Kangaroo Kronicles 28 – Making Big Bucks

with Warehouses- Part III

By

“Uncle Zally” / Stu Silver

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Hey I’m back in Ocala!

Tomorrow morning I’m heading to the Kangaroo Express in the Dodge pickup I traded for lot rent, to get a large cup of Peruvian coffee.

Tonight there is a Paralounge Drum Festival going on across the lake, in the Ocala National Forest. This is the third time I’ve been here for the banging of the drums that goes on till 2 or 3 AM.

For the previous two blogs, I discussed another housing investment I feel passionate about, ware–housing. We even coined a new phrase together: “Warehouses are the big boxes that spit out money.”

I showed you, in 2011 D.R. – During Recession – the process of how to figure out what you could pay for a warehouse today, that would give you at least a 10% return, and a fantastic return A.R. in a N.E., After Recession in a Normal Economy.

I took Uncle Zally’s 3 legged stool for business excellence out for a spin:

1- Excellence in your product or service

2- Excellence in the management of the business and people

3- Excellence in marketing

We discussed the first leg, excellence in the warehouse product, by discussing the most popular size, and amenities, your customers, i.e. your tenants, desired.

Now we’ll discuss excellence in managing your business.

Luckily, managing warehouse tenants is not time intensive, labor intensive, or aggravation intensive. Your customers own their own business and are used to taking initiative and getting things done. In a typical commercial lease, you will not have to repair anything except for the roof. The tenant will be responsible for repairing everything else.

If you are used to residential tenants, it’s okay at this point to sing the great spiritual, “Free at Last, Great God Almighty, Free at Last!” I used this joke before, and it’s too good not to use again.

You should drive by your warehouses once a month to make sure they are being taken care of, and there is no damage being done.

What about getting paid your rent?

 

You should not have to go personally to collect rents. Business people are used to receiving bills each month, and then paying them. We send out a rent bill ten days before the beginning of the next month, like the electric company, water company, and telephone company. Our tenants just put a check in the return envelope we enclose, with our company name and address printed on it, put on a stamp, and place it in the mail. We like to make it easy for our customers to pay us.

I know what you’re wondering. What if we don’t get the rent?

We wait until the 7th and then make a phone call. We ask if the tenant has mailed the rent, and if not, why. No matter what answer we get, we explain if the rent is not received in 2 days, we will be putting a 3-day notice on the tenant’s door, which is the start of an eviction. If the tenant’s story is particularly convincing, or heart wrenching, we might hand deliver the notice rather than taping it to the door of the tenant.

Commercials tenants are very sensitive about their customers and employees seeing an eviction notice taped to their front door, showing they are running from their obligations. I would not recommend placing one there the first time without telling the tenant first. It will strongly affect your relationship in the future

On the positive side, when a tenant comes up for renewal, you should aproach your good tenants at least 90 days before the end of their lease to see if they want to renew. If the space is difficult to rent, you may want to approach them up to 6 months before. You should discuss what new terms you want, and what terms the tenants are prepared to accept. You should give the tenant no more than 2-3 weeks to make up their mind and re-sign, or you will put the space back on the market.

In these troubled times, we have had tenants come to us before their lease is up and demand we either reduce their rent immediately to what competing landlords are charging, or they will move to the competing space. You can explain they signed a legal contract, called a lease, and you will sue them to get the money owed you if they skip out. We have done that, and have been met with laughs.

Why laughs? Many times we are dealing with a tenant who only exists on a month to month basis, without any real savings or assets to go after. When you have been painfully vacant on a warehouse for six months to a year, there is a sense of doing what continues to bring in rents, rather than going an expensive legal route.

In the good times, B.R., Before Recession, we had wonderful long-term relationships with our commercial tenants. It was a delight to rent them a small space at first, and then move them into larger ones as they grew and prospered. They remained with us because we treated them fairly, and both sides benefited. Those times will return, as soon as our government makes up its mind to make it happen – plus an election year is coming.

Today, in these difficult economic times, more commercial tenants are transient. Some go out of business and disappear in the middle of the night. Some have moved to other areas of the country where it was easier to do business – especially those in construction. Many have remained with us, but have negotiated leases less than half of what they used to pay, while our costs, and our mortgages, are still the same.

We are making out well on properties we bought in the last three years, at dramatically reduced prices, so that we can afford to rent them out profitably at dramatically reduced rents. On properties we have owned for 10 – 20 years, we are still making money … just not as much, and we are thankful we did not over-mortgage ourselves.

In the next article, and the final one in this series, we will discuss marketing. This means finding customers – tenants – and qualifying them.

Investing in warehouses is not like selling hamburgers, where anyone can qualify to buy a Big Mac as long as they have the money. When you are putting someone in a property you own that costs tens of thousands, hundreds of thousands, or even millions of dollars, you don’t want it trashed. Just because someone has the money for rent today does not mean you should rent to them. Why?

Tune in next week to see why.

Until then, Cheers, Mate!

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