It is the cashflow stupid.

My friend Adrian posted a very good blog entry about cash flow.  His blog is one that everyone who is serious about being wealthy should subscribe to.  I made and answer to him that point out how stupid so many investors are.  I wanted to share it with all of my readers also so here it is.

Read his entry HERE.

Here is what I replied with….

I have seem this time and again in commercial real estate.  People are willing to leave a strip mall mostly empty, they are unwilling to do short term leases, or even to discount the leases.  So what happens, there are tons of strip malls, and office buildings here in Arizona that are empty.  They have this mindset that if they get a nice long lease that it will be better than the money now.  This may have been the case in the past but to me it just seems so stupid.

An example is a building I was thinking of renting back in 2002.  It was perfect for a business idea I had, I had the backers and was ready to go, I just wanted 6 months rent free and then to rent it for $12k per month, going up 5% per year.  They would not budge on their price of $18k.  It was too much so I passed.  Well now it is 2009 and it is STILL empty, no one has EVER rented it.

Another example is a strip mall that I know of.  It is very poorly designed but has over 400k square foot in total.  Less than 50k square foot is rented out.  A guy I know rented a 8k square foot space, and put a Filipino restaurant and grocery there.  Soon the space next door was rented by another Filipino to build a karaoke club for Filipinos.  It was all located in a part of the strip mall that was totally empty.  The grocery store invested everything they had, over 300k into building out their store and stocking it.  Then the economy hit them, and they could not pay the rent.  On the 15th day of the month the landlord locked them out, charged a penalty and the guy could not come up with the 20k needed, over 50k in food spoiled and they guy was promptly out of business, and the guy next door also moved out  The place is now empty.  So what did the owner of the property have to loose to give the guy some time to catch up, maybe some discounted rent.  He would surely not be making less than he is making right now, he has over 300,000 sq foot of other places to rent out, most of which are better.  It was dumb and short sighted, but that seems to be the majority of commercial landlords, especially the distant ones who never even see the property.

I think of tenants as clients.  They pay you and you should keep them happy.  You have only limited supply so when you are full you can be more selective and follow the rules to the letter, but when no one is buying your product you need to sell at any price to make money, they still like to keep rent high, and if it not rented then they take the tax break at the higher level.  That is illogical to me, but maybe that is why I am not as wealthy as they are.  Or maybe they are just huge REITs playing the game with other peoples money and they don’t really care that much.

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