What is the "Quadplex" of Commercial real estate?

Question

What is a good starter-type property for someone looking to get their feet wet with commercial real estate? Like a 12-unit apartment building? Or like a warehouse? etc. Looking for a type of property that won't make me feel overwhelmed and would help me understand the numbers side of commercial a little better. Basically, I'm interested in what people would recommend to look into for someone just starting off in commercial real estate rentals.

When it comes to smaller residential properties, I think most people know how much of a fan BP is about multi-families (with quadplexes being the most common example). Now I ask... what is the "quadplex" of commercial real estate, if there is any? And what are some things to be aware of with this type of rental?

Ariou B. · Answer

@Craig Garrow I think it really comes down to location, location, location. Self-storage is appealing in dense neighborhoods where there are lots of apartment buildings.

Derek Carroll · Answer

you can find many that are turn key. If you have a 6,000sf office on a $15NNN lease in a market where that's a 9 cap then that's a $1m purchase. Many of these will be too small for the big commercial brokerages but you can always check the commercial divisions/specialists at the residential firms like COLDWELL, Remax, hunt, etc. these folks have $500k sales all the time. Dry cleaners, auto repair shops etc.

Be sure to do your due diligence on the tenants thought for anything this size. You want to be sure they will be there a while and have the financial strength to keep paying rent. If it's a sale leaseback especially for a small business then many times the reason is because they are low on cash. Not necessarily bad but requires investigation.

Check your residential mls as many times the small commercial is listed there as well. I'm sure someone above suggested loopnet but if not a good place to find a deal it at least will show you active brokers to reach out to.

Victoria Townsend · Answer

@Derek Carroll the under $1m range is exactly the space that I'm looking into :)

When you say there are deals to be had in this range (for lawyers, small medical, etc), does that usually mean buying a property and fixing it up to suit the needs of the business, or do you mean there are plenty of deals that are already turnkey for under $1m? And are pretty much all of those deals found through commercial brokers? Would love to hear some of the numbers on your returns for any small biz commercial property!

Victoria Townsend · Answer

@Michael Wagner - wow, that looks super interesting! Seems like it's working out well for you.

Please let me know if you have any tips on how to research storage opportunities out here in Los Angeles :)

Michael Wagner · Answer

Storage has been great to us.  You can check out my blog here on BP "All Things Self Storage"  It has a couple case studies that might be a bit dated by now but will give a good idea.  Very roughly speaking, we cash flow, after expenses and debt service, about $100K per year working 10-15 hours per week on our two facilities combined.  Our total out of Pocket to purchase the two was $66,000 ($40K in 2011 and another $26K in 2014) and they are now valued at roughly $2.8 Million.  We do carry about 1.4M in debt on them right now.

While your concerns about customer churn is understandable, it does not play out that way in the real world that way.  As long as you purchase/build in a healthy market that is not oversuppllied, decades of historical data shows that you can be reasonably certain to "sell your service." Market research is critical of course but the opportunities in storage are truly incredible.

Victoria Townsend · Answer

Hey @Michael Wagner - thanks for the response!

I have pretty low overhead right now (minimal debt, no kids/car debt), and am trying to find the best revenue stream that would create a good ROI. I'm totally fine with working full-time on this (in order to replace my job), but I eventually would want to hire someone out and move on to something else.

I'm in Los Angeles - If you don't mind me asking, how are the numbers in your storage business? How much did you invest, how did you grow it, and what are the returns you're seeing right now?

One thing I worry about storage is having customers churn and never coming back after they realize that they could have just re-bought everything instead of keeping their items in storage for a few years... thoughts?

Michael Wagner · Answer

My advise would be to make sure you UNDERSTAND THE NUMBERS before you get started in anything.  Beyond that, its tough to answer your question without knowing what you hope to achieve by investing in RE.  Are you looking to build some side revenue in nights and weekends? Or do you want to fully replace a J-O-B in pretty short order?  Are you in a position with current low personal overhead (no car, house debt, no kids, etc) or do you have big monthly obligations that you need to meet?  These are all important questions that should guide any advice you get.

That being said, my niche is self storage and it is a great business for what I desire out of life.  One primary challenge is that the whole business is based on being available when folks need you.  So if you still have a day JOB, then you need to hire someone or develop a system to address the needs that happen while you are at work.  You also need to decide who will take calls after hours (if anybody).  Its not necessary forever but if you buy a struggling facility, you will want to ramp up as quickly as possible and that inevitably involves dinner time calls.

I just scratched the surface here and I know the questions I asked arent the easy ones to answer but you dont want to be one of those people who gets a couple years into investing to realize that your ladder was against the wrong wall (I speak from experience).

Hope that helps.

Mike