Can you have your cake and eat it too with commercial real estate? It absolutely can be done if you have the 4 essential ingredients; increasing cashflow, building equity, the ability to do a cash-out refinance, and the use of that cash out refinance proceeds to invest in the next property. As you increase your cash flow, you also increase your Net Operating Income (NOI). Increasing your NOI, builds up your equity, which enables you convert some of that equity into cash through a "cash out refinance". Then, you can take that excess cash and use it to purchase your next property. The cash flowing property is what I call the delicious cake and using that cash flowing property to invest in a new deal is what I mean by eating it too!
How to Have Your Cake and Eat it Too in Commercial Real Estate
You may remember one of our students Chris from my post and video entitled How Chris Became a Millionaire in One Year. Chris has now retired from his job as an airline pilot and is enjoying staying grounded; spending time with his family and managing his commercial investments with his wife. I recently interviewed Chris and he shared with me how he has been actively building his commercial real estate portfolio. It illustrates perfectly how these four ingredients enable you to have your cake and eat it too.
Ingredient #1: Increasing Cashflow
In his first deal Chris purchased a 90-unit apartment building. Currently the property’s cashflow is $21,000 per month.
Ingredient #2: Build Up Equity
He purchased the 90-unit property for $3,000 000 and made improvements costing $600,000. The current value of the property is $6,750 000. With our guidance, Chris was able to double the value of the property in just a few short years.
Ingredient #3: Cash out Refinance and Pull Out Access Cash
About a year ago Chris approached Peter about doing a new deal because he had accumulated cash. They had done a cost segregation study, which allowed him to take early depreciation expenses on the property, which built up even more cash. Because he was able to increase the cash flow and build up the equity, he has done a cash out refi and pulled out most of his down payment.
Ingredient #4: Use the Cash to Invest in Another Property
Chris decided that investing in self storage was the best option for him. He started reading and watching my content on self storage. I also recommended that he talk to people who deal in those types of commercial properties letting them know what kind of cap rate he wants and cash on cash he needs to see. One of the brokers Chris spoke with called him a week later with a potential property. It was a boat and RV storage facility and met all his requirements: it was close to where he lives, gave him the desired cap rate (8%-10%) and cash on cash he wanted, was a mom and pop operation, and was more than big enough at nine and a half acres.
After meeting with the owner and interviewing the manager, Chris started doing his due diligence. He drafted a letter of intent; however, the broker wasn’t interested in that because there were six individuals competing for the property. Chris then put in a full price bid with significant earnest money. This landed him in the top three.
At that point, the owners added another acre parcel of land to the deal, which was very unusual. Chris came to me and we worked through how to recalculate his offer and the best strategy moving forward. He put in another bid and won because he followed my recommendations. He included with his bid a personal letter of why he wanted it, how he would operate it, that it would remain a family business, keep the same name and maintain the tradition of high value.
Chris and his wife managed the property for about five months when they hired their daughter to take over as manager. The net cash when he acquired the storage facility was about $2,500 a month. It is currently cash flowing $4,250 a month.
Click here to learn more about Chris and his RV Storage deal: How to Invest in RV Storage
Tips from Chris: Property Management
One of the reasons Chris is successfully increasing the cashflow and value of his property is through good management. Here are a few tips from Chris on how to successfully manage your management correctly and efficiently.
Hire a good management company: Transparency is a key ingredient when you're interviewing management companies. It’s an odd question and they may not tell you much about it, but you can talk to people who use them and find out if they're transparent.
Scheduled and unscheduled visits to the property: My wife Kim and I visit the property about once a month. That was sidelined with COVID, but we're going start doing Zoom meetings. These are scheduled visits, but as Peter recommended, you need to do surprise visits as well. We talked with our management team about this before we started doing that and they were fine with it, which goes back to transparency. They're very transparent.
Reward hard work: The other thing we do is give extra bonuses for outstanding work. We give the usual bonuses at Christmas, but we added bonuses of our own and they're spontaneous. It has been highly effective and really makes a difference in their financial lives. It also makes a difference emotionally to them. They're very happy and encouraged and I think it gives them a smile about working there.
Consistent and Clear Communication: We communicate consistently with our management team via text, email, occasional phone calls and then of course our visits. I have an agreement with the regional manager that I can go directly to the manager with concerns or questions. I inform their regional manager by copying them to the emails or texts, or just let them know by email what was discussed and the outcomes. This method has been helpful. Our manager is outstanding, and she likes it when I occasionally bring things to her attention that she missed or needs to address. Consistent communication, along with visits, and the encouragement of extra bonuses makes a tremendous difference in how the property is managed.
Use Software as a management tool: We use ResMan, it's great software. I pour over that with my wife every day. We know every line item on the profit loss statements so when we see something out of sync, that raises a flag and I'm emailing the manager about it. That often happens when I'm looking at turnover and people who aren't up to date on the rents and it looks like it's getting a little out of hand. Then she always satisfies me with good answers.
Have a rainy-day fund: Peter encouraged me to develop in a healthy checking account for the operation and the management company love that. They're very careful in their spending, but it gives them a sense of stability. That means they don't always get the lowest bidder anymore. They get the best person or company for the job even if they charge a little bit more. We keep those funds well funded and I think it gives them a lot of peace.
Meet with your mentor: I also communicate with Peter once a month and go over everything and get his input. Those meetings get long sometimes but I am where I am in commercial real estate because of it.
- Chris owns a 90-unit property cash flowing $21,000 per month.
- He bought it for 3 million and he put in $600,000.
- Just a few years later it is worth $6.75 million. Back when he did the cash out refi, which is a couple of years ago, the property was worth $4.2 million.
- He was able to cash out refi $600,000. So, he was able to take out exactly what he put in.
- He took the $600,000 and bought an RV and boat storage.
- The storage cash flow is about $4,200 a month today and increasing.
Tips from Chris: How to Have Your Cake and Eat it Too
Tip 1: Have a Mentor Who is Experienced
Peter has expertise, experience, passion, and is available and transparent. You need that in a mentor. Don't get into commercial property if you don't have a mentor and in my opinion he's the best, so I encourage that relationship.
Tip 2: Follow the Procedures
Follow your mentor's advice and the advice in the materials. Digest all those materials, the videos, the books, the weekly calls. Every time I look at a property, I go through ePartner with a fine-tooth comb and load it up and see whether something is workable. It also gives my mentor an exact presentation of what's going on, who then can give me advice and help me fix things I might not see.
Tip 4: Know the Tax Law
Get a cost segregation study done on your building because you can take your depreciation early, save a lot of taxes, and put that in your operating account and rainy-day fund. Then you'll have that in any cash out refinancing, so that your current property bankrolls your new deal.
Tip 5: Focus on the Benefits of Commercial Investing
There are so many benefits to commercial property investing. It bankrolls the next property, the tax advantages, the income you get, and then the appraised value. What other asset does all those things at one time? I also ask myself, "Is my property doing those things for me today?" And if it's not, then I start thinking about it and processing and figure out how to get it working better.
Focus on the Goal
As mentors we helped Chris focus on the goal. We met every month, going over the numbers, keeping our eye on the bottom line, with the goal to do a cash out refi and to invest in another property. It took a few years to do that, but we stayed focused and achieved that goal.
Watch the full interview with Chris on our YouTube channel.