All Forum Posts by: Mike L.

I have a house in Long Beach which I am looking to renovate before I most likely sell it.  Can anyone recommend an investor-friendly (aka reasonably priced) contractor to do a full face lift?  This would include new cabinets, countertops, floors, bathroom vanities, paint, etc.

Thank you!

I'm interested, as well. Thank you.

I have the opportunity to rent one of my residential properties to an Adult Residential Facility (ARF). It is a regular SFR in a good neighborhood.

With all of the COVID eviction protections in place, I would prefer to have a commercial lease agreement with the tenant instead of a residential one. Is there any issue with using something like the California AIR Lease Agreement to sign this lease with the operator of the ARF?

Thanks in advance,

Mike

Hi Kyle,

Just some terminology: you would be looking for a tenant representation ("tenant rep") broker to help you find space.

You can try a service like getdigsy.com, which pairs tenants up with brokers who can help.

Or you can call the real estate office of a company like CBRE or NAI Capital and the operator may be able to send your call to a broker who is hungry and hardworking.  

I'm going to make an assumption (feel free to correct me if I am wrong) that you are looking to open your first location for the fitness studio, so you are new to the industry.

The honest truth (and you may not like to hear this) is that most experienced brokers would not really want to work with a client who is opening their first location.  Reason being that tenant representation work is a LOT of work (researching spaces, giving property tours) with no guarantee of getting paid.  And many brokers especially don't want to do tenant representation for a business that is unproven.  Most tenant rep brokers will screen their tenants for business experience, cash in the bank, a business plan, etc.  They should be screening you to see how serious you are about opening the business.

And if they do find a location for you, if that is going to be your only location, then they only make a few thousand dollars' commission on the deal, without much likelihood of future business.

Successful tenant rep brokers in the retail world are typically running with a corporation or a local franchisee who wants to open several, or several dozen locations.  It doesn't make much financial sense for a broker to do tenant rep work for a brand new business, unless that business is backed by a lot of cash, with a strong plan to grow to many locations.  Brokers only have so much time in their day and they need to choose how to best spend it.  

A few years ago when I started out, I knew nothing about the business and chose to do some tenant rep work for independent businesses.  I spent weeks researching spaces, and giving tours, only to find out that the tenants ended up finding space on their own, so I didn't make a dime.  So while on your side you might think that brokers would be lining up to help you out, and that you should be able to find a great broker, please try to see it from their side, as well.  

To understand the economics of it: A broker might typically get paid 3% of the lease value for a 5 year lease; so if you rent a 1200 SF space for $2.00/SF, the calculation is:

1200 SF x $2.00/SF = $2400/mo * 60 mo = $144,000.  3% of that is $4,320.  The broker probably splits this 50% with the house, so he pockets about $2,200.  And while that might not seem like a bad paycheck, there is always the possibility that you may decide not to open the studio if you don't find anything to your liking, or you might find a space on your own.  Since you are typically not contractually bound to your tenant rep broker, the broker may not get paid at all.  So once you factor in that risk, the broker is probably thinking it doesn't make a whole lot of sense to take on that assignment.  Unless, like I said before, he is very hungry and hardworking (and likely very new to the business).

Hope this helpful to explain the business a little bit.

Hi there,

I'm a commercial broker specializing in the purchase and sale of retail properties (single tenant properties and strip centers).

I have come across many investors who use their residential agent to help them buy commercial properties.  As a specialist, I wonder if the investors know that there are brokers who specialize in certain aspects of commercial real estate, or if they know, but would rather stay loyal to their agent, even if that agent doesn't understand commercial real estate very well.

Have any of you (as investors or brokers) had this experience?  Do you have any good or bad experiences in working with a residential agent to handle commercial, potentially gotten in trouble if the residential agent missed something?  

Mike

Is that income of $50k/year gross or net of expenses?  In many retail buildings, the leases are triple net, which means that the tenants will pay the cost of taxes, insurance, and maintenance.  If these tenants have triple net leases, then that would mean that the 50k that you receive per year would go straight to your pocket with no other expenses, because any expenses that you incur would be reimbursed by the tenants.  In this case, your property would have a capitalization rate (cap rate) of 50k/450k = 11.1%.  Cap rate is your annual net operating income divided by the purchase price. A higher cap rate means a better return. Where I'm from (Southern CA), an 11.1% cap rate is ridiculously good and is unheard of.

If the tenants are gross leases, which means that the landlord is responsible for some expenses, then you have to deduct those expenses from your gross income to get your net income.  So let's say you collect 50k in rent but you have 20k in expenses (taxes, insurance, maintenance).  You are left with 30k.  Then the cap rate on this property is 30k/450k = 6.7%, which certainly not as good.

To determine whether this is a good deal, you'd have to find similar comps in the area and see what cap rates they are selling for.  Then you can compare the cap rate of this property to those, and see if it's a good deal.

In order to properly value a property, you would need copies of the leases as well as an income statement (income/expenses for the property).

Find a couple of top brokers in each of those disciplines and learn from them about what they do.  See if you like it.  Perhaps you can even shadow them for a few weeks to get a better understanding of their jobs.

First find out which product type you would like to work in.  Office?  Industrial?  Retail?  Each one has its advantages and disadvantages, and some will be more lucrative than others, depending on your geographic location.  Most (but not all) successful brokers have a very focused niche, and only concentrate on one product type and geographic location.

Also define a geographic location.  It looks like you are in Chicago. But you might also look at firms that focus on the outskirts of Chicago, since it may not be as competitive.

Investment Sales probably requires the most "number crunching," as you will be doing building and property valuations.  Landlord rep (leasing) gives you more control over the deal, instead of tenant rep, because as a tenant rep, you could potentially show a ton of spaces to your tenant, and they don't like any of them, and you could never get paid.  But with that being said, there are some people who specialize in office tenant rep and they have extremely successful careers.

That's just the tip of the iceberg.  I'd be glad to talk more about this with you.  I made a mistake in choosing a path when I first started, and I wasted 9 months.  Just send me a private message if you have more questions.

Investments like these largely boil down to whether you can find a tenant to be in that space 6 years from now - whether it's the current tenant or the new one.

Is the tenant strong (Ross Dress for Less) or shaky (Kmart)?  How is the tenant doing in that location?  If the tenant is doing well and there is no reason they would leave, then they would likely renew at the end of 5 years.  But if they are not doing well, then there is a good chance they would leave at the end of 5 years.  If the rent is below market, that is to your advantage, as it is an incentive for the tenant to stay.  At-market or above market rents are to your disadvantage.

Do they have options to extend?  Options only benefit the tenant; they do not benefit the landlord because as the tenant nears its option period, the landlord is in an uncertain state of whether the tenant will renew or not.  The tenant has control and the landlord can only sit and wait.

Most investors would stay away from a deal that has 5 years left unless they feel good about finding another tenant to fill the space.  Certain tenants take a certain size of box, and you need to know which tenants could take that space if your tenant vacates.  

The return (cap rate) better be really good on an investment like this; as the investor is taking quite a big risk on it.

You could try to contact the real estate departments for the major tenants.  Usually the title is "Real Estate manager" or "VP of Real Estate."  There is usually one person or a team that handles a specific geographic area.

A local retail-focused commercial brokerage should have contacts at the major fast food companies, so they can fast-track the process and give you guidance on whether they think the site would be a good option for McDonald's, Taco Bell, Chick-Fil-A, etc.  Of course, they will expect a fee for their service, though.  If you go this route, you can (and should) make your broker earn their fee by having them negotiating hard on your behalf.  

Dealing with an experienced negotiator at a major fast food chain may not be something you are comfortable with.  The tenant could try to take advantage of you if you don't know what a customary lease should be in your part of the world.  You should know the market rental rate, what a typical lease duration is, how many tenant improvement dollars are expected, etc.

No, not often at all.  That's really risky and is like putting a lot of eggs in one basket.  I wouldn't get too "buddy buddy" with your tenants because it will make it that much harder for you to enforce the rules when things aren't going so well.