Gone Commercial!

For about 6 years, I invested in residential real estate in the D.C. region as a landlord, rehabber, hard money lender, spec home builder. I think I was fortunate enough to start my investing career as the market was heading into the Great Recession. This made me risk-averse and cash flow conscious (two qualities which I hope will stay with me for the rest of my career). Being in the D.C. market also shielded us from the dramatic drops in prices that regions like Florida, Nevada and parts of California experienced. My residential real estate investments allowed me to exit a dead end legal career and allowed me to learn how to "hunt" and eat what I hunt.

In the back of my mind though, I always knew that single family residential investments probably isn't for me for the long term. For me personally, I find that there are a few challenges that single family residential cannot overcome.

First, it's a zero-sum game. Take a rental home for instance, you either have 100% vacancy or you have 0% vacancy, nothing in between. This presents an unacceptable risk the more properties you have. Also, think about the typical residential lease, it's only one year. This means about every year, you got to back-fill that unit with a new tenant. Invariably, when you say goodbye to your old tenant, you will spend some money replacing carpets, repaint, etc. There goes your profit for the year...

Second, financing options are very limited. You have friends and family funds, hard money loans and some bank financing. These are nothing to sneeze at, but with "one home at a time" type of scale, you can never raise very much of any of these. This is especially true from the banks. Banks qualify first on income, second on credit and third on collateral. In many SFH projects, the income the property generates does not meet the DCR (debt coverage ratio) that the bank demands for a decent LTV (Loan to Value). This means, you got to bring lots of equity to the table. This makes the deal safe but what kind of ROI are you getting?

Having good credit helps, but it is never enough by itself. Most bank do not weigh the collateral as much as income and credit because they don't want to go there! This is why hard money exists. Hard money desn't work for most buy and hold type of deals because the profit margin simply isn't there. I suppose rehabbing can be very profitable and you don't even need to be bothered with banks. Most of them just go straight to hard money sources. This is fine and it is a proven business model. But I guess I got tired of picking out tiles and managing a crew a few years back.

Third, it is hard to manage SFHs in several different places. Any landlord of several SFHs knows that things seem to happen at the same time. I once had a plumbing leak, a tree fall on a roof and a water heater go kaput happen on the same night at three different places. Because they are not in the same building, it's inefficient to hire outside management so, we self-manage. But how many more can we do this way?

This are the reasons why I decided to switch to commercial about a year and a half ago. It took me about that long to reorganize resources and position myself in the right place for this shift. I think I am finally there. I hope to use this blog as a way to share some of what I learn, some funnies, teachable lessons (so others can skip them) and success stories as I go.

If you do residential and love it, do not change. I just hope to bring a different perspective (and I am not the only one) to whomever is interested in the stuff I get myself into. I hope the experiences I share here will bring a little more complexity to the already layered and rich experience that is real estate investing.