Buying Other Types of Commercial Properties
Most people get started in commercial real estate with multi-unit properties. Even though residential properties are a big part of commercial real estate investing, other types of properties make for excellent investment opportunities, as well. For instance, commercial real estate includes offices and warehouses, retail centers, and even undeveloped land. Depending on your situation and the status of your current portfolio, it’s possible that one of these other asset types might make more sense than acquiring another apartment building.
Apartment buildings (also known as residential properties)
The commercial properties that are in the residential category include everything from small apartment properties (five or more units) to huge apartment building projects that cover several city blocks. You drive by thousands of commercial properties like this every day (or you may even live in one). Every single building you see is owned by a commercial investor who’s in the game to make money. (Now anytime you see a nice apartment building, you won’t be able to stop thinking about getting into commercial real estate investing.) What we find great about investing in apartments is that they’re easy to find, banks love to lend on them, and they’re great cash flow generators.
The advantage of starting off with residential properties is that they’re a great way to jump into the exciting world of commercial real estate investing. We both started off investing in small- to medium-sized multiunit properties. This was a great experience because it allowed us to make the jump to get started. For most people, getting started is the hardest part. However, after you’ve started investing in commercial real estate, you’ll have a difficult time going back to the old grind of the rat race that so many others find themselves trapped in.
After you get the itch to invest in commercial real estate, you’ll never walk into an office building again without thinking, “somebody owns this building. Why couldn’t it be me?”
As our populations expand, more and more office buildings are being constructed. Offices are great for investing because they have what we call triple net leases. This type of lease is one in which the tenants in the property pay you the rent plus they pay for the following:
* All maintenance and repairs
* The insurance on the property
* The real estate taxes
Bingo! It’s called passive income for a reason. After you get your office building rented out, you can sit back and watch the cash flow come rolling in. Heck, you can even hire a property management company to lease it out for you. Then your only obligation is to sit on the beach.
Triple net leases are so called because the tenants in your office building pay for all three categories of expenses. Tenants pay all three of these costs so that the rent you get is a net amount from which you don’t have to pay expenses. So, after the tenants pay for all the expenses and you pay the mortgage, the rest goes into your pocket. It’s quite typical for a triple net lease to be 5 to 20 years in duration with rent increases every couple of years. But that can be a disadvantage as well, and here’s why: Let’s say that the lease is for ten years. If your neighborhood experiences explosive growth over the next three to five years, you won’t be able to charge higher rents or capitalize on what’s happening because you’re locked into a ten-year lease agreement. But overall, triple net lease investments are very much sought after.
Retail centers, also known as shopping centers or malls, are at the heart of most of the towns and cities in our country. These are the places where people come to shop, eat, and meet with friends. And retail centers are one of the commercial property asset types that you can invest in. Most investors like retail centers because, like office and warehouse properties, many retail properties are leased out on a long-term triple net lease basis where the tenants pay for all the expenses. The upside to this as an investor is that your rates of return won’t go down over time as the taxes and expenses go up. In fact, as rents go up over time, your returns just keep getting better and better. And as in most triple net lease agreements, rent increases are built into the agreement with the tenant.
Office buildings and retail properties have gone through massive changes as a result of the COVID-19 pandemic. Thousands of office workers got the chance to become remote workers and discover they (most of the time anyway) like working from home. Big national companies have closed their stores at shopping malls with some of them going completely out of business. Other stores have transitioned over to doing a large portion of their business online. This change creates opportunities for us as investors. Office buildings are being converted into apartments. Some apartment buildings now include separate “work at home” areas. Department stores have been converted into warehouses for online companies that ship out their products.
Warehouses or industrial properties
With the advent and growth of online shopping or e-commerce, companies that ship to us need a place to store their goods. These buildings, known as warehouses, are pretty simple — large structures, four walls, multiple doors, and centrally located for shipping purposes. Warehouses tend to be relatively low-maintenance properties, focusing on storage more than aesthetics. Also, warehouse tenants may be more inclined to sign longer-term leases in the coming years as e-commerce grows.
Just like everyone needs a place to sleep at night, nearly everyone needs a place to store their stuff — old things, recently purchased things, and treasured personal things.
Why is it so popular amongst investors? Compelling reasons include
* No toilets to clean
* Low cost of operations
* Low building costs
* Operations can be automated
* Low down-payment loans
The various types of self-storage facilities to consider are
* Cold storage
* Climate-controlled storage
* Vehicle storage (including RVs, boats, and cars)
For you, the average investor, we recommend you begin your acquisition search for Mom and Pop self-storage facilities. Avoid the “big boys,” such as U-Haul and Public Storage, and all other franchise-types, because they are too expensive for the beginning investor.
One of the most important things to consider is your facility’s location. Ideally, it should be located where there’s demand for storage, where it’s easy to drive to, and where there’s high visibility. If there are a lot of small houses in a town, it’s good sign that there is an opportunity for a self-storage investment. Small houses mean a large percentage of people in that town require extra storage spaces for their stuff.
Hotels and resorts
This asset type isn’t our recommendation as the place to get started, but many experienced investors have found it to be a fun and highly profitable area to focus on. Of course, other investors have also lost their shirts (and sometimes their trousers, too), so make sure that you know what you’re doing before jumping in. Most of the deals we’ve run into have been smaller hotels or motels rather than the larger nationally branded, or as they’re referred to, “Flagged” hotels.
One commercial client of ours used a commercial master lease, a form of creative financing to get a 40-unit motel outside of Springfield, Missouri. They changed the name of the motel, hired new staff, and upgraded the units. Six months later they sold it for almost twice as much making almost $500,000. Another Commercial Dream Partner of ours has a 135-unit hotel under contract with plans to convert it into apartments.
The success of any hotel or resort is composed of two parts, the property itself and the business of marketing, managing, and operating the property. If you’re going to invest in this niche, we suggest that you invest in the property and then lease it out to another company that will operate the hotel or resort.