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It's not all malls

by CRE on 26 Sep 2018

Sam Beckford has been making his mark in commercial real estate since 1999. He now owns $15 million worth of commercial property and uses his success to educate investors about the oft-overlooked advantages of acquiring commercial properties.

CREW: What drew you to commercial real estate as opposed to residential?
Sam Beckford: Before I got started, I went to a few residential real estate seminars, and they sounded interesting and appealing based on the investment aspect, but as far as management and the number of transactions required to make money, I thought there had to be an easier way.

At the time – I hadn’t even purchased my own home yet – I consulted with a commercial real estate investor whom I trust. He believed that you only need to own one commercial property. His exact words to me were, “If you take good care of a commercial building for 15 years, it’ll take care of you for the rest of your life.”

CREW: And you’ve found that to be true?
SB: Absolutely. I purchased a commercial building in 2003 for slightly over $1 million. It was a huge amount of money for me back then, but thankfully I received owner financing. The building was cash-flow-positive from day one. Now it’s paid off, and it’s generating a profit of about $170,000 a year.

CREW: Is owner financing fairly common in commercial purchases?
SB:
Owner financing and vendor financing are very common in commercial property transactions. In residential, the seminars and books all encourage you to use other people’ money or to ask the owner for financing, but in Canada that generally doesn’t happen.

A seller of a residential property probably owns one property and is selling it to buy another property or to fund some other pursuit. But most commercial property owners own multiple properties. They understand the business, so financing a deal is something they’re very comfortable with. It’s one of the major advantages of going commercial.

CREW: What are some of the others?
SB:
There are very few moving parts compared to residential investing. Maintenance is minimal because you don’t have to manage the tenants, and turnover is usually minimal because tenants are often long-term. It’s very common to have three-, five- or 10-year leases in commercial real estate.

Another advantage is that in commercial investing, the laws are on the side of the landlord. In residential investing, the laws are on the side of the tenant. If you have a bad tenant in your apartment, sometimes it’s almost impossible to evict them, even if they’re damaging your place or are late on the rent. But in commercial real estate, the courts and laws favour the landlord. There’s usually a 20- or 30-page lease that outlines every single thing about how the transaction is going to happen. If the rules are not kept, the payments still go to the landlord. The tenant does not get off the hook.

Commercial tenants also tend to invest a huge amount of money into the building you own. They are making their livelihood as a result of the space you’ve given them, so they have a lot riding on making sure that space looks nice and is well kept-up.

A commercial property also gives you a much greater ability to increase the property value when you do renovations. Renovating a duplex might generate a couple thousand extra dollars in annual income – and that’s not nothing – but upgrading a commercial space can bring in a completely new tenant with far higher revenue potential who will be able to pay substantially higher rents.

CREW: So why don’t more people make the switch from residential to commercial?
SB:
I think there’s a huge myth that commercial is this complicated black box. Most people in residential real estate say to stay away from commercial, and the reason they do is because they’re residential investors themselves. Most people live in a house, most people have bought a house or sold a house, so they understand a residential transaction.

Most first-time investors cannot make the mental shift that’s required for commercial. Since there’s no familiarity, they treat it as this huge, mysterious thing that can’t be learned. But people aren’t born knowing how to do brain surgery – they learn it – and commercial real estate investing is not brain surgery.

I don’t want your readers to think I’m talking about buying the Eaton Centre. That is complicated. I’m talking about buying a property with two or three tenants, you get them on five-year leases, and it just ticks away. It’s less complicated than residential.

CREW: What’s one key strategy that has helped you, your properties and your tenants thrive?
SB:
I invest backwards. Most investors buy a property, fix it up and then try to find tenants. Or they buy a property that already has tenants in it. I actually find the tenants first, before I even have the building. That way you can find tenants who are not only low-hassle and long-term, but complementary of each other.

It’s not about putting anyone willing to pay in your space; it’s about finding what business will be successful in that space and what other businesses they should be next to. You’re selling opportunity to your tenants, so that opportunity needs to be optimized.

CREW: Any final words for residential investors who might still be unconvinced?
SB:
It’s hard for people to step away from the status quo, but success comes from doing things differently

 



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