Friends... I'm changing course in my business. If you've seen (m)any of my recent posts, I've become somewhat pessimistic regarding the traditional residential rental market for the past 3 years or so, and not without reasons. The two biggies of course are 1) the unconstitutional Govt seizure of private property rights via Covid eviction moratoriums and 2) the rise anti-landlord sentiment such as the "Cancel Rent" movement, rent control, and other onerous Govt interference in residential market with things like limiting background checks, sealing eviction records, making source of income a protected class, ESAs, rental property registration, and a host of other little annoyances that seem aimed at taking away the ability of residential land lords to control their businesses and run them properly.

Complaining without a solution is just whining, so my solution has been to move toward the commercial side of real estate. Assuming a contract I submitted yesterday gets accepted today (already got the verbal "yes") I'm preparing to 1031 Exchange eight of my residential units and roll those proceeds into a larger commercial space. I've owned small commercial spaces (2 automotive shops with a total of 12 individual units, 1 retail store with two units, as well as a 77 unit self-storage facility that included a medium size commercial building, and a 13-unit lake resort, and while there was a bit of a learning curve, I can say that hands down the commercial space is easier to manage and are far less regulated. The tenants are generally of higher quality than my Class C residential renters, and to date my eviction rate is only 1 out of 17 tenancies, and that one was a weirdo I inherited. The others have been great to work with. Several that have moved on also made major improvements to our properties that stay with them allowing me to boost rent for the incoming tenant all at zero cost to me. Also, my favorite part, the creativity is amazing! I can turn DIRT into cash thru renting parking spaces to things like car dealers, roll off dumpster businesses, extra storage for business vehicle. Again, all at zero cost to me other than the dirt. This in turn boosts the value of the property itself because in commercial, the INCOME is the key, not comps. If I can prove it rents for $X, then the sale price is based on $X, not what some homeowner or cheapskate investor (like me) would pay.

These things put a smile on my face and a spring in my step. They also put cash in my pocket!

That's my story for now. I'll let you all know how the offer goes today. The sellers are meeting in about 20 minutes, and our offer is the first thing on the agenda.

I'd like to get into commercial, but in the mean time my residential rents are killing it this year. My profitability is way up and inflation is eating my debt!

I'm following the same steps as you have done.

Everyone gets a text to "fill out the google form" with link to our two step process

Responses go into a google sheet with conditional formatting. Anyone below a 600 credit score (the vast majority--C properties) gets no return reply.

I check social media (looking for menageries, anti social behavior, etc) and maintain my own database of prior refusals. Refusals get added as contacts into the rental phone and coded as refusals so I don't have to waste time sending preliminary links again.

Anyone above 600 and meets the other good criteria (can prove they paid rent through covid, etc) gets a link to my listing to screen at rentals.com

Anyone who looks good on their screening, gets a viewing appt and a link to our actual application which includes the SS# that we need for our files.

And yes, it is like looking for a needle in a haystack. My most recent issues since I've re-entered residential is young couples from the SE county over, breaking up in 3 months time and wanting to move back to "Ex-ville" (coincidentally the same county that DH's ex lives in and will never move from)

Chris, your assertion on Class C tenants might be true for the majority of land lords, but I haven't had nearly as much trouble as some on this forum or that I've met. There are GOOD tenants in Class C: they're good people who just don't have a lot of money. Some work low paying jobs. Some are just starting out and saving. Either way my job is I find them. Again, my eviction rate is below 3% on residential tenants over the past 3 years, which included Covid/eviction moratorium. All other are paying, and as you have said...record rents!

And yes, inflation is clobbering the remaining debts I have. So it's not that they aren't profitable...but...that said...

The Govt has showed us it both CAN and WILL shut down the ability of land lords to function, and only offer token compensation that will take time to get, extra effort, and make unreasonable demands in exchange. I believe the "handwriting on the wall" has been showed to each land lord in this nation: now we must act knowing what we know.

NY, CA and other land lords in liberal states are posting about eviction moratoriums, rent controls, sealed eviction records, yadda yadda. As if they hadn't know this was all coming. The warning signs have been clear for decades. Eviction moratoriums are just as clear today to all residential land lords. Govt did it once (or is still doing it now): they absolutely will do it again if/when opportunity comes.

I'm also selling single family places and considering other investments. Same reasons as you listed. I've been considering investing in other countries -- Japan and Panama are interesting to me as in both there is a culture in which not meeting your obligations is considered a disgrace and just not done by most people. In Japan, I heard that to rent a place the potential renter usually gives the landlord consideration of about a months rent to even consider renting to them and also, all rents must be guaranteed by a cosigner. If no cosigner will do, then there are companies that will guarantee the rent and performance/damages for a fee which the renter has to pay the company in advance before moving in (I really like that).

Another thought about the changing times and commercial space.

As things fall apart, I am thinking we are going to see more unrest and riots, especially in the larger cities.

I'm thinking that many store owners are going to close, like is already happening in Portland. I think that as this happens some store owners are going to go to a different model of store-- one where there are no customers coming inside. Where all all orders are done online. Where customers either come into a protected place and things they buy come out the doors to them (a pick up service) or things will be delivered, like Amazon does, via UPS or whatever. Buildings will be outside the downtown areas and surrounded by high fences with razor wire and guards, like some truck terminals or a prison. The buildings will be pretty much fireproof, not full of windows.

I'd bet that many merchants will locate in these central area buildings and leave/abandon their customer friendly stores (no doubt the cities will use taxpayer money to convert these now empty stores into homeless housing/shelters).

'the unconstitutional Govt seizure of private property rights via Covid eviction moratoriums'

You need to remember that it was the Trump administration who

allowed this to happen. The solution is simple here,..keep Trump from ever being president again.

Sid, you are right in so many ways. I got the message loud and clear when our Governor signed a "no eviction" order even if tenants did not pay rent, but yet still said that property owners had to pay their taxes on those same properties. Tell me how that makes sense! Oh, so the landlords still have to pay their expenses without revenue, but the state still MUST have their revenue? Makes me sick thinking of it.

As to what I'm doing about it...I have a plan but will wait a few more months to discuss as I get into it further.

I did look at commercial property BEFORE I got into residential, but I didn't have enough money to get into it the way I wanted, and I found out the tenants were "smarter" than I was...I was going to get taken because I didn't know enough about all the terminology, how triple-net leases worked, and so on.

Residential has been good to me, we've had as many as 6 B- to C+ properties for as long as 14 years now, and although that's a small number to many on here, it was the right number for me to manage. We paid cash for all of them, so there are no mortgages...the cash flow has been excellent.

I'm sure you'll do well in the commercial space, and wish you well. I look forward to hearing some of the mostly boring (lol) stories about your commercial clients.

I was always taught to diversify my investments. Well I have diversified my real estate portfolio.

Knock on wood, the residential side of the business did rather well during COVID. I did give myself a Christmas gift each year, I made a list of properties and tenants that gave me the biggest headaches and I peeled them off.

Within the SFH world, I beefed up my RTO program this past dozen or so years after I got a mortgage broker in on my team. That aspect of the business hasn't done that well this past six months as mortgage rates have shot upwards and the broker passed on due to COVID. I did have a nice pipeline going on where I would pick up an option on a local commercial spot and do a 1031 when the tenant pulled the trigger. That isn't happening as often as I would like to see.

I still track down distressed properties but it is harder to do and the margins are not as robust as I would like. Next week is the annual tax upset sale and I have a list of 15 places out of the initial 800 the county published. I will not know how many of the 15 will not wait to the last second to pay there taxes. We are a deed state and not a tax lien county.

I picked up a DST with storage units two years ago to hedge against a recession. I also picked up a Multi family one down in Florida since I didn't have a strong presents in highly appreciating locations. The rates on these though are not flashy.

I picked up a couple of NNN places for solid income. But even with them, I have them staggered on the length of the lease so I can layer up against inflation. I picked household names that everyone knows in locations where it is easy to do a value add by getting taxes REDUCED.

I concur with about commercial units being easier to manage. The pettiness and drama stops. It is liberating. There will be new found time in your day without the stressors.

I picked up on some OGM positions as a hedge against inflation. These have been awesome......best I can figure, the path to green energy has been laid by western Europe. How are their energy prices going? Hmmmm not so good - boy that is horrible. looks like a nice profit center for another decade until we shift to complete renewables. Until then we have to use nice clean gas to create electric. This will be a nice gravy train.

Based on the market place, instead of the normal auction path - I have tracking down sub to places that make sense

I have been following your sound advice ever since before the "mortgage melt down of 2007". Moving out of "C" class residential income property into Commercial Retail, Larger Apartment Complex (out of my crazy rent controlled City of Los Angeles) and "Oil" lease/income tradeable via a 1031 tax deferred Exchange.

Only one hitch, the darn supposed Corporate Guaranteed Lease. Not a "real" protection since Corporations have attorney's on staff and can litigate any issue.

Case in point. I had a mixed use property with retail on the first floor and offices on the second level. Newer construction. Sold 3 apartment properties for the "down payment".

One current tenant, a franchise food company with sit down and take out, opened up here too close to another store. When they measured the distance, it came to my intersection, but my building was on the corner across the street from the "measured" mileage. So for over a year there was a legal battle between the franchisee, corporation and the other store. My franchise used the store as collateral for a loan to pay for an attorney. When the dust settled, my tenant moved out and the inventory of equipment was seized by the lender even though the fixture attached to the property became the buildings fixtures and couldn't be moved.

So I then wanted to just rent out the space to another person seeking a food location. But the Corporation refused to release themselves from the lease and for 8 months did not pay rent or try to place anyone there. So I had to sue everyone, to add insult to my injury. Since the Corporation acted in bad faith, the tenant did not have to abide by any legal judgement, they simply closed their corporation and walked away.

So in short, guaranteed leases are not always what they seem. I thank my lucky stars they were the smallest retail store and I had other income during these hard times.

One thing this story tells us, even though I could afford this mess and was leveraged out, I still could afford to carry the property. But 12 years later we had the pandemic and some of the retail business tried to get their rent reduced, claiming they had less business and income. Their attorney's sent me letters saying, "If I force the tenants to pay the full rent, they will file for bankruptcy". I responded with my parking lot video's showing plenty of customers, even more than before the pandemic, were shopping their store and walking out with packages in their arms. A upgrade to my recoding drive was well worth the investment.

They tried to lower the rents by 40%. Instead I sent them an increase because of extra utility use an this was a triple net rental.

All Real Estate is Local.

Commercial spaces here change tenants more than Class C Residentials! And sit empty way longer too.

Annual, residential rentals cash flow for us, and if one goes empty (they don't) or if one didn't pay their rent (hasn't happened in years) it's a much smaller hit to the pocketbook than a commercial space would be.

Relying on a public health law intended to prevent the spread of an illness, the Trump administration said Tuesday it is implementing a national four-month moratorium on residential evictions.

Sid, is it possible for someone to start out in commercial, even if they have never been a LL before?

What abought all of the commercial buildings being looted and burned during the riots?

What about all of the commercial businesses that were shut down?

Government essentially interfered there as well, did they not?

I have heard a lot of times though how commercial is easier.

Ken,

With all of the fake news floating around on the Internet, it is hard to figure out what is true and what is just B.S. In 2020, he eviction moratorium did originate with the Trump administration. There are news videos of Trump at a press conference announcing the 4 month eviction moratoriums.

Sid, what is the CAP rate on the commercial building?

Dave,

We have been able to find decent Residents even if we have waited 1 month to do so.

The lack of labor has been the number one problem we are running into.

As an example, back in December 2021, we contacted one of our contractors to replace windows and he said he would be able to get to us in October 2022. I contacted him last week to get an updated timeline and he said two of his workers had quit, he was too backed up and suggested I contact a window company.

We are pivoting out of renting homes and into owning mobile home parks where the Residents own their own homes and we simply rent out the land. Although we currently have RV parks and the site service fee for an RV space is almost identical to what mobile home lot rent would be, our experience is that RVs stay for 6 months - 2 years and then move on and mobile homes are more stable.

I am not getting into the politics. Both parties have made dumb and/or illegal acts with the Rona response as far as I'm concerned. Expecting them to solve your problems is like expecting your 6-month-old to use the toilet correctly: it aint gonna happen, and there will be lots of poop left to clean up.

Lots of question, I'll try to answer:

Ken:

1) Are they easier to deal with than class c tenants? Yes, by leaps and bounds! Most are fully self-sufficient. They only call me when something legit it wrong.

2) Where have you found the buildings you have bought? Mostly MLS, but one was through a commercial broker who brought me a pocket listing.

3) Have you done tests for spilled oil or anything like that? Haven't needed to so far.

Richard:

Not a question, just a response to a comment: All but one of our spaces are basically steel frame building with concrete floors. Easy to clean; harder to damaged. One building has cinderblock walls with steel trusses. No worries about termites here!

Hoosier:

Good for you! I'm glad to hear you found the niche that works well for you and keep things happy and profitable. Congrats on the no debt state of your investing!

Ray:

I enjoy hearing about your NNN properties. With the latest purchase, I may be moving in that direction. They're not quite as big as yours, but one of the tenants is Safelite, and auto glass repair business with 15,000 employees that has branches all around. They might work well with NNN as they take up one entire building of the set of three we just got under contract.

6x6:

Is it possible for someone to start out in commercial, even if they have never been a LL before? Definitely!

What abought all of the commercial buildings being looted and burned during the riots? I both live and invest in an area that has no issues with this. We believe in law and order in Missouri. Also, these types of buildings are the hot spots where crowds gather to protest. They're often along busy traffic routes near the edges of town, not close to any Govt buildings or luxury retail (or convenience stores).

What about all of the commercial businesses that were shut down? Our existing tenants did see slow down, but since our state opened back up fairly quickly, they got back on track. None of our tenants lost their businesses. Funny how that works!

Government essentially interfered there as well, did they not? In general with the lock downs, yes. But not with eviction moratoriums. Govt can always interfere in some ways no matter what your investment is: so I'm picking ones with the least interference I can find.

Dave: what is the CAP rate on the commercial building?

The new one we just got under contract is a 7 CAP as it sits and 100% rented, but the rents are below market and there are some expenses that could be turned over to renters that wouldn't make a huge difference to their bottom line, but with 16 units would help us a bit. Some of the leases are 2-3 years, but by the end of this year I should have rents boosted to an 8 CAP with a 9.5-10 CAP in 3 years. You know what that does to drive up the value on commercial! It's also rented under 11 leases with 3 tenants taking multiple suites, but as we know smaller spaces yield higher rents: so my goal it so lease the individual units at our at higher rates. If I can do all that and push up the price per sq ft by $1.50 - $2.00 per annum, realistically I'm looking at a 12 CAP which is unheard of now in commercial real estate.

Roy,

Not a question, but a response to your comment "I would like to know the Rent to Value ratio on Sid's commercial properties too. Do they rent for at least 1% of their value? "

The rent to purchase price doesn't need to be as high for commercial because of several reasons.

1) Maintenance is far cheaper. I don't repaint...ever. Floors are concrete. All wiring and water is exposed on the walls, so plumbing and electrical fixes are cheap. I also can get bulk discounts on many cap-ex items. Instead of doing one HVAC replacement, I can do 4 systems and get 20% or more off.

2) I get priority service with contractors. 16 commercial units (well have 30 assuming this current deal closes) are a better source of income to contractors compared to dinky little old houses that are harder to work on. Most times I've had to call someone, it's same day response. No waiting to get in line behind all the other LL's.

3) Per dollar paid, these buildings are much cheaper to insure.

4) Per dollar paid, the taxes are lower. I know, that doesn't make sense since in almost every area I've ever head the local municipality levies a much higher rate against commercial vs. residential, but it comes back in that validations are overall much lower on commercial units.

The bottom line is my typical expenses + vacancy on a Class C SFH run around 35-40% annually. For my commercial property, about 20%. Since I don't have to spend as much to keep them going, I can make less rent monthly and still be okay.

Sid, a 7%CAP is great. Most I see is a 5% maybe a 6%.

So as I said on another thread ... I sold out of the hood. At one point I had 23 units in the middle of the bee-hive. Took a while to divest. Couple years ago (in COVID) I paid cash for a B&B in a resort area.... foreclosure of course. It's commercial (obviously).

I've found the inn business to be a nice compromise. Still housing people without all the BS I dealt with in the hood. No dead beats ... they get the key code after the CC clears. No evictions .... just change the key code. But I still get to meet interesting people who are HAPPY to be in your resort town. Nice blend of what I've been doing for 30+ years.

I don't really subscribe to all the doom and gloom. In reality, the moratorium didn't affect me one bit. I think it has more to do with the state and local politics than anything and Texas is very landlord friendly. Yes, class C rentals take some management. In reality though, most of mine have consisted of two maintenance visits a year and an occasional plumbing issue. At a high, I might spend two hours a month per SFH managing them but it is really probably closer to 1/2 hour per month per unit on average. I got into it because the cap rates on SFH's was in the +20% range when commercial was closer to 10%.

“scarf lady”

LMAO

Dollar General 6.45% when I bought it. The rates are down to 5% now

Pizza Hut was 6.875%.......have a meeting with them next Sunday. I will be trying to make this a land lease with the franchisee

My fudge factory is at 13%

My mixed use building brings in $2,100 per month. If I said how much I bought it for at judicial sale no one - even myself would not believe it. It did need $30,000 in repairs and upgrades.

The word of commercial is all over the place and it depends how much risk you want to take. There are over 9,000 Dollar Generals. Do you think that company is folding? My Pizza Hut operator operates three locations.......he could absolute go under - by the cap rates reflect that risk.

Does an ice cream shop that makes fudge most out of season in the snow belt make sense.

Ray says, "There are so many variables that you can't just use a rule of thumb....just study cash flow. "

Bingo! I cannot agree more. Commercial is all about the cash flow. To me, it's also about the higher quality of tenants, generally. These are people who ALREADY are renting or owning a house somewhere, so they understand things like paying rent/mortgage on time and many are businesses who understand cash flow and have reserves and access to things like lines of credit in case there is a lean month. I bought our first commercial unit in March 2020 and in the 2+ years have NEVER had a tenant ask me to "work with them" on the rent.

I also love the creative uses you can come up with to move up the scale of "highest and best use" of the land. Sometimes, with simple things like parking, it costs nothing to offer and boosts cash flow and therefore also boosts value.

Residential requires piles of $$$ to be spent, and maybe you get more rent or maybe not.