Another project for the rooming house is to convert to gas heat. Currently have EBB. Annual electric bill is about $ 7500. I'd cut that in half. I believe I could pick up a subsidy from the utility company to switch over which will offset some of the upfront investment. Figure about $ 15,000 for gas conversion. I'll get a 20% return in heating savings and force equity by another $ 30,000 assuming a 10% cap rate. Additional investment in what I have is my best and least risky choice given the paucity of other opportunities.

That sounds well thought out, GKARL.

Sometimes ya just let go of the handlebar,

Gcarl reading your post it occurred to that whether it works or not you are working a well thought out plan. You have named your own game. Called u win.

Always always put the pencil to the paper. O winging it.

Still have some funds set aside for a good purchase deal, if another one shows up.

Plans for now are to work on what I have as well.

Trying to find replacements for five awnings. Might just build a roof system over the doors instead.

Have ten units with shared water meters that I want to separate. Have talked a little with a guy that can put the new lines from the meter bases to the houses, then I can go from there. I could possibly do it myself, but this should save time.

Just sold a place that was going to take a lot to rehab. Working on my last full rehab now.

Once I get things back under control I will look again at building a large garage or small pole barn.

I've gotten very picky buying lately. As laws change and political attitudes toward landlords and "the rich" shift, my goal is not just making MORE dollars and cents, but how to protect what we already have and bullet proof them as much as possible for the future.

I've spoken favorable here about commercial real estate, and that continues to be my main focus. There seems little to no appetite to regulate it anywhere near the extent that we see in the residential arena. It's like people who demand rent control for homes could not care less about business owners' rents, and that's probably true since most people are not business owners. Thus, there are no calls for regulations. I can still screen using whatever tools and techniques I feel make sense, because the Federal Fair Housing Act only applies to... (drum roll) HOUSING!

Too, there are so many opportunities with commercial, such as Modified Gross leasing and NNN (triple net) leasing where you can outsource some or all of the costs and maintenance to tenants, your only real concerns might be ensuring that taxes and insurance are paid and rents are received. Management is minimal.

Commercial tenants are typically solid financially as they have equipment, inventory, own their own homes, and have access to lines of credit if sales hit a slump. They can't / won't want their business to be moved because that loses them customers and creates down time while moving which equals lost income. I'm not saying they are perfect, but overall I've had far fewer problems with on time payments with commercial tenants.

My favorite units are what I call "metal boxes with concrete floors." Think automotive shops, warehouses, self-storage units, etc. Low maintenance, easier to clean/repair compared to residential, electric and plumbing is often exposed or easy to access.

Also, you can get creative. Land is easy to rent out as storage, provided the zoning allows it (mine all does!).

Fewer competitors. The price tag is higher, so you're not dealing with all the folks who just took a $5000 "how to get rich using other people's money" guru seminar. Most of the folks who own/sell the stuff I like are owner occupied business people. They're ready to retire and move on and just want to cash out. The fact that the price tag often starts at $200,000 means Joe Blow real estate investor who started last month isn't going to be able to compete with me. Often, I'm the only bidder who shows up after a property languishes for 3-6 months with zero takers. Little to no competition means I get a better price on the buy.

I think for any landlord looking to spend less time and effort while still staying in the REI game, consider getting into commercial rather than just bowing out completely.

Sid,

Will you share your numbers on the commercial units?

WE are also being picky about new purchases...but we are maximizing what we already have. Doing repairs and improvements. Rents going up at least annually and at every turnover.

MMIT

You can pick up NN leased places from about $500,000 and up. These typically have five or less years left on the lease so you will be expected to offer a concession to keep them in the location. Hmmmmm. Someone ask you for $6,000 of HVAC upgrades and $2,000 in a new sign to your building and in return they agree to pay you another $250,000 to $350,000 over five years. How many times are you willing to do this?

Some LL want to be completely hands off though. Those folks buy NNN lease properties. These start at about 1.7M and offer Cap Rates of 6.5%. These are not homeruns, but you can be getting a place with no vacancies, no maintenance, no taxes and no utilities for the next 15 years and the tenant still has the option to renewal multiple times. These tenants can be national franchises!

If you are willing to take on a bit more risk, I have a local commercial tenant who has been with me for 8 years now. He is paying me over 10% for a completely hands off metal box. That box was under $170,000 back then so it might be worth double that now.

Sid doesn't mention some of the due diligence you should be doing but it truly isn't that hard. If I buy another Pizza Hut for example, it will be one using the DelCO (Delivery and Carry Out) business model. Pizza Hut was so cool to take a date back in the day. When was the last time you ate inside a Pizza Hut? That extra unused space is expensive for an operator to pay for. There is still money in some of the locations though........it depends on the location.

6.5 doesn't count taxes, insurance, maintenance or utility expenses which all paid by the tenant. That pads another 2.5 to 3% on the Cap Rate.

With only about 40% down, I am paying the place off in 12 years and still have a DSCR of 1.3 without counting all the reimbursables.

One example:

Bought a 6-unit automotive shop for $425,000. It came with inventory and machines we sold and made about $27,000.

Total rents: $6870/month, including the outside storage/parking. We had 100% occupancy last year. I realize that's an anomaly, so discount that 8% to account for "Standard" vacancy and let's call it $6,320 per month.

We pay for parking lot lights. Tenants pay all other utilities (gas, water, sewer, electric) separate. Total LL paid utils: $1,030.

Maintenance is minimal. Last year's tax returns (2022) show about $3,950 total, in which I included common area mowing. Looking about the same so far this year.

Insurance is $3,800 (2023)

Taxes are $9,785 (2023)

Net Operating Income $57,279 for a CAP Rate of 13.4%... plus the $27,000 we got for the inventory/machinery fire sale.

Commercial real estate brokers in my area swore at the time we purchased it in 2020 that you CAN'T get commercial property better than an 8 CAP. Well.... we blew that out of the water. Sure, if you look online at places with pretty ads, you probably won't even get an 8 CAP on the surface, but if you're willing to dig for diamonds...

Just for kicks and giggles, if we re-ran the value of our property at an 8 CAP, it would be a little over $700,000!

$57,280 NOI / $700,000 = 8.2 CAP

You make money in commercial units by doing your due diligence and adding value.

Sure you can add value with residential investments. But EVERYONE is trying to look for that value added property opportunity. Does HGTV ever show anyone doing commercial deals? Not at all.

So at one level, you need to look out for sharks in the water. But at a different level, I agree 100% with Sid in that commercial is easier find value added properties.

If a NN tenant is down to its last year of a lease, simply finding common ground and having them renew for five more years and giving them a second five year option can double your money.

More over, most commercial brokers are not exactly that excited about selling a $600,000 place when they get paid more for doing the same amount of work selling a $6,000,000 or even a $60,000,000 property.

GKarl,

Ray, yes... I see where you're coming from on the larger properties.

Thinking about the numbers $6 million and $60 million: those are attracting players way out of my league. I'm thinking large portfolio managers buying 400 unit apartment complexes with onsite managers and maintenance staff. "Institutional" money like big insurance companies looking for a place to park the money collected from premiums to generate cash flow and preserve the value of the money for the future. I have neither the ability nor the desire to compete with such folks.

My advantage over the competition I've found (so far) is I'm in a niche of properties priced between $500,000 - $2 million that are largely ignored by other investors. Too large for small timers/guru seminar folks... too small for institutional money players. The only people interested in the properties I'm after are owner occupants. Someone who buys it to use it for their business site. But that creates opportunity for me as an investor to subdivide units and/or lease them out for non-business purposes and increase overall income. So I get the twin benefit of less competition that gives me a lower price and value-add opportunities.

I'm guessing such an investing process is repeatable in other markets.

The rooming house business is the armpit of residential rentals but it shares some features with commercial in that no one is looking for such investments and one is free of a lot a regulatory stuff that applies to regular residential housing. I fully expect national rent control at some point. These regulatory pressures are largely absent in the commercial space which is why I think this is the way to go. Also, I think renting to NNN business opens up investing anywhere which is not done as easily with residential unless you do so at scale IMO.

Right now I've got one guy who has an upholstery business out of three of my shops. Another business is a medical supply rental; they take up four bays in another property.

Anywhere that needs space for work on projects and/or for inventory is fair game. Other examples include HVAC, electrician, plumbers, etc. Don't think "automotive" so much as think "shop." Anyone who needs a shop/warehouse place to stock or store lots of stuff.

Hobbyists too. Car clubs. Wood workers. Welders. Paint shops. Custom detailing. Small car dealership. Etc.