No Bank Loan Real World Commercial Deal

Discover how a multi-million dollar self storage facility was purchased without a bank loan. In today’s environment of rising interest rates and market fluctuations, commercial real estate investors need to apply creative strategies in order to thrive. In this video, you’ll discover how the creative technique of seller financing was used to acquire a real world commercial property and how you can apply owner financing to your deals too:

 

4 Benefits of NOT Using a Bank Loan

No Large Down Payment: Most vendors require a large down payment, typically 25%. Unlike traditional financing, seller financing has no standard amount, which means you and the seller can negotiate the down payment.

Net Worth Isn’t a Factor: When you apply for a bank loan on a commercial property, the lender requires your loan amount to be at least your net worth. Dean purchased the property for $2.2 million. If he had gone to the bank for financing, he would have needed a net worth of $1.65 million. Instead, his net worth wasn’t a factor because he was using seller financing.

Your Credit Score Doesn’t Matter: Your credit score is one of the factors lenders consider when you apply for a bank loan. When we do seller financing, since no banks are involved there’s no one to look up your credit score. The credit score doesn’t matter. What does matter is building up seller trust and your ability to put a good plan together and execute it. What matters most is seller trust and knowing what you’re doing.

Avoid High Interest Rates: Seller financing is how you beat climbing interest rates because no banks are involved. There is a Wall Street saying, “Credit leads and then equity follows”. Credit is the banks, and we are the equity. We follow whatever the bank does, so when interest rates go up our purchase power is affected. The property doesn’t cash flow as much and it’s harder to get approval for traditional financing. So how do you beat that? Seller financing.
 

4 Skills for Investing in a Self-Storage Facility

There is nothing particularly special about the facility that Dean purchased. It is a typical self storage warehouse. And that’s the beauty of self-storage. Nothing is special about the building that makes it so special. When you have an apartment building or retail space, if it’s ugly or lacks curb appeal, people are put off and don’t want to rent there. But self storage is all about need and fulfillment. There are 4 basic skills required to analyze a self storage facility to ensure you’re getting the right deal.

Analyze Income and Expenses: I won’t break down how to analyze the income and expense of a self-storage property here because I have already gone into detail in my teaching Self Storage Investing for Beginners.

Understanding Location: Location is critical for self storage. You need to be in the main thoroughfare or on a highway with high visibility and easy access. Dean’s self-storage facility is in a great location that’s central to the city. It has very convenient interstate access and the visibility is fantastic.

Optimizing Storage Mix and Configuration: Mix could be varied sizes of storage units, like 10×10, 5×10 and 15×20. The configuration can vary from a standard dry storage unit to a climate-controlled unit. It may be an RV and boat storage unit, or even just outdoor parking spaces where people can park their RV. It is important to optimize all the available space.

Know Your Competition: Knowing the competition within a five-mile radius of your investment is crucial so you can price and market accordingly.
 

Finding a Deal without a Bank Loan

Dean found his seller financed deal in the neighborhood of one of his investment properties. In fact, it was adjacent to the first commercial property that he purchased. He had heard that the owner of this property had died recently and left it to his two daughters. So, being the new neighbor, he decided to stop by and introduce himself. When he walked in, he realized that he knew the husband of one of the owners and that’s when he expressed his interest in buying the property. Six months later, he got a call, and they began to talk about what that deal would look like.

So, how do you find a deal without a bank loan like Dean? There are three key steps you must take.

Go Direct to the Property Owner: To find deals with the potential for seller financing you must go to the owner directly. Some of my closest friends are commercial real estate agents and they are clueless on how we find and structure off-market deals because their focus is getting a listing and selling a property. They don’t know how to think creatively about the deal. You need to deal directly with the owner to be in the best position to get the seller to agree to financing the deal and we teach how to find these off-market deals in our Protégé Program.

Relationship Based Business: Commercial real estate is a relationship-based business and always will be. It does not matter what school you went to, how much money you have, if you have a suit, or if you have a fancy job. In fact, Commercial Property Advisors is proof that it doesn’t matter. We have successful protégé students from all walks of life. What matters is taking your time and having genuine relationships with the sellers.

Seller Motivation: You need to find out what is motivating the owner to sell. And you do that through the relationship you are building with the seller. Building rapport will help you to understand their motivations. As you begin to establish credibility and show genuine interest, they will start sharing their motivations with you. This is what happens when you have a motivated seller and a motivated buyer; beautiful things can happen, just like Dean’s deal.

Seller Motivation

Dean was diligent in all three of these steps. After the initial phone conversation, he met with the owner for coffee. During that conversation, he was able to determine some of their motivations for selling. The two sisters that had inherited the property were at retirement age. One was living out of state, and the other was local but not in great health. They were both enjoying the cash flow the property was providing, however the management and maintenance of the facility was becoming burdensome for them.

In addition, he was able to determine that one of the major tenants was planning to vacate the property. From there, he and I had numerous conversations and we developed a strategy for making an offer using a Master Lease Agreement. That Master Lease Agreement was at their asking price of $2.5 million. It would be interest only at 5% for a period of three years and we would make a 10% deposit. The owner accepted the agreement and Dean began the due diligence process. Through that process, it was determined that there was a significant amount of deferred maintenance, and he negotiated the final purchase price down to $2.2 million.
 

Let’s Talk Numbers

Are you starting to see how this is all coming together? Let’s look at the numbers of the deal in two segments: the numbers at closing and then numbers by year two of Dean’s strategic plan.

Numbers at Closing

Purchase Price: $2.2 million
Down Payment: 10% with a 5% interest only for three years
Strategy: Seller Financing – Master Lease Agreement is a powerful strategy for seller financing and it’s a must know to combat high interest rates. The basics of a Master Lease are covered in my teaching Master Lease Agreement for Commercial Real Estate.

Monthly Income at Closing: $21,250 – On the surface this appears to be a lot of income, however there are quite a few expenses plus renovations. So the monthly cash flow from day one is a deficit of $2,116. Why would you buy this deal with negative cash flow? Because the potential cash flow is almost $20,000 by the end of the project.
Exit Strategy:  The plan is to have a three-year exit strategy, which means by the end of year three Dean needs to pay the seller a significant amount of money. With a purchase price of $2.2 million and a down payment of $220,000, Dean must pay the seller $1.98 million. It is crucial that by the end of year three the value has increased enough to get a bank loan and pay off the seller. That is the exit strategy for this deal.

Year 2 Numbers

The property has considerable rent upside potential. Not only are the current rents below market, but there are ongoing plans to renovate and reconfigure the facilities.

Gross Monthly Income: Estimated conservatively at $38,390
Renovation Costs:  The property requires interior and exterior renovations costing $200,000
Projected Value: Between $5 -5.5 million once the income increases to $38,390. This value estimate is based on recent sales comparables.

Strategic Plan

With this strategic plan Dean will create an upside of more than $2 million. We helped Dean design this exact plan with timetables, budgets, numbers, quotes, estimates and lending details and developed a two-phase project.

Phase 1: The first phase is to stabilize the property and take care of all the deferred maintenance, plus create some curb appeal, improving the exterior look of the property so that we can attract good tenants and backfill the vacancy of the building.

Phase 2: Dean will then move on to existing tenants and expanding the self storage space. There’s approximately 5,000 square feet that will be added for additional storage and there is opportunity for increased rent rates on that side of the business as well. Upon completion of this, Dean should be able to force the equity of the building and thus increase the value of this property to an estimated $5.5 million.
 

Lessons from a Real World Deal

What can we learn from Dean and how can it help you as a commercial real estate investor?

Lesson #1: Don’t Wait. The best day to get into commercial real estate investing was yesterday. The second best day is today. Even though Dean could see market conditions fluctuating and interest rates going up, he still went ahead with the deal. Some of you are reading the news and you’re not sure what to do or how to make decisions. I have a video that’s perfect for you. It’s called Five Keys to Making Decisions in Commercial Real Estate. This is an important teaching in today’s climate of fear and uncertainty.

Lesson #2: Things are changing rapidly so you need to arm yourself with creative financing techniques. It will help you combat higher interest rates and fluctuating marketing conditions that can making getting bank loan difficult. Don’t sit on the sidelines and wait, missing opportunity after opportunity. Arm yourself with knowledge. Do you think Warren Buffett is sitting on the sidelines? No, he’s planning and looking for ways he can take advantage of the situation.

Lesson #3: There are still good deals. This is for the people saying that all the good deals are gone. The problem for those people is they’re looking in the wrong place. You need to go direct to the owner, but you also need to know how to convince the seller to do something creative with you and how to structure the deal. At Commercial Property Advisors, we mentor our Protégé students step by step through this whole process.