6 Reasons Investing in Commercial Property Might Be a Bad Idea

by | BiggerPockets.com

Who doesn’t love a slightly controversial headline?

I can already sense the upset commercial mortgage brokers, investors and real estate agents ready to unleash a mouthful of comments below. Now before you take the gloves off, please keep in mind that I’m a big believer in commercial real estate investing and see it as a MUST end game for any investor starting of with single family or multifamily properties.

So don’t take your gloves off just yet and read on.

You might have heard that any type of property, whether it’s commercial or non-commercial, is a good investment opportunity. And more so, commercial properties offer much more financial rewards in comparison to non-commercial properties. But did anyone also tell you that investing in commercial properties is quite a bit riskier and messier than investing in non-commercial real-estate? There are so many issues like legal requirements, additional laws and in-depth knowledge that make commercial properties more difficult to manage.

In this article, I’ll touch on the key issues that make commercial properties so difficult to handle and why you’d better think twice before doing it.

Commercial real estate is a class of property assets that are used for business purposes. It consists of three sectors: office, retail and industrial. Commercial property is often preferred for reasons like high returns on investment, longer leases and smaller deposits. All these factors ring true, but these things look good mostly on paper. There are risks associated with commercial properties that you need to be aware of before investing — risks that just aren’t there with residential property investing.

6 Reasons Investing in Commercial Property Might Be a Bad Idea

1. Commercial properties are complicated to understand.

Buying a residential property requires you to have a good understanding of the sales and the rental market. You need to learn how much a house will cost, what it will cost to repair the house, the value of the house after repair and the kind of rent that you’ll be able to get from it. Well, all these things come with experience, and none of them are overly complicated. In fact, you can get a lot of information simply by asking people. Need to know more about the neighborhood? Ask the neighbors. Simply looking at what other places nearby are able to collect in rent will immediately give you a good idea of what you can expect.

Related: What Every Investor Should Know About Forcing Appreciation in Commercial Properties

Not so with commercial property. This requires an understanding of similar concepts, but it is much more complicated than that. Figuring out the numbers requires knowledge that’s not readily available and certainly requires some experience. The other crucial factors that hugely affect the value of a commercial property are the future desirability of your property, the lease period, how solid the tenant is and the type of business that best suits your property. The value and the rent of your property also depend on the types of businesses running in the area in which your property is located. In addition, laws are less strict in some areas. That means that the transaction will be governed by contractual agreements rather than state law. All this together makes it quite complicated to jump into commercial real estate investing. Usually, it comes down to picking a niche and focusing on that.


2. Commercial properties are sensitive to economic conditions.

Sure, as the economy grows and shrinks, residential properties change with it and can have a lower ROI than expected. But where that might be true, commercial properties are far more sensitive to a changing economic climate. Everyone needs a place to live, and most jobs are relatively stable. Even when the economy is taking a downturn, people will always need to have a roof over their heads.

But the same can’t be said about commercial properties. When the economy is strong, the demand and the price of commercial real estate go up. People renting commercial property may choose to operate from home instead and close shop when the market is bad. But, even when the economy is doing great on a national scale, local economic changes play their part as well. Maybe the location you’re offering is no longer as desirable as it once was. When that happens, your property might go years without having a tenant.

3. Valuing commercial properties is difficult.

Residential properties are usually rented out by using rent comparison. This means the owner compares his property to similar properties that have recently been rented out in the same area. In the case of residential properties, finding similar residential properties is much easier. It usually means going around the neighborhood. In some cases, you can get by on common sense.

In the case of commercial properties, it is very difficult to compare two properties. A number of factors affect the value of these properties. Also, it is hard to find similar looking properties that have been rented out recently and are also relevant for the same audience. One way to value commercial real estate is to take a look at value per square meter. This is something that can be used when you own a property in a shopping center, for example. Location is important, but at least neighboring properties can be of some guidance here. If that doesn’t work, as an alternative. commercial properties are valued using an income approach.

An income approach takes into account the profit a property can make per year and multiplies it with the market cap rate to reduce the value of the property. The market cap rate varies based on different types of properties, the type of tenant, the length of the lease, the credit rating of the tenant, the condition of the property, market conditions and different locations of a property. But even then, the value of a property is a very fluid concept and requires a lot of insight. This is not something you’ll be doing on your own straight off the bat.

4. Finding tenants takes longer with commercial properties.

Though commercial properties can enjoy long-term leases of three or even 10 years, once vacant, it usually takes much longer to find suitable tenants for these properties. Since these properties are rented out for business purposes, finding a suitable match between the location of the property, the type of the property and the business requirements of relevant companies usually takes a longer time. That has a pretty big effect on the cash flow. The owner is also expected to cover all the costs during this period. This can be a huge burden on the owner, as taxes can be a lot higher compared to residential real estate.

In addition to all this, the terms for a commercial lease are quite complicated in comparison to a residential lease. A commercial tenant has many options for lease, like a gross lease, modified gross, double net and triple net. The market cap rates also vary depending upon the types of leases. Laws also vary per state, so what might be possible in one state can be downright illegal or way too expensive to try and pull off in another. Once again, handling tenants, lease value and vacancy agreements demands quite a lot of expertise.


5. Old commercial properties are a threat to new and upgraded properties in the same area.

Investors of old commercial properties are always threatened by newer and upgraded commercial properties in the same area. Tenants always look for modern and upgraded office areas or business spaces. It’s the same with residential properties, of course, but upgrading an office can get a lot more expensive than upgrading a house. As new properties pop up, the risk of vacancy to existing properties increases which might mean more costs.

Related: How to Use Commercial Real Estate to Add $1M to Your Net Worth in 5 Years

6. Financing a commercial property is difficult.

This is not to be underestimated. It is not all that difficult to get financing for purchasing residential rental properties, as there are a large number of lenders available who will offer loan for a period of 15 to 30 years. Usually, the residential real estate isn’t that expensive anyway and is something that can even be paid off using rent money. In the case of commercial properties, the loan amount will be amortized for less than 30 years and will mostly follow a balloon payment mode. This means that the entire balance of the loan will be due after a certain amount of time—let’s say after five or 10 years. The investor is supposed to pay off the loan when the balloon payment is due. This is not always convenient for the investor. Many investors look forward to getting refinanced when the balloon payment comes due, but if the market changes, refinancing the loan is difficult.

Add to that the fact that commercial property is usually more expensive to purchase, and things get even more difficult. It’s true that larger properties can yield a more steady income, but to get that kind of money from a bank, you’ll need experience to go with it.

Commercial property investments require a lot of ground work. You need to pay your due diligence evaluating the market and the property. If you want to go ahead with investing in commercial properties, you better keep a hawk’s eye on local market and property conditions. You have to do a lot of number crunching, as a number of factors affect the value of a commercial property. Lastly, while you do all that, you should have a solid exit strategy in your plan. It’s all these things that make residential real estate so much more attractive for investors, especially those who are just starting out.

[ We’re republishing this article to help out our newer readers. ]

What do YOU think—is investing in commercial property worth the hassle?

Feel free to jab me a few comments below, but watch out for my right hook!


About Author

Engelo Rumora

Engelo Rumora, a.k.a.”the Real Estate Dingo,” quit school at the age of 14 and played professional soccer at the age of 18. From there, he began to invest in real estate. He now owns real estate all over the world and has bought, renovated, and sold over 500 properties. He runs runs Ohio Cashflow, a turnkey real estate investment company in the country (Inc 5000 2017 & 2018) and is currently in the process of launching a real estate brokerage called List’n Sell Realty. He is also known for giving houses away to people in need and his crazy videos on YouTube. His mission in life is to be remembered as someone that gave it his all and gave it all away.


  1. James Wise

    Great points Engelo. Financing commercial is a whole different ballgame then residential. Nice thing about commercial financing is that you can finance A LOT more capital then you would be able to in the residential space.

  2. Anuj Sharma

    Agreed with all your points. Friend of mine invested in commercial property and he recommended to stick away from them. I am with residential so far and open to commercial but whenever I talked to folks invested in commercial especially in RI /MA area, most of the folks recommend keep sticking with residential which is working so far for me so I will jump in to commercial when my residential portfolio becomes saturated. Great article and thanks for sharing your knowledge.

  3. Mav Larson

    You’re right about commercial investments requiring a lot of ground work up front. But on the flip side, once you’re 100% leased, you’re basically on cruise control. Residential investing requires more upkeep and there’s more tenant turnover.

    I own 2 strip malls and one single tenant store consisting of 8 units total. I chose to dive straight into commercial because tenants stay longer, years longer, and I thought that over the long term, it would be more stable than residential. It’s true that when a store becomes vacant it could take a year to find the next perfect tenant though. I haven’t invested in residential yet, and I still might because there are so many more opportunities it seems.

    Great article!

  4. Jeff Greenberg

    You brought up many good points. What I disagree with is not differentiating the different types of commercial real estate. Do your statements ring true on all your points when talking about, a 5 unit apartment, a self storage unit, a mobile home park, an RV park, other MF properties.

    You left it a little misleading by not pointing out the multitude of different types of CRE. I do agree that with the extra zeroes in the price and upkeep, a new investor should not go in uneducated and poorly funded, but I don’t agree that residential is a stepping stone needed to get involved CRE.

    Good article thanks

  5. Juan Martinez

    Engelo great points! In my experience, your capital requirements are much more higher when dealing with commercial, which slowed me down for a bit. However, I found tenants (retail) with a good reputation in their industry, which has provided me with great steady monthly cash flow (a lot higher than my residential properties). I enjoyed having a mix of residential and commercial and would encourage other investors to explore the possibilities commercial real estate has to offer…

  6. Joel Owens

    Hi Engelo,

    Your painting commercial real estate with broad brush strokes. As a seller of turn key investing SFR you are promoting that of course.

    I hear a lot of those comments by SFR guys all the time. I do not agree that in a down turn SFR will not be affected and commercial will. In a down turn yes people need a place to live but it doesn’t mean rents will not be affected or that they will not start moving in together to save money.

    Also the biggest mistake I see investors make is comparing small balance commercial to large balance commercial associating it with the same risks. What I mean is someone is comparing a small strip center in a rural area with local tenants because they think they are getting a high cap to a suburban to urban area with national tenants as having the same risks. Nothing is further from the truth. The local mom and pop tenants usually have mortgaged their houses to keep the business afloat. Any down turn in the economy and they might go out. National median housing income is 54k on average. For my clients I focus on 80,000 median income areas or higher. Preferably over 100,000. In an upturn the lower income areas those people might have about 2k to 3k a year for additional money. Cost of gas for travel goes up and economy goes down and now they have almost zero recreational money to spend on businesses.

    Conversely in a higher income area in bad times the people might go out to eat for steak once or twice a week instead of every other day. Different concept of “roughing it”. Additionally national tenants where the lease is backed by corporate the store can lose money and they still pay the full term of the lease because the lease is backed by thousands of locations.

    Where I see investors get into trouble is moving from SFR to low end commercial say a 500k property etc. versus owning 4 – 150k houses. Those type of properties highly fluctuate more. You can get a 30 year amortization in commercial real estate. The asset classes are at various points in the cycle.

    My clients wealth tends to be on the higher end side with ranges of seven to nine figures. Commercial is more complex and investors need a professional to guide them. I am not upset at anyone as I am going to have a record 2016 ( minimum 7 figures ) based on current business . I am writing a book right now that will be finished this year.

    Office I do not like as much as retail. Office unless medical people can move with a truck in the middle of the night. I like tenants with more “stickiness” that are more cemented as a tenant in your building.

  7. Joel Owens

    Hi Engelo,

    You have great success as well. The key for investors and systemic risk to capital is what type of quality asset they are buying.

    The small balance commercial properties generally under 1 million have a much higher risk to them. You are dealing in most cases with local banks who will want full recourse and short amortization periods with short balloons. When you move up to larger properties and deal with non-recourse lenders the quality of the asset,tenants,location, and loan terms are much more favorable to the borrower.

    For commercial most of my clients are invested in warm belt states. The retirees in the tens of millions are flocking to the warm climate areas. The cold belt states have net migration issues especially in suburban to rural locations. Those types of areas are very risky for commercial. In the cold belt states there is a lot of vacant commercial unless on a strong corner.

    The larger stores such as a Kohls are Target are talking of reducing from 100k size store to about a 40k micro store. Instead of having a large shipping for multiple states have an industrial warehouse space 5 miles away to service local locations. This way instead of paying high retail rates on 100k size store they can pay much less for warehouse space and replenish a store faster.

    • Engelo Rumora

      Thanks for your detailed comment Joel,

      You definitely have a wealth of knowledge in commercial real estate and much more than I do.

      Most of our investors are cash buyers when they take down any commercial property up to $1m.

      We also control the asset with our entire in-house operation.

      2 years have gone passed now without 1 investor loosing money in this market and I’m looking forward to another 2 and longer without anyone loosing a dime 😉

      Thanks mate

  8. Your points are true. And it is true that it is especially difficult to find good properties under $1m. They are out there but you have to be very careful. However for those who are smart and diligent, and are starting with assets that make them atractive to commercial lenders, there is no comparison. I earn 15-20%+ per year on commercial buidings with 15 year corporate NNN leases. These are leases that are backed by large corporations, not mom and pops. They include built in increases, and involve virtually no work. The tenants pay every bill and my only work is making sure they pay the property taxes and insurance and maintain the property appropriately. Yes, any tenant could go bankrupt, even large ones, but I have also made sure the buildings are desireable and that the tenants are paying low rents, so replacing them is easier. I also can afford to have a tenant out while I get a new one.

    I’m not going to say this is easy. It was basically a full time job for 3 years to find the right properities for me. I looked at about 50% of all the commercial buildings for sale in the US over those 3 years, and only ended up with 4 that were right for me. (I made more offers than that, but sometimes learned things during due diligence and other times was outbid). I also found a very good commercial agent and a good attorney, and I am extremely good at finances and spreadsheet analysis.

    I would not recommend anyone start with commercial property due to the complexity. I had some residential rental properties previously, and bought my very first commercial property to lease to my own business. But when I see people with 100, 200, 300 residential properties, and the amount of work it involves, I certainly think some of you could take life quite a bit easier by transitioning into some commerical property.

  9. Peter Mckernan

    Hey Engelo,

    First of all, great talk at the BP conference a few weeks ago in Oakland! I was there and it was my second time there, glad I got the chance to hear you talk this time around!

    As for the commercial investing, yes, this type of investing is a lot trickier than residential, which brings the bigger upsides/downsides. This type of investing also creates that much more leg work and analytics to land the deal that will payout in the end for all the investors involved.

    Great article and keep up the success!

  10. True, True, and True, I learned the very hard way, and I jeopardized myself financially and my health by buying office building, I had good luck with small residential properties, and I made the leap to 15,000 SF office building, that I bought for $120,000, I could not belive I can go wrong with this purchase due to property condition and location, but that was one of the biggest mistakes of my life, and the realtor knew all of it, but he led me to the slughter house where I will lose all my life saving, just so he can collect $1,500 in commisions. these large properties are very hard to lease, and very expensive to have due to property tax and utilities, it is simply put you under the gun, and I felt like a rat in a trap. eventually, I sold it a year later at $30,000 loss.

  11. Hello Engelo,
    Thank you for this wonderful article. Very educational. I am not sure if you are still reading the comments on this blog.
    I came across your site when I am actively planning to invest in a commercial retail investment property and that too as one of the equity investor. Adding to that this is my first time into any property investment.

    I must confess that I am not that educated like rest of the folks who have left their comments.

    Pardon for being so naive, but let me still ask, what advice would you give a person like who is planning to invest in a class A commercial retail property out of state for 2% equity where the property is value above $20M. what would be my risk?. Judging by the comments posted by other readers the investment below $1M seems to be very shaky.

    I find many people strongly against out of state property investment. However In my case, the primary owner of this brand new retail mall ( 2 years old) based in Texas was looking for additional equity because one of the investor is asking to be bailed out. He approached me ( being my grad school friend) for a 2% equity.
    Now going thru the 6 areas of concerns you had raised, I was to see how it impacts my decision:-
    – commercial properties sensitive to economic conditions
    worst case scenario will be that my money will be held for longer duration till the next up-cycle occurs and will not receive any yearly distribution. But I still own a piece of commercial property rather than stock that can vaporize. I have heard horror stories about residential investment going so bad in a down-market particularly in not so high growth areas. Long run it is not bad ( say >8 years)

    – commercial property deals are complex
    Since I am in just a 2% equity holder and other actual property debt is held by my friend who has prior experience and will take care of it, this is probably not a concern for me ( may be I am sounding too naive,.)

    – Finding tenants
    The property already has 80%-100% occupancy rate and in a good neighborhood. This may be my blind spot. Lease are fully NNN so everything paid by the renters.

    -Old property v/s New
    This is a new propery ( build 2014) . I presume it is therefore less risky and more in demand. Is it a fair assessment.

    -Getting financed
    – It is already financed. There not my concern.

    – Property assessed value
    – This is blind alley for me. How do you determine this?

    – Out of State ( not part of your list)
    – I must confess I have no knowledge of the place and purely investing on the judgement of my friend. But I read the CAP of the property from industry consultant and it is listed as a class A property with an average CAP of 6.75-7.5.

    Overall my question is , 100k investment in a 20M property is it worth the trouble ?.

    • Engelo Rumora

      Hi Sunny,

      Thanks for your comment.

      Why not start off small and local.

      Invest in SFH and build from there.

      I’ve done 500+ deals and am only now starting to dabble in multifamily and commercial

      It’s a long way to the top and I suggest starting on ground level with basic SFH type fix and flip deals


  12. Vaughn K.

    Personally, I like the idea of residential because of the fact that you can always rent it out at SOME price in any market. Commercial of all sorts just has so many crazy ups and downs.

    That said, I have known people who had an eye for spotting potential in properties and made a ton of money on them. If you can envision doing something creative with a commercial property via renovation, subdividing a bigger space, etc there may be lots of instant equity to be built there.

    I have long said that the only ways I will buy commercial property are:

    1. Buying property I need to use for my own business ventures, even if I overbuy a bit and end up with a tenant or two in the same building. As long as I’m the primary renter from myself, I feel pretty confident a lot of properties will work out overall.

    2. I do think certain properties that are in really important areas are as easily rentable as residential. Think right downtown in a spot that will never be dead. Maybe you can’t rent it for what you’d like, but you can rent it for a touch less (if you really need the money) to a tenant who has a good shot at staying long term. Contrast that to a random strip mall in a random sub division of suburbia, where you may never be able to find a tenant at almost any reasonable price. That prime location property will probably also come at a premium though, so may well not be worth it anyway!

    This is why unless you have a real vision for a property, or stumble upon a screamin’ deal in an area that will never lose its luster, I would just stick with residential.

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