What does it take to generate a 97% return on investment with commercial real estate? It takes a high level of skill and knowledge, but also it takes work, sacrifice, risk, admitting what you don't know, and getting out of your comfort zone. Are all of these qualities attainable by you in one or two years? I would say no if you are doing it by yourself, because I personally, find it too risky. But if you have a high-level adviser helping you out, a mentor willing to get in the trenches with you, then I would say yes, it is possible.
Commercial Property Advisors Protege Example:
We have a commercial real estate protege named Kevin that has all of these above qualities. He bought a commercial property with seller financing, meaning that there's no bank involved at the onset. He raised the down payment himself, and performed minor renovations to the property, that resulted in him increasing the rents by 30%.
As the NOI goes up in the property, so does the property value. So when Kevin accomplished raising the rents by 30% he increased the property value by $536,000. And this was not a five or ten year process, this was all done in a little more than a year.
This $536,000 property value increase allowed us to execute our ultimate exit strategy, which was a refinance where Kevin was able to pull out his entire down payment, thus reimburse himself for his down payment, meaning that he no longer had any of his own money invested into the deal, yet he still owned the deal. This makes his overall return on investment 97%.
A Breakdown of Kevin’s Deal
Kevin runs a small family business as a commercial flooring contractor in Panama City, FL. He began working in real estate 4 years ago and connected with Commercial Property Advisors approximately 2 years ago.
Why Commercial Real Estate? (Why not flip houses?)
Kevin felt that commercial real estate would mentally challenge him more than residential real estate. He also felt like there were a lot less people investing in commercial real estate, because most of the people he knew had already jumped on the “fix and flip” houses bandwagon.
Kevin found a 24 unit apartment complex that was being sold by a real estate attorney who was willing to finance the deal for 24 months. This means that Kevin was able to just make payments until the end of 24 months, when he was then able to refinance and pay the owner off.
After discussing the deal with the owner, Kevin soon discovered that the numbers for the property would make it difficult for him to obtain bank financing. The owner knew that Kevin was getting help from Commercial Property Advisors and felt comfortable that Kevin knew what he was doing, so he agreed to a creative deal.
The Down Payment:
The property was purchased for $925,000 with $50,000 earnest money, and another $100,000 due at closing. $50,000 came from a personal loan Kevin received from his parents, $50,000 came from Kevin’s savings, and the rest was either owner financed or borrowed from someone.
The Exit Strategy:
The exit strategy was to do a cash out refinance. To cash out all of the money Kevin had invested in the property, and then refinance with a loan from Fannie Mae. When Kevin purchased the property, the units were being rented out for $550 a month. Over the next 24 months Kevin renovated 17 out of 24 of those properties, in order to increase the rent to $775 a month per a unit. During this process he was able to increase the property value from $925,000 to 1.46 million dollars. This means that when he went to refinance he was able to cash out all of the money that he had invested in the property. He even pulled enough out to replace six roofs on the building as well.
Renovation Break Down:
Seventeen units received a complete cosmetic face lift which included painting, new flooring, new toilets, and washer/dryer hookups connection installed. There was no major construction needed.
Why hadn’t the seller done this himself?
The owner lived six hours away and just had other things on his mind, besides taking on such a large project from far away.
Words of Encouragement from Kevin:
Listen to your mentors. Work diligently. Work Smartly. You will find a deal eventually, and then just work hard to pursue it and make sure it comes to a realization. Other than that, you know, work hard, listen to your mentors, and follow their direction, and you can be successful.
Summary of Kevin’s Deal
Kevin purchased 24 units for $925,000. The seller was able to finance the deal for Kevin. After Kevin put down $150,000, the remaining balance was financed over the next two years. The down payment came from two things: Kevin's home equity line of credit, and secondly, he borrowed money from his parents. Both of these were paid back when we refinanced the property.
Out of the 24 units, 17 units were fully renovated, producing a rent increase of $225 per unit. The other 7 units had a slight increase in rent by $50-$75. $225 x 17 PLUS the remaining seven units rental increase = approximately $4,200 per month more cash flow a month. This is about $50,000 more per a year, and as you know, the NOI going up results in the property value going up as well.
The end result was an appraisal for $1.46 million, so he bought it for 925, and over the course of a year and a half, increased the value by over half a million dollars.
Our exit strategy was to refinance the property with a Fannie Mae small balance apartment loan. In the refinance, he paid off the seller, paid himself and his parents back, plus got enough money back to replace roofs on the property. Once all that's done, he keeps the property and the cash flows.
3 Keys to Kevin’s Success
1. Kevin was a good student
2. Kevin dug out the seller’s motivations
3. He focused on his exit strategy