Our Cities Would be Better Off if People Invested in Commercial Rentals Rather Than Residential

By Franco Faraudo

There is a new public enemy when it comes to popular commentary around affordable housing. Large property companies gobbling up single family rental portfolios have come under fire as an example of how Wall Street is buying up Main Street. The pushback against corporate ownership of rental properties is not without merit, companies with deep pockets buying properties to rent can certainly take more housing stock off the market. But this sentiment is a bit misguided in my opinion. Even with the recent investment by companies like Blackstone the amount of homes that are owned by large corporations is still rather small. In fact, it pales in comparison to the other type of rental owner, one that doesn’t get any of the same kind of press scrutiny, so-called “mom and pop” rental owners. 

Buying a rental property is a solid game plan for anyone trying to retire. The cashflow, appreciation, and tax protections a rental property provides can prove to be better than any other investment in the long run. For most people that investment comes in the form of a residential rental, not a commercial one. There are a lot of reasons for this. Residential properties are much less expensive and are cheaper to get mortgages on, lowering the barrier to entry. Most people understand the market for a rental home because they know their area and/or have been renters themselves. But as good of a wealth creation device a residential rental property is for an individual, we have to admit that it takes away a possible home for someone else to purchase almost the same as if a large corporation bought it. 

As more homes in an area are bought and turned into rentals, it can push home prices to a place where lower income households and young families have no option but to rent. That means they lose out on the same wealth generation that investors are so keen to buy into. The same is not true when it comes to commercial rentals. If more locals owned the neighboring retail, office, and industrial buildings in an area, it not only doesn’t negatively affect homeownership, it creates a way for the community to be involved in the placemaking of their neighborhoods. This can be especially important for neighborhoods with large minority populations, who might have almost no representation when it comes to who controls the buildings around them. 

I realize that lots of things would need to change in order for “normal” investors to choose a commercial investment over a residential one. First there would have to be much more parity in the way both of those purchases are financed. Right now most investment rentals are purchased under the guise of a residence or second home in order to get the low-rate, thirty year mortgages that were designed to get people to buy their own home. Lenders would need to apply more scrutiny to who gets a “home” loan and who should have to pay a higher rate for a “commercial” one. Lenders and regulators certainly don’t want that extra diligence dropped on their laps. 

Next, for individuals to buy more commercial properties there needs to be an easier way for them to do so without having to buy a property outright. There have been plenty of fractional ownership sites that have sprung up but none of them has gotten the kind of traction that would be needed to really open up commercial property investing to the masses. Oftentimes these sites take much of the profit as payment for their services, taking away from the margin that investors need to offset the risk.

Both of these things are a bit outside of the purview of any of us unfortunately. The one thing that the commercial real estate community can do to get more “retail” investors into the game is by dropping some of its gatekeeping culture. The commercial property industry loves to turn up its nose at first time investors and residential brokers trying to get into the commercial game. Obviously commercial real estate is quite specialized and isn’t the same as its residential counterpart but those differences are not so large as they can not be bridged. It is silly to think that a successful residential rental investor could not also be adept and buying commercial real estate, especially if they are surrounded by experts like brokers and lawyers who can help them understand the market and avoid any disastrous mistakes. 

Commercial real estate is an overlooked asset class when it comes to all but the wealthiest individuals. The lack of an easy path to becoming a commercial property owner pushes many investors into the more familiar residential market. But if we want to see commercial properties become owned by the people who live close by and all of the transformational affect that it would have, the commercial property industry needs to get off its high horse and welcome newcomers into its ranks.



The San Francisco Chronicle went as far as to put together an interactive map of all of the rental owners in the Bay Area.

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