans are based on the property’s income potential, not the investor’s personal earnings. This makes entry easier for new investors, though some initial capital is still required.

Additionally, commercial properties' higher prices encourage creative financing solutions like owner financing and raising private capital.

Reason 5: Less Competition in Certain Sectors

While some commercial real estate sectors are competitive, others, like RV parks and self-storage, have less competition. Residential investors compete with families, other investors, and institutional buyers, leading to intense bidding wars.

In contrast, many RV parks are owned by mom-and-pop operators, making them prime candidates for owner financing and value-add opportunities. This reduced competition makes it easier for new investors to secure their first commercial property at a reasonable price.

Final Thoughts

Residential investing is appealing due to its familiarity, but those looking to avoid treating real estate as a side hustle should consider commercial real estate. With better lending options and less competition, it's easier for new investors to enter the market. More importantly, the control over property value allows for focused commitment, scalable systems, and accelerated financial growth compared to residential investing.

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