I feel like i’m finally starting to make my mark in residential rentals (okay, okay i’m waiting to close on number three). Last week I had a discussion with a man who told me “stop with these houses, industrials are the way to go”.
He has done exceptionally well with industrials and all his advice contradicted everything I used to begin residentials.
This guy even went as far as to tell me that when I have an extra 50k and i’m ready he’ll help me get started.
He did admit to me that he started in residential but strongly suggested I cash out residential and start looking at industrial.
Anyone here that can offer some insight about this? I know there are other landlords here but I dont know if any of you stray from housing.
Replies
Do you mean industrial, industrial - foundries, etc. Those can have lots of hazardous waste problems.
Light industrial - warehouses.
Or Commercial - offices and stores.
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A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
Light industrial. Probably 4000-20000 sqft buildings. He has some commercial but prefers industrial.
With small rental properties in many parts of the country you can do a lot of the maintenance yourself. With business/commercial properties the rules generally get stricter and you'll likely have to hire out more of the work. And you'll have to worry more about accessibility, fire codes, energy codes, etc.
Not saying it's a bad idea, just that it's not the same business.
The leases this guy writes leaves him liable for: the floor, walls, and roof, thats it.
He says if the tenant gets the building with a working furnace and it breaks while its in lease, the tenant fixes it and it has to be working when the building is returned to him.
If the tenant wants a new front office, thats on the tenant.
I regularly do tenant fit-outs for a national chain. They seem like they would be great tenants. They step in to an existing wharehouse and demo anything they don't like and create a showroom, offices, bathroom and wharehouse at there own expense. They will not go into a facility that is available for less than seven years. Rent is the prevailing commercial rate. They budget about $250,000 to convert the space.
If you are renting this kindof product you have national chains who have strong negotiating power but pay every month and deal with all interior issues you just provide the shell.
Jason
Thats something else this guy told me.
He said with residential if the bottom were to fall out, I may have 3 families living in my house and if they cant pay they leave me broke.
He said with LI he's the first check written every month. If the business loses its building it loses its business.
This is the exact opposite of the advise I was given that got me into residential.
msa,
I bought the warehouse unit that my business is in, and the one next door. Both 1800 sq ft in a condo type building. I have also had one rental house, sold it a while ago. I will tell you one thing great about industrial/ commercial rentals .... other than the 4 walls and the roof ... the tenant is responsible for everything, at least in this area that is how the leases are written. If the heat goes out .. the tenant foxes it. Electric .. same thing. Its almost foolproof. How much damage can they do to four block walls ???
As soon as I get some spare change, I am going to buy another one. Cant see going wrong with it as long as the vacancy rates aren't real bad in your area.
Bill Koustenis
Advanced Automotive Machine
Waldorf Md
Your telling me the same things this guy told me. I'm in SE Michigan so i'm very apprehensive about renting ANYTHING.
Having said that though, I rent every house I have quickly, and (from what he told me) he has his buildings rented BEFORE he buys them.
I think my houses do well though because I deliver a better product.
I never just paint a house and let it go, as a matter of fact i've never done a house and not been critisized for going overboard. When its all said and done though, my stuff sells/rents before the competition so maybe i'm onto something here.
Most businesses are on a triple net lease. They have to fix the roof, furnace and AC and etc if it goes bad. Or they are required to pay a percentage of the repairs.
That is a tough business but so is residential properties. Renters get behind in rent etc.
Some contractors build business properties and rent them out. Usually to a client that is wanting to move for more space, expanding or a better location. The client is on contract before ground is broken.
Thank you, I couldnt rememeber the term "Triple Net". Thats what this guy uses.
I have one duplex... everything else is commercial... mostly strip shopping centers but i do have one 4 story office building...
the plus side is
you are dealing with business people... they understand the need to pay
i fix the roof & parking lot
if it's work'n when you move in... needs to be work'n when you leave
if you don't pay i have a leasehold on everything inside the building... (here) I can change the locks and keep whats inside... without going to court ... i don't need a judge to say i can remove you... it's not like i'm putting someones kids out into the cold street
if i do a buildout... you pay for it
if my insurance goes up... you pay for it.. same for taxes ect... CAM fees "common area maintance" if i wanted to i could buy a new truck and bill my tenants for it and the gas and insurance if i use it for the upkeep of the building...
i can repaint... ect.. and bill you
anything i do for the upkeep is billable to the tenant...
now... i don't do this for the most part... only if they pizz me off and i can back bill em for the whole term of their lease...
when i hand someone a lease.. I explain... "read this if there is anything in your favor tell me and we'll change it"
the office space is different... alot of hand holding and upkeep... all utilities and janitorial i pay for.. i maintain everything... and yes i can bill each tenant their share... i just never have..but it's in the lease and it's also in the lease that i can do it at anytime.. so the fact i never have doesn't mean i can't...
anyway... lots of reasons to like commercial property... yes most leases are long term which banks also like... i have some 20 yr leases... i have dominos. subways ect... they prefer to use their leases... i never let em... I tell em "i don't come change'n your menu don't try to change my lease"
p
Sounds like those that have LI are doing okay with it. Honestly, i'll probably buy a few more houses and hopefully around spring i'll be posting here about LI building i'm about to bid on.
Thanks everyone.
Another thing to remember is that commercial is even more cyclical than residential. People gotta live somewhere, but businesses can just evaporate, or at the very least need to "cut back" and suddenly need only 1/4 the space they used before.
We have a tradition around here (and even more in the Twin Cities) of overbuilding commercial space during a boom, then having a lot of empty space when the economy goes sour. This is one reason that people lease -- so they can cut back more easily if they need to.
Hey MSA,
I'm involved in some industrial buildings, and, done properly, they do have the advantage of "set it and kinda forget it" when done properly with triple-net leases. (Which is pretty much as described in other posts.) The psf rate is much lower than retail and the like; an agent can advise you of the current market's going rate, usually expressed as a $psf (annually) NNN or gross, with a term attached (3, 5, 7, etc., with option to renew, etc.)
We only do light industrial -- warehousing and the like; we specifically prohibit involvement with hazmat stuff. EPA issues are big problems and big money; so if you do decide to pursue a building, I strongly advise a Phase I enviro, which is a first-stage general review. Costs some money, but well worth it down the road. You don't want to go to stages II or III.
Fees vary for commercial/industrial real estate agents, which we do use.
An empty building can sit for some time, and can cost you some money in property taxes, insurance, and general nuisance, such as vandalism.
Know your market; have a good lease; make sure you're named as insured on the tenant's insurance; keep up on your inspections. It is much easier to deal with businesses than individuals.
Good luck!
soj