Make Money With Commercial Property
Rentals
Commercial property rentals with triple-net
leases mean little management and high returns. However, this
can be a tough market to break into, and you can have negative
cash flow on vacant storefronts for a year at a time.
How about a real estate investment in which
the renter pays not only the rent, but the taxes and insurance,
and maintenance costs as well? That is the idea behind the "triple
net lease." It is common in commercial real estate.
Many companies make too much money on their
products to have their capital tied up in a building or real
estate. For example, if a retailer can turn over $500,000 worth
of inventory six times per year, making 10% profit each time,
they make $300,000, or 60% on that capital. It wouldn't make
sense to have that $500,000 invested in a building. This is why
they rent. In fact, many large retailers will buy real estate,
build their store, and then sell it to an investor who leases
it back to them.
The triple net lease means that the investor
has a guaranteed return on his investment, more or less. Rising
property taxes or insurance rates don't affect him, because the
lessee pays these, as well as maintenance costs. Essentially,
the owner of the property just collects the rent for the term
of the lease. As you can imagine, these are deals that many investors
would love to have.
Commercial Property Rentals -
An Example
Suppose you find a building that is suitable
for a furniture store or other retail store. You can get it for
$600,000. You find that the bank will loan you $480,000, or 80%
of the value - but only if you have a lease first. You have enough
cash to invest (or a partner does), so you can handle the deal
if you can find a renter.
The seller will give you an option on the
property for $10,000 for four months, and will apply the option
fee towards the purchase if you can close the deal. This buys
you time to find a renter. Of course, you will lose the $10,000
if you can't close the deal.
You hire a good real estate agent who has
experience with commercial leasing, and get busy. After two months,
you find a hot tub company that seems to be doing well and wants
a store in your area. After checking out their references, you
negotiate a rental rate of $4,500 per month on a ten-year lease.
They also pay property taxes, insurance and maintenance expenses.
The bank loan is due in ten years, but
amortized over 30 years, with eight percent interest. This means
your payment will be about $3,500. Since the renter pays virtually
all of the other expenses, this means you get positive cash flow
of about $1,000 per month, or $12,000 per year. With a down payment
of $120,000, and about $30,000 in other expenses, you have $150,000
invested, making it a cash-on-cash return of about 8%.
Your total return will be substantially
higher. This is because you will get a depreciation allowance
for the building at tax time, and you gaining equity with each
payment on the mortgage loan.
Of course the company you rent to could
go bankrupt. This is a real possibility. What happens then? You
rent out the building to a new tenant hopefully.
This is where commercial real estate gets
tricky. You have no cash flow when the building is empty, but
you still have payments on the loan, as well as taxes, insurance
and maintenance. In the example given, these could add up to
$4,200 per month. You may also have to pay utilities, and advertising
costs, and a fee to an agent to help you get the place rented
again.
Now for the really bad news. It is not
uncommon for commercial real estate to remain empty for a year
or more. It takes time to find the right tenant for a building.
It isn't anything like residential real estate, where there are
always a few buyers around, and they can live in many types of
houses. Each business has its own particular needs.
Imagine that it takes thirteen months to
get the place rented out again. The good news? Perhaps you can
get $250 more rent this time. The bad news? Thirteen months of
expenses, plus the expenses of re-renting it will likely add
up to about $60,000. That means you have $210,000 invested now,
and the cash flow of $15,000 represents just a bit over 7% cash-on-cash
return.
If you don't have the $60,000 to cover
this period of vacancy, you may just lose the property - and
your investment. As you can see, you need to have some large
cash reserves or access to cash for situations like this. This
is one of the reasons that there are relatively few investors
who pursue these kinds of deals.
Of course, this means less competition
than in some areas of investing. Then, when you do get a good
ten-year tenant on a triple net lease, you get to enjoy the cash
flow with none of the usual headaches of being a landlord.
You may want to find a mentor and
study the market before considering any commercial real estate
investments. Find out what kind of returns investors are expecting.
Commercial property rentals have to pay you a higher return than
residential property, because the risk of long vacancies is greater,
as is the possibility of rents going down.
Copyright Steve Gillman. This article was an excerpt from 69 Ways To Make
Money In Real Estate. Want to know the other 68 ways? Visit http://www.99reports.com/make-money-in-real-estate.html