All Forum Posts by: Jimmy Klein

Matt,

 Let me clarify on what I think Joel is saying. You say there is a pop of a 150,000 in a 20 mile radius and while that sound great. It really is nothing special. I am in the hotel business and let me tell you why your banquet hall will have a hard time competing. If there is a 150,000 population, then there are some high quality hotels with great banquet halls in top notch locations that you will be competing with. The hotels will probably in the most dense areas of the town/city. Your location is going to be more rural. A 20 mile radius is simply too large of a demographic you are trying to encompass. As Joel mentions, typically 1,3,5 are what you need to look at. 

I understand there is a quality factor of the venue, but your end goal is to make money and not just enough to buy a soda, but enough to do well. That's what I am trying to point out for you. Now I very well may be wrong, so you have to look at all aspects.

I can shed some light on this as I owned both and still have a strip mall. I rarely ever hear of a 500k strip mall with good tenants and as a quality asset. I own a strip mall. Purchased for mid 5 million. I have good tenants, some credit quality, others mom and pop. The location is good, near a major mall and restaurants. 

Here is what I will say. As far as maintenance goes, the strip center has very little. Just make sure the roof is well intact. Most of my leases are NNN, so tenant pays for everything. If something happens to their unit, they take care of it. Otherwise structural cost such as roof and landscaping are on me. This is almost minimal. I rarely ever step foot on the property. I just don't need to. One issue with retail strip is that the process of leasing up vacant spaces when a tenant leaves. You typically get a leasing broker and they take a pretty big cut and their may be some down time in the vacant unit due to tenant improvements as well as waiting to find the right tenant. However, once the ordeal is done, assuming you did it right you'll get a new tenant with a 5 year, or hopefully longer lease.

Multifamily is good in certain ways, but requires a lot more attention. With a 50 unit complex, you have 50 kitchens, 50 bathrooms (maybe more), several hundred light fixtures, HVAC units, water heaters, maybe even washer and dryer. So this property requires you to be there a good amount of time. The nice benefit of multifamily is that leasing up is easier. Tenants only sign one year leases. As long as the property is in the right location, releasing shouldn't be an issue. 

So in one, you have very little responsibilities, but have issues during releasing. For the other, you have a lot of responsibilities, but should be able to re-lease fairly easily. Each has their own benefit. In both, LOCATION MATTERS.

There is no question cap rates are at an all-time low. Multifamily investing is expensive in terms of return. There is very little because the market perceives risk to be low. To understand the market, look at where we are at now and look at what the future holds. Everyone kept saying multifamily cap rates would rise in 2011 and then in 2012 and then in 2013 and then in 2014. They have all been wrong. You can't predict the market, but can make educated guesses.

Here are my two cents, each asset has a different demand generator for it. Multifamily is seeing demand due to renters not being able to qualify for mortgages. Housing prices are also skyrocketing, which means they are not able to even look at home buying yet. However, when the trend switches, and believe the trend will switch at some point, the renters will start buying homes again vacating these multifamily buildings. Over the last couple years, developers have went in headfirst with apartment development. Some cities have seen unit growth of 30%-50%. Eventually occupancy will fall when renters start buying. I don't know when this will be, but it will happen. It could be 3 years from now, it could be 10 years, but it will happen. Its tough for people who have liquidity and need to place it somewhere, but don't ever doubt your investment criteria and stick to your guns. Those that do will survive, those that do will get burnt.

Banquet halls can be great for the right locations. I saw one for sale a couple years ago, where it was booked every friday/saturday and some weekdays. There needs to be enough demand and little supply. In your situation, a rural setting might not be the best location. You will not see enough demand to generate any business. Keep in mind, expenses such as utilities and janitorial expenses. The people booking will just pay you a flat rent.

Biggest problem you will have is that you need a full service kitchen with refrigerators and stoves. Banquets typically include food. A good kitchen can cost you a 100k. You need two bathrooms each for men and women. Simply throwing together four walls and calling it a banquet space won't cut it. There is a lot to consider.

@Bill Gulley

Not sure the number of posts on biggerpockets should determine their credibility. Its actually pretty ignorant to even say that. Regardless, I'll take the high road.

Yes, CRE has plenty of risks. I understand you are comfortable with RE and therefore in your mind RE investing is the greatest thing since sliced bread. In my opinion, as I mentioned before, each has its own merits. The fact that you provide airports as an example for CRE investing is like comparing Stalin to the Pope. It makes no sense.

I do agree with the fact that CRE is adapted for the best use in that given location.

I am not a cheerleader for CRE. In fact, CRE requires a 100x more due diligence than a SFH investment. It is not meant for the faint of heart. However you make it seem like with SFH investing, that it has the same risk as treasury bonds.

@Bill Gulley

I disagree with some of your points. I will say that yes CRE does have greater risks and requires more due diligence. If you think interest rates for houses are less because of risk, you are way off. Please understand how the Federal Reserve works in conjuction with banks. Housing interest rates are lower as we are a housing based economy. The government is incentivizing people to own homes. This is the very foundation of what we have. The govt and any pseudo-political organization such as the Fed doesn't care about strip malls and office buildings, they care about homes.

I'll agree that CRE is NOT for noobies. In fact, people that even consider it without knowing anything about the industry are out of their mind. Yes, no book covers all the information, the best information you will receive is through experience and proper due diligence.

CRE in my mind is dominant when someone has enough money. If I have $10 million. Would I buy 100 houses or 2 CRE properties? I would hands down go for the CRE properties obviously making sure they are in good locations. I easily cut my hours by 70% to manage the two properties. Yes you have location risk, with the 100 properties you could argued you are diversified, but honestly its really hard to imagine each house being more than 15 mins apart, otherwise your gas bill will kill you.

CRE is for a certain group of people. Residential is for a certain group of people. Each has its merits and problems. The bulk of people buying residential properties for income are looking for retirement income or to supplement their existing jobs. In CRE, its completely different.

First off, this is not called a joint venture, its simply a co-broker agreement. Joint Venturing is when two or more parties are investing together and there is a structure to split the profits in a certain way. 

Ok so your in Gainesville, so I am assuming your talking about UF, in this case, do not sell at all. If your land is adjacent to the university, construct a mid-rise apartment complex with a 100 units. Student housing is doing extremely well. I would see if you could get that 50,000 commercial rezoned to residential. Assuming UF needs more off-campus housing, you could develop 2 acres into housing and achieve great returns. At this point, not only did you build a profitable asset, but also diversified into multifamily. In my opinion, I would do this since you mentioned you are not in a hurry to sell. 

@David Krulac@Steven Rogers

My apologies. Forgot about this thread.

Here are two books that are good:

How To Win In Commercial Real Estate Investing

The Due Diligence Process Plan Handbook For Commercial Real Estate

Wow some people really don't understand commercial. To those that say commercial properties have lower returns and can bankrupt you, these people are clueless.

Commercial properties are good and bad, just like residential. I own investment homes and some commercial assets that are much larger. I have a bigger headache when it comes to these homes in regards to maintenance. I also own a strip mall with both mom and pop tenants and corp tenants. Most of these leases are NNN. Also I got non-recourse debt on most of my properties, so NO I actually don't go bankrupt. If anything, I get hit harder for an investment house.

Yes, returns may be better for residential, but they should be given all the issues that can arise. Also in many situations the returns are not that significantly different. For example, in Houston, if you want a DECENT house in a nice area, the cap rate is like 8%-9%. There are some nice shopping centers sold in Houston with caps in the 7% range. So yes there is a difference, but in one you get less headaches and non-recourse debt in the other you are responsible for all issues. 

For the person that says when the market nosedives, commercial gets hit hard. Ok this is true, but doesn't the same apply to residential? The residential market got hit insanely hard. This is not a matter of commercial vs. residential, this is simply about overpaying.

Honestly, for my shopping center, I had ZERO tenants leave during the worst years of the recession. I did renegotiate one tenant's rent in this period and got them to sign a 10-year lease with a personal guaranty. Good luck getting this for a SFH renter. How you manage the asset makes a big difference.

Simply comparing a NNN Starbucks selling for a 5% cap on loopnet to a SFH in Memphis doesn't meet commercial real estate is awful. I'll admit CRE prices have risen quite a bit, but I know the same has happened for residential. I think both types of assets have their pro's and con's, but to say CRE is a worse investment than SFH is way off. I recommend you do some research. If anyone is interested, there are some very good books out there.