What do you all think of commercial real estate as investment??

[waldorfknitmama]

Or for income? The market is obviously like crap, but I was doing some thinking about it, and if it was the right place, could you make steady income? We are planing a move from MN to CO, CO is a big trucking state, and I thought maybe if it was the right place for the right company, it could be a good investment. I know nothing about real estate, so has anyone ever done this?

Ideally it would be nice to just sit on the property and rent it out, thus giving us money we can use every month (pending the actual price of the property is payed for in cash, or close to it) and hubby could quit his job. Does this sound way far out and totally impractical?

What I should be learning researching, if I was to pursue this/

Any advice is appreciated!

[cappuccinosmom]

We only have residential right now. I know dh would jump at commercial if he had the money, but...

Residential has been good for getting our toes in the water. It is not as easy as buy a place, rent it out, and make money, kwim? Between repairs, various disasters, and tenants moving out or refusing to pay, it took about 6 months for us to be getting regular, reasoanble chunks of the money the manager collects.

Even with the manager I still spent 2 hours Friday and 1 today dealing with two seperate problems, having to do with utilities and taxes, and I'm not done with that mess yet.

The first thing you'll want to look into would be taxes. They can be a killer if you're not careful. What would the prop. taxes be for you (school, municipality, and county, probably)? Could you afford them if you had a bad year with rentals? Is the place you're considering already occupied with tenants who pay on time? If it is empty, is it in an area where things are growing and you'll be likely to get a good tenant? Would you or the tenant pay utilities? Are you prepared to be held responsible as the owner if the tenant doesn't pay their utilities (that's happened to us multiple times). Do you have some money saved that could cover the inevitable Things That Go Wrong?

It's not far out or impractical. But you need to be very well aware of what you're getting into, and in a situation to deal with it. If you don't start out well prepared it can easily slide into a downward spiral.

[SleeplessMommy]

I am pretty cynical about real estate investing ... all of the "good" deals are going to change hands before they hit the general market. And a as newcomer to the area, you will not know what is going on locally. (In our area, an out-of-towner bought a "nice" restaurant and found out after the deal closed that the former owner was in jail for a rather sordid crime involving an employee. )

One more problem is financing -commerial props pay a higher interest rate.

If you are still enthusiastic, drive around your NEW area and find a few yucky commercial properties for sale - ones you have a good reason not to buy. Pick a real estate agent locally, have them show you some things, then ask them what they think about property X. This will tell you lots about how they work.

[zoebird]

personally, i feel that real estate is a good business. but, it is a business which means it requires preparation and work. and you need a good team working with you.

you need a lawyer, a good accountant, and a whole team of repair crew whom you like and trust. you won't need them all the time, but a good list of repair people is very important (unless you do repairs yourself, which i do not).

you would also do well to have a mentor--a friend or someone who is experienced in the business to help you learn how to run one successfully. our landlord (who holds our commercial lease for our business) is a very successful man owning multiple buildings across NZ. *i adore him*. he is mentoring my husband and i right now, long before we are actually getting into the real estate business.

you might also talk with SCORE about creating business plans around this sort of business--they offer free advice in running businesses.

[wytchywoman]

I really don't know much about real estate but both of my parents are retired realtors. They invested in a large commercial property with a pool of other investors and really took a huge loss over it. I think the property is finally going to be sol so the investors can get some of their money back, but nowhere near as much as the contributed originally, and they haven't seen any payments off of this property for years. Just be careful and do a ton of homework and investigation prior to parting with your money.

[nichole]

not a fan for reasons previously stated

IRAs, CDs, living frugal are better in my opinion

[Caneel]

Lots of good advice here so far.

I was a commercial real estate appraiser for a number of years and income-producing properties were a big of my work.

A few quick thoughts -

If you intend to finance, make sure you have a big down payment, at least 25%, more like 35% if you want to be safe. Like someone else said "good deals" rarely hit the market. Properties with great cash flow generally don't sell. When they do, it is reflected in the price. With a high price, it is difficult, if not next to impossible, to show a positive cash flow without a hefty downpayment being part of the deal structure.

If you have the cash to pay for the property, consider the risks involved. Depending on where you are, it might take months to get out a deadbeat tenant and months to secure a new one.

Plan, plan, plan and then plan 10x over for repair and replacement reserves. When major components go bad or need to be repaired on a commercial property, watch out. A new HVAC system for a 10,000 square foot building could be $25,000 to $100,000. A new rubber roof on a retail center? Six figures.

Later on when I worked in commercial banking, I would see plenty of owners come in looking for loans to finance major repairs. Often, they never set anything aside for repair/replacement reserves and refinancing or adding anoth loan ate up all cash flow.

Condition and maitenance is very important. Really good quality commercial rentals (in terms of cash flow, not necessarily size) are generally built/developed by people that have a time frame in mind. Build for $x, lease it for $y, hold on to it for z years during which time the owner makes a 12% return. At the end of z years, the property will be needing major maintenance and the leases will be expiring in a few years, time for the investor to put it on the market.

[waldorfknitmama]

Thanks for the good advice everyone! I am trying to do a lot of research on the subject, it helps to hear people's personal stories!! Keep em' coming! This would be many years off (and many years of researching) I thought of even going to real estate school (or whatever you do to become a realtor). This is very good conversation. How long would it be to begin to receive steady income and maybe even live off of real estate---- or is it really not realistic?

[SleeplessMommy]

Originally Posted by waldorfknitmama

How long would it be to begin to receive steady income and maybe even live off of real estate---- or is it really not realistic?

What Caneel says is 100% spot on.

Go for the real estate license Look up the idea of a conservative investment portfolio and diversification... this means you won't loose everything if one or two major investments go bad. If you have $10million, maybe $1million or less should go into commercial real estate. If you don't have $10million, don't play in commercial real estate.

As I have hinted at, and others have, there are many very friendly real estate agents who will be happy to sell you commercial properties (for example a failed restaurant or a small storefront) for a few hundred thou. They will be very friendly, and strongly hint at the opportunity to make large amounts of money, but it is all BS. If it was really a good property, someone with more money would have already bought it... or a REIT with billions available.

My relative R is a smart person by very, very optimistic. He hopes to invest and make a million bucks. He was looking at "investment" residential lots in FL. (Lives far from FL.) The real estate agent talked him out of the $40K lots, and showed him were the "real money" was ... multi-million dollar (new construction) mansions. With a straight face, the agent proposed that R buy a mansion with some friends/family, rent it out at a loss, and then resell in a few years for an expected profit. This is an especially laughable idea since it was at the height of the real estate bubble. Those mansions are probably selling now (or sitting on the market) at half the price or less, having been foreclosed on. In fact R's own home has lost enough value compared to purchase price that he considers foreclosure on that.

[Caneel]

Originally Posted by waldorfknitmama

How long would it be to begin to receive steady income and maybe even live off of real estate---- or is it really not realistic?

I don't know that it is possible to answer that question without answering (not that I expect you too, just giving food for thought) many, many questions.

Like how much money to you need to live? $50,000 a year? $100,000 a year?

A very, very rough rule of thumb gauge based on my old appraisal days is a good quality (condition, location, secure tenants) property that yeilds a pre-tax, pre-debt service cash flow of $50,000 would cost $500,000.

This is based on a capitalization rate of 10%, something too long and probably too boring to explain unless someone is really interested but the better quality of real estate, the lower the capitalizatoin rate, the higher the cost.

If you couldn't pay cash for the $500,000 property and needed to finance 75% of the purchase price, the annual debt service on $375,000 for 20 years at 8% would be $37,400.

$50,000 cash flow less debt service of $37,400 = $12,600 after debt service but before income taxes.

In my example, it would take 20 years to clear $50,000 on the $500,000 if one had a 25% down payment and financed the rest of the purchase price.

(I have no idea what commercial real estate interest rates are at the current time, a different rate would obviously change the #s)

Although it hasn't been mentioned, I am going to comment on any number of the get-rich-quick pitchmen one can find on late night tv. Any real estate plan/scheme/method that someone is selling can only be trouble. None of them work, it is all a shell-game.

When in banking, I would get so many people coming thru the door trying to buy commercial real estate with no money down it was ridiculous.

Despite what the recent sub-prime residential mortgage mess might be telling us, no real bank is going to loan someone 100% of the purchase price of a commercial property.

Maybe one could use the equity in their primary residence as collateral - generally a very bad idea- but the bank will (or should) have a loan covenant in place called a minimum debt coverage ratio.

In my financing example above, the bank I worked for (a national, traded on the NYSE bank) would have required a debt service coverage ratio of 1.25x, meaning the property would need to produce a pre-tax, pre-loan payment cash flow of $46,750.

125% of 37,4000 is 46,750 or another way of looking at it is cash flow must cover debt service by 100% plus another 25% as an extra cushion.

At a 100% financing and a loan of $500,000, cash flow from the property covers the loan payments only. Any income taxes would need to come from the owner's savings or other source of income. Any hiccup in the rental cash flow, like a tenant paying late, increase in real estate taxes not covered by lease clauses, etc., puts cash flow into the red and quite possibly, repayment of the loan in danger. This is why a real bank generally doesn't do 100% financing of investment/commercial real estate.

[Caneel]

Originally Posted by SleeplessMommy

As I have hinted at, and others have, there are many very friendly real estate agents who will be happy to sell you commercial properties (for example a failed restaurant or a small storefront) for a few hundred thou. They will be very friendly, and strongly hint at the opportunity to make large amounts of money, but it is all BS. If it was really a good property, someone with more money would have already bought it... or a REIT with billions available.

Not to be totally negative but this is true and it doesn't even need to be on the REIT scale.

[sunflower.mama]

My dad is in commericial real estate and does well for himself. What he does is gather individuals etc (such as those who invest their own money as well as those who manage trusts) to do the investing. He and a partner organize the capital so they can have the cash to put whatever they need down to obtain financing. The investors get an income stream and so does he. Then he (and his investors) profits when (hopefully) they sell the building for a profit. He acts as a landlord - both for apartments and business. It takes a strong stomach to do what he does, as it requires both a tolerance for risk and a lot of wealthy friends and investors. It has taken him decades to build it up and it will take a while for him to be able to retire since he'd obviously need to sell everything to be really retired. It would be much harder to do what he does if he was solely personally responsible for the financing for the down payments because he'd have his fingers in less pies and he'd be making a lot less money. The way he does it, some of his money, but not all of it, is tied up at a given time.
If you want to get into commercial real estate, I'd start by finding people like him to talk to and get advice from.

[sunflower.mama]

Oh - in case it wasn't clear - it is very possible to live off of it!!! Quite well. But my dad was a lawyer in addition to the CRE for a long time until he completed the transition.

[Caneel]

OP - in the scenario that Sunflower.mama talks about, those investors go into those deals know they want to make a minimum of X% return on their invested dollars. That is where you should start thinking.

Educating yourself on what type of what type of return you expect, how much risk you are willing to take, how much is outside professional services going to cost, etc. is as valuable, and probably more valuable, then getting a real estate license.

Preparation to get real estate license will focus mostly on legal issues surrounding the listing and transfer of properties, contract law, professional ethics, etc. (and there certainly is value in that knowledge) but won't scratch the surface of the economic element of investment-grade real estate.

[waldorfknitmama]

Thanks everyone! Wow a lot to think about, I just thought it would be a good extra income for our family, and maybe eventually hubby can quit his job. Basically bare minimum we would like to see $50,000 a year. We can easily live off of that, I never intend to make millions, nor am I thinking of a get rich quick scheme! I just thought long term why not? Like others are saying I suppose I need to research the hell out of this, but I think it may be interesting. So maybe I won't go to real estate school, but learn economics instead.