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The Money Machine - Exploring The ICI Option

The Money Machine - Exploring The ICI Option

If you have ever attended one of my Money Machine seminars, watched our investment videos or read any of our investment articles such as those in this newsletter, you’ll understand the power of real estate investment as a vehicle for generation of passive income while at the same time allowing you to build up immense personal wealth. And, believe me, acquisition and ownership of rental real estate will allow you to accomplish both of those objectives.
 
But you will also see that for the most part our model has centered around acquisition of residential real estate. Diverse to be sure – single family, semi-detached, multi-family, condo and so on, but pretty much all residential. We have not really ventured much into other areas of real estate investment, commercial, and industrial, to be specific.
 
There are a number of reasons for this. The Money Machine seminar was originally rolled out for the novice investor, first getting started. And when you are new to the process, residential real estate is just easier to handle. For one thing most people understand residential real estate. After all, we all live somewhere. And residential real estate is easier to acquire. The unit costs tend to be lower, the financing tends to be more manageable, requiring less of a down payment and usually at a lower interest rate. And residential real estate tends to be more stable. Certainly, in this present situation of COVID-19 most commercial and industrial establishments, especially retail and food service, are shut down. And many will not re-open even after the pandemic has passed. But even in more normal times, our economy expands and contracts. During periods of contraction a number of businesses will 

inevitably shut down, and often it is a long time before another suitable tenant is found. Investors for ICI (Industrial, Commercial & Investment) need to have deep pockets to weather these tough times. This is not so much the case for the residential investors. After all, people always need a roof over their heads.
 
Having said all that, however, there are a lot of good reasons to venture into ICI investment, especially as you become a more seasoned investor. For one thing, residential tenancies are very heavily regulated. The Residential Tenancies Act billed as consumer protection legislation is very much that. It is very weighted in favour of the tenant. For a landlord, it controls how much rent can be increased, who can occupy the unit, if and how a tenant can be evicted and so on. The commercial Tenancies Act on the other hand is much more balanced, rent is negotiated and governed by the market. A landlord has a great deal of control as to who the tenant will be and what allowable use the premise will permit. Tenancies tend to be much longer terms. 5 to 10 years is often the norm, so when a landlord has a good solid anchor tenant, he can rely on his investment without facing frequent and costly turnover.
 
But perhaps the biggest factor is that most commercial tenancies tend to be triple net or carefree to the landlord. By this, I mean that in addition to base rent, the tenant is responsible for all maintenance and repair costs. This can be handled both through a fixed monthly amount known as additional rent, or TMI (Taxes, Maintenance and 

Insurance) as well as direct expenses handled by the tenant.
 
I just got a call from one of my residential tenants as an example, telling me their toilet was blocked and could I call a plumber. Now this was a pretty good tenant and I did call a plumber, but I also explained that this type of problem would normally be up to the tenant to resolve and he certainly understood, but the point is, with a commercial tenancy situation you wouldn’t even get that type of call. Oh there might be some confusion with some type of repair as to whether it would come out of the TMI or if it should be billed directly to the tenant, but those situations are rare. For a true triple net lease situation, everything, with the possible exceptions of roof, parking lot or HVAC replacement all of which should be spelled out in the lease, is covered by the tenant: utilities, repairs & maintenance, taxes and insurance. The landlord can know at the start not just what his gross rent will be, but also what will be the net. And not only can he enjoy peace of mind that security buys, but also the peace of mind of not getting calls for clogged toilets, heating issues, lawn care or all the other things that can crop up with residential tenancies.
 


This really only touches the surface, but ICI investment is a very worth while option that you’ll want to seriously consider as your portfolio develops, and one we’ll revisit in coming months.

Wayne Quirk, Author, “THE MONEY MACHINE”, wayneq@remax-gc.com