Why bother with residential rentals?

Rehabbing, Fix and Flip, Rental Properties
1

I’ve been in investing in Real Estate for over 20 years. The following comments are my opinions based on that 20 years of investing through good times and bad.

I, like many people here started out by investing in residential real estate, basically I bought homes to rent.

If I had it to do all over again I wouldn’t go anywhere near these types of properties. Here’s why…

First off, your tenants have the law on their side. Most of them know this and are experts in using that to their advantage. Second, in my experience most renters live like pigs. This statement is actually an insult to the real 4 legged pigs. Because people LIVE in these homes their problems become YOUR problems. Houses require much more maintainance than a concrete block commercial building with a pitched roof.

When I started my goal was to learn the real estate business by rehabbing homes, buying/selling and building my cash. My initial goal was to put $100,000 in the bank. I got there in 2 1/2 years. Then I started buying rental homes. I hated every minute of it. The phone calls, the morons, the repairs that a 3 year old could have taken care of but “Hey it ain’t MY house” , the late payments, the NO payments, the evictions, the lawsuits, the constant rehabs to homes already rehabbed 3 times.

Then I discovered the wonderful world of commercial/industrial rentals.
I purchased a lot in a industrial complex (basically a road that had other block buildings on it near a highway) I put up a 50’ X 200’ block building and broke it up into 4 units, each with a overhead door, small office and the majority of space left open. The entire building rented out in 3 months of opening. Each tenant signed a 2 year lease with an automatic 4% rent increase every year. The thing that amazed me was how well these people kept their units. Clean would be the best way to describe them. These are businesses, these folks have customers that actually need to go to these buildings. And PAY?? Oh they pay. I’ve had 2 minor problems with late payers (notice I didn’t say no payers) One guy was a auto repair guy. Always late, I stopped by to tell him I wasn’t happy, and he made the mistake of being offended by me wanting my rent on time. I calmly explained to him that if the rent was late EVER again that I would have 3 dumpsters parked in front of his shop the next day. I would then take care of any and all maintainance the building required in the same timely fashion he paid his rent. Funny, never had a problem after that.

Another point, because these people actually make a living from these locations, losing them can be catostrophic to their income. If they have a good location they don’t want to lose it. SO THEY PAY!

If I was doing it again I would have taken that $100K and just built small commerial/industrial block buildings. The rents are 2 to 3 times what you get for houses, the headaches are 100 times less, the construction is a joke compared to a home. Think about it, no basements, no fireplaces, no kitchens, no hardwood floors, no media rooms, no elaborate bathrooms with Jacuzzi’s (I put in a sink and toilet, that’s it) a concrete slab floor, basic plumbing, basic electrical (no expensive light fixtures) Few if any windows, industrial ceiling mounted heater in each unit, ect. I’ve built both residential and commercial…commercial is half the work.

I still fip houses because I enjoy it, it’s profitable and I’m not marrying the person who buys it. (Unlike renting to that person) I have 5 of these buildings with a total of 20 units. They cash flow like a casino. I will say that I purchased the land for these buildings before things went crazy, but you guy’s will get another shot at that real soon I think. There’s very little stress in this type of investment. Banks love them, tenants want them, and when I decide to retire they will turn into a big pile of money.

There’s nothing wrong with owning residential rentals, but there is an easier way to the same result, that’s all I’m saying. Think about it. I wish I had earlier.

2

Big part of the reason why is that commercial investing needs the 10 to 20% down payment while SFH can be purchased on 100% financing. Granted there are creative ways of buying commercial buildings, but to get to that level, you need some kind of experience or knowledge.

I don’t like rentals and I don’t but rentals. My long term plan is to use SFH investing to build commercial portfolio, but first I need to build the capital I need and the knowledge needed.

It is always easy to look back and say I could have done this or that :slight_smile:

3

Fadi,

I think you just made my point. If I was offering a new guy some advice it would be learn the business through buying and selling. Build your cash, keep your day job, and get your hands dirty. you’ll learn a ton.

The problem I see is most people assume the only path is through residential rentals. IT’S NOT. As a matter of fact EVERY investor I know who is successful got OUT of the residential and now just does commercial.

Learn how this stuff is built. That’s what I did. I paid cash for the land with my profits from buying and selling and the bank loaned me what I needed for the building. They were in a no lose situation equity wise.
In the end it actually helped me too. By the time that building was finished and fully rented they had me approved for a $500,000 line of credit based on the completed value of the building.

It can be done more ways than one!

Oh, and in my opinion, no money down on a pain in my @ss is still a pain in my @ss.

4

how much did it cost you to build the 50x200 buildings, and how did you go about financing them?

5

What about steel buildings?

6

The first building I built was in 1996, the economy was in the toilet at the time and I was able to get very hungry sub-contractor pricing, that first building cost me $275K with the land. The lot was $75K and the building was $200K. I paid cash for the land and borrowed the rest from a local bank I had been doing business with for years. I did have experience building homes, and the bank had loaned me money on some spec houses that I built then sold.

At the same time 3 family homes were selling for $200K and generating about $1800 gross ($600/floor) So it wasn’t a giant leap to get into this building.

Once completed each unit leased for $1200/ month X 4, for a gross monthly income for the building of $4800. Financed at 15 years at 8%. Current rents are $2200/month/unit or $8800/ building.

Because this was a brand new concrete block building with a 4 pitch, trussed roof (never use flat roofs, unless you enjoy leaks) with 30 year architectual shingles on them. ( I figure any roofer can replace them in 20 -25 years and I won’t have to hire a commercial roofing contractor to do it)
This building has required minimal maintainance.
Oh, one priceless tip I got from a seasoned commercial building owner…NEVER… put floor drains in ANY of your buildings unless the thought of tenants pouring all kinds of expensive to dispose of material down them excites you.

As far as metal buildings go, I looked into them, they just are not even close to being as maintainance free a concrete block. They are cheaper, but my plan is to have these babies all paid off in the next 4 years, I don’t want to be looking at metal buildings that are entering the end of their lifespans just as my cash flow goes through the roof.

7

Lots of good stuff here. Most investors get involved in SFR because there are millions of them - literally - buying and selling are normally more straight forward and financing, especially for a newbie, is simplified.

But I have to agree with fdjake that the best profits are in Commercial buildings - either small unit commercials, or I’ll add smaller apartment buildings.

There are several reasons for this. One - SFR value is based on “owner-occupied” values - which generally come at a premium to rental income. However, value for apartments and other commercial property is dependant on rents. You can very quickly move into a property and provide good management and increase values simply by being a good landlord.

Second - with multiple units - 4-20 units in a complex, you can take a vacancy or two and still be profitable. With SFR - one vacancy of a month while you make repairs from a bad tenant can cripple you and leave your small positive cash flow into a major negative cash flow in a short period of time.

One problem you have to watch with smaller commercial buildings like fdjakes - is the health is dependant on the economy. We have had one of the greatest business and economic expansions in the last 8 year - I’d even go back as far as 12 years, with no major correction. However if the economy makes a major correction (quite possible in coming months) then small businesses like his auto repair shop are normally the first to feel the pain. I’ve been watching commercial and residential markets go boom and bust since 1976. Right now I think the best thing will be smaller apartments - 8-20 units. Foreclosed homeowners have to live somewhere, right?

I’d be hesitant to make a big splash in industrial commercial units right now until I had a better feel for the post election economy. As always - local conditions are important. Find what your local community is short of and provide it. You’ll make money.

8

Got to agree commercial RE makes for a good retirement. My dad is a good example.

Back in 1963, he got into it accidentally. Bought a building for 25K because his business was in it. Bought it to prevent rent increases and collect rent from another store, an apartment upstairs, and four garages in the back. Put 10K down, and assumed a 15K mortgage with 15 years to go.

He retired in 1979 when the mortgage was paid off. Market rent for the stores run over $2,500/month, EACH nowadays, and the garages well over $150/month each. He moved into the apt upstairs, but could be rented out for another $1,800/month, as an apt or office.

The best part about the stores are:

  • They pay the heat, RE taxes, do maintenance, and shovel the snow, clean the sidewalks. Never a heat or toilet complaint.
  • A good tenant stays 10 - 20 years, or forever. Some buisnesses in the area are at the same location for over 50 years.
  • When a store becomes vacant, he’s beseiged by renters from a nearby commercial district where the rents are two to three times what he charges. Store rents run $5,000/month and up in the commercial districts.

As it turned out, he did the smartest thing and rented the stores out as offices, as office rents in NYC went to the statisphere, especially afer 9-11. Offices are clean, quiet, and best of all, keeps the insurance rates low, as say, compared to restaurants.

And for his tenant, best of all, he picked the place because the two clerks that worked for him lived down the street, and the commute was less than a 5 minute walk. After 9-11, he rented a store to a travel agency that packages cruises, whose rent for a small one room office in Manhattan went to several thousand dollars.

And it was the best of all possible worlds, and I wondered why it took 9-11 for people to think of it.

All the issue of vacancies, moron tenants are non issues.

Two years ago, he had a major operation, and was in rehab for six months. So I had to handle the rent collection.

This involves taking the several rent checks out his mailbox, write up a deposit slip, walk to the bank two blocks away, and putting the money in.

As a frugal man, he’s spent none of the rent money as he’s got another pile of money he put away from the business he retired from. All the rent money are invested into “triple tax free municipals” since 1979. At several thousand a month, plus tax free interest, you can imagine what a pile of money several thouand a month socked away has become.

Based on a current value of the property, about $1MM, the monies he socked awy, close to another two million, not a bad return on the original 10K investment. In my opinion, he did just as well, or better, than Warren Buffet.

9

Buying apartment buildings is no different than owning and renting single family homes. Your tenants problems are your problems 24/7. The basic issue here has not changed. You are still renting HOMES to people. They have more rights than you do, and that’s the bottom line. When you rent someone an apartment or a house it makes no difference, legally they LIVE there, and that is totally different than renting someone business space. Don’t confuse apartment buildings with the type of commercial property I’m talking about here. Apartment buildings are the same headaches as SFH’s. Evictions, lawsuits (BIG TIME, because everyone in it thinks the owner has money) damaged units, drug transactions, bad tenants who drive out the good ones, it’s no different, it’s just concentrated in one building.

As far as the auto repair shop. I have to disagree with you. Prior to getting into real estate I owned and operated a profitable used car dealership. I can tell you in no uncertain terms that when the economy tanks independant repair shops go crazy. People keep the cars they own and fix them instead or running out and borrowing $25-30K for a new one. Think about it… In uncertain economic times if you have a good 6 year old car and owe nothing on it, are you taking that car to the local New Car Dealer for a brake job at $600, or my guy for the same repair at $250? My tenant wins that one everytime.

The point I was trying to make here is simple. I DO NOT like renting apartments, homes, residences, ect to people. If they LIVE in it, I’m not interested.

Will an economic down turn effect some of the businesses in my units?
Of coarse it will. I’ve been in construction for 20+ years, I’ve seen it first hand. I will tell you this however, in my experience bad economic times are the PERFECT opportunity to get into commercial buildings for that very reason. I never buy anything when it looks safe. Being safe costs money. I would rather buy land for these types of buildings when times are hard and I can steal it. This isn’t for beginners, you need YOUR money behind this type of investing. Forget 100% financing, a bank won’t touch that. But, you find yourself a nice lot that you can steal and pay cash for, then you have something a bank will be interested in. I build these myself because I know what I’m doing and it saves me a tremendous amount of money. Can anyone do it? I would say yes and no. Most people I know seem to want to do things the EASY way. I was never like that, and I have all the battle scars to prove it.

10

All real estate is local. That means that all types of real estate and approaches don’t work everywhere. For example in California buying a house and renting it out for a profit doesn’t work. Where you are it looks like commercial properties work better than residential single family houses.

Where I am in Houston commercial doesn’t work very well. First nobody rents your commercial unless they get 3 to 6 months free rent, and they make you build it out to their specifications. That means I put another $3k to $k and don’t get anything back for 3 months. The people renting your commercial property is a new business (old businesses already have a rented space). Almost all new businesses fail in the first year so you only get 6 to 9 months rent until you have to re rent the space.

When I do my residential rentals that section that states the tenant is responsible for repairs up to $____. I fill in $100. That makes my property acts like your triple net lease properties. I do have a home warranty which I allow them to use to make those repairs with a $30 co-pay.

People don’t turn into pigs once they get into your house. They were pigs when you first meet them. If you screen them properly you find out that they are pigs and you don’t rent to them. There are only 3 kinds of people. There are perfect people, these people never miss a payment take care of the rent house. There are normal people that miss a payment every now and then, don’t have very good credit and will leave your place needing paint and carpet cleaning. Then there are Martians that come to earth impersonating people trying to rent your house. They look like us and are really fun to talk to, but they are not going to pay you rent, they are going to kick holes in the walls and they are going to cause you trouble everyday. You want to rent to perfect people and normal people with a one month security deposit. You want to rent to Martians with a 3 month security deposit. The key is screening. If you screen you will know what kind of person you are dealing with. There are only 2 reasons you don’t know exactly how a person is going to act when you rent to them. The 2 reasons are that you are either lazy or greedy. Lazy is when you just decide to take a person with out checking them out. Greedy is when the prospective tenant (usually a Martian) waves a bunch of cash under your nose and you take it instead of checking them out.

I choose not to rent to Martians. That means that I have to go through more applicants than you do, but my houses still only take 2 weeks on average to rent. I am not saying that you have been doing it wrong for 20 years, but there has to be a better way than you have been doing it.

11

I agree with your statements to a point…

Real Estate is local, what works for me may not work for you.

On the other hand, not one of those businesses who rent from me are new. These people have been in business for years and wanted bigger or newer facilties that’s why they came and that’s why they stay. But like you said, my market may be different than someone else’s.

I know lot’s of investors who have made plenty of money doing the residential thing. I also know that 99% of them got out as soon as they could. They never looked back and never regretted leaving that world. I know I haven’t.

It sounds to me like you do a good job with your residential properties. My question to you is how many do you manage, and how long have you had that many?

I like to call residential rentals “VELVET HAMMERS”. A velvet hammer hits you softly over, and over, and over, it’s a slow, cummulative effect. Over a period of time that differs for each investor, the hits (aka BS) start to take their toll. When your building up it’s a challenge, your hungry, over time you just get sick of the never ending BS. And I don’t care how good you screen people the BS never ends. If screening was the “save all” we’d never have a bad cop, a bad politician, or a bad nurse. How does a Doctor get through over a decade of schooling and still be a screw up. All of these people get scrutinized beyond belief yet we still read about nit wits getting through the check points.

I do agree with and like your Martian reference. In the real world what happens to landlords is they check these people out and receive good feedback because the poor bastard who rents to them now would give anything to get rid of them. These people are not stupid, we all like to tell stories about how dumb some of these people are, but in my experience they know EXACTLY how to play the game. From fake references, to stolen identities, to using schills to get in your rentals. And on and on. I’ve had these dopes rent homes in their parents names, the parents would give anything to get these losers out of their house so they just sign. What are you going to do to them?? Sorry, my nit wit kid is now YOUR nit wit tenant. Oh you eventually get them out, but again, it’s the VELVET HAMMER (aka BS). I would also point out that these types were a small percentage of my tenants, but, they require lot’s of TIME & MONEY. Remember…a small stone in your shoe can cause lots of pain.

Nothing has been as easy as these commercial rentals. I’m just letting people know there are easier ways. If commercial is dead in your area, and residential rentals are your niche, your a successful real estate investor!! You should be proud of that. Personally, I’d flip houses before I became a landlord again. Buy it CHEAP, fix it, sell it, no long term committments. I know a lot of millonaires who have NEVER owned residential real estate rentals. The more seasoned they are the more they tell you to stay away from it. One of the smartest guy’s I know built a real estate portfolio of nice commercial properties. He’s 68 now, and he tells me all the time. “If I hadn’t screwed around with all that BS residential crap and just went straight at the commercial stuff I’d have 10 times what I have now.” He figures he wasted 10 years just playing the landlord game.

Frank Chin posted a great example of this. Imagine how many single family homes his dad would still have to own to put that kind of cake in the bank. Imagine the hundreds of tenants he would have gone through in that time frame. The headaches alone over a 40 year period would be incredible. Instead, he keep a building that was very low stress, a SUPER investment, and now has over $3 million dollars because of that one building.

The bottom line is, and always will be this…If you find a niche in any type of market and exploit it, you will make money. Bluemoon06 runs what sounds like a very tight real estate ship. He is, and will continue to be successful, and in the end THAT is what matters.

12

Good info guys, keep it coming.

13

Well I agree, real estate is VERY local. I see tons of vacant commercial buildings in downtown Raleigh were I live. In my opinion, building a commercial block building down here would be financial suicide. Thats not to say other near by markets it might work. But I wouldn’t know. Sounds great in theory though

14

Great discussion everyone…

fdjake,

My market is like jb_bak’s. I have wondered how people in my area make any money on commerical property. Some of these places sit empty for months. In fact a while back I posted a question to this forum about this very question because the whole commercial thing has become a mystery to me. I see vacant buildings go up all around me but all stay empty. I’m fascinated by commercial real estate and my area of interest is exactly the types of buildings you’re talking about. I just can’t figure out how you can make money at it? I have the following questions for you:

  1. How do you find the lot? Do you mainly concentrate on lightly developed areas?
  2. What sort of property is your sweet spot? By that I mean who is your audiance? What sort of square footage?
  3. Could you tell us about how you structure your leases in more detail?

Thanks

15

First off ANYONE can get in a car in ANY market and drive by hundreds of empty commercial buildings. I could show you 30 to 40 on one road here. In my area these tend to be RETAIL commercial buildings, small strip shopping centers, even commercial office space. I’m not interested in that market. I concentrate on owner operator type businesses that need industrial space. In my buildings I have the folowing tenants. A steel fabricator (Big Company) Mechanics, Tree Companies, Boat repair facility, Motorcycle repair/storage (beautiful in cold new england winters) Various distribution companies, 2 landscapers, Glass co., Tile co. and on and on. I always build close to highway access. THIS is key in my mind, most of these businesses need to MOVE either product or people, being near a highway makes the most of their time.

As far as your other questions…

I find most of the lots by looking for areas that meet the criteria, close to highways, near other key support businesses (nothing like being a mechanic and having an autoparts warehouse 2 buildings down from you.) I never over pay for land, NEVER, I don’t care how great the location is, if I can’t get it for my price I’m out.

My favorite property type is light industrial, I also have 2 self storage warehouses which are beautiful businesses. I include those as being part of my commercial buildings. Light industrial is great because most of these people have been in business for years, they are growing and require bigger space (that’s where I come in) I wouldn’t go near a retail commercial building for anything. THAT is the stuff that sits empty.
There is not much unoccupied NEW industrial space for rent around here. I can’t think of ANY in my area.

My leases are pretty straight forward… Leasee signs for 2 years, automatic 4% increase every year on aniversary date, (this is key, it completely eliminates the BS over getting your rents up) They must notify me 30 days prior to anniversary to renew, if THEY forget, I can decide NOT to renew their lease. That is a nice little sentence in a lease. No one I wanted out has EVER remembered to notify me within the 30 day time frame. They then recieve notice that they’re GONE!! This has happened 2 times in 11 years. One for slow payments, one for being a slob. BOTH GONE, and not a single thing they could do about it. BYE, BYE!! They pay for all utilities, and a small fee for snow removal on an as needed basis. ( I have nothing to do with it, the money goes into an association, whatever isn’t spent gets returned yearly) I handle maintainance on the OUTSIDE of the building only! If you want to run your heater 24/7 at 78 degrees YOU (the leasee) can pay for a new one when it dies. I don’t have to do a hell of a lot of maintainance on these buildings, they’re realitively new to begin with, and built like brick sh*thouses.

I’ll mention one other thing…ever notice how most of the people on this forum consider commercial rentals as being apartment buildings? That’s NOT what I consider commercial property, that’s a giant pain in the @ss under one roof.

I’ve been browsing this site for years and there is very little talk here about industrial/commercail rentals. In my mind owning apartment buildings is absolutley no different than renting single family homes. I know the theory’s. But bottom line for me is…NO ONE IS LIVING IN MY PROPERTY. I can not stress enough how big that is. Even the law recognizes it. It is much easier getting a business out of your property than it is a person living in “their” home.

Think about this…you see all this commercail property just sitting??? That’s not even close to market research. Go down to City hall and find out who owns it. Then check the records to see what OTHER property they own. What you’ll find is very wealthy people/Co.'s who build when the opportuntiy presents itself. They have numerous other commercial properties that generate BIG numbers, guess what they’re doing with that empty building???

They are taking a HUGE tax deduction based on market rents for that
space. Why don’t you guy’s see this stuff going up for auction??? Ever wonder about that? I have a VERY wealthy mentor, he owns numerous commercial buildings and he ALWAYS has a few that he builds out then has to wait for the market to catch up to him. Meanwhile his gross income is reduced by whatever the market rent for that property would be. When you reach that point you HAVE to start playing defense, otherwise you give uncle Sam a HUGE portion of your income. By doing this he reduces his tax liabilty, waits out the market, and as we all see everyday, those buildings do fill up with tenants, it may take months or years, but this isn’t like flipping 3 family homes, it’s an entirely different beast. Most of these people have the staying power to ride it out. As a matter of fact, if you can’t you shouldn’t even consider it. The only guy’s I know who get hurt in commercial real estate are Doctors and Dentists who think it’s all gravy. Those are the investors who get burned. The seasoned guy’s know how to play the game, have the capital, and understand the time frame involved.

This isn’t for new guy’s.

16
I like to call residential rentals "VELVET HAMMERS". A velvet hammer hits you softly over, and over, and over, it's a slow, cummulative effect. Over a period of time that differs for each investor, the hits (aka BS) start to take their toll. When your building up it's a challenge, your hungry, over time you just get sick of the never ending BS. And I don't care how good you screen people the BS never ends. If screening was the "save all" we'd never have a bad cop, a bad politician, or a bad nurse. How does a Doctor get through over a decade of schooling and still be a screw up. All of these people get scrutinized beyond belief yet we still read about nit wits getting through the check points.

fdjake,

Very good posts and I especially like your “Velvet Hammer” analogy.

However, I have found that being a landlord gets easier over time. As you said, there is a constant level of BS, but when I first started all the BS seemed like a sledge hammer and four years later, it does seem like a “velvet hammer”. It is still an annoyance, but I have become so numb to the stupidity that a LOT must happen before I get too excited.

I do like your post about commercial property and think that is a natural progression. It is something that I certainly will pursue in the future as my residential business becomes more mature.

Thanks for the great posts!

Mike

17

please help me understand this…

if comercial rentals make so much more money and are less of a headache, why don’t more poeple do it? Is it because of the difficulty of financing?

thanks,
-Rich

18

Financing, lack of understanding of the commerical market, far more residential property than commercial, lower price point in residential. Most people understand residential, they get it. They know what a mortgage and other home fees cost since they pay them. They have either rented before or can at least look in the newspaper to see what rents are now. It’s not foriegn and scary. Never forget this- if someone can’t understand something they will say no, everytime without fail. Add to the basics other complexities like commercial leases and people run away.

19

Just to echo what Rich said above, the “commercial market” is more diverse and complex. For one, it consists of many segments:

  • Warehouses
  • Hotels
  • Office buildings
  • Medical centers
  • Apartment buildings (as some mentioned, same issues as SFH)
  • Retail
  • Land
  • NNN Leasing

You’ll need to delve into the economic dyamanics of each, which entails understanding the “supply and demand” side, that affects the success or failure of an investment.

Often, zoning, demographics, and transportation come into play

Because my dad had some success in his “stores”, and looking at “good vs mediocre” commercial investments, I used my dad’s investment as a basis against what others are measured. So I analyzed small strips, and buildings that contain one to a few stores.

There are many categories of retail, and for small retail, I’ve looked at:

  • Downtown stores and strips, in a suburban setting.
  • Neighborhood strips in urban areas.
  • Older ubrban strips, i.e. small building on a major road with a few spaces in front
  • New strips from 6 to 12 store with lots that can park up to 100 cars.

And when I look at these, I look at vacancies, and what type of businesses that characterize the area, and the type of clientele that patronize the establishments.

Of all of these, downtown stores in suburban settings has the most issues, and risks. Their main cleintele and workers in that area. Restaurants here mainly serve workers at local courthosues, office buildings, and is often uneconomic to open after hours or weekends. Suburban shoppers don’t go to dwontown after hours or on weekends.

Neighborhood strps in suburban areas supply a range of services from restuarants to beauty shops, stationery stores etc. Because restaurants pay the highest rents, usually older neighborhood strips come up short. Who wants to go somehwhere to eat, and can’t park.

Store in urban areas are interesting. I live in the edge of NYC, with a lower population density. Where I am, twenty years ago, one out oof three stores are vacant, so they can be snapped up at good prices. But, what are you going to do with a store where there’s another vacnt one nearby, with cheaper rent. Vacancies kills rents.

But little by little, in the last twenty years, vacancies filled up, and I figured rents should be going up. But wait. Most of the new businesses opening up are dry cleaners, nail salons, and Chinese takout. And now there’s abarber or beauty shop, a dry cleaner on every corner. I also noticed I pay LESS for a haircut now than 20 years ago when my barber did not have all these competitors down the street. And because of this, rents did not go up that much either, though building prices gone up. Why?? Land value. So the cash flow is much poorer.

How does this compare to my dad’s area.

First, it’s an older area, more dense, with no vacancies. His stores are three blocks from the main shopping district, and since people in the area walk, they pass the local store before they get to the major strip. Because rents “out of the commercial district” are lower, these merchants in theory can charge lower prices.

Your FREIND in these areas is zoning. In many older residential districts, older commercial structures are grandfathered so someone just can’t build a store down the street. My dad’s store, and his tenant, would not have new competitors because no one can get any place nearby zoned for a store.

In many areas, with less restrictive zoning, say the Houstan area, commercial investors would have a hard time of it, even if he got a paying tenant. His tenant can just have a new competitor open up down the street from you, when someone buys a piece of land, and just throw up a shopping strip.

You see, commecial investing involves more aspects. For SFH, what on earth would the price of a haircut have to do with things. But in commercial investing, it does have a major bearing, as barbers might not be able to pay the rent any more.

Another sign of higher rents on small businesses is all the local Carvel ice cream franchises are opne on Xmas and New Years Day. When I was a youngster, they’re close for their winter vacation from Nov to the following March.

Several strips I looked at that contain restaurants I skipped. If I go there on a Saturdaynight, and the place is dead, then I figure the tenant would have a hard time paying the rent. Usually, I can tell even before going Saturday nights just checking out nearby restaurants with better parking, and better access.

Another telling sign of a “low rent commecial area” is the prevalance of storefront churches, AA meeting site, or use as storage for local plumbers. These guys pay the lowest rents. The highest rents goes to areas with restaurants.

So it’s the theory of the highest and best use.

And I’m just talking about retail here. I haven’t even begun warehouses.

20

Frank-
As always a good, long and concise post.

Who wants to go somehwhere to eat, and can't park.
This point is paramount folks. Across the street from where I am sitting right now is a place that has housed a few restraunts in the past few years, the place that is currently occupying the spot is almost never open anymore and is soon to fully close. I think they only cater now mostly. The problem? Parking!!!! There are about 5 on street spots on their side and 5 on the other side. The problem is that there are a few businesses on that side and 2 banks on the other side sharing about 10 spots. If I had to spend anymore than 30 seconds looking for parking I would go to one of the other 8+ restraunts in this tiny little town, most of which have better parking.

Let me break this down in digestable terms, there are only 3 things that affect real estate:

  1. Location
  2. Location
  3. Location

If all of that fails, location. I’m dead serious. In my own town which is 40 miles from here there are at least 3 spaces that REGULARLY open as new restraunts. These three spots see more turnover than ANY warzone residential you’ll ever see. If you think a residential tenant staying 6 months is bad some of these spots have had 3 tenants in the past YEAR. The locations suck for them, plain and simple. They are all on main roads but none the less they aren’t in the right spot and they get killed every time. And when you get into the right locations the land prices are insane.

I’m going to use my cousin for a few examples here to map out a few things:
About 10 years ago he sold off part of his farm to Walmart and on an outparcel of Walmart a Ruby Tuesdays. Price, $2.6mil. Imagine you the new investor wanted to build a strip on that parcel, how could you begin to think about it? First off purchasing the land, no bank is going to touch much over 50% LTV on raw land. Got $1.3 mil? Next you’ve gotta prep the land, grade it, run utilities, etc. I don’t want to even begin to speculate how much earth they had to move to get that land ready to build. Then they had to deal with construction costs, even if you aren’t building a Walmart your strip would be the same square footage or a tad smaller. Sound like fun so far?

Ok, another story…same cousin. The Walmart land was across the street from his farmstand and garden center, he sold it 10 yrs ago. About 2 years ago he decided to close the farmstand and garden center and build his own strip mall there. He is going to retain ownership of it. Now, he already owned the land. He also had the Walmart money. He also sold a lot of land behind the farm to condos, etc. So he’s not cash poor by any means. Despite all that he still needs more cash to do the buildout. So he goes and get himself some leases for the space including an anchor, I think it was a Chili’s. Now with him owning the land and bringing cash to the table plus having leases ready to go with a national tenant the bank approves him. When the anchor store pulled out of their lease the bank pulled the loan. Even despite him owning the land, having I don’t know how much cash to throw in he still had financing issues. I think he is now again resuming the build and hopefully he’ll get it built and open soon. I can’t wait to see the finished product. He’s keeping some greenspace in the middle and putting in a park so it’s not going to be your typical strip.

This stuff isn’t easy kids. Unless you really know what you’re doing stick to residential.