Is commercial where you should start - Posted by Mort

import · November 26, 2010, 11:33am

Posted by Bill H on November 28, 2010 at 13:30:19:

As David said the foreclosure factor looms. It is an established fact that foreclosure is:

First: Land
Second: Industrial
Third: Commercial
Last to go: Residential

Me, I buy tax liens. Do not want the property, just the interest and penalties.

Yes, it is not without risk. It like all other forms of real estate investment takes EDUCATION, TIME & PATIENCE and most of all DUE DILIGENCE.

In any form of investment; “Investigate BEFORE you invest.”

If you start small, place your returns in high yield short term CD’s (6 to nine months) and reinvest them in next year’s tax liens, it will add up quickly.

Bankers rule of 72 says your money will double in 4 years at 18 perent.

Good Luck,
Bill H

import · November 26, 2010, 11:33am

Is commercial where you should start - Posted by Mort

Posted by Mort on November 26, 2010 at 12:33:12:

An investor friend keeps telling me that commercial is the
best place to start real estate investing. He went to a
Scott Scheel boot camp. I have told him that he should walk
before he runs and do a few residential deals first.

He has no money or income but has been told that all you
have to do is find several investing partners that will each
put in money and you draw your salary from that. I told him
that Scott is making it sound too easy.

I spoke with one experienced investor that has been at
investing for about 30 years. He said that you shouldn’t
even think of attempting commercial until you have 10-20
years of experience and reserve capital.

Who is right?

import · November 28, 2010, 6:51am

Re: Is commercial where you should start - Posted by Frank Chin

Posted by Frank Chin on November 28, 2010 at 07:51:54:

Mort:

I agree with the others. Commercial real estate is not something to jump into.

As I mentioned, my dad is a commercial landlord, and back into the early 80?s, some businesses in need of a commercial location came calling, and he thought he found some buyers. As it turned out, at the time, most banks doing commercial lending are not doing commercial deals under $500,000, and many of them won?t do it under $1MM, so the only source of financing was ?owner financing?.

I told my dad to skip the deals because I told him I found no difference in him collecting on a mortgage as compared to collecting rent, work wise, except rents can go up, and building values can go up, and he had no need for the money. Mortgage payments stay the same, and gone one day when the mortgage is paid up.

As David mentioned, neighboring commercial vacancies can kill you. I moved into my current neighborhood some 20 years ago, started using a barber. I thought of buying some commercial properties nearby, but noticed half a dozen vacant stores within a quarter mile radius. Then, when two new barber shops went up in those vacant stores, about the same time, my barber started cutting his prices by asking ?how much did I charge you last time??? and asking for two dollars less.

This year, he moved down to a smaller store as I noticed his businesses struggling for a while. A new Korean Restaurant is about to open up at the spot, about the sixth one in recent years. As to the other five, 2 changed hands, 3 or more closed up, one as quickly as six months. as there?s just too many of them.

I learned a lot looking into buying Laundromats and dry cleaners, and nearby vacancies could kill your tenants business. I looked into buying a Laundromat, there for years, where it was booming one day and dead the next when a spanking new laundromat opened nearby. I was looking at the new one, and concerned with the old one have a block away. The new one had a dozen customers, and the old one had ?one?. The seller told me to go down the street, the one with the one customer, and see if the old one is a threat.

There were vacancies nearby, so I asked the seller what would happen three years from now, someone opens up a newer one on the next block??

I had partnered with others looking at real estate deals, and I would laugh if someone with NO income, NO job, and NO experience whatever in commercial real estate would have me give him money to live on so he can basically ?bird dog? for me. In fact, people going into ?hedge funds?, or ?investing?, had taken investor funds doing just that, living on it, and been arrested for fraud.

import · November 27, 2010, 9:48pm

not from where I stand… - Posted by David Krulac

Posted by David Krulac on November 27, 2010 at 22:48:53:

but I only have 4 decades of real estate investing experience.

It is not a place to start
It is very competitive, lots of big operators in the commercial game.
In todya’s economy in the places that I see there are lots of commercial vacancies.
commerical vacancies tend to last much longer than residential vacancies.
Commercial will come back when the economy comes back, when unemployment is down and businesses are growing.
You have to have deep pockets to last the dry spells in commercial and many operators have gone belly up. Several shopping centers have gone bankrupt that I’m familar with. and every main street has your choice of vacnt propeties to chose from.
Residential will recover before commercial recovers, so use the residential recovery when it happens as a leading indicator.
Commericla propeties for sale stay on the market for long times. One time I sold a commmercial property that had been listed for 7 years. The custom painted wooden sign was faded and hardly readable and was stuck in the weeds and undergroth as well as some wild grown trees.

import · November 26, 2010, 12:03pm

Re: Is commercial where you should start - Posted by michaela-CA

Posted by michaela-CA on November 26, 2010 at 13:03:22:

Mort,
I agree with you in that commercial should probably not be the place for someone to start gaining experience.

Also, to find partners who put up the money for your friend to get his salary does not sound an easy sell. What would he bring to the partnership? What would they be paying him for? I couldn’t image someone that has money just paying a salary to someone that has no experience in actually finding and putting deals together.

Maybe I’m being negative, but that’s not something the best salesman could sell me on, if I had funds…

Michaela

import · November 28, 2010, 11:00am

Re: Is commercial where you should start - Posted by Mort

Posted by Mort on November 28, 2010 at 12:00:00:

Another thing about commercial is that when it comes time to exit then the only people that buy commercial is other investors and they are always looking for a deal.

On a Residential property you are dealing with a much larger set of buyers than in commercial.

Also in Residential you have more options such a renting out a property if you can’t sell it. It is much harder to lease out a commercial property than a residential property.

import · November 26, 2010, 6:05pm

Re: Is commercial where you should start - Posted by mort

Posted by mort on November 26, 2010 at 19:05:06:

That is my thoughts exactly. Before I invested I would
want to know what other projects that he had done.

I know that most Angel Investors don’t look at the deal
as much as they look at the management team.

import · November 30, 2010, 5:24am

Re: Is commercial where you should start - Posted by Frank Chin

Posted by Frank Chin on November 30, 2010 at 06:24:33:

Mort:

You’re right, but it’s not all that simple.

As to the issue of selling, in many cases it’s hard to find buyers, but in other cases, for a good commercial location, it wouldn’t. My dad’s acquisiton of his comercial property is a good example.

He had his business (since 1948) long before he bought the building in 1963. Around 1961, the previous owner died, he tried to buy it from the estate, for $24,000, but at the time, a group of investors grabbed it for $23,500. Long story, but the estate thought the investors more credit worthy.

Apparently they tried to flip it, but as you said, buyers looking just to invest in real estate would drive a hard bargain. The best buyers are “users” such as my dad, but these investors wanted to make a killing flipping it, and making a 10% immediate return on it.

Almost two years went by, my dad remained the only viable buyer, paying a bit over market at $25,000, and the investors waited two years to make their $1,500, less expenses. Apparently, real estate investors drive hard bargains. They made a few dollars in rental in the meantime.

Today, it’c become an excellent retail location as it’s grandfathered in a residential area. With rents escalating in a nearby commercial district a block away, he often has inquires from retailers seeking to buy a location close by, and move their businesses to.

So, zoning has a lot to do with real estate values. People just can’t build a retail location next store due to zoning restrictions.

With all the advantages of commercial real estate, whay didn’t I go into it??

For my third acquisition, I had a choice of a small commercial property, one store and two office suites in the commercial district, versus a three family house. The commercial location was a few block from my dad’s and he reminded me each of his vacancies took six to eight months to fill, though he was choosy in a good location.

This is besides the difficulty of obtaining a commercial mortgage and much higher monthly payments and also higher commercial real estate tax rates.

Since all three commercial units were empty at the time I looked, my wife and I decided we don’t want to chance carrying a mortgage, pay taxes and insurance, and wait eight months or more for tenants. Brokers told me people inquiry about opening a pizza store, but I can see two other established nearby locations.

So, I’ve looked into doing commercial real estate for many years, but wound up staying in residential.

import · November 26, 2010, 9:41pm

Is commercial where you should start - Posted by Bill H

Posted by Bill H on November 26, 2010 at 22:41:20:

The very first thing you will hear when you aproach someone and ask them to invest with you is, “What is YOUR TRACK RECORD?”

In other words, what have you done in this industry that MADE a profit for your investors?

Every investor thst I have ever known or had dealings with is NOT throwing his/her/their $$$ at everything being pitched at them by every Tom, Dick, and Harry.

Good Luck,
Bill H

import · November 28, 2010, 10:53am

Re: Is commercial where you should start - Posted by Mort

Posted by Mort on November 28, 2010 at 11:53:46:

That is why I thought that commercial is NOT the place to start. Even though that some of the Gurus make it sound really easy. I just believe that the gurus are making things sound easy and only telling the upside and not the potential risks.

You can make anything sound easy like a moon launch

Build a rocket
go to the moon
take a few pictures
come back to earth