SFR, Commercial, Multi Family, Income properties, what?

Question

Most of the investors on BP everyday are doing some form of SFR investing. My question is why? I'm sure it's because many of you are just getting started, and funding is tight. I understand that. However; for those that invest in higher end homes, etc., have you ever considered other types of properties?

As developers we have developed projects covering the real estate spectrum. We just finished up a spec house, and are now looking down the road at what to do next.

It will probably be an office building, built as a condo project, which allows us flexibility in marketing. Upon completion, we can sell to 1 owner/user or an investor that would bus the entire building to lease it out to 1 or more tenants. 
By it being condos, over the years it would allow the owner to sell off one or more units and keep part of the building if they chose to do that, etc.

We can also sell individual units, allowing us or smaller investors not wanting to purchase an entire building the option to purchase a commercial project at a fraction of the cost of an entire building.

Commercial property tenants make decisions on their business based on the economy, budgets, etc., and tend to be less emotionally invested in their properties, though some really do like to put in upgrades etc. since they spend so much time at work.

I was just wondering, in the area where you live, have you looked at any commercial properties to invest in, and if not, why not?

Brian Burke · Answer

I built a lakefront resort.  One of those "been there, done that, got the T-shirt" experiences.  It was fun to create something like that and basically revitalize an otherwise blighted area.  BUT, residential and apartments are just so much easier, and so much higher return!

I think you have it figured out...do what works for your area and skill set.  I can imagine that OC would be tough for SFR, I experimented in San Diego for a while and found the same thing.

I can make SFR work because I spread out.  While I found your old hometown of Redding to be a great area for SFR, now I'm in 14 counties.  Change property types, or add areas...I picked one, you picked the other, seems like both worked.

Brian Burke · Answer

I've bought SFR to flip and to hold, I've bought Multifamily both large and small, built/own/operate self storage, built houses, developed land, and built/owned/operated hospitality.  Even though I have done all of that, most of my business is SFR and large Multifamily.

Why?  Because it is working for me. As a private equity real estate firm, my business exists for one reason: to generate return for my investors.  If I could generate the returns that I'm generating now by making widgets, I'd make widgets.  But I don't know how to make widgets, so I stick with what I know, and what works for me.

I think that the market fundamentals, the recent market meltdown, and the skill set of me and my team are in perfect alignment to capture the most advantage in the residential market.  As market fundamentals change, skill sets evolve, and opportunities align for utilizing a different asset class to generate return, there is a very good chance that the composition of my deal flow will likewise evolve.

Karen Margrave · Answer

Steve K Actually I thought Obamacare was going to kill the market for medical, however; it's quite the opposite, and then throw in the boomers, and medical should be one of the best investments out there.

Steve K · Answer

I've done both and go back and forth on how I feel about which one is a better avenue.  End users are 10x easier to deal with on commercial developments however the risk and capital demands are much higher unless you are good at schmoozing investors, which I am not.

In a perfect world I would likely agree with your preference for commercial, specifically medical.  Banks love to finance doctors for owner occupied spaces so moving product would be easy until Medicare reimbursements kill off doctors incomes.

Karen Margrave · Answer

John Mireles The success or failure of any type property depends on the location, the amount you can get for rent, and what's going on in the economy. Some segments of the office market, like healthcare are in good demand, due to the fact there's 10,000 baby boomers reaching 65 each day, and will be for the next 20 years, so anything that is affected by the boomers is good to look at. Plus, with Obamacare there will be even more patients going to the doctor, clinics, etc.

At the same time, just because a property has a commercial zoning, doesn't mean it's a good location. I've seen so many times where developers build on the outskirts of an area where office makes no sense, and then wonder why it failed.

As for your live/work units, it would seem those would be more successful if developed and sold to the business owner that wants to live above their shop/office, or leased to a business owner that wants the business space AND the living space, etc. I could see where there would be problems with businesses not wanting to be located underneath noisy tenants, or someone playing music while you're trying to business, etc.

John Mireles · Answer

I own both commercial properties and residential. In fact, I have both in one building - a mixed use property with retail on the ground floor and residential above. I can tell you this: I don't worry so much about the residential units going vacant. However, I lose sleep at night thinking about losing my commercial tenants.

The deal with residential is that people need to live somewhere. They may not be willing to pay what I'd like, but everyone needs a home. Residential may be more work than commercial - fixing toilets and whatnot - but there will always be a tenant.

When it comes to commercial, if things get slow, the first thing business owners do is shed their expenses. Instead of working out of an office, working at home will do. Renters don't need commercial space so when the economy heads south, uh oh, better hope that your tenants don't start dropping out because once they go, it may be a long, long time until you get a replacement.

This may not be such a big problem if you bought when the market was low or if you have prime location, but if you bought near the peak, there's not a lot of room for vacancies until you're pretty far underwater.

By the way, I nearly invested in an office condo project. One of the best decisions of my career was not getting involved. Once the economy started to head south, they couldn't give those things away. I'd make darn sure there was sufficient demand for office condos before I'd touch that market.

Karen Margrave · Answer

Brian Burke Sounds like you've got a successful formula for your area. Here in OC it's very hard to find SFR that works. Aside from that, our experience has been more commercial.

I just like to hear from people that are doing other things in other areas, and find out if anyone is doing anything similar to what we do, etc. just curious, and trying to change up the conversation.

What type of hospitality property did you own?

SFR, Commercial, Multi Family, Income properties, what?

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