One of my commercial tenants skipped out on me earlier this year, so I have my office building on Manchaca Rd. for rent again. I knew it could possibly take 6 to 12 months to find a new tenant, and so far, even after dropping the rent from $1,700 to $1,495, I still don’t have it leased. Bummer.
This unfortunate reality is one of the first big differences between owning small commercial investment property versus single family homes in Austin. It would never take 6 to 12 months to rent a house (well, if you have a lousy Austin property manager it could I guess). But extended vacancy is not unusual with a commercial property, especially in this economic climate. Meanwhile I am absent the $1,700/mo. rental income that the former tenant, a tow truck company, provided. Ouch.
Ironically, I could have leased this property immediately, which would have been a streak of incredible luck, but I decided I didn’t want the type of business that the business owner wanted to set up. This is the second big difference in owning commercial investment in Austin versus residential rental property, making sure the tenant is a good fit for the property and the community.
The tenant prospect wanted to open up a “gaming room”. I wasn’t even sure what that was until I looked into it a bit more. It’s legal, apparently, but I just don’t want 40 or 50 of these gaming machines, which are a cross between bingo and slot machines, in my building, with gambling addicts sitting in front of them till midnight smoking, guzzling coffee and blowing their money trying to win Visa gift cards. It just doesn’t seem like an activity that adds value to the community of Manchaca, or society in general, so I don’t want to be involved by providing the venue. And I worry that even if the business is technically legal at present, our friends down at the Texas State Capital, who have a fondness for trying to legislate morality, might change the laws and cause me a vacancy. So I passed on the quick lease-up for personal reasons.
With residential property, you can’t do that. Applicants either qualify or they don’t, and even if the applicant owned a business I don’t like, it would be improper for me to decline rental on that basis.
Plus, that’s too many gamblers flushing my commodes in a property serviced by a 30+ year old septic system. On the other hand, the $15K in lost rent between then and now would have paid for a brand new septic system.
So, in a nutshell, this small commercial investment property is a cash cow when it’s leased. I paid $58K cash for it in 1998, and immediately invested another $17K remodeling it, so I’m in $75K for a property that was paying $1,700/mo. rent until it went vacant. Not a bad return. I can’t buy anything today that even comes close to that kind of ratio. Plus, it’s appreciated nicely to a value of about $250K today, and it’s located in the fastest growing zipcode in Austin, 78748. Had I invested that $75K in the S&P 500 10 years ago, I’d still have about $75K. Today, rent proceeds plus equity buildup make this a good investment.
But when it’s vacant, it stays vacant for a long time. Much longer than a typical house. As an investor, if you’re thinking about small commercial, you have to ask yourself if that’s ok. Can you handle extended vacancy or will it drive you crazy? I’m in it for the long haul and the vacancy, though unwanted, is just part of the business of investing in small commercial real estate, so it’s not upsetting or distressing to me given the return the property has already produced. But I don’t think the average small investor wants to own a property that is this difficult to rent. It’s high return, high risk and I think most small investors would prefer a more predictable real estate investment.