Do you ignore investing in ugly commercial properties? Some of the best deals are the ugly ones! In this training, you'll discover my 5 rules for investing in ugly properties. Plus, I'll take you onsite to an ugly RV Storage Facility and show you our 3 phase plan to transform it into a trophy asset.
5 Rules to Finding Beautiful Potential in Ugly Properties
Here are the five rules of finding beautiful potential in ugly commercial properties:
Rule 1: Have a Strong Why
My Protege, Sam, has a single-family home investment and two other businesses but they're not creating enough wealth for him to leave the rat race. Only commercial real estate can produce enough cash flow for Sam to accomplish his goal. As we jump into the numbers on this RV storage facility that Sam acquired, you'll see what a life changer it is.
Rule 2: Go Direct to the Property Owner
This is how to get the best deals. Sam found this 7.5 acre underutilized RV Storage facility using the proprietary methods we teach our students. However, going to the property owner is just half of it. The second half is knowing how to negotiation with the property owner wisely and effectively. And Sam relied on his mentor's experience to coach him through the negotiations.
In Sam’s case, the seller wanted to sell and wasn't knowledgeable about his property. It was poorly organized and the property was littered with abandoned cars and junk. Also, only 5 of the 7.5 acres were being used which meant that there was huge upside in the rents if all the space available was utilized. The challenge was that there were certain tax implications the seller needed to avoid which were extremely complicated. Even the attorneys didn't know how to handle it, but we solved that problem with seller financing. So it was a win-win for everyone. Which leads us to rule number 3.
Rule 3: Structure Your Offer Based on Seller Motivation
We teach our Proteges that commercial real estate is a relationship-based business. We structure win-win deals that benefit the Protege and the Seller. This was probably the most important aspect of the deal. The seller and Sam developed a solid relationship which allowed the deal to come together. The seller and Sam had an agreement, even though the hawks were coming in from everywhere wanting this property. In fact, Sam almost lost the property, but a handshake solidified the deal. This is an unusual situation these days, but it did happen with Sam. So, it speaks to the notion that commercial real estate is a relationship-based business.
The offered price was $5.5 million with a 10% down payment. The deal is seller financed for five years, which means Sam will make monthly payments that are interest only on the balance for five years and at the end of that time he must pay the seller off. How do you do that? The strategy is to get the NOI up to where Sam can refinance the property, pull out his down payment, pay off the seller, and keep the property.
Rule 4: Establish a Team of Experts
If you are a beginner investor, you need a team of experts that have your back. Sam’s deal was complicated, so we provided our resources for Sam to get this deal done. In addition to what we provided him, these are the resources he utilized:
Legal Advice: Sam needed two attorneys and I had the perfect attorney for Sam to work with on his contract. But he also needed an attorney to help with zoning because the property has outdated zoning. And Sam can’t maximize the number of spaces in the park without getting the correct zoning. So, Sam intends to get the zoning changed and realize the full upside potential of the property.
Now, getting zoning approval can be difficult. But it turned out that my attorney referred the zoning issue to a friend of his who happened to live in the same county as Sam’s storage facility. And he also previously worked for the zoning office in that county. Because of his connections and knowledge, he can fast track the zoning approval process for Sam.
Feasibility Study: Sam hired a company to do a report on the feasibility of this RV storage facility succeeding in the market. The report costs a couple thousand dollars, but it's so worth it. The report includes:
- Existing competition and what they are doing right now
- Rates and occupancy
- Market demand
- What's missing in the market
It’s a valuable report that shows Sam that this project can truly succeed.
Technology for Operations: This RV storage facility was a family owned business for two and a half generations and during that time all the accounting was done on handwritten ledgers. Sam can't realize the potential of this facility and manage it efficiently without having some powerful software. So, after considering several option Sam chose one my favorites called Easy Storage Solutions. It’s a fantastic RV and self-storage software platform that we recommend to our Proteges that are investing in storage. It manages accounting, sends notices out to tenants, and even opens the gate. It does everything for the owner of the facility.
Onsite Manager: Fortunately for Sam, there was already an on-site manager. Her name is Linda and she has worked there for over thirty years. She knows every inch of the seven and a half acres and all the day-to-day operations of the property.
Rule 5: Plan Your Exit Strategy
An exit strategy is how you plan to get your money out of the investment at the later stages of the deal and pay back the seller. Mapping out an exit strategy is almost like predicting your future. And it takes years of experience to plan for possible scenarios and make the outcome positive. We developed a 3-phase exit strategy.
RV Storage Plan: Phase 1
Zoning Legal Nonconforming- The property is zoned legal nonconforming. What this means is the property was legally built and used but because the zoning laws have changed it no longer conforms to current laws. So it is legal, but it's not conforming to current laws. Sam is beginning the process of getting the zoning up to date to legal conforming, so he can begin expanding the business.
Layout Structure: Sam has completed a layout plan of expansion. There is so much potential with this property and it's all RV storage in the wine country of California.
New Software: Sam has already installed the new software so that the business can be managed efficiently.
Raise Rents: Sam raised the rents within weeks of owning the property.
Increase the NOI: The goal at the end of phase one is to reach the NOI to $375,000 a year. And at a five cap, that will bring the value of the property to $7.5 million. When he reaches this point, he will have increased the equity by $2 million.
RV Storage Phase 2
Zoning Legal Conforming: The goal in phase 2 is to get the zoning to legal conforming. His attorney has applied for the legal conforming zoning designation, but we aren’t certain how long it will take.
Asphalt: In the meantime, Sam will upgrade the property with asphalt, clean out the junk, abandoned trailers and cars and a few shipping containers.
Canopies: Once he has legal conforming, he can add canopies. And once he puts the canopies over the RVs, he can charge $150 more per month. So just adding canopies gives a huge upside.
Increase the NOI: With the increase in rents, Sam will have pushed the NOI to $600,000, and at a five cap, that increases the property value to $12 million. (And for those of you who doubt the 5-cap rate, remember this facility is in the wine country in California)
Pay off Seller: At the end of five years Sam will pay off the seller.
RV Storage Phase 3
C3 Zoning: Sam will apply to get the property zoned C3. This commercial zoning designation will allow him to put self storage buildings on the property. So his attorney is working on taking him from legal nonconforming to commercial zoning.
Increase Storage Units: Sam plans to add two and a half acres of self storage units once he has zoning approval.
Increase the NOI: After these upgrades are complete, the goal is to get the NOI to $1.2 million, and at a five-cap rate, it pushes the property value up to $37 million. What beautiful potential for this ugly commercial property!
Acquisition: The end goal for Sam is to refinance once he reaches this level, and go into acquisition mode of other RV facilities, a multifamily in the area, or maybe even a development on the other side of the property.
Viconto Goodwin says
Congratulations Sam! You have a great teacher in Peter Harris. Thank you for sharing your win.
Quinn Swingle says
Congratulations Sam, you have done it. You give hope to the rest of us who want to get into commercial property
Melvin Burrell says
congratulation Sam, great job
Wahabi I Shittu says
great work Sam and Peter! Congrats!
Mark Minton says
Thank you for reaching out with this wisdom and knowledge.
I like how Commercial Real Estate works, all the NOI potential from making some adjustments or restructuring the situation, etc… but I lack on taking action
Interesting deal and explanation in how it came together. Congrats to you Sam and Peter for this educational video.
Awesome Sam!! You did it! Congratulations 🍾🤩🎉🎈
FJ Jalil says
It was encouraging to see someone go from A-Z to get a deal done, and with the right team to accomplish this first step to his dream. Keep going!
Walter Rhymes says
Wow! How can I do that? If not the same thing.
Ching Sheung says
Great work! It’s amazing deal!
Banabas Seaton says
Thank you for this awesome step-by-step video deal.
Thomas Russell says
Very nice explanation of a commercial property success plan.
I like this.
Pat Winter says
wow what an engineered plan of action.
Thank you for the step by step of this deal!