This Will Keep You POOR - Commercial Property Investing

hi everyone it's Stephen here this one thing can lose you a lot of money cause you massive aggravation and waste a hell of a lot of time and energy as a commercial property investor I've been investing in commercial property since 2013 having bought commercial property in the US and the UK and I'm not too proud to admit that I made this very mistake on my first commercial investment property it's something that I see a lot of commercial property investors do because on the flip side There's an opportunity to make a lot of cash flow so I'll explain to you what the problem is how you can spot it how you can lose money if you don't do this one thing and the three simple checks that you need to do before you buy any commercial investment property to make sure that you're not buying a dud to help you better understand the problem I'm going to take us back to my very first commercial Investments probably purchased back in 2013 and I'm going to take you through the numbers and what the deal was and let's see if you can spot what the actual issue was before I explain exactly what the problem is with deal so I bought a seven-year-old a fully talented Commercial Warehouse made up of three units each of these units are called a flex space because what it has is an office and a warehouse this total Warehouse in size was 6600 square feet and each unit was around 2 200 square feet made up of that office and warehouse space it had three tenants in it when I first bought it but I soon changed those tenants over and got a new tenant and I got in two new tenants that were split across those three units so one tenant had two units and the other tenant just had the one I agreed to buy this property for 375 000 and I bought it with 75 000 down which is a 20 deposit I bought this property on seller finance which means that the seller carried back the finance for the rest of the money because he owned it free and clear he had no debt or mortgage associated with the property once I stabilized the rents the rents were bringing in 3600 a month and there was other expenses associated with this property so there's probably taxes they're about five thousand a month there was also insurance that was about four grand a month and then there was property manager I had a property manager in place looking after this they were charging me 200 pound a month for that so 2400 for the year so all up the total expenses were about 15 grand because I was also paying for the water because the water meter was a single water meter even though there was three units there so what I did is just divvied up the water amount and added that onto the rent so they're paying slightly more increase in rent because I was paying the water for the tenants so the cap rate on it was seven percent and how we get to that figure is the net operating income figure which was about 28 grand divided by the purchase price which is 375 Grand that gives us our cap rate so then I had the debt so the debt was being paid back to the seller direct so that was being paid back monthly at that five percent interest rate over the next five years until we had the balloon payment and that was costing about 940 dollars a month so that 11 Grand a year and so the cash on cash return with the 75 grand down with the cash flow that was coming back per month about 1400 per month that was generating around a cash on cash return of 22 percent so if you managed to spot it yet at first glance it might not be that obvious but it becomes apparent a bit more when you look at the size of the warehouse so the warehouse as a total 6600 square feet is a good size but then when you divvy it up into smaller Flex bases and we've got three units in there it's not a massive size it's 2 200 square feet so what type of people do you think are gonna be renting that type of property it's going to be mom and pop type businesses so it's going to be small businesses starters startups so I specifically targeted these types of business because coming at the global financial crisis it been a couple of years but things were starting to grow again the economy was coming back on its legs back in 2013 and these types of start-up spaces were ideal to be able to rent quite quickly they were affordable to people and so people would jump on them and that was the reason for picking this type and this size in my thought process at the time but what I found with these small mum and pop type businesses is they're exposed to cash flow problems they start paying their rent late they're difficult to get hold of and when you agree a payment plan they don't keep to it or they then just will pay a lump sum to kind of make up to where they are and then they'll start slowly start to fall away again and stop paying rent to gain and then you go through the eviction process and then they'll pay a lump sum and then you decide not to evict them because you're giving them opportunity Unity because you're not trying to be a crappy landlord you're trying to do the right thing by people and help their business Thrive as well but there's only so much pain you can take as a landlord when it comes to you're you're relying on the income yourself so you can can't just keep taking the pain because you've got bills to pay every month no matter what I had the mortgage to be paid if I wasn't getting payments for three months that's going to cause me an issue so the tenants in this particular property were quite complementary because one was a repair shop and the other one had a paint booth and would fix up the repairs they were really good to have next to each other so someone could go and get their car repaired and then get it fixed up next door but these types of businesses were one-man bands typically and they would just have one or two employees at best working with them so you know with that comes the natural problems that their small businesses trying to get going trying to stay afloat and your rent is due month after month and nine times out of ten these small mum and pop tentative properties will have these cash flow issues and this is exactly what happened with my first commercial investment property I regularly receive emails about property investor deals hitting my inbox regularly every day and there's one particular types of properties that I keep getting emailed and these are industrial properties and their tenants are these Mom and Pop Style businesses and two the average investor they might go this is a great thing it's industrial it's fully tenanted with a 10-year lease Fri lease RPI linked so inflate linked inflation to the rent and it's got like an eight or eight and a half percent yield based on the purchase price based on the income that's coming in and people will be thinking wow this is a pretty good one but it's not always the case because if you look at the tenants who are the tenants and their individual tenants and you see it's just a person's individual name so as an example here's one that came through recently this one's up for 350 000 pounds its rent is 29 640 a year with a yield of eight and a half percent now if we just flick down through this we can see that it's located in Wales and this is what it looks like it's a normal industrial Warehouse with rollover doors hasn't got a great height on it but when we look down at the tenancies we can see that the tenants this particular person Mr Adrian Whitcomb and Mr Gary Cooper nothing wrong with these guys who knows I've got no idea about these particular people whether they pay on time or not for me when I see these types of individuals on a tenanted lease it doesn't matter whether it's a 10-year full repairing Insurance lease whether the rent is linked to RPI or not all those things disappear when it's an individual because at the end of the day if that person decides to not pay they're not paying what are you going to do but unfortunately those types of properties are only going to attract that type of tenant that's why it's so important to determine what's the tenant profile that you're trying to aim at when you're looking at an investment property even if it's residential commercial you need to know what the tenant is that you're trying to attract for your property type and it's equally massively important when it's commercial property because you're buying commercial property for cash flow and you want to make sure that cash flow is coming in all the time if it isn't you're up for the business rates after a three-month period so it's going to really impact you so the other issue with these types of Tendencies is that the rents collected month to month rather than quarterly in advance which is normally on slightly larger commercial investment properties so in harder Economic Times a bit like what we're starting to experience now where we've got high inflation we've got high energy costs everything's costing us a lot more money than it did 12 months ago everyone's getting impacted by this and these small mum and Pop Style businesses are just the same and they've got it worse because they're paying business rates on top of the rent on top of the high energy prices that I pay because it's a business all these extra bills that they have to stamp up as well as their own bills at home so they've got a lot on their plate these small businesses well I'm painting a bit of a bad picture it's not always a bad picture if you've got the right tenants and the right type of business that is definitely always going to be doing well and they've got longevity and they've got proven history of making rent payments on time and all those things so that's why you need to do these three checks before you buy a commercial investment property so the first thing you need to do is get a copy of the lease and this is easy to get from the selling agent that's marketing the property they should have access to the lease and they should be able to give it to you without you visiting or viewing the property so once you get the lease you want to check on the lease who's named on the lease is it an individual or is it a company if it's an individual already it's a bit of a flag you need to go into additional checks now on that individual and you know do you really want the hassle of being with an individual on a commercial investment property if it's a business you can go to companies house and check out that business simply put in the search the business name and you can see all the accounts history that they've submitted over the years and from that you can see how long has their business been established or what does their accounts look like you can see the balance sheets and things like that and it will also give you an understanding of whether there's any credit issues with that particular company get a copy of the rental history payments and see if they've been making payments on time regularly at the time that they should be paying or have they been missing when they should be paying are they always paying late have they been paying the late fee if there's one written into the lease now if it's a new lease there's not going to be much of a rent payments associated with that lease and some of these properties that I'm seeing are being advertised with tenancies that are only like three months old so what are you going to see in a three-month-old tenancy three payments maybe you definitely hope to have that there but it's not going to tell you whether they're great they're a good tenant that pays on time every time for the next however many years you've got that lease with them maybe in that 10-year lease and they're three months into it so who's to say whether they're going to be a good tenant or not the third thing is to find out what the tenant demand is in that particular location for that particular property so if it's an industrial property for example is it on an industrial estate surrounded by other commercial properties which would likely do better than say a property stuck down an Alleyway somewhere and it's not very convenient for other locations it hasn't got good transport links and things like that so depending where that property is the tenant demand is going to be stronger than other areas where it won't be even though it might be tenanted now you might have big vacancy periods once that tenant goes because it's just not in the right location for where tenants want it to be for that type of property for those types of businesses they would operate from those premises as part of this you want to find out the rental history for that particular tenants in that property so if the owners own that property for quite a number of years let's say they've only for 10 years so they've got 10 years worth of tenant payments how many tenants have they had in that time how what's the attrition been like has there been a lot of different tenants over that 10-year period or has it been one tenant for 10 years and now they've renewed and they're still there which would be a good sign that that property is really performing for that type of tenant and they want to stay there and they've been there 10 years already but if you found that the tenants keep chopping and changing with a year on a year off year on year off there's some red flags there that you want to make sure that you're happy with because you can fix the problem or you'll look for a next one really a problem investors selling you great deals so you need to do your due diligence on every commercial investment property that you look at and to determine what the issues are and then whether those issues are acceptable for you or you've got the skills to remedy those issues and make it into a great commercial investment property for you but I hope I've given you something to think about when it comes to Mom and Pop Style commercial investment properties there's a lot of them out there not all of them are duds and I'm just trying to make you aware of what to look for for that type of style of tenants so if you're a property investor you can get 75 pounds worth of credit if you use my link below for property data you and I both get that 75 pounds worth of credit there's no additional advantages to me or you I use Property Data I found it great for finding property analyzing property and understanding everything there is about probably properties that I'm looking to buy so thanks very much for watching I really do appreciate it and I'll see you next time

Channel: Stephen Duncombe

Views: 30,637

Keywords: property investing, real estate investing, buy to let, stephen duncombe, property investment, commercial property, commercial real estate, uk property investor, commercial property investing, commercial property mistakes, commercial real estate investing, commercial property investment, commercial property inspection, commercial real estate for beginners, property investing tips, commercial property buying guide

Id: TMWxdkxHRvQ

Length: 13min 34sec (814 seconds)

Published: Thu Nov 10 2022