having commercial properties for early retirement....is it a wise move?

[G-95]

Thinking about having commercial properties for my retirement.....what's the pros and cons about having this type of business?

 

[ziggy29]

I don't own investment property but I would say this -- if you can get it to cash flow well while being under professional management and allowing for a certain percentage of vacancies, I'd imagine it can be a good source of retirement income.

If you are managing them yourselves, it ain't retirement.

 

[haha]

Thinking about having commercial properties for my retirement.....what's the pros and cons about having this type of business?

If by comercial porperties you mean strip malls, office buildings, warehouses etc, these are usually pretty big ticket. So unless you are wealthy it is hard to get adequate diversification. Also, unless you know the business you can pretty easily get hammered. If you are still fairly young, consider working as a broker in the geographic and commercial industrial area that attracts you.

If you mean SFH homes, bought well and turned whenver you can it is likely a good business. Very successful until the past 5 years, because no matter how badly you choose, that good old inflation and in many areas migration into the area has been a great bailout fund. But IMO in many areas buying SFH to rent out is a loser, as you have too much competition that really does not understand the costs of their operations. So they tend accept too low returns, or too much risk.

In my city, even after the residential losses of recent years, rent is still a relative bargain, which means that landlording is a subsidizing operation mostly based on the idea that houses are an investment, not a means to gain shelter. This may always be true, until the overall demographics and economy of the area changes, which may never happen, or may be beyond our investing lifetimes.

Ha

 

[sunsnow]

I do own investment property (residential, not commercial), and the return after expenses, which include professional management, vacancies, repairs, etc, is about 7%. I'm happy with the investment, have no exit strategy, and am using it as a major part of my retirement strategy.

 

[Wrirya]

I have to agree, I own commercial and single family, I have also owned plex, The down side of commercial is vacancy, funny enough that can be an up side. In commercial you may go 1 year or more to find a tenant. That is a long time to go without income especially if you need it for day to day living, however once you get someone in commercial they stay for a long time typically. I am a big fan of single family homes and even a bigger fan of owning notes on single family homes, basically own the paper secured against the real estate.

 

[G-95]

I personally owned one SFH on my investment portfolio, it has a monthly positive cashflow. However, I attended a real estate investing seminar last year and got into their ideas of making BIG bucks through commercial properties. One thing that they said is that commercial properties have different ball game than residential properties, one advantage of making deals on commercial is that we, as individuals, don't need to be qualified on loans because in commercials, the property itself will have to be qualified on loans. Banks need to know how well the property can perform.....is this true?

Note: commercial properties they discussed are apartment complex/buildings, mobile homes lot, self storage buildings, etc.

 

[pb4uski]

My folks have a single commercial property that is a significant source of their retirement income. However, they would still have sufficient retirement income without it.

The plus is that we have had a long term tenant (~20 years) that is a major company and stable and we have owned the property a long time so we can offer them an attractive rent and still be happy with the return. The minus is that if we lost the tenant it might be very difficult to find a replacement tenant.

If you could still eat if it was vacant for an extended period and could sleep at night with the lack of diversification then fine, otherwise it might not be the right place for you.

 

[FIREd]

I use REITs to invest in commercial properties (instant diversification without investing big money). I own one SFH property and soon will add a second one to the portfolio. People in my family have a combined century worth of experience in the residential rental market, so I feel quite comfortable investing myself in these types of properties.

 

[bld999]

Depending on your local market, triple net leases are common for commercial vs residential, and with "storefront" size [say<5000 sf] buildings, tenants often expend lots of money on improvements, so they want longer leases to spread the cost out. Valuations are different than residential, tending to use cap rates and appraiser's "income approach" to set value instead of comps.

I would befriend a local owner and get the real dope before diving in. Buy a few beers and get the story on the actual market you are considering.

 

[traineeinvestor]

Our retirement assets include one unit titled retail shop which is leased to a major chain. It has been a great investment - a reliable tenant, no vacancies, tenant does all the maintenaince, reasonable rent increases and considerable capital appreciation. We recognise that if it became vacant it could take a while to find a new tenant. I wish we had invested more in this type of property but prices locally have appreciated to the point where it is pretty hard to justify further investment.

We also have some carparking spaces which are pooled and under common management with other spaces in the same building. It's a hassle free investment - no vacancies, no maintenaince and all I have to do is fill in the tax return each year. However, the net yield has been below expectations.

 

[Wrirya]

I personally owned one SFH on my investment portfolio, it has a monthly positive cashflow. However, I attended a real estate investing seminar last year and got into their ideas of making BIG bucks through commercial properties. One thing that they said is that commercial properties have different ball game than residential properties, one advantage of making deals on commercial is that we, as individuals, don't need to be qualified on loans because in commercials, the property itself will have to be qualified on loans. Banks need to know how well the property can perform.....is this true?

Note: commercial properties they discussed are apartment complex/buildings, mobile homes lot, self storage buildings, etc.

I have not seen this to be the case. Most lenders want to make sure borrowers have "skin in the game" meaning money . Typically 20% min and are personally liable on the loan as well

 

[obgyn65]

+1. This is the main reason why I would keep away for commercial properties.

If you are managing them yourselves, it ain't retirement.

 

[pb4uski]

I have not seen this to be the case. Most lenders want to make sure borrowers have "skin in the game" meaning money . Typically 20% min and are personally liable on the loan as well

I think you are both right. For commercial lending the lender will look to the cash flow of the property only so the borrower's credit rating isn't as important as it is in getting a mortgage for owner-occupied residences. However, the lender would also expect 25% or more down.

 

[jerome len]

A lot depends on economic conditions. Today, in most markets, the vacancy rate is about 15%. I just had coffee at Starbucks and 2 of the 4 spaces in that little commercial retail center are vacant. Most little shopping malls, commercial buildings, have a lot going on. If you don't know what you're doing, look for a building with a long term lease with a financially healthy client.....these don't up for sale very often. I own buildings and their a hassle, yes, the banks look at these based on cash flow BUT mortgage terms are far different. You have to look at depreciation, cost of money, and positive cash flow is far different then you might think.

The folks that I know that do well are and have been professional commercial investor/owners for a long time. It is a great business if you know what you are doing...if not, get an education ......you could get burnt.

 

[G-95]

A lot depends on economic conditions. Today, in most markets, the vacancy rate is about 15%. I just had coffee at Starbucks and 2 of the 4 spaces in that little commercial retail center are vacant. Most little shopping malls, commercial buildings, have a lot going on. If you don't know what you're doing, look for a building with a long term lease with a financially healthy client.....these don't up for sale very often. I own buildings and their a hassle, yes, the banks look at these based on cash flow BUT mortgage terms are far different. You have to look at depreciation, cost of money, and positive cash flow is far different then you might think.

The folks that I know that do well are and have been professional commercial investor/owners for a long time. It is a great business if you know what you are doing...if not, get an education ......you could get burnt.

Thanks for sharing some info and experiences, do you know where to start to learn this commercial investing? Do they have their own network?
I've been thinking to quit my job and get in commercial properties industry. Not sure if this is a good idea since I'm new to this.

 

[jerome len]

Hey G-95
I don't really know the answer on how to start to learn the business. I'd probably try to find a good commercial RE salesperson and tell him/her you are there to learn....before you buy. And, I'd look at nearby colleges and see if they have any classes. I learned because I bought the property that housed by retail businesses.
And, I've always wanted to buy good apartments in good neighborhoods....but haven't do it yet. You also could talk to a CPA and learn about tax advantantages/consequenses in owning commercial property. It's a profession, you'll have to "go to work" getting your best answers to your questions. Sorry I can't be of my help......maybe others have good ideas.

 

[G-95]

I have to agree, I own commercial and single family, I have also owned plex, The down side of commercial is vacancy, funny enough that can be an up side. In commercial you may go 1 year or more to find a tenant. That is a long time to go without income especially if you need it for day to day living, however once you get someone in commercial they stay for a long time typically. I am a big fan of single family homes and even a bigger fan of owning notes on single family homes, basically own the paper secured against the real estate.

Hello Wirrya,
Interesting ...
How do you own notes on SFH without owning the property itself? It probably more like partnership when one of investors just invest his/her money and name doesn't on property's title, correct?

 

[Wrirya]

Hello Wirrya,
Interesting ...
How do you own notes on SFH without owning the property itself? It probably more like partnership when one of investors just invest his/her money and name doesn't on property's title, correct?

You are the lender. So rather than buying the property you buy or create a note by giving a loan with real estate as collateral.