How to buy a warehouse

On Sun, 28 Mar 2010 21:16:44 -0500, the infamous Ignoramus8246 scrawled the following:

Go talk with a REA, Ig. They can tell you what's out there and who's ready to sell cheap right now. Something close to you so you can check on it frequently, right? Warehouses near airports are always full...in good times. You might find a really nice place in these economic times. You might also find a small place for your own stuff, so you don't have to fill up your garage and driveway, eh?

Let us know what you find.

-- Everything I did in my life that was worthwhile I caught hell for. -- Earl Warren

I will start earnestly looking. I did look a bit on loopnet and it seems that there are some affordable deals. With a bit of looking I may be able to find some kind of a buyout deal, where I buy a warehouse with machinery and sell it off in two months, or something like that, to help pay my costs.

i

Like any other business, this one requires training and experience. Spend a year talking to people Ig.

I'm also a little surprised, given the following:

With the Fed Funds rate at zero bonds have only one future and it ain't pretty.

With the tremendous distress and ongoing deleveraging in the bond market it still isn't certain what any financial services business ir really worth these days.

With the upcoming need to refinance a HUGE notional value in corporate high yield bonds begining in 2011, there might just be a shortage ( and therefore interest rate run up ) of funding for debt.

That you are thinking about an investment that isn't remotely liquid.

The secondary and even primary, credit markets, aren't so far from trouble that a little frost might set in and then freeze solid in a big hurry. There is also a good chance that equities in anything that looks like KKR or what that bunch has been leveraging might go right to hell without much notice. What can they do besides have a fire sale if they can't roll over their bridges?

You are truly a brave fellow!

The first thing to do is to watch the classified and see what is available and check the prices of rents on commercial real estate. Also see what is selling and prices. Also find a commercial real estate salesperson and pick his brain. I would be very cautious in getting into a large commercial building. If it stands empty for any time the taxes are likely to eat you up.

John

...

Good idea. I do not expect to find a super great deal, given my level of expertise, just something where I would not be screwed and where I do not overpay too much.

Um, I do not see the contradiction. I did not post a message here saying "I would like to invest in a 30 year bond". I want to buy a warehouse, not a long bond. I was planning to put up 50-60% in cash and if I can find a loan at affordable fixed rates (I never take out other kinds of loans), finance 40-50% of the purchase. If I cannot find such a loan, I wuold just buy something smaller.

This is all assuming that normalized rents would give sufficient return on caiptal to make this worthwhile.

If, say, I buy a warehouse, and rates go up, that may indirectly help me in the longer run, as higher rates would force higher returns on assets and thus higher rental rates. (though I would also anticipate a minor reduction of economic activity).

The best time to invest, generally, has been when fear was the mani public emotion. Investing when everyone feels optimistic and giddy, as we know by now, does not lead to great results. I had close to 100% of my money in stocks by March of 90 for that same reason. I was a little bit early to the party, having started puttnig cash to work in November, but in the end it worked out.

Same here. If rates rise, our government has trouble paying its bills, etc, that does not directly result in people not needing warehouse space.

There are many ways to lose money. One way is by becoming financially overextended and then hitting a "snag". Another way is to have money in cash and lose due to inflation. Yet another is pay too much for assets due to public optimism, compared to their true income producing ability.

What I am getting at, is that even not investing has its own risks, as does investing where such troublesome things as you outlined, are not anticipated.

Consider current Greek troubles. I hear that Greeksw stocks are down. Imagine a Greek company that sells chewing gum to Greeks and enjoys substantial market power. Question: how much does the default of Greek government, impact the earning power of that company? The answer is, of course, not by much.

I am not really concerned about the possibilities that you mentioned, if I can buy warehouse space at a price that allows good return from good renters.

i

I was thinking about something like 4k square feet, two bay doors or something like that. Not a big building 90% financed via leverage.

i

It's a soft market, ig. Who are you going to sell the machinery to if places are going out of business, and there is a glut for equipment? You could get into a storage situation with a lot of inventory, but not a lot going out the shipping dock. I know that you are moving stuff right now, but you don't have the big nut you would have in a building, where the first $XXXXX a month that comes in is already promised.

Why don't you do this? Start on a small scale, and see how it works. If it doesn't, you don't have a large warehouse and a lot of equipment, sitting there like a horse that just eats.

Steve

I mean March 09

i

Steve, most machinery sells very easily, if one does not demand pre-2008 prices. I was not considering buying anything that I could not afford without big pain.

i

You make good points but I guess what I was trying to say goes to your last comment. It's straightforward to adjust rents when you aren't leveraged. Otherwise, you are dependent on renters and rents. Those two might be adversly impacted. I'm becoming increasingly convinced that this is the case and just went back and reread a short volume about these markets that Ed Gramlich wrote shortly before his death to refresh my understanding.

One example is that there is considerable supply side support in the US for rental properties. Everyone knows about the big demand side programs like Section 8 but not the supply side stuff. Yes Ig, the feds, states, and local communties actually pay landlords to create rentals and not just single family or multi unit residential properties.

You might also be able to discern rents and the extent to which your market is both subsidized on the supply side and also leveraged from CRA, HMDA and AHS databases. The CRA data might be the first place to begin. Talking with a loan officer at a local regional bank would also be productive. He or she will know all of this stuff and they have to disclose it to you.

As I originally stated, what you are considering is just like any start up and that means you have to know both the business you are entering and the lay of the land where you intend to operate.

I didn't think you were investing in American equities from Moscov

It's all business, ig. Buy low sell high. If you're right, you make out. If you're not, you don't. My experiences with businesses was that a lot of people know their crafts very well, but once they go commercial in a big way, they create an overhead monster, and that monster must eat every month before the owner does. You have the drive and intelligence to do this. However, you are moving from a position of do it when you want to having to be there every day to open the doors, search for the stuff, clean it and prepare it for sale, deliver, etc. You may be doubling your work week, and only increasing the profits by 20%.

And then there's employees. When I started a welding business, a friend of mine had a friend of his coming into town from Florida, where he owned a very successful business. We talked, and he mentored me. I remember him saying, "Do everything you can by yourself. Employees are the kiss of death."

I wish you well on your venture. The only way you are going to find out is test the waters. But it's like piling a bunch of money and your stuff in the middle of the street and sitting a gas can beside it. If all goes well, it all goes well. If not, it's like adding gas and lighting it all off. It just goes away.

Steve

I have done that, and it certainly can come with a lot of headaches, but it paid for itself and the property appreciated very well for me. Except for one office building which I still own and rent I sold my rentals a few months before the real estate bubble burst and did very well.

I'm actually actively looking again. I'm just afraid that so may a lot of other people.

The way I think about it, is that a lot of real estate people lost a lot of money, so not as many people may be looking. The key is not to buy into hype and avoid leverage.

i

Steve, I was thinking of buying a warehouse to rent out, not to open a full time business. If I was planning on that, I think that your comments about running a business would be spot on.

i

You can't hide the real reason from the long-time readers of this group. The real reason is you have run out of room in your garage and you need a place to store your new stuff.

Paul

Keep checking the classifieds to understand the market for space. What is the demand and cost for space in various locales? Talk to other landlords, commercial real estate agents and appraisers to see what the issues are. Check what taxes are applicable. Factor in continuing maintenance costs of buildings and grounds. Don't forget insurance costs and legal costs. Your bank can tell you the average worth of warehouse space per square foot and how much is available. It could be a good investment.

I don't know what sort of properties are available in your area. A guy in our area, who unfortunately died of cancer last year, bought an incredibly cool clerestory factory building in downtown St. Louis about

5 years ago. The rear part with the clerestory windows was in pretty good shape, but there was a 2-story office space in the front that was pretty badly rotted out. He re-roofed it, rebuilt the office space into a home, and it was apparently pretty cool, but I didn't get a tour of that part.

Under the front office was a shop space with street-level access and a big roll-up door. He had machine tools, an incredible foundry setup and all sorts of other stuff there. He rented out most of the clerestory back part to a couple of tenants. This was in one of those "loft districts" where all sorts of artsy folk were setting up all sorts of studios. But, one of the guys had a horrible little cement blockhouse of a shop a block away where he repaired Indy racecars, and he needed a place to store the cars he was working on. A very interesting place!

Jon

Oh, one other point. Be SURE to factor in security, whatever mods you will need to make to make the building secure, etc. Also, depending on what you are going to do in it, check into insurance. Business insurance, even just casualty coverage on business property, is just insanely out of sight.

Jon