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5 Reasons Why Commercial Real Estate is an Ideal Choice for New Investors
While many new investors gravitate toward residential real estate due to its familiarity, the assumption that commercial real estate is overly complex often deters them from exploring it. In reality, commercial real estate can be a more accessible and rewarding option. My own journey into this space began unexpectedly during a cross-country RV trip. As I visited various RV parks, I became curious about their financial performance, and soon realized I could operate one myself. This insight led me to my first commercial real estate investment, which I closed on shortly after returning home to Tennessee. Looking back, I’m grateful I chose commercial real estate over single-family homes, short-term rentals, or small multifamily properties. Below, I share five reasons why commercial real estate was a more manageable and profitable starting point for me—and why it could be the right move for you too.
Full Commitment is Key to Success
When I purchased my first RV park, there was no time for a side job. I had to dedicate myself entirely to managing the park. The steep learning curve meant I had to adapt quickly, but being fully immersed in the business allowed me to grow my expertise faster. In contrast, if I had started with single-family homes, I might have earned modest cash flow each month, but it would not have been enough to justify leaving my job. With commercial real estate, I could focus my energy on a single, high-potential property rather than juggling multiple smaller investments.
Faster Scalability
In residential real estate, scaling typically involves acquiring numerous smaller properties over time, which can be both slow and resource-draining. In commercial real estate, however, it’s possible to acquire multiple units in a single transaction. For instance, purchasing 150 units in one deal is far more efficient than closing on 150 separate homes. The key difference lies in financing, which can be managed through various methods such as partnerships, creative financing, or tapping into savings. The process of managing 150 units at once forces you to establish scalable systems, which can then be replicated across future investments.
Greater Control Over Property Value
Residential properties are largely valued based on square footage, location, and comparisons to similar homes in the area. This limits the potential to significantly increase their value. For example, in house flipping, there’s a ceiling to how much value you can add before the property becomes overvalued for the market. With commercial real estate, however, value is often determined by the property’s income potential and capitalization rate (cap rate). By increasing a property’s income—whether through improving operations, adding new revenue streams, or increasing rents—you can directly boost its value. This is how I grew the value of my RV park from $3.2 million to $13 million over ten years, by adding diverse revenue sources like a pizza kitchen, golf cart rentals, and glamping tents.
Superior Financing Options
In residential real estate, loans are typically tied to the investor’s personal income and credit, which can pose challenges for newcomers without substantial personal income. Commercial real estate loans, however, are based on the property’s income-generating potential, not the investor’s personal earnings. This makes it easier for new investors to get started, as long as the property shows promise for profitability. While commercial properties often come with higher price tags, financing options like owner financing, partnerships, or private capital can help overcome financial barriers to entry.
Reduced Competition
While residential real estate markets can be fiercely competitive, especially in desirable areas, certain types of commercial properties, such as RV parks and self-storage facilities, tend to face less competition. Residential properties often see bidding wars with families and large institutional investors driving up prices. In contrast, many RV parks are owned by independent “mom-and-pop” operators, who may not be optimizing their property’s full potential. These owners are often open to creative financing and might be more willing to sell at a reasonable price, making it easier for new investors to acquire commercial properties without facing aggressive competition.
Final Thoughts
While residential real estate has an undeniable appeal due to its familiarity, new investors looking to move beyond the side hustle phase of real estate investing should seriously consider commercial properties. With more favorable financing options, less competition, and greater control over property value, commercial real estate offers a clearer path to scaling your investments and achieving financial success more rapidly than residential options might allow.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“
5 Reasons Why Commercial Real Estate is an Ideal Choice for New Investors
Has the U.S. Housing Market Finally Begun to Thaw After the Pandemic?
It seems like the housing market might be showing signs of life. According to a recent report from Redfin, pending home sales in early October have seen their largest year-over-year rise since 2021, with a 2% increase in the four weeks ending October 6.
This news is likely to be welcomed by real estate investors who have felt the market has offered limited opportunities over the past few years. However, it’s important to take a cautious approach—one promising statistic doesn’t necessarily indicate a broader trend.
Is the Housing Market Truly Recovering?
Let’s explore the different factors at play.
Interest Rate Reductions: A Critical Factor or a Red Herring?
The Redfin report links the surge in pending sales to the Federal Reserve’s much-anticipated rate cut announcement in mid-September. According to Redfin, this announcement prompted buyers to re-enter the market in late September, despite mortgage rates having already been falling for weeks before the cut.
This psychological boost is crucial. Although buyers were aware of the falling rates beforehand, many seemed to be waiting for a formal signal to act. This could be attributed to a lingering fixation on the ultra-low rates of 3% to 4% that buyers enjoyed before 2022.
Any rate cut announcement serves as a nudge for prospective buyers, making them feel that now might be the right time to purchase, even if mortgage rates had been decreasing already. In an unstable mortgage market, such announcements hold significant influence.
However, mortgage rates are just one piece of the puzzle when analyzing housing market performance. As noted by Investopedia, the real estate market is driven by four primary factors: interest rates, demographics, economic conditions, and government policies.
Demographics: Shaping the Market
During the pandemic, demographic shifts had a profound effect on U.S. real estate, with major population movements like the Sunbelt migration fueling booms in cities such as Phoenix and Austin, which later became unaffordable for many.
Age is another key demographic factor, and the millennial generation’s pent-up demand continues to be a driving force behind the rise in home purchases. Despite the challenges of the past few years, millennials who have longed to become homeowners are now entering the market in greater numbers, as more properties become available.
Rising Inventory: A Sign of Stabilization
A key factor contributing to the market’s stabilization is the growth of housing inventory over the last year. The pandemic had a significant impact on the availability of homes, with sellers hesitant to list properties due to COVID-19 restrictions and, later, higher mortgage rates.
Some homeowners, particularly those upgrading to larger homes, found it financially challenging to sell and take on higher mortgages. Others, however, simply chose to wait for a more favorable market.
Although the latest Realtor.com report shows that inventory remains down by 23.2% compared to pre-pandemic levels, we are seeing an upward trend. For instance, new listings have been rising since last year, with a 5.7% year-over-year increase for the four weeks ending October 6.
As of September 2024, some states have even surpassed their pre-pandemic inventory levels, including Tennessee, Texas, and Idaho, with others, like Washington, close behind.
Vulnerabilities in Certain Regions
However, not all regions are showing positive signs. For example, some areas, particularly those affected by extreme weather, have seen inventory spikes not because of market recovery, but due to homeowners trying to offload damaged properties they can’t afford to repair.
For instance, regions like Florida and North Carolina, hit by hurricanes, have experienced increases in home listings, but these may reflect a response to climate-related challenges rather than market health.
Opportunities for Investors
Investors should be discerning when choosing markets, focusing on regions where inventory is growing due to increased home construction rather than climate-related distress. States like Idaho, Utah, North Carolina, and Texas, which are building new homes, offer potential, though caution is needed in areas prone to natural disasters.
The Midwest and Northeast, meanwhile, still face significant challenges in recovering to normal market conditions. These regions have lower rates of new construction, meaning inventory remains scarce, which could present both opportunities and difficulties for investors.
The Bottom Line
The U.S. housing market is showing signs of recovery, but the situation remains complex and varies by region. Interest rates play an essential role in unlocking the market, but investors should also consider other critical factors, such as homebuilding trends, climate risks, and government policies. While the market is heading in the right direction, it’s crucial to examine regional differences carefully before making investment decisions.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“