How to get into commercial real estate - invest or storage units

15 Replies

Hi,

I dabbled in real estate years ago (2004ish) by buying a 4 plex, renting it for a couple of years, fixed it up and sold it for a really great profit of ~$100k.  From there I did a joint venture with and built a house, after that I struck out on my own, but the market crashed (2008-2009).  It's been a passion of mine to get back into - I'm interested in flipping or a possible commercial venture, like a storage facility or small strip mall.  For commercial, I have no idea where to start if I want to buy bare land and perhaps do a storage facility.  Any recommendations or thoughts would be great.  Thanks!

Jennifer

Jennifer,

Storage is a great plan. If you are talking about building, any retail is going to be far riskier. The future of retail is very questionable, which means all retail owners are fighting for the service businesses and restaurants out there to fill their spaces. So unless you find an area that is under served, storage is safer. 

Another though is multi-tenant industrial. These small industrial units can be used for office/warehouse, automotive, manufacturing, storage or showroom/warehouse, depending on the zoning. 

Lauren Prichard

Aborn Powers/Aborn Homes

CA BRE#01031213

Hi Lauren,

Thanks so much for your reply!  I live in Boise Idaho - about 15 years ago I wanted to get into self storage, but didn't know how.  Fast forward to today, and everyone is moving here from California (and other places, but primarily CA) and the growth is exploding, and now there are new self storage facilities popping up all over.  Sigh...  I agree with your assessment on retail space, and I really like your idea of multi-tenant industrial!  Instead of "thinking" about it, I'm really trying to find the best way to jump in and get started.  Do you have any suggestions?  I'm thinking that I should look at various places around the country and do some investigating, then contact a commercial real estate business?  Does that sound like a good start?

Thank you!

Jennifer

I agree that Storage is a GREAT Sector.  I always recommend that folks buy existing before going after ground up development.  There are several reasons for this including the high cost to develop ($100-200K plus into earth work before you even get a building up which means you have to erect 15-20,000 square feet for the project to be viable)----Basically you need to swing for the fences and then be able to feed the alligator (negative cash flow) for 18-36 months unless you are in a VERY hot market.  Buying existing (preferably under performing facilities) allows you to have some cash flow to start with, improve the operations and then if the market supports expansion, develop further using the cash flow and equity you created in your overhaul to fund the build out.  I've done this 3 times in the past few years and it has worked very well.  The art is in finding the deals and then putting in systems to run them with minimal hands on effort.  We (my wife and I) spend 5-10 hours per week operating our small but profitable portfolio (80K square feet in NY and FL). Happy to chat storage anytime.  PM if you'd like!

Mike

What cap rate or cash flow would you (all on this thread) be looking for regarding storage units? I'm attracted to the lessor involvement and time committment, haven't yet offered on a local property essentially because I'm not familiar (no real lenght of time studying or personal knowledge) with storage units as a business. 

@MichaelWagner is correct. It is always easier and often more profitable to purchase an existing property. 

@BritHale, the cap rate is a very individual decision and varies greatly by market. I prefer nothing lower than 7, but in a tight market the caps often never get that high and it can still make sense to take a lower cap at times. If an area tends to always have low cap rates, it is likely because it is a low risk area for investing - rarely any vacancies and rents stay high. Higher caps mean more risk. Right now the economy is good and rates are low. The key is to try to find the highest cap rate in the area. And if an area has extremely low cap rates (3-4%) just stay away. Prices are probably really inflated. Wait until they come down again 

The future of retail is alive and well. You would not believe how strong the demand is to buy these properties for NNN. I stay busy around the clock with clients.

Department stores have been croaking for the last decade so nothing new. Experiential and service based tenants are doing very well in most markets.

Self storage can be good. Where I live it is all new builds and climate controlled units. The older existing units tend to be not climate controlled and those can be less in demand at least for my area but we are more upscale. I love retail but I know it very well and do it day in and day out. Where people see risk I see opportunity because I know and understand the sector. Many others are the outside looking in and read some news stories and have maybe one experience with it and paint broad brush strokes as to what is happening in the space.

Industrial the newer buildings with higher ceilings for warehouse and distribution are more in demand from larger companies. Rents per sq ft for industrial and self storage can be much lower than retail.

Whatever industry you focus on they can all be good if purchased correctly. Ultra low cap rates with limited upside tend to be for 1 to 2 crowds.

1. Those that make 500k to 1 million or more profit to income with their business or profession and just want a return and tax write off.

2. Retirees doing estate planning that want NNN and no hassle and get a check. They pay cash for a 4 to 5 cap but then live off of the 80k to 100k with 2 million for instance. With rental increases the cap rate blends up over the 10 to 20 year primary lease term This is single tenant NNN.

Retail centers are a whole other discussion that would take up many pages and I do not have time to expand on tonight.

Some buyers buy low cap rates if the property has a story. Example a multifamily building that is full but rents are 40% under market or a building at 50% occupancy in a great area. Stabilized properties for a local market might trade at a 6 cap and by buying at a 4 cap 50% occupied you then lease up to have an 8 cap etc.

There are all kinds of value plays out there.

I have friends that have been in industrial for over 30 years. I stay in the retail space because it is what I like to do.   

I need to do more reading and learn these terms that are new to me, but this sounds very intriguing to me and I'd like to learn more. I've got some homework to do on the NNN as well as the Cap rate that Lauren talked about above. This is exciting stuff - thinking about different ways of doing deals, what market to go into, etc.

@Jennifer Love Storage is a very attractive niche, so as many others. Overall, it depends on what your long term goals are, how active you want to be: Passive via NNN leases or other investments or active.

In terms of self-storage benefits, here's a post on it: 

https://www.biggerpockets.com/blogs/10850/74467-do.... Hope this helps!

Jennifer, NNN (also known as Triple Net) is a way to recapture the expenses of a property. Retail tenants typically pay NNN. This means they are billed back for actual expenses for 1. common area costs (trash, water, maintenance, landscaping, etc.), 2. property taxes, and 3. insurance.

Cap rate, also known as Capitalization Rate, is a percentage used to compare the price of a property. It is derived by dividing the NOI (Net Operating Income - income minus expenses) by the sales price. Working backward, you can take your NOI and divide by the market cap rates in your area to come to the sales price.

I hope that helps.

@Jennifer Love   If you are just getting back into the commercial area, I suggest you start with purchasing versus building.  Construction guidelines are getting tighter in preparation of a market correction since the USA has not had one in the last 10 years. For construction, lenders want someone that has experience building.  You could partner up with someone that is already in that space to get the experience which will help you leverage that experience later on with your next project.

@Karen Schimpf Sounds like the best option so far.  I'm in the process of gathering info at the moment to learn as much as possible.  I'm not sure how the purchasing process works in commercial - assume you need to have quite a bit down in the commercial market?  And how do interest rates work for a loan?  Any info you provide would be very appreciated!  Thank you!

@Jennifer Love Many people want to equate commercial loans to residential since they understand residential. Commercial loans are a very different animal. The terms for a conventional loan can be a 3 year, or a 5 year, a 7 year or a 10-year fix rate with an amortization 10 years, 15 years, 20 years, 25 years and 30 years. The typical term you will see is a 5-year fix with a 20-year amortization. The fixed period has a prepayment penalty that is typically the length of the fixed period. After the fixed period, in the old days the loan ballooned, but today you can get a rate that will adjust or reset after the fixed period. Storage is viewed as special purpose so the loan to values typically can go up 80% to 85% LTV for an SBA and maybe 70% to 80% on conventional. If you write the contract to close in 30 days, the loan would need to go hard money because they are set up to close quickly. It takes a conventional commercial loan to close in 60 to 90 days.