Stop Buying Rental Houses. Start Buying Commercial.
Most rental properties don’t fail because they’re bad deals. They fail because the margins are too thin to matter.
The average landlord is making around $700 a month in profit.
That might sound fine until one repair wipes out the entire year.
That is where most investors get stuck.
Residential real estate can work, but it is getting harder to scale, harder to grow, and harder to rely on as a real income stream.
In this video, I walk you through why that is happening and what changes when you start looking at commercial real estate instead:
Why residential cash flow is getting squeezed
Where most investors underestimate risk
How commercial properties shift the numbers
What makes a deal actually scalable
You will also see real examples and simple breakdowns so you can understand how these deals work in practice.
If you are trying to build something that grows, not something that keeps you busy, this is where you need to start.
Get commercial real estate coaching, courses, and community to jumpstart your investment journey over at CRE Central: www.crecentral.com
Key Takeaways:
Residential rentals are squeezed
Average profit is only about $713/month per house.
Rising interest, insurance, and maintenance costs are outpacing rent growth.
~80% of landlords self‑manage, effectively creating a low‑pay second job.
Residential is hard to scale
Short 12‑month leases mean constant turnover and risk of bad tenants.
Property value is based on comparable sales, so you’re largely “praying for appreciation” and dependent on neighbors and timing.
Commercial real estate advantages
With triple net (NNN) leases, tenants often pay taxes, insurance, and maintenance.
Longer leases (3–10+ years) with built‑in rent bumps = more stable, predictable income.
Forced appreciation: raising rents or filling vacancies directly increases value via higher NOI.
Better tenants, better risk profile
Tenants are businesses, not individuals: rent is a business expense.
You can get financials, personal guarantees, and corporate backing, and freely say no to weak applicants.
Same purchase price, very different returns
A $500k house example: ~$45/month net, ~0.4% cash‑on‑cash.
A $500k small NNN commercial building example: ~$825/month net, ~7.9% cash‑on‑cash, plus upside from forced appreciation.
Transition strategy
Don’t fire‑sale your portfolio; stop buying new weak residential deals.
Sell problem properties first, use 1031 exchanges into small commercial buildings.
Start with smaller commercial deals ($300k–$1M) to learn and scale.
About Your Host:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors.
Episode Transcript:
Tyler Cauble 0:00
This episode of the commercial real estate investor podcast is brought to you by my cre accelerator mastermind, where you'll get access to my step by step investment blueprint, essentially a library of resources on how to invest in commercial real estate. You'll get connected to a supportive community of other commercial real estate investors that are doing projects just like you. You'll get personalized coaching and feedback from me every step of the way go to www.crecentral.com to learn more. $8,552 that is the average annual net profit that a residential real estate landlord will take home after expenses. That's about $713 a month. And that, to me, is crazy. That's actually higher than I thought it would be. Now you're probably sitting there thinking, well, that's really not a lot of money. It's not but it's still higher than what I thought it would be when I started doing my research. This is, according to I property management, $713 a month. That has to be including people who have owned their houses for a long time, people that have 3% 2% mortgage rates that we will never be able to achieve now, because most of my friends, when they're looking at residential real estate these days, it's we're talking about a couple 100 bucks a month in cash flow, right? Even if you are netting 8552 a year. Let's say you are the average residential landlord. If your HVAC unit goes out, there goes almost all of your profits for the year. Now you're probably saying, well, Tyler, that's only four or five $6,000 yeah. Are you gonna take all of that risk? Are you gonna even get out of bed for $2,500 a year, probably not. So what we're going to be diving into today is me basically saying to you, stop buying residential real estate. It's not a bad thing. It's not that you've done anything wrong. It just doesn't make sense anymore. And there are better alternatives out there. Commercial real estate is obviously one of them, but I would argue there are probably other alternatives other than that. And I'm also going to break through some of the myths today, some of the lies that people feel, that people believe about commercial real estate when they are first getting into it. But here's here's the thing. I've got friends that started off in the residential world. And the first thing I always like to tell you know, my my recovering residential real estate investment friends, they haven't done anything wrong. You know, they did everything right. They did what everybody told them that they should be doing. Go out there, build you a portfolio of homes. Buy a home a year. Buy a home every other year, start building up that portfolio. Start utilizing leverage so that you can use other people's money to build up equity in these properties. Start getting some cash flow coming from other sources, other than your primary income. And it works, right? I mean, residential real estate is great for that, right? It is still a great first step, but here's here's the problem. It's not working today. It hasn't been working for a few years now, and I have a hard time seeing how it's going to continue working the way that it used to in the future, because housing prices are going up. Interest rates hopefully will come down at some point, but there's a chance that they stay where they are, or they even go back up again, right? And if you start considering that with the margins of where single family residential investments are today, and even some smaller multifamily, it doesn't make any financial sense to get out there and do those types of deals, sure. Souris is saying, Good morning. Good morning, sure. So thanks for joining us, guys. By the way, this is office hours. We do this every Tuesday, 8:30am central standard time I go live. I teach you guys some stuff about commercial real estate. You ask me your questions. So if you have any questions about commercial real estate, about investing, anything like that, feel free to jump in the comments. Let me know. Happy to get to those costs on these units are rising far faster than the rents, right? I mean, like I said, we've seen construction costs go up pretty substantially in the past few years. I mean, cost prohibitively so. Even institutional investors cannot make construction numbers work. Interest rates are higher. Insurance is going up. Costs are rising substantially faster than rents are expanding. Right? Just because costs go up doesn't mean that you can just raise rents and all of a sudden people can afford to pay more on their monthly rental right?
Tyler Cauble 4:31
Over 80 this. This is a pretty staggering statistic. Over 80% of single family residential landlords are self managing, which I find to be a wild I mean, four out of five are self managing. That means that you are taking the phone calls. You're dealing with the toilets that are breaking. You're the one you're on call. You're a glorified maintenance, you know, man, right, like, and, of course, now that. There's anything wrong with that. But look, I don't want to be getting the call at midnight on a Friday to go fix a toilet because somebody's kid threw a cherry bomb in there. Happens all the time. You know, I mean, self managing 80% of the time. I thought that was a wild, wild number. Are there commercial landlords that self manage? Of course, I'm one of them. I have my own property management company. We manage over 4 million square feet of commercial space, but I've got a team that does that for me. And also it's commercial. The nice thing about commercial, most your tenants are operating during business hours. They typically have problems during business hours. Now that's not to say, like, Yeah, you can't have a roof leak over a weekend or something like that, but generally speaking, it's during office hours, right? So I get my nights and weekends back, and then look the returns are just too thin to scale. I mean, if we're talking about $713 a month net income, $8,500 a year, how long is it going to take you from that one property to save up enough cash to do a down payment on a second one? Right? It just you're going to be there for a little while, and then, of course, that's assuming you're able to get to the 8500 a year, right? Like I said, most of my friends that are looking at single family residential still, which, you know, we got to figure something out for them, right? They can't be doing that anymore. They know better. It's a couple 100 bucks a month, like it's just, it's not there's no margin there, and so you can't really scale that. And the problem is, if one thing goes wrong, you're losing money. So it's just too thin. Ted is saying good morning. Are you finding less applicants for your empty units this year over last year at this time of your market? No, Ted, we're not seeing that at all. I mean, most of our properties are actually pretty full right now. We do have some vacancies, but nothing above average. So leasing activity has actually remained steady across our portfolio, which is nice. All right, so the squeeze is real, and it's definitely getting worse. On the residential side of things, 82% of landlords last year. This is according to baseline door loop apartments CNBC. You know, I did a bunch of research for this one. All right, 82% of landlords saw ownership costs rise in 2024 I don't think that's going to surprise anybody. 26% saw costs increase more than 20% in one year. Imagine that. Imagine your costs going up more than 20% in one year. That is 100% hitting you in the bottom line, taking out your profit. Just costs increase. And a lot of that's insurance. A lot of it does. I thought this was also interesting, too. The average single family homeowner Now this includes, like, investors and just single family homeowners, spends about $10,000 a year in maintaining that's not in property taxes, that's not an insurance and that's not in like, bigger capital expenditure moves. That is in maintaining, you know, maintenance and repairs on the property. It's a lot of money. Apartment rents have fallen 5.2% from their peak in 2022 5.2% I don't know about you, but when I am looking at my investment options, an asset class with declining rents is not necessarily very exciting for me. All right, yeah, that is, that's clear sign that something's probably not going very well, you know. And there's a couple reasons why. I mean, one, apartments just got overbuilt. It happened in 2017 too. Maybe that was like specifically in Nashville, but I'm pretty sure it was a nationwide thing. We just got overbuilt on apartment units. And, you know, rents had to start decreasing. And sometimes you'll see that in rental rates on a monthly basis decreasing. Sometimes you'll just see it in somebody going, I'm going to give away 3456, months of free rent just to get a lease done. You know that that's, again, not very exciting to me.
Tyler Cauble 9:01
Yeah, 80% I could not believe this. 80% of residential landlords self manage their properties. That's, I mean, it's a lot of work. You know what one thing that I talked to like when people are joining the CRA accelerator mastermind, one of the first things that we talk about is making sure that we're not creating a second job for ourselves, right? Because we have our first job, right? Whatever our primary source of income is, real estate is supposed to be the side hobby that doesn't require a lot of your time, that eventually gets to a point where it replaces your income, and again, still doesn't take up your time. That's the whole point. And unfortunately, you know, when you're when you're in the residential grind, you can't really afford to hire a property manager. I mean, maybe you can. It's going to be eight to 10 to maybe even 12% of your monthly rents, right? And so that's a pretty substantial. Portion of your 700 bucks a month, right? I mean, if you think about that 10 10% now, obviously that's your take home, so that they'd be charging 10% on let's call it, you know, I think the average rent was like $2,000 $1,800 whatever it is, they're still taking the home, another 200 bucks, right? So, I mean, if you're not self managing now, you're down from 700 bucks a month to 500 you know, that's a pretty substantial portion of your take home. So rentals got you here, they won't get you there again. I don't think that there's anything wrong with residential real estate rentals. I don't think there's anything wrong with building up that there is a lot of opportunity for you. Like, here's the thing, if you've built up a portfolio of three to five single family homes, you're going to love commercial real estate, because it's actually a hell of a lot easier. It really is. I mean, I've had buddies get up to 8090, 100 single family homes. Start selling them off and buying, you know, sell 1015, 20 buildings at a time, houses, and then buy one commercial building, sell another 10 houses, buy one commercial building, and your life becomes substantially easier to deal with. So let's, let's dive into the commercial advantage, like where commercial real estate is actually better in many ways. And look, there are some ways that single family is better, and we could talk about that today, too. That today too, but let's talk about where commercial real estate is better than residential, and then I'm going to get into busting some of the myths that a lot of newer commercial real estate investors have about this sector. All right, so let's see here. Is it showing my screen properly? Looks like it might be stuck on the wrong slides. Let me see what's going on. Let's do this. Switch it over. All right. Stop loading there for a second. All right. So the nice thing, like difference number one of five, getting back to it. The nice thing about commercial real estate is that your tenants
Tyler Cauble 12:13
pay a lot of the expenses on the property. So in residential you pay the property taxes, you pay the insurance, you pay the maintenance, you deal with the management calls, and on top of that, your lease length, typically 12 months. And we'll get into this in a little bit. And you could always, of course, make the argument, well, Tyler, my tenants have stayed there for seven years. That's great. That's awesome. Most residential tenants don't stay for more than one or two years, so you're having to constantly turn it over and deal with turning over something that somebody's lived in for a year or two, right? Which can always be messy. Triple Net leases are the commercial standard, right? There's all sorts of different lease structures when it comes to commercial real estate, and we can get as complicated as we want, but let's just talk about triple net today. It's a very simple lease structure where the tenant pays you base rent, and then they pay their share, like, if they're a single tenant, that would be 100% if they're, you know, one of five tenants would be 20% they pay their share of the common area maintenance, the property taxes and the building insurance, all right, so in a commercial trip on that lease, the tenant pays the property taxes, the tenant pays the insurance, the tenant pays for the maintenance, the tenant handles management calls, and then your lease length three to 10 years, maybe even 15 years. So think about that, like, just from a perspective of, hey, I want something that I don't have to worry about all the time. You go and sign a five year commercial lease, you don't have to worry about thinking about another tenant for at least four years. Then there's a good chance, if that business is doing well, they want to stay there, because all their customers know that they're there. All their employees, it's convenient for them to get to they may just want to stay right. It's, it's a lot, a lot, I don't know, just more efficient in so many ways than residential TED is saying in the Fort Worth area, it's crickets out there. Man, that's wild. I wonder if it's because Texas is so heavy on oil and the market's just weird right now, but I don't know. I mean, I don't think Fort Worth specifically is heavy in oil. It's not in West Texas, another bigger and cattle and healthcare and stuff like that. So I'm not sure, not sure what's going on in Fort Worth. I'll talk to my dad. He lives out that way. Husney is saying, big fan of your content with a looks like a whale emoji, laughing. I love it. Good to see you. Husbandny, thanks for coming out. All right, so let's, let's talk about the longer leases. So in residential, I mean, look, if you're again, if you're getting multi year leases. Good for you. Really appreciate, you know, really appreciate that. That's it's definitely a rarity. Look at this over a five year period. You're you're having a release and release and release and find a new tenant. And look, a lot of people will make the argument, and we'll talk about this in a little bit well. But Tyler, it's very easy to find residential tenants. You just put it up on craigslist@apartments.com and you know, then it's leased, sure. But I mean, look, you're taking a risk every time you have to put a new tenant in a space that you're going to get a bad tenant, right? So if you're signing to five tenants over a five year period, versus my one on the commercial side of things, you have five times the possibility of getting a bad tenant that will destroy your place than I do, right? The nice thing about commercial we do 1535, 10 year lease. There are automatic rent bumps built into the lease, so I don't have to worry about raising my rents every year. It's already built into the lease. I don't have to go through the releasing cycles. I don't have to turn it over every single every single year. There's actually less involved in dealing with commercial tenants when it comes to that you can raise your rents. These leases are fully negotiable, so you can set your rent increases to whatever you want. Typically, markets like three to 5% per year. Well, with that, I mean, tenant turnover costs about $1,800 per month per unit. You know, if you've got a vacant unit, every single time you turn over a residential space, that can add up over a five year period, right? So, something to keep in mind there for sure, all right? Number three, you're praying for appreciation on the residential side of things. And, you know, I mean, it's for some reason my computer keeps not bringing up the right charts. But there we go. So we'll be that, and I know I'll have to read the button the ones in the bottom right hand corner for you, because they're covered up a little bit because my beautiful mug here, you're
Tyler Cauble 17:06
praying for appreciation on the residential side. I mean, look, you're hoping the neighborhood moves right. The value of your home is so dependent on what your neighbor's house sells for. And I don't like playing in a world where what Jimmy down the street decides to do with his front lawn impacts my ability to sell my property, to lease my property, to maximize the value, simply because we don't have an HOA and he's decided he wanted to start parking junked cars out front, right? That's crazy. And then also, if you do have an HOA to help deal with things like that, then they're telling you what you can and can't do with your own property. That just drives me insane. Nope, you can't have a six foot fence. It has to be five foot and 11 inches, not six feet. That's not permitted around here. Oh, you gotta wait for the market to move. You know, you've got to continue hoping that that neighborhood stays popular, that that area stays popular, that people keep moving into that area. You have no control over the value creation. And again, I can hear you saying, well, Tyler, I can paint the house and I can add on a fourth bedroom and add on a third bath, sure, but you've got to spend a lot of money to do that, and again, you are still capped at what your neighbor's four, bed, three bath sold for, right? You might be able to argue, okay, well, this is a little bit nicer than the neighbor's house, so we should get $10 per square foot more, whatever. You're still capped on what they sold for, because that's what an appraiser is going to look at. They're going to look at every four bed three bath in the neighborhood, every three bed two bath that is sold. And your value is going to be very heavily based on those comps. A lot of your returns can depend on timing and luck, in the sense that, not that you know you've got to get in there and just get really lucky to have things work out in residential real estate. But you have to hope that somebody else raises the value of their property by 5% and sells, and somebody else raises theirs by 5% and sells, and then another 5% and sells. There's just too much that you're having to depend on everybody else for it. I can't do that right like I want to be able to control my own destiny, which is exactly why I love commercial real estate. You have forced appreciation. It is one of the greatest things ever invented. Forced appreciation, if you raise rents, your value goes up immediately. Because the value of commercial property is based on the net operating income. Like, yes, we can look at replacement costs. Yes, we can look at a price per square foot on the actual building compared to the dirt, whatever. But if you are signing leases correctly and you raise rents, your value goes up immediately. If you add a tenant to a previously vacant space, and your net operating income increases, the value goes up. If you reposition the property, you are forcing new equity into the property you control the outcome. That is the beauty of commercial real estate. You are actually controlling the outcome. You don't have to wait on your neighbor and hope that they sell for more. You can actually go out there, improve the space, find a tenant, sign a very strong lease with them, and now you've increased the value of your property. And here's here's an actual example. You guys have heard me talk about this before on this channel, like this same deal. So I'm not gonna go into you know big details on it was a total 2200 square foot retail building I bought for $435,000 here in East Nashville, right? We went and repositioned it. But here's all we did. All I didn't, I didn't spend a single dollar building out the space. We just signed a lease, and we sold it for $625,000 it appraised for actually more than that. We're talking about $290,000 in value created just because we signed a piece of paper, right? You can't do that in residential but because we went out, we found a tenant that was willing to sign a five year lease at a certain rate per square foot. The bank then looked at it and said, Okay, well, we'll appraise it based on that, because you have a contract that this person is going to be paying you for the next five years. So it actually added value to the property. Sometimes in residential, having a tenant is actually a detriment to the property. That's a story for another time.
Tyler Cauble 21:51
Look, another reason I love commercial real estate, your tenant is actually a business. It's not a person, you know. And really good timing. TG dropped in there with a personal tip. Stay out of New York. Rest in peace. Real Estate Market. There are markets where it is very landlord unfriendly when it comes to residential real estate, and also you have to adhere to fair housing laws, which I agree with, because you're having to deal with people personally. However, having those sets of restrictions and things that you have to deal with makes your life far more complicated. Why be complicated when you could just deal with a commercial business? So when you're renting to a residential tenant, we're talking about individuals here. Things happen in people's lives all the time, all the time. Things are always changing, right? You got job loss? What happens if they lose their job? What happens if they get divorced? What happens if they have kids? What happens if they just decide to move right? Rent for most of these people is a personal sacrifice. It is not a means to an end, right? If they didn't have to pay that, I mean, obviously nobody would pay rent if they didn't have to, right? But if they had better options, they probably take it, right? They're renting from you because they can't buy. And that's not to say maybe they don't have money to buy, maybe they just don't want to buy, but they're not buying for a reason, right? They're renting. They don't have corporate financials behind them. Hopefully, they've got savings. But we know today, especially, I think the the US has more credit card debt per capita than we've ever had before, so you carry a lot of risk in that, all right? As opposed to when it's a commercial tenant. We're talking about businesses that need that location. That business doesn't have an option. They have to be in a location open to where their customers can find them, to where their employees can get to, where they can have meetings, where they can easily service, you know, their clients. You typically can't operate out of a garage. You might be able to start that way, but they have to have a space. They're often backed by corporate financials. And this can be, you could see this in many different ways, right? Like it could be all the way up to Starbucks corporate has signed the lease. There's about as strong of a guarantee as you can get on a commercial lease. It could also be, you know, Jimmy down the street, who started up an HVAC company and has five employees, right? And that's, you know, his his LLC is what's backing the financials. Now, obviously you're gonna want him to personally back to lease as well in a situation like that. But that is something that you can actually do in commercial real estate that you can't do in residential you can have people sign as their business and for them personally, so that even if they shut their business down, they are personally still liable for them, for them. Rent is a business expense. It's not a major sacrifice, like it's just a cost of doing business. It's the same as having, you know, an assistant, the same as. Buying a work truck like you just, you just kind of have to do it. If you can't afford that, you don't have a successful business anyway, what are you doing? We talked about personal guarantees a minute ago. Personal guarantees and credit review, you can go and ask for anything and everything that you want. When it comes to dealing with commercial tenants, if I want to see the last 36 months of your bank statements, I can reasonably ask for that. If I want to see your business plan, your branding packets, your marketing strategy, anything that I think will help me understand why you're going to be successful in this location, I can feasibly ask for it your credit I mean, I make the joke like I can ask for your mother's blood type. It doesn't matter, like there's no lines that I can cross if I don't like any of it. If there's one thing that I don't like in it, I can say, No, I don't have to worry about adhering to some sort of, you know, commercial Housing Act, right? There isn't one. This is business. Man, do I just like treating things more like a business. And then that last one there, I know it's cut off for you guys. The lease is backed by an entity, not just a person, right? So that entity is making money. It has its own credit as well. Of course, you'll have it co signed with the owner. I actually have anybody that owns over 10% or more of the business they have to all sign on the lease. It's very important for me, and finally, reason, five out of five you could scale without the proportional headaches. All right, let's bring this back up for you guys. If you
Tyler Cauble 26:38
have 10 residential units, you have 10 separate leases. You have 10 sets of tenant calls, 10 maintenance budgets, 10 insurance policies, 10 tax bills, multiple properties, multiple trips. Now, of course, we're making the assumption here that you're buying single family homes. You could say, Okay, well, Tyler, I could buy 10 a 10 unit apartment complex, and I wouldn't have to deal with all that. Yes, and that's actually technically commercial, depending on how you want to look at it. Drop in the comments. By the way, how many residential units do you have? What is your biggest headache in having to deal with those? I want to know. I also respond to like every single comment. So keep that in mind, it could be dangerous. A 10 unit commercial building. You have one address, you have one insurance policy, you have one tax bill, both of which, by the way, the tenants will pay. You have one roof and one structure to maintain, which is always nice. You have one property manager that you have to deal with, and then the tenants pay most of those operating costs. So other than maintaining the property, managing it, making sure that the property is running smoothly and things are going as they should be, and you're collecting rent, that's all you have to worry about. It's a pretty straightforward operation, which is great. Now I want to run through a sample same $500,000 purchase, two very different outcomes of residential versus commercial real estate. The first thing that you're probably thinking is, okay, well, yeah, I can buy a house for $500,000 How the hell can I buy a commercial building for $500,000 you can find commercial buildings out there for $500,000 all day, all day, all the time. I just bought a building last May in East Nashville for $400,000 in a market that is one of the hottest markets in the country. Do I have to put some money into it and some renovations? Absolutely, I do. We're about to do that, but you can do this in every single market, like you don't have to look at commercial and think, Okay, well, I think, Okay, well, I've got to go buy a $10 million building. No. Go on correct seat. Go on loop net today and look at what is for sale in your area under a million dollars. And just expand it out. Maybe you've got to go to the suburbs. Be reasonable with it. You know, you can't buy something downtown if your budget's 500 grand, but I guarantee you, you could probably find something 45 to 60 minutes outside of town that's still in a growing area where businesses need to be right again. Sorry, guys. I know this is cutting it off a little bit as we're going through this, but look, if you've got a $500,000 single family rental, I base this on the Nashville market because, surprise, surprise, I'm in Nashville. We're going to assume 25% down and a seven and a half percent rate. I based this off of Freddie Mac's mortgage market survey. Your gross rent would be around 2800 a month. Your mortgage, which is Pni and taxes, comes in at 2625 a month insurance, 150, maintenance reserves, 300 which is low, apparently, according to the average single family resident, residential homeowner, spending 10k a year, property management. 280, a month. That brings your net cash flow down to $45 a month. That's a point four. 0.4% return on a $125,000 investment. I don't think I have to point out that that's terrible. I would, I would not be getting out of bed for that. For that much, I'm staying in bed and I am watching Sopranos. All right, let's do a $500,000 small commercial triple net building. All right, Nashville market again. Maybe I'm going out to Clarksville, maybe I'm going out to Murfreesboro, maybe I'm going out towards cookville. Doesn't matter. Yes, they're 45 to 60 minutes away. You can find $500,000 commercial buildings. I mean, hell, when I did 30 deals in 30 days, I'm pretty sure we found a handful of them. I just went out and randomly found them on correction and underwrote them live for you guys. So if you haven't checked out that playlist, by the way, you should I go through how to underwrite those deals, how to find them and underwrite them too. You get to see my entire thought process, because I just did a live Okay, so this is 25% down as well. This is a 7% rate and a triple net lease. The nice thing about this, you could probably argue for a better rate than residential because you've got more credit backing up some of the income coming in here, all right, triple net rent. Tenant pays the taxes. Insurance in Maine, it's 3500 a month, your mortgage principal and interest. 2500 a month. Property Management. 175, tenant pays the property taxes, the insurance and the maintenance. Your net cash flow is 825,
Tyler Cauble 31:29
a month. It's a 7.9% cash on cash return. Again, in my opinion, not all that exciting. Most of the stuff that we're able to go out and get, we're actually looking at over 15% like, I mean, the minimum typically, for me, is an 18% annualized cash on cash return. But a 7.9% cash on cash isn't bad. It's very good, especially when you start taking into account the tax benefits, the debt pay down right the appreciation that you get 8% cash on cash is pretty great. You now if you start talking about forced appreciation, you also add that into the mix. That's where things start to get really interesting. All right. Market rent $3,500 a month. Let's say after you renew the lease, you've raised the rent to 4200 a month. If you have it on a 7% cap rate, your new value for that $500,000 property is $720,000 you've just added over $200,000 in value just by raising the rents by 700 a month. That's all it took. It's not a lot. I mean, if we're talking, I mean, it depends, like, if that's one space and you raise the rent 700 a month, you know, maybe it was just severely under market before, but if you got two or three tenants and you raise them all a couple 100 bucks a month, most businesses aren't going to notice that. It's a pretty good like, that's the great thing about it is, you know, we're talking about margins that just aren't massive for your typical, your typical businesses. Okay, let's get into your objections, because I'm sure some of y'all are having some right now. But wait, I've heard commercial real estate's riskier. I would challenge that like, yes, is it easier to find a tenant? Sure, because there everybody needs a home. But I would say what is actually riskier Is it a lease backed by a person whose life can change overnight. You're dealing with something where they have to live people, people are disgusting, by the way, and some of the ways that they live. Or what's less risky a lease backed by a business with financial statements, corporate guarantees a need to maintain their location. They genuinely care about how the place looks, operates and feels, because it's a reflection of their business, right again, I mean, on the residential side, we're talking about risk, where the tenant loses their job, they stop paying you rent after a 12 month lease, they're moving out. You're having to release it every single year. And again, you may be in such a great area where that's not a problem for you. It allows you to raise rents. You got to deal with the stress of it. You still have to deal with it every year. You can't plan for vacancies. Typically, you're often surprised by your tenants moving out. Sometimes not. Sometimes tenants are good. I mean, look, sometimes residential tenants get it. They're really nice, they're great. More often than not, they could not care less about communicating with you as a landlord. And I know a lot of y'all have experienced that there's also no financial vetting beyond a credit check, like you can't really get in there and ask a lot of this stuff. Charissa is saying, Well, we have time to underwrite that random warehouse near Parsons. Not today, not today, Charissa, but we will next week. Would you go out of state to find King is saying, Would you go to state to find properties like five to six hours away? I wouldn't personally. I mean, it depends on on what you're looking for and what you've got going on in. Hmm. I mean, it just depends, like I would rather do a deal that's closer to me that I can get over to and do something with. If you've got $10 million and you just want to get stuff that is basically a bond and paying you every month you can buy them anywhere, doesn't matter, because you're not trying to add value. You're not trying to deal with lease ups or renovations or anything like that. So it doesn't matter. On the commercial side of things, you of course, you have vacancy risk. You know, I know a lot of you see a lot of vacant commercial space. Some of that's actually intentional. The landlords don't want to sign leases on some of those spaces, that's a conversation running out of time, or they're just bad, to be honest with you, a lot of commercial real estate marketing for spaces is bad. It doesn't take a genius to recognize that. But the nice thing is, you can plan years in advance. I know in five years, I'm going to have a vacancy. All right, let's start thinking about it today, right? I could start working on it a year in advance to find me a new tenant. If the tenant defaults, we've got their credit reviews. We've got their personal guarantees. They have to deal with it all. You've got longer leases. You're not having to deal with turnover all time, you know, yeah, business failure risk again, offset by personal guarantees. Now you could say, Okay, well, are we trying to squeeze blood from a turnip? Because they don't have any money at all? Well, you know, walk away.
Tyler Cauble 36:16
I don't understand commercial. I get that one a lot, right, and that's fair, because it's residential. Real estate is familiar. It's so easy to understand. Most of us grew up in a house, most of us grew up in an apartment somewhere, residential, right? Most of us didn't have parents that owned commercial real estate, right? So it's just not as familiar or owned a business that occupied commercial real estate, right? It's really, really simple. And so what I'll challenge you today to do is to just go out on correct see your loop net, and look at what spaces that you're interested in are renting for if you like retail, go to your area, search for retail suites between 12 103,000 square feet, and just see how much they're asking for rent, you'll start to learn the price per square foot in that market, which will help you understand your lease rates. Right? That rent, the price per square foot, is going to get you to the net operating income, and then the cap rates are going to get you to the property value. Now, cap rates can get a little convoluted. It's as much of an art as it is a science. Typically, you're going to be at a seven to 8% cap rate. So just start there. The more you learn about cap rates, the more you study the market, the more you'll be able to really dial that in. But a Seven 8% cap rate will at least get you started as you're going through the process. And then the thought that you need more cash for commercial, I just showed you an example of a $500,000 deal. I mean, technically, the one that I mean, technically, the one that I bought was 435,000 and I fixed it up, and I didn't fix it up, I signed a lease and sold it for 625,000 still affordable, right? We're still talking about 20 to 25% down for both of them. And then, if you own your own business, you can actually do less. You can do like 10% down, 10 to 15% down, if you're owner, occupying with your business. So really, what I would say is the capital is not the barrier. It's really just your knowledge around the subject matter, and that's very easily fixable. That's the nice thing about it. All right, you don't have to worry about what I don't know. Here's the thing, like it's commercial real estate, expensive? Yeah, it absolutely can be, but it's not nearly as big of a deal as a lot of people think it is. And here's the thing, if you have a residential portfolio right now and you're sitting there thinking, Well, yeah, hell yeah, it's not working anymore, chances are pretty good that your current portfolio is fine. Maybe it's difficult for you to find new properties today. So what I would say is like, keep what's working. Don't just go and start selling off everything immediately, right? Start thinking through, like, if you're going to put together a strategy to sell off your portfolio of residential and get into commercial start with a problem, properties first and just sell. And you can, 1031, exchange into commercial real estate, right? You can, you can sell a house and then buy a commercial building and defer all of your capital gains tax. That is a like kind exchange, all right, stop adding residential. It was not, it's not worth it. It's not worth it, in my opinion. I mean, can you make money doing it? Of course. Do I like it better than gold and crypto? Of course, right? But if you have the option to be getting into commercial real estate, and you're still doing residential, what do you why? Why would you, why would you want to deal with the drama of where people live? I just, I don't want to touch that. So start with small commercial you can find these small 300,000 500,000 million dollar buildings that will have, you know, one to several tenants that will give you a very good transition into being in the commercial market. I have a free training for you as. Well, we've, we always have this. It's in the description of every single YouTube video that I have. So if you ever want to learn, I think it's like an hour and a half long. So if you want to learn how to actually transition from residential to commercial, real estate, go to Siri central.com/resources,
Tyler Cauble 40:19
you'll be able to find the transitioning from residential to commercial real estate video there, or training there. It's one that I actually did for Brandon thornberry's Group better life, which was pretty cool. And then again, that link is in the description below. I've got a mastermind, you know, I teach people how to do this. We have just under 200 members now. It's really cool. We get together two to three times a year. We have two calls a week where I am diving into the deals with the members. So if that is something that is of interest to you, if you're thinking, Okay, well, yeah, you know I can, I can find the knowledge. But then I still have questions on how to do this. I still am wondering, Am I making the right choices? And you want somebody to be there to guide you along the way. That's what we do in that group. So feel free to go to cre Central. Calm book a call there. It will actually be with me. I do screen the calls to make sure that I'm hopping on the call with, you know, not not just anybody, and that people are actually qualified. I take every call. I onboard every single member into the mastermind because I'm the one that's going to be coaching you and guiding you through the whole process. I need to know exactly where you're coming from, like what your situation is, what your goals are, so I know how to best help you. So if any of that's of interest, check it out. Otherwise, we've got tons of videos on this, on this YouTube channel where I'll keep teaching you how to invest in commercial real estate. We go live every tuesday, 8:30am Central Standard Time with more trainings like this. Appreciate you guys for being here. Y'all have a wonderful Tuesday. This
Tyler Cauble 41:54
episode of the commercial real estate investor podcast is brought to you by my cre accelerator mastermind, where you'll get access to my step by step investment blueprint, essentially a library of resources on how to invest in commercial real estate. You'll get connected to a supportive community of other commercial real estate investors that are doing projects just like you. You'll get personalized coaching and feedback from me every step of the way, go to www.crecentral.com to learn more.