What resources could one look at to begin learning about commercial real estate?
Start small and move up. Master small residential, then start growing up.
What you guy’s are talking about here is the MAJOR LEAGUES of commercial investing. I’m 42, I have about as much of a chance owning real estate across the street from a Wal Mart as I do starting in Left field this week for the Boston Red Sox. Don’t confuse that type of commercial investment with what I was talking about.
I do not build $3 million retail strip malls.
I do build $300,000 to $600,000 commercial industrial/warehouse/business space. Off the main drags, but close to the highway on/off ramps (by close I mean 1-2 miles)
A 3 family home right now in my area sells for $300K It generates about $2100/ month in gross rents (when they pay) in other words it’s a LOSER!
I have cash available through selective buying and selling of single family homes.
I would rather take that cash and build a $400,000 two unit warehouse/industrial rental that rents for $4000/month gross than screw around chasing morons for $700 per floor every month of my life.
You need to know how to BUILD to do this. If you think your going to find these things sitting around for sale YOUR NOT. They’re cash cows, no one sells them. You have to build them yourself. That’s the niche folks. How many of you guy’s here could do it??? I’d bet it would be less than 10%. THAT is my advantage. It could be your’s too.
Your going to need AT LEAST enough money to buy the land cash. But if your buying and selling homes that is an achievable goal. While your buying and selling those homes build a realtionship with a local bank.
Using your home equity to buy and sell houses doesn’t show the bank anything. You need to get a credit line established for your business and SHOW them you know how to make THEM and YOU MONEY!!!
Once you do that believe me they will have no problem financing your first SMALL commercial build. Start small, check and recheck everything, then when it’s successful, repeat at a slightly larger scale next time.
Don’t write this stuff off, it’s the best real estate investment you’ll ever make. Just wait until Propertymanager gets his toes wet in this stuff. We’ll all be reading about him selling ALL his houses to build more commercial. It eventually happens to all successful real estate investors. Just watch.
I’m just trying to say that anything like this is going to be much harder than residential initially as there are a ton of other variables. And like you say you need to really either buy the land cash or at least put a hefty down payment towards it. This puts these out of the realm of a starting investor most of the time. A good move to make for someone that’s already built up cash and some experience in residential.
I agree with you Rich, it’s not for new guy’s but it SHOULD be something everyone strives for. I still to this day can’t believe how much different commercial is compared to residential. At least 80% less BS.
Your right on your points though Rich, it takes more money and more knowledge, but it is definitely worth getting there.
Personally I’m shooting for something like this: http://www.newbostonfund.com/properties/prop.asp?id=30
Yea, start small :biggrin
I’m not talking about $3MM strip malls either.
I’m talking about buildings in downtown that goes for $300K, or a neighbohood strip that goes for $600K, with buildings on it, today.
Way back, when I bought a 3-family for 180K, a storefront with 2 apts converted to offices upstairs commanded slightlly hiigher rent even, with 90% less work, selling for 200K. Financing was a bit trickier, as it required commercial loans, and banks don’t like doing commercial loans that small.
We passed on it because based on what my dad said, a vacancy can take several months to fill, and you got to be picky, unlike residential around here. We opted for the safer investment. But we felt we didn’t have a six to 9 month cash cushion.
Eventually, a retail travel agency occupied the store, and it’s been there for over 20 years now.
Another opportunity I missed was a building that housed an Irish bar, an anachronism now, with several garages out back, and an apartment on top. It was in the border of a residential and industrial area. The old building really looked ugly, and it was going for less than 200K.I looked at it as a blight in a residential area.
Someone snapped it up, resided the place, cleaned it up, put in a laundromat, and converted the garages to several small stores, housing a nail salon in one, a small beauty salon in another… The upstairs were converted to offices. The corner is busy nowadays, the laundromat is always jam packed. It was exactly what I was looking for as the nearest strip is several blocks away, as the location is grandfathered. No one is going to open a laundromat down the street. Unfortuantely, I spent too much time thinking about it.
This is the type of commercial investing I’m talking about. And rehabbing something like this is far cheaper than building new, and far faster taking into consideration governmental approvals .
Excellent point Frank. I know a guy who does just what your talking about. He’s a remodeling contractor. I’ve seen this guy take old crappy looking buildings, rip the vinyl siding off, reframe the front facade, then cover everything with Dry-Vit and BOOM!! Looks like a completely different structure.
He always seems to have them fully rented within a few months of the completed rehab.
That leads to another interesting observation. I have noticed that a high exposure ugly building that under goes renovation is like a giant BILLBOARD. People and potential renters pass it everyday and watch it’s restoration. That building is getting attention!! Everybody see’s it. Ever notice how most of those buildings are always full?
That’s an important clarification. Now that you mention it, I always wondered who put up places like those. :smile
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.
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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.
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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.
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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.
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:
- Price the land?
- Decide on property type (i.e. single tenant, multi-tenant…if multi-tenant how big of units and how many)?
- Evaluate how much rent you can command?
- 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.
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
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.
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
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.
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.
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…
All GREAT points Architecturefan!!!
Very insightful.