I've been working on my exit strategy from residential SFHs for about 24 months now, moving mostly from smaller, SFHs to larger commercial property. The rent control wins in several major Mid-Western cities (St. Paul) tell me this is a "thing" that like most trends starts on the coasts and gradually makes its way here.

I don't plan to sell out my entire SFH portfolio as they are easily the most profitable, but I am thinning the herd and moving into structures that are easier to manage and require less maintenance at turn overs.

Most of my inventory consists of giant metal boxes with concrete floors and red-steel frame work. Self-storage units, garages, auto-work shops, etc. Tenants take care of all the interior fixtures. I take care of walls, roofs, and major systems.

No one is calling for rent controls on commercial units....yet.

Curious how/if/when any of my fellow SFH land lords are considering protecting your portfolios from what seems to be an inevitable trend of Govt interference in private housing? Are you hearing any calls for rent control in your area?

In NYS, the hideous act of July 2019 has a built in trigger for rent control at vacancy rates below 5%. The scamdemic created an artificial low vacancy rate especially via the eviction moratoriums.

So far, Rent Control is banned by statute in NC law. Doesn't mean that couldn't be repealed or changed, but it will take a lot longer than just passing a city ordinance.

One reason right here are the tourist homes. If they tried to pass rent control on private annual housing, people would simply convert to AirBnB (or some other form of vacation rental.) They can't ban that without shutting down the entire beach economy.

The sell-off of some annual rentals into private homes and conversion to vacation rentals of others is already in full swing - we had more people come here during the pandemic than at any other time.

Rent control makes no sense in areas with ample affordable housing which is the case in my state. Also, my state has always been pro LL and I doubt that will change anytime soon.

Last summer, our eviction moratorium only last 6 weeks before the courts re-opened and immediately started evictions again.

I am curious as to why you think commercial is less hassle than SFH's. Do your commercial rentals produce a 20% or greater return? I would not be anyone's LL for any less than 20%

I protected myself by diversifying the portfolio.

OGM-

My Natural Gas play some 17 months ago was a grand slam. I bought at a low point and some experts still think that it will still double this winter. So far it has tripled in value for me, a so a double at this point will be six fold increase.

Then again, I bought when the govt ordered everybody to close down. We have a green administration in office that wants to punish new drilling - so what do you suppose is going to happen to existing production.

NN/NNN -

I have been putting myself into plays that allow me to use the same skill sets with SFH but use them on small franchise operators. Selling options works at all levels

M2M -

Roy, you asked about the hassle factor with commercial. I thought I'd already explained that in my OP, but here goes again.

Giant metal boxes with concrete floors. (*grins)

# of commercial tenants who had punched a hole in the wall? Zero.

# of commercial tenants who spilled water on the floor, rotting it to the joists? Zero.

# of times I've had to repaint the inside? Zero.

# of times I've had to replace flooring material like carpet, hardwood, vinyl, allure? Zero.

ALL and I mean ALL of the interior maintenance is on them. Even if they refuse to do it, that hurts THEIR business if THEIR customers come into a dark space when they aren't changing bulbs. Their utility bill suffers when they don't maintain the furnace properly. Their customers are offended by the dirty bathrooms. Their profits suffering = huge motivation to fix stuff and not bug me.

Turn over is easy. Sweep it, power wash the floor, done. Takes an hour for my handyman. $60. Billed against the deposit.

Do I get 20% ROI? Not at first, but the value-add is tremendous when you take a piece of commercial dirt and can easily convert it to "higher and better use". A house is a house and it will forever be a house. But what if I take an old metal building someone was just using for storage at $700 and I slap two hydraulic lifts and an 80 gallon air compressor into it for a couple thousand bucks and now it rents for $1200 a month? I've done that now...twice. As units come vacant, I will do it again and again.

Also the dirt itself has endless possibilities. I bought a place with about 1.25 acres of unused land. I've rented part of that to a guy who has a roll off dumpster business. $300/month for 1/4 acre of parking space and he puts down the gravel and mows the grass for me.

I've also rented another 1/4 acres to a guy to park his dump trucks. $300 a month again.

That's $600/month just for 1/2 acre of DIRT that the Seller of this place wasn't using for anything and so they didn't value it in the sale. I started using it. It was like getting a free house that takes zero maintenance. If you've ever figured CAP rate, you know that increasing income means increasing value. $600 doesn't seem like much, but even at a very modest CAP rate of 7% that is almost $13,000 of added value.

I've got one more of those little "parking" areas to rent still. It's paved. $400/month easy since it's right out by the main road and has good visibility.

Another nice benefit is savings on insurance. I thought commercial would be more expensive, but it's not. Per square foot, I pay less for commercial than for residential. Probably again because these are giant metal boxes with steel frames. Very unlikely to burn down and much more weather resistant.

I'm not hearing about it -yet- in northern Michigan, BUT there is a major shortage of what they call "affordable housing" in my area. The cost of construction has long ago outrun the payment that the low income earners can afford, especially single parents.

I've been reducing my units and should soon be out of the single family market. I agree that it seems only a matter of time until the govt interferes to the point where the smaller operators go broke.

Oops, I figured my cap rate only for one MONTH. Annually, which is the correct measure...the value add is $103,000.

Basically, since local cap rates are about 7%, that means people will pay $100,000 for every $7000 of annual net income an asset generates. $600 * 12 months = $7200 with no expenses, so the value add of $103K is right there with what someone would expect to pay for an asset generating that much net income.

Regarding your value add: if you have 0 expenses, which is doubtful, $600 per month adds $102,857 @ 7%cap rate.

Sisco....so far I've had zero expenses. It's dirt. The guys park stuff on it. They mow it, gravel it, fence it, etc.

Management fee? Property tax? I know that the additional time is negligible, but I suppose the management fees should rightly be accounted for. Property tax should be allocated - I would think that a prospective buyer would take that view.

Sisco...fair enough on management. In the "real world" I would be paying 10%, so shall we say $60/month?

Property tax is already "baked in" with the rest of the property. Sorry if I wasn't clear: this is dirt that is part of property that I'm already renting to 6 other tenants (auto repair shops, etc). Me deciding to rent that dirt shouldn't impact the taxes at all.

With that accounting, $540/month * 12 / 7% = $92,500 value increase with minimal effort. This is one reason I love commercial. I can't think of how I've ever had that much success for such minor effort in residential.

NN and NNN leasing is so much easier SISCO.

And one thing I noticed, the bigger players don't want to deal with small single unit operators of franchises because they are riskier.

Because they are risker these are also cheaper.

I am game, can I use the same tools for a residential tenant as I do for a commercial tenant to slowly train them up to be real estate owners?

You make even more doing it on the commercial side of the house than you on the residential.

SID

I have been watching a metal box, as you call them for a year or so. It was a garage. Been vacant for about 2 years. 3 bay with a little office - Metal building - probably 30 years old - dirt parking. I am not sure how much land comes with it.

Any ideas.

"Are you hearing any calls for rent control in your area?"

Yep, we already got that.

But do I trust our govt to AGAIN not destroy thousands upon thousands of small businesses by saying they aren't "essential?" He// no!

PG, may a guy who likes to tinker or a shop? I'm not sure about the location so can't tell you much.

Ken, mostly small business guys with auto-repair. One buy is a small car dealer. Another guy uses it for storage for his "fleet" of fun cars. Most are easy to deal with.

CAP RATE is the rate at which capital is being returned. It is calculated as follows:

Cap Rate = NOI / Market Value

So a CAP 7 could look like this...

$7000 / $100,000 = 7

or

$14000 / $200,000 = 7

Sid, little over 4 yrs ago when my parents sold some farmground... we went from mainly apts to having a mix. Office space in another town, metal boxes like you describe, retail strips, still have 2 houses, and our apts. When covid hit, business all paid. 95% of apts paid. No talk yet of rent control here. If it does, there is enough real estate investor in INDY to get it shut down quick. I spend 95% of time on the apartments.

Pros to this model: you have multiple baskets. Eggs not just in one. Office space is slow right now. Retail, all full. Evens out in the big picture. with apartments, I'm handing rent increases like crazy to stay up with the inflation.

Cons to commercial: long term leases with built in rent increases. sounds great. But not at 3% increases, when the market is at 5% or greater.

With your shift to metal boxes, the time requirements are much lower. Really, you could have a 40hr/week job and still do this model. With multi apt, no way. Non stop work when you have numbers....

Sid,

Yesterday you made the statement that commercial investors are willing to pay $100K for $7,000 in net income which produces the 7% cap rate. I realize that commercial investors are buying "streams of income", especially when buying a multi-unit like an apartment complex. My question is,..why are Cap Rates not used in residential SFH valuations?

Example: I have one SFH that has a yearly NET income of $10,000. Based on a Cap rate formula, how much would another investor pay for this one $10K stream of income? How much would YOU pay?

NE,

$30K would be low ball and you can't pull the wool over my eyes.,..LOL. This property is a fricking Gold Mine and I would not sell for anything less than $100K. Would that be a 10% cap rate?

It might be a gold mine to you NOW but it’s no longer a gold mine to a cash flow investor at $100,000 purchase price. You might pull the wool over the new investors eyes with good salesmanship and an offer to carry some of the financing though.

We have a trailer, with an attached ADU over the garage, that anyone else would probably pull down. For us it nets about $20k per year. Paid $45k I think, plus fix-ups of maybe $20k (life was cheaper then.) So is that a CAP rate of 30%? Not a math genius here.

Here's the rent control statute from NC. I notice that rent control CAN be enacted if the housing provider accepts state or county money for various reasons, which makes sense. Which is why I would not accept state funds during Covid if it was offered even if I was eligible - too many strings attached.

§ 42-14.1. Rent control. No county or city as defined by G.S. 160A-1 may enact, maintain, or enforce any ordinance or resolution which regulates the amount of rent to be charged for privately owned, single-family or multiple unit residential or commercial rental property.

This section shall not be construed as prohibiting any county or city, or any authority created by a county or city for that purpose, from:

(1) Regulating in any way property belonging to that city, county, or authority;

(2) Entering into agreements with private persons which regulate the amount of rent charged for subsidized rental properties; or

Sisco,

Each 2/1 house on either side of my house would comp-out at $35K. My house, which has one extra bedroom AND a 2/1 Garage Apartment (ADU) in the rear,...would comp at about $60K. As you know, comps are just for potential homeowners who are willing to pay retail.

Rent control is very unlikely to ever happen in Idaho, but I think there is a very large possibility of a national federal rent control law.

The state of Oregon has it in the state constitution that rent control is illegal, so the politicians just called it something else and insist it isn't rent control because it isn't called rent control.

T (IN)

So, you think just because you have a commercial tenant, they will not stiff you on a rent payment? That is about as naive and ridiculous as it sounds.

Roy- there is always a risk. With that said, you should have a much lower risk in commercial vs Joe Redneck.

Also, when I say commercial... im talking fortune 500 companies. Dollar general, fastenal or local business that has been around for 20 yrs. Not Mike's Mechanic who just started out of his garage.

Sid,

Remt control you ask? Govt moratoriums on eviction is the ultimate rent control.

It worked well and was easy to implement. I suspect we’ll see it again.

T (IN)

T,

Is your DG NN or NNN?

Ray-