What's your commercial REI strategy?

Question

Do you invest exclusively in your home state or nationwide? What do you look for in a commercial property? National credit tenants or independent tenants? How do you go about learning about a company/business when opting for a national credit tenant? How do you assess the area if you're investing out of state? How do you assess the risk?

Jeff Kehl · Answer

Account Closed I'm just getting started with commercial properties in the last few years. So far I have only invested in my home state of Georgia. Mostly office, some special purpose and one retail. My properties are all smaller, local properties so I am all independent with only one credit tenant so far.

As far as area, I have only invested in the Southeast U.S. so far. I have many brokers emailing me NNN properties from around the country and I don't see anything I like better. It's tough to argue with job and population growth.

Jade S. · Answer

Great thoughts, Jeff.  I invest in residential assets in GA, but my one office commercial property is in the Upstate of SC.  I liked the growing economy in that area (Greenville, Greer, Spartanburg), and now have 5 tenants in my building.  ~ 1200 or less sq feet seems to be a sweet spot with the office tenants I deal with.  But like you said...one vacancy isn’t a catastrophe as the rest still pay for the expenses and debt coverage.

Jeff Kehl · Answer

Account Closed that you should buy somewhere where the cost of the land is high. That way even if the tenant you have in there doesn't work out you can usually always replace them. Also that keeps them from moving two blocks down and rebuilding a new location at the end of the lease. I've seen two dollar stores do that recently. They just have a shell metal building so it's not all that expensive for them to move and rebuild.

Also, find a metro area that has very high population and job growth then find out which directions they are growing (usually easy to see by where there's a lot of construction). Then buy in their path of progress or just outside of it. That should help the price of your dirt increase over time.

For tenants, I like to look for things like services, restaurants or entertainment that are more 'internet resistant'. If it's just a retailer selling some commodity good like books, electronics, or clothing beware. They can be ok if they find a good niche but definitely riskier.

Also, it sounds like you're only looking at Single-Tenant properties? Let me suggest a smaller multi-tenant property like a strip center or office building with multiple suites or even mixed use. Why? To me it's much less risky that way. You can stagger the leases, handle some vacancy, etc.

Just some things I've been thinking through but of course a lot of it depends on your personal situation.

Account Closed · Answer

@Jeff Kehl This is great advice, thank you! I am looking or single-tenant properties, specifically NNN. We've been eying restaurants, especially QSR's but what we've been finding is that these are commanding a premium (especially if they're corporate tenants, not franchisees) and come with fairly low CAP rates and the ability to negotiate the prices is almost non-existent. But as Brant said above, they are lower risk and safer than mom and pop shops.

Strip center's are also a great alternative and as you said, the diversity creates less risk and more opportunity.

Account Closed · Answer

@Brant Garner Some great stuff here, thanks!

All too familiar with the kick-out clauses. Been eyeing a few Starbucks properties and they seem to like the kick-out clause and they require you to obtain full liability insurance on the property. Some don't have kick-out clauses but its rare, and I'm not too keen on the liability insurance. It would be a small amount to pay annually but I feel that a lawsuit from a slip-and-fall or something similar wouldn't be very enjoyable to get roped into.

Account Closed · Answer

@Brant Garner @Jeff Kehl I can definitely see the higher returns relative to properties here in the West coast. But for those of us on the other side of the country, how do you go about analyzing a property and the area it's in? What's the best way to make sure that the McDonald's I'm buying in Tennessee is a great property to invest in?

What's your commercial REI strategy?

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