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Author Topic: Why bother with residential rentals?  (Read 24402 times)

Offline Cakeaholic

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Re: Why bother with residential rentals?
« Reply #30 on: October 10, 2007, 09:18:35 am »
How do you go about screening tenants for these buildings? 

I've been looking at commercial properties for the last couple of months trying to better educate myself on the market and investing strategies but I don't think I'm ready to leap just yet. 

Offline Frank Chin

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Re: Why bother with residential rentals?
« Reply #31 on: October 10, 2007, 10:20:50 am »
How do you go about screening tenants for these buildings? 

I've been looking at commercial properties for the last couple of months trying to better educate myself on the market and investing strategies but I don't think I'm ready to leap just yet. 

For residential, you look at the tenant's credit history, job income etc. For "small retail commercial", it's the same idea, but other issues also predominate.

- Is it the highest and best use?? When my dad was a newbie, a local plumber rented a retail store, month to month, from my dad, and as store rents went up in the area two years later, my dad asked for a rent increase, he left. The plumber store pipes and tools there, with a desk for girl to answer the phones. The pipes can be stored in garages, or a basement that the plumber later asked my dad about renting. The place was next rented to a "vidoe store" as retail space, at a much higher rent, and was a video business for over 15 years afterwards.

You maximize retail rent using the place as retail, not storage.

- Are there too many other similar businesses in the area?? My dad often gets inquiries for rental as a pizza parlor or laundromat. Unfortuantely, there's two several such businesses two blocks away for each of those businesses, and as a landlord, you'll have to gamble if the "newbie" will take enough business to make a go of it.

I seen landlords dumb enough to rent to a pizza place down the street from an established one, only to have it fold up in several months. Same goes the other way. A smaller sushi place, around for over 6 years, closed after a larger, brighter, cleaner one opened up across the street. Yes, I patronized the new one myself after it opened.

- Experience in the business. The best tenant for my dad is an established business, located at a nearby commercial strip, that has to move a few blocks due to rent increases, or when a user bought the place for themselves and evicting. My dad can be greedy and charge overmarket rent, or be reasonable and get himself a profitable establsihed business for years.

One time, I thought my dad lost his marbles, asked me to witness the lease signing, when he agreed to rent the store to a young fella that just graduated insurance school, and decided to open up an insurance agency. He figured with "six months security", why not?? The fella was a neighbor down the street. Unfortunately for the "newbie" entrepreneur, he folded up after a year, just as I thought, asked to be let out of the lease. I told my dad it was not a good idea to rent a store to someone trying out a business, just out of school, if his objective is to avoid vacancies.

- Compliance with zoning. A business suitable for one may run afoul of zoning for another. Looked at a strip where the restaurant was in violation of zoning because it needed 25 parking spaces to comply. Landlord didn't know about zoning when the place was rented out. The town decided to overlook things temporarily due to local employment issues, but can shut the place down at any time. Tthe place would be perfectly suitable for something else that does not have such parking requirements, such as a nail salon.

- Compatibility with neighbors. Its' obvious that renting to a X-rated business would bring trouble with neighbors, especially down the street from a church or school. Less obvious would be a busy restaurant immediatlely abutting a residential zone due to odor and "pest" issues.

- Personal finances and guaranties, and stay on top of things. The video store my dad rented to went through four owners, till the last one that my dad evicted. The guywas behind on the rent, had numerous personal issues, and my dad can't get hold of him. Didn't know where the owner lived. He hadn't notice that the store changed owners, and tried to enforce the personal guaranty on the original owner, only to find he retired and moved to Greece. While it's true changing ownership requires a new lease, or a lease assignment, and owners often benetit asking for "key money" to approve the sale of the business, but you can only benefit if you notice that the "payer" on the check has changed. Usually, in commercial retail situations, staffed by clerks, and absentee owners,a change in tenancy is not immediately obvious.

BTW, I was chatting with a local coffee shop owner about "key money", that's usually "under the table money here" paid to landlords to sign a lease or approve an assignment,  and for busy commercial strips in Brooklyn, NYC, the going rate is $30,000 for restaurants. A residential tenant of mine, complained about having to pay $8,000 "key money" just to get a lease for a dry cleaning business he recently took over. This was new to him, as he never had to pay these fees before.

   

« Last Edit: October 10, 2007, 10:42:47 am by Frank Chin »

Offline oldmandate

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Re: Why bother with residential rentals?
« Reply #32 on: October 10, 2007, 09:55:11 pm »
Fdjake,

Your post has been a breath of fresh air…

My daytime work is located in an area very much described as the ideal location by you.  It is in the suburbs and very close to two major highways. For past two days (since reading your original post) I decided to go for a drive during my lunch hour and see how these businesses fair.  There are blocks after blocks of Light Industrial (LI) buildings in a variety of grades.  Some have nice brick facade others are mainly a metal box with an office, a big warehouse and an overhead door.  I must say that I saw none for sale and only a few For Rent signs.  I realize (as you and others have already said) this is not for the inexperience but I’m very interested in learning and may be pursuing this in the future.  With residential I have a very firm idea of what sort of rent an area commands and property prices but how would you:

1)   Price the land?
2)   Decide on property type (i.e. single tenant, multi-tenant…if multi-tenant how big of units and how many)?
3)   Evaluate how much rent you can command?
4)   In general evaluate a potential prospect property?

As Rich said Commercial is tricky (and I know it) but I get the feeling that the school of hard knocks is the only thing out there…

Thanks a lot.


Offline Architecturefan

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Re: Why bother with residential rentals?
« Reply #33 on: December 14, 2007, 03:13:09 pm »
Just a few thoughts on Commercial Vs. Residential

A.  Commercial/Multi Family can be harder to sell than SFR....ten SFR's can sell much easier and faster than a ten unit complex, or commercial space which can take years to find a buyer for sometimes.  Just a causal effect of a larger pool of buyers with higher demand.

B.  Replacing a residential tenant can be much easier and faster than replacing a commercial tenant, again, months or even years can pass before a suitable commercial tenant comes along.

C.  Creativity has more outlets in SFR's.  True, you can create instant appreciation simply by rehabbing the facade of a Commercial Building, but SFR's have more detail, systems, landscaping, etc. that a savvy investor can tap to add instant equity.  By painting cabinets and adding handles, replacement windows, shutters, windowboxes, bushes and shrubs, driveway stone....you can make a SFR look like you spent $50,000 when you only spent $5,000.

That having been said, I can certainly see how someone with the skills and mindset to take on commercial/multi family would go that route over SFR's















Offline fdjake

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Re: Why bother with residential rentals?
« Reply #34 on: December 14, 2007, 06:13:44 pm »
Here's where most people who own residential rentals make their mistake....

They own homes that they have found through various ingenius methods.  Maybe it was advertising, mailings, billboards, finders fee's.
What ever....they found GREAT deals on the homes BEFORE they came on the market or they purchased homes that needed work at BIG discounts.  THAT is how they found properties that would cash flow.
 
When they try and move into commercial real estate this is what I hear......

I looked at 5 commercial buildings for sale, they were all over $800k.

I drove around and called on some commercial buildings that are for rent, they rent these things for about $700/month and they want $700K to buy them.  You can't make money in commercial.

I see a lot of empty commercials buildings.  That must mean the market for them is bad.

You can't sell a commercial building as easy as I can sell my single family homes.

Land is too expensive for commmercial property.

MY GOD!!!  Did some of these guy's forget EVERYTHING they learned over the years in real estate....

First off.....of course a brand new commercial building is going to be expensive!  Who do you think BUILT IT.  It was built by an commercial investor who probably has built 3 dozen over the years.  He KNOWS EXACTLY what he can get for them and in all likelyhood has a dozen that he rents out which are now PAYING for that new one.  Show me a NEW housing developement were you can go in a buy a home and have it cash flow for you?  Same thing isn't it?

I see lots of empty houses for sale right now.  I guess the 6 homes I've sold in the last 4 months were just luck.  Here's a tip.  SOME COMMERCIAL PROPERTY IS OVER PRICED!  ( I know houses NEVER are)
Of course you're going to see lot's of empty properties.  Just because someone has THE MONEY doesn't mean they know what they're doing.  Fill in  Doctor, Dentist, Lawyer, ect.  I have purchased buildings and land from these guys.  They get in WAY over their heads and just pull the plug.

The good commercial buildings DON'T HAVE "FOR RENT" SIGNS ON THEM.
They get rented VERY soon after a tenant leaves.  Also, there are a LOT of commercial property owners who INTENTIONALLY leave a unit unrented and take the amount that unit would rent for as a tax write off against other income.  If you have a building that you've owned for 20 years that is paid for.  That unit may have a market rent of $3000 a month.  If it's unoccupied that $3000 a month can come off your income.   At this level TAX planning is an art form.

Commercial land is EXPENSIVE..........NO......REALLY?????? Hey ever think to see what that old single family home is going for right NEXT to that commercial lot?  Get a zoning change by increasing the tax revenues for a city of town with new economic developement and you could have a sweet deal.  Is it easy???  No...who told you to try the EASY button in life?

Your right, WAY easier to sell that single family than my commercial buildings.  No doubt about that...  Funny though, I don't SEE people TRYING to SELL positive cash flowing commercial MONEY MACHINES.
I do however, see LOT'S of people trying to DUMP their single family homes right now.

Take 5 of your single families and they wouldn't bring in what 1 of my commercial buildings does.  I know..... I've done BOTH.  Not even close.
PLUS.........about 99% less BS.   I also have written offers from 4 of my commercial tenants for the opportunity to buy those buildings should I ever decide to sell.   A GREAT location for a business is PRICELESS!  These people have moved their businesses around.  They know when they find a GREAT spot.  They will pay through the NOSE for it should it EVER become available, because they KNOW they may NEVER get another shot at it.

The problem with commercial is this.... your competing with people who have built very SUCCESSFUL Real Estate businesses.  It's tough, they know what everything is worth.  You just have to be out there looking and dealing.  The great deals are out there they just don't last long.
« Last Edit: December 14, 2007, 06:22:17 pm by fdjake »

Offline propertymanager

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Re: Why bother with residential rentals?
« Reply #35 on: December 15, 2007, 07:41:18 am »
FDJake,

I agree with what you said, but Architecture Fan is also correct in what he said.  I personally know of many vacant commercial buildings, including a $2,000,000 that has been vacant for 5 years that the owner is desperately trying to sell. 

I think the point is that many commercial properties are in a different league.  Would I love to have a bunch of commercial rentals that would provide cash flow without having to deal with residential tenants?  YOU BET I WOULD!  However, could I afford to have a $2,000,000 building sit vacant for 5 years (or even 1 year)?  No, I couldn't. 

I am approaching commercial the same way that I approach residential.  I am always on the lookout for a great deal.  When I find a commercial property for 50 cents on the dollar, I will buy it.

Mike 
www.1MinuteToRentalPropertyRichs.com 
This No-Hype, No-Nonsense Book is a step by step course in making money and building wealth with rental properties!  Everything from buying properties at a discount to dealing with terrible tenants.  Now In Paperback!

Offline fdjake

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Re: Why bother with residential rentals?
« Reply #36 on: December 15, 2007, 08:56:11 am »
Mike,

You just made my point!

THAT is the ONLY way anyone should be buying commercial property!

I goes right back to what I said.   Don't FORGET what you learned in residential investing. 

Everything's the same except the zero's.

Offline usmctpdog

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Re: Why bother with residential rentals?
« Reply #37 on: December 15, 2007, 11:30:44 am »
 W O W.........FDJakes, Frank and Rich.  You guys are a wealth of information!
Reading these pages of posts have been invaluable and are quite insightful.


Knowledge is key and I am thankful for finding this forum and your valuable insight.





« Last Edit: December 15, 2007, 11:59:18 am by usmctpdog »

Offline Architecturefan

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Re: Why bother with residential rentals?
« Reply #38 on: December 15, 2007, 02:47:59 pm »
Purchasing Commercial property for 50 cents on the dollar would be easier than finding similar discounts in SFR's (unless the market is extremely depressed or heading in that direction where the SFR is located) I would think, again due to less buyers who seek out and/or understand Commercial.....And if you can attract tenants it is definitely more of a winner.

When Commercial goes well, it can go VERY well.....someone posted earlier that prime cash cow commercial properties are never for sale, if you want one, you are best to develop one.

But they can all too often have their value solely tied into the numbers.....Look at how they are marketed over SFR's.  An SFR will mention it's community, location, school district, quietness and solitude, unique setting (i.e. Lakefront, Borders Parkland, etc.)

A Commercial property will often simply mention it's location to let the potential purchaser know how close or far they will be from it, advertising focuses on gross and net income, cahs flow sources, strength, longevity, and prominence of tenants (i.e. a major chain store as anchor, etc.)......Amenities that add value to SFR's could actually detract from Commercial value.

Commercial property will get caught in the tailwind of a boom market, but may not appreciate as far or as fast as SFR's.  In appreciating markets, more people make improvements to SFR's from more expensive improvements to whole house teardowns and the "one wall wonder" where one wall of the original stucture is left to avoid new construction taxes.
You can sit back and watch your new and old neighbor's build McMansion's around you and it's instant appreciation.  This does not happen as often with Commercial.

True, you can create appreciation above and beyond cash flow with Commercial by buying a vacant property and tenanting it, replacing less stable tenants with more stable, buying an underperforming strip center and getting a major chain anchor, etc.....And there are instances where you can change usage (turning warehouse space itnto residential lofts) but obviously this is location specific.  In either case, you are doing all the work, no sitting back.

With Commercial, there are less people who "appreciate" it, if you'll pardon the pun.

And when the Commercial road is right, it can be paved with gold...but if the going gets bumpy, there are less detours and alternative routes to take....In My Opinion....
     

Offline fdjake

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Re: Why bother with residential rentals?
« Reply #39 on: December 15, 2007, 04:20:28 pm »
All GREAT points Architecturefan!!!

Very insightful.


Offline Bluemoon06

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Re: Why bother with residential rentals?
« Reply #40 on: December 15, 2007, 09:33:17 pm »
I believe that money can be made in a variaty of ways in real estate.  Just because I don't know how to do it doesn't mean it can't be done.  The question was why bother with residential.  The answer is that all real estate is local.  In some local markets it makes more sense to do commercial than in others.  If somebody could show me how, I may do it.  I just haven't found anybody that can tell me how to make money in commercial.  My question is how do you make money in commercial?
Real estate to Retire you
http://sphinxwealth.com/

Offline fdjake

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Re: Why bother with residential rentals?
« Reply #41 on: December 16, 2007, 10:09:26 am »
Fair enough....

I make money in commercial by actually BUILDING my properties.

That alone usually saves me 30% right off the top.  By building them myself I CREATE whatever the market is paying good money for.

I started out as a builder.  Residential homes.  Got into developements, roads, the whole show.  That is a HUGE advantage for me.  Most guy's get overwhelmed by the costs involved in developement.  There are ways to do this and save a LOT of money.   I don't build roads anymore.  Too expensive, too much equipment, too much labor.  I build my properties on EXSISTING roads and LOVE converting sinlge family homes into commercial office space. 

When you get into commercial real estate you better be prepared to start attending NUMEROUS political functions.  This is where the projects get started.  You attend a fund raiser, make some connections, know WHO to talk to, and they know who YOU are, now your off to a decent start.  It's all a sales job.  Hire the right attorney, the right engineer, and lay out how your new office building will bring X amount of money into an area that has an abandoned home on it bringing in nothing but complaints to the city and you have a potential PROJECT!!

It sucks that you have to do it this way but it's the reality.  Buying single family homes doesn't involve politics.  You just do it.   When you get into the commercial world it's a whole new ball game.   It's not a hard game to play, but most people don't even know where the ball park is.  Never mind how it's done.

So in a nut shell.....I buy land or buildings that I can CHANGE.  By changing that land or building I create something of value,  that is in demand.   It is a lot of work at first.  The pay off comes once the project is done.  At that point unlike residential you just sit back and deposit checks.  In residential THAT is the EXACT time the REAL work starts.  TENANTS :banghead

Here's a real world example....Ugly burned out house on a main commercial road.  Some difficulty with an estate that the building was in.  I paid to fly one of the family members who didn't want to sell up here to actually SEE the building.  He thought his brother was BSing him about it's condition.  Put the guy up in a nice hotel took him out to breakfast and found out he LOVED old Shelby Mustangs.
I have a 1966 Shelby Mustang!!!  BINGO.  Took him to my house, drove the car around with him for the day. Just had a nice time with him.  Met my family.  Signed, sealed and delivered NEXT day.  Still talk to him.
If I hadn't gambled on a $500 plane ticket for him the deal NEVER gets done.  That's why no one else GOT it.  They never TRIED to solve the PROBLEM.  This guy thought he was being screwed.  He wasn't.  It took a plane ride to convince him.  I converted that house into a Doctors Office Building.  It generates over $100,000/ year NET!!!   I'm NEVER there for ANYTHING!!!!

That's how I do it.  You can't drive around and ask how much that completed commercial building is??  I'm the guy who built it.  And NONE of you are getting a deal :biggrin

Offline Architecturefan

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Re: Why bother with residential rentals?
« Reply #42 on: December 16, 2007, 11:34:23 am »
Thanks for the positive feedback on my comments fdjake and propertymanager.....

Fdjake....You have a decided edge with your unique background with building.  I think the two most important skills you implement are creative problem solving and going the extra mile.   You could be successful in any and all avenues of Real Estate (or anything else, for that matter) by implementing these, but I can certainly understand not wanting to deal with residential tenants...LOL

On the flipside, Commercial success does seem to demand the political contacts and connections you speak of, where residential does not (or to a lesser degree).  For people who get into R.E. in order to become more independent, escape their boss, the 9 to 5 and office politics associated with it, this may come across as a frying pan to fire scenario.

  But it could be a small price to pay if they do not have (or do not want) the skills to deal with residential tenants, be bothered seeking out unique properties that will attract the most qualified tenants, etc...

Offline fdjake

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Re: Why bother with residential rentals?
« Reply #43 on: December 16, 2007, 06:50:38 pm »
You hit it right on the head.

EVERYTHING is a trade off.   In commercial property you don't get dirty.(not that I mind that, spent a lifetime doing it)  You spend your time on deals/projects.  In residential you spend you time DEALING with tenants.

Your 100% right.  To some folks dealing with politicians VS tenants is a toss up.   That's the great thing about Real Estate Investing there's room for everyone!


 




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