Commercial Real Estate

[classicrando]

Does anyone have any experiences with or book/education resource recommendations for commercial real estate?  My partner has expressed an interest in us looking into real estate and I figured I would supplement my Google and LLM research with asking you folks here.  I know that one of their primary goals is looking for ways to reduce our overall taxes (e.g. "If Warren Buffet can pay a lower tax rate than his secretary, we can damn sure pay less than 24% marginal."), and they figure we should be able to find a way to leverage a small business or real estate investments to do that.

Thanks in advance, y'all.

[clarkfan1979]

Does anyone have any experiences with or book/education resource recommendations for commercial real estate?  My partner has expressed an interest in us looking into real estate and I figured I would supplement my Google and LLM research with asking you folks here.  I know that one of their primary goals is looking for ways to reduce our overall taxes (e.g. "If Warren Buffet can pay a lower tax rate than his secretary, we can damn sure pay less than 24% marginal."), and they figure we should be able to find a way to leverage a small business or real estate investments to do that.

Thanks in advance, y'all.

Commercial Real Estate is a very different animal than regular single family homes. The normal path for an "average" commercial real estate investor is around age 50 after about 20 years of residential real estate investing. I'm referencing apartment complexes greater than 4 units.

You typically need 50 units to hire one person full time (40 hours). This would be tenant placement and handyman repairs. If it's 100 units, you can hire 1 full-time person for tenant placement (40 hours) and another full-time person (40 hours) for handyman repairs.

Commercial real estate is also run by an inner circle. The relationships between real estate brokers and lenders is very important. It would be difficult to buy commercial real estate after reading a couple of books and have nothing else. However, I think it would be reasonable to buy a duplex on a 30 year fixed mortgage, after only reading a couple books.

[GilesMM]

You can find local real estate investor groups who will take your money and let you share in the profits as they develop properties (apartments, retail, office space, you name it).  They will give themselves better terms than you get, but they will do all the legwork.  As you learn from this process you and increase your investment, your returns, and your control. You can usually find them locally or just ask a commercial realtor.

[classicrando]

Does anyone have any experiences with or book/education resource recommendations for commercial real estate?  My partner has expressed an interest in us looking into real estate and I figured I would supplement my Google and LLM research with asking you folks here.  I know that one of their primary goals is looking for ways to reduce our overall taxes (e.g. "If Warren Buffet can pay a lower tax rate than his secretary, we can damn sure pay less than 24% marginal."), and they figure we should be able to find a way to leverage a small business or real estate investments to do that.

Thanks in advance, y'all.

Commercial Real Estate is a very different animal than regular single family homes. The normal path for an "average" commercial real estate investor is around age 50 after about 20 years of residential real estate investing. I'm referencing apartment complexes greater than 4 units.

You typically need 50 units to hire one person full time (40 hours). This would be tenant placement and handyman repairs. If it's 100 units, you can hire 1 full-time person for tenant placement (40 hours) and another full-time person (40 hours) for handyman repairs.

Commercial real estate is also run by an inner circle. The relationships between real estate brokers and lenders is very important. It would be difficult to buy commercial real estate after reading a couple of books and have nothing else. However, I think it would be reasonable to buy a duplex on a 30 year fixed mortgage, after only reading a couple books.

Thank you, this is a valuable insight regarding the inner circle and relationships involved.  Does any of what you've said change if I wanted to avoid housing entirely (no apartments, duplexes, etc.) and only focus on things like small four-door strip malls, warehouses, or the standalone buildings that some corporate brands rent as triple net leases?

[rocketpj]

Commercial is hard to break into in large cities - high cost being a big barrier.  Multifamily are one option, depending on the tenancy laws where you are.

I'd recommend looking at mini-storage properties.  That was my path in, and it can be excellent.

The best thing about commercial real estate is that it is much more hard nosed that residential.  What I mean is that a commercial property is mostly just worth a multiple of what you can make from it, and you can scale your price using that metric.  There is no premium for a view or being close to a school for a warehouse.

That can make for some funny bargains.  My first commercial property had 34 storage units, 8 one-room office units and 2x2 br apartments.  I could not have bought a duplex for what I paid for the entire commercial property, and it came with 42 other paying units.  Granted, it needed a lot of work (1.5 yrs of renovations) but the upside was enormous.  Because it was commercial and I am in a smallish town there was very little competition for the property and I got it at a 12% cap rate.  This is not normal, but it is something to look for because they do happen.

[classicrando]

Commercial is hard to break into in large cities - high cost being a big barrier.  Multifamily are one option, depending on the tenancy laws where you are.

I'd recommend looking at mini-storage properties.  That was my path in, and it can be excellent.

The best thing about commercial real estate is that it is much more hard nosed that residential.  What I mean is that a commercial property is mostly just worth a multiple of what you can make from it, and you can scale your price using that metric.  There is no premium for a view or being close to a school for a warehouse.

That can make for some funny bargains.  My first commercial property had 34 storage units, 8 one-room office units and 2x2 br apartments.  I could not have bought a duplex for what I paid for the entire commercial property, and it came with 42 other paying units.  Granted, it needed a lot of work (1.5 yrs of renovations) but the upside was enormous.  Because it was commercial and I am in a smallish town there was very little competition for the property and I got it at a 12% cap rate.  This is not normal, but it is something to look for because they do happen.

This is more along the lines of what I am talking about.  So, mini-storage properties were your way in.  Did you have any preexisting relationships with any realtors, brokers, or investors?  Or did you DIY your entry?  Did you find this property through a listing on something like LoopNet, or did you just know about it because smallish town?  Did the whole thing need extensive renovations, or were there leasable units from day one?

[rocketpj]

Commercial is hard to break into in large cities - high cost being a big barrier.  Multifamily are one option, depending on the tenancy laws where you are.

I'd recommend looking at mini-storage properties.  That was my path in, and it can be excellent.

The best thing about commercial real estate is that it is much more hard nosed that residential.  What I mean is that a commercial property is mostly just worth a multiple of what you can make from it, and you can scale your price using that metric.  There is no premium for a view or being close to a school for a warehouse.

That can make for some funny bargains.  My first commercial property had 34 storage units, 8 one-room office units and 2x2 br apartments.  I could not have bought a duplex for what I paid for the entire commercial property, and it came with 42 other paying units.  Granted, it needed a lot of work (1.5 yrs of renovations) but the upside was enormous.  Because it was commercial and I am in a smallish town there was very little competition for the property and I got it at a 12% cap rate.  This is not normal, but it is something to look for because they do happen.

This is more along the lines of what I am talking about.  So, mini-storage properties were your way in.  Did you have any preexisting relationships with any realtors, brokers, or investors?  Or did you DIY your entry?  Did you find this property through a listing on something like LoopNet, or did you just know about it because smallish town?  Did the whole thing need extensive renovations, or were there leasable units from day one?

At the time I was looking at all kinds of businesses, and there was a local realtor I was talking to about them.  That said, I saw the sign on the property and brought it to him - asked him to get me some info. 

I DIY'd my entry, took a line of credit against my home equity to buy the property.  It needed extensive renovations - at purchase the town had put a 'do not occupy' sign on it because the previous owner was a moron and wouldn't let them inspect it.  Before purchase I lined up the town to agree to lift the order, give me a permit for the renos, and got the bank on board with giving me a lower down payment requirement to close the deal.  They had been on the brink of having to foreclose on the property, so they saw me as an opportunity to save their investment.  It was a risk, but I was confident I could do the work.

There were rental units full from day one, and it was paying its mortgage and utilities from day one as well.  I did a rolling reno where I upgraded units as people moved their stuff out, while doing all the other stuff as well.  For the last few I moved people around so I could get the units complete.  The two apartments were occupied the whole time, though I did do some upgrades as I went along - and will do more if the tenants ever move out.

If I do it again, which I am considering, I'll probably just go with straight storage.  Easy tenant management, minimal maintenance.

[classicrando]

@rocketpj  Thank you, I appreciate you sharing that experience.  A couple more questions if you don't mind.  Did you do the bulk of the renovations yourself?  What, if anything, did you sub out?  Did you form an LLC or other entity to own the property and run the business, or just handle it as sole proprietor?

And, how smallish of a town are we talking?  (I ask because @ChpBstrd and I were discussing small towns, and places with populations between 10,000 and 250,000+ were being thrown around as examples.)  Is the town somewhat isolated, or does it bleed into the endless urban tapestry of a larger metro area? (Like the difference between Bloomington, IL and Evanston, IL.)

[rocketpj]

Town of 5000, enmeshed in a region with about 35000 people.  We are a 45 minute ferry ride away from a metropolis though, which makes us something of an exurb.

I did most of the renos myself, but hired out the electrical and some plumbing.  I also had to hire an engineer and a sprinkler system company to do that work.  In all my renos cost about $80k.  I do most ongoing maintenance, which at this point is minimal - though there are some larger things that will be coming up (new roof in a couple of years, ~$60k).

The entire thing is through an LLC.  If someone falls down the stairs I don't want them coming after my family home in a bogus lawsuit.  Higher annual tax filing costs, but worth it for peace of mind - 30-50 customers every month means a lot of random variables that I don't want to have any avenue to my personal wealth outside of the company.

We are in Canada, but my limited understanding of US law is that I would want an LLC there even more than here.  Pre-current regime I was looking at some possible storage properties over the border, but that is off the table for now.  The pricing for storage in the Pacific Northwest of the US is fairly reasonable.

[classicrando]

@rocketpj  Thank you again for the reply and those details. :)

[Geppetto]

Town of 5000, enmeshed in a region with about 35000 people.  We are a 45 minute ferry ride away from a metropolis though, which makes us something of an exurb.

I did most of the renos myself, but hired out the electrical and some plumbing.  I also had to hire an engineer and a sprinkler system company to do that work.  In all my renos cost about $80k.  I do most ongoing maintenance, which at this point is minimal - though there are some larger things that will be coming up (new roof in a couple of years, ~$60k).

The entire thing is through an LLC.  If someone falls down the stairs I don't want them coming after my family home in a bogus lawsuit.  Higher annual tax filing costs, but worth it for peace of mind - 30-50 customers every month means a lot of random variables that I don't want to have any avenue to my personal wealth outside of the company.

We are in Canada, but my limited understanding of US law is that I would want an LLC there even more than here.  Pre-current regime I was looking at some possible storage properties over the border, but that is off the table for now.  The pricing for storage in the Pacific Northwest of the US is fairly reasonable.

Not sure how it is in Canada, but be careful assuming the LLC shields you from personal liability. Generally, if you're in physical control of the property - i.e. if you're the human being who will be alleged to have committed negligence by not de-icing the sidewalk quickly enough, or whatever - you'll be a named defendant in the lawsuit along with your LLC that's in title. It's the difference between individual negligence and premises liability. Both flavors of claims are often occasioned by the same accident.

The situation changes when, for example, you live 2000 miles away from the property and it's totally in the custody of a hired property manager. Then you're not personally liable for slip-and-falls and the like since premises liability doesn't attach to anyone who doesn't directly own the property, and you presumably weren't individually negligent in causing the condition that led to the injury.

[rocketpj]

The entire thing is through an LLC.  If someone falls down the stairs I don't want them coming after my family home in a bogus lawsuit.  Higher annual tax filing costs, but worth it for peace of mind - 30-50 customers every month means a lot of random variables that I don't want to have any avenue to my personal wealth outside of the company.

Not sure how it is in Canada, but be careful assuming the LLC shields you from personal liability. Generally, if you're in physical control of the property - i.e. if you're the human being who will be alleged to have committed negligence by not de-icing the sidewalk quickly enough, or whatever - you'll be a named defendant in the lawsuit along with your LLC that's in title. It's the difference between individual negligence and premises liability. Both flavors of claims are often occasioned by the same accident.
[/quote]

People can name whoever they want in a lawsuit, and of course I have liability insurance.  I'm pretty careful not to be negligent in my management of the property, and I still like the extra layer of protection an LLC offers. 

Canada is not as litigious as the US, and payouts are normally a lot lower when people do sue successfully.  That said, the LLC also works for tax reasons in ways that a proprietorship would not.

[GilesMM]

The entire thing is through an LLC.  If someone falls down the stairs I don't want them coming after my family home in a bogus lawsuit.  Higher annual tax filing costs, but worth it for peace of mind - 30-50 customers every month means a lot of random variables that I don't want to have any avenue to my personal wealth outside of the company.


Not sure how it is in Canada, but be careful assuming the LLC shields you from personal liability. Generally, if you're in physical control of the property - i.e. if you're the human being who will be alleged to have committed negligence by not de-icing the sidewalk quickly enough, or whatever - you'll be a named defendant in the lawsuit along with your LLC that's in title. It's the difference between individual negligence and premises liability. Both flavors of claims are often occasioned by the same accident.

People can name whoever they want in a lawsuit, and of course I have liability insurance.  I'm pretty careful not to be negligent in my management of the property, and I still like the extra layer of protection an LLC offers. 

Canada is not as litigious as the US, and payouts are normally a lot lower when people do sue successfully.  That said, the LLC also works for tax reasons in ways that a proprietorship would not.

You are better off having sufficient renter's liability coverage plus umbrella insurance if warranted.

[Geppetto]

@rocketpj  I didn't mean to suggest you shouldn't own the property in an LLC. Or that you're a negligent person.

Only that you're personally liable for your individual negligence if an injury occurs, to the extent that you're your own property manager. It's true that "anybody can be named in a lawsuit". But you're not entitled to be dismissed from that lawsuit just because an LLC owns the property, whereas anybody else would be. 

I'm speaking to a common misconception about LLCs and rental properties. One that you expressed. You should assume a tenant-plaintiff will "come after your family home." A fat umbrella that covers your rentals activity is a good thing to have. God forbid you have to pay for your own defense if a claim is brought. (You're welcome.)

[rocketpj]

@rocketpj  I didn't mean to suggest you shouldn't own the property in an LLC. Or that you're a negligent person.

Only that you're personally liable for your individual negligence if an injury occurs, to the extent that you're your own property manager. It's true that "anybody can be named in a lawsuit". But you're not entitled to be dismissed from that lawsuit just because an LLC owns the property, whereas anybody else would be. 

I'm speaking to a common misconception about LLCs and rental properties. One that you expressed. You should assume a tenant-plaintiff will "come after your family home." A fat umbrella that covers your rentals activity is a good thing to have. God forbid you have to pay for your own defense if a claim is brought. (You're welcome.)

Cheers and thank you.  I do have some pretty robust liability insurance, which I actually just upgraded a few weeks ago.  Around here you have to be pretty thoroughly insured for the banks to even consider a commercial property loan, and they check up that it's current regularly.

I'm more concerned about earthquake insurance.  Given where we are the front-end deductible is pretty huge without added insurance.  I'm considering the added policy, because when we do get a big earthquake (not if, when) it will likely do a lot of damage.  As with all insurance it's either a fantastic idea or a huge waste of money, and we don't get to know which in advance.