Discover why a small business owner sold his franchises to become a commercial real estate investor. Plus, you'll learn exactly how Chris invested his proceeds into two commercial properties and then created $1.3 million in forced appreciation in less than a year!
3 Reasons to Sell a Small Business to Pursue Commercial Real Estate
- Time: Small business owners have little time or freedom to do anything else other than work.
- Cash Flow: For a small business to produce cash flow, the business owner must be involved in the day to day management and monitoring of the business. Whereas commercial real estate investors have a property manager doing most of that work for them.
- Legacy: When small business owners retire, they want to leave the business to their family. However, often the children don't want it and the business is sold. With commercial real estate, you can leave cash flowing properties creating passive income as a legacy for your children.
Meet a Small Business Owner Turned Commercial Investor
As a small business owner, our Protege Student Chris had little time for anything other than work. He owned two fitness studio franchises and was very present and active in a management role, training, and coaching. After eight years of building up the business, he was looking for a new opportunity. Chris began researching commercial real estate and discovered it presented the best opportunity for him to leverage the proceeds from the business into something he could scale. Looking to secure his financial future, Chris applied to our Protégé Program. He sold his two fitness studios and used some of the proceeds to purchase two stable commercial properties.
Mobile Home Park Investment
The mobile home park is in a unique area, nestled between apartments and condos and only a quarter mile from the university. Chris found his 20-pad mobile home park through the proprietary methods taught in our Protégé Program. We like to create win-win deals for the seller and the buyer, and Chris was able to do that by nurturing his relationship with the sellers.
The sellers were older professional investors that had been in the commercial and residential real estate business for decades. Chris took the time to visit the property early on and build repour and that seemed to make a big difference to the sellers. They understood that Chris was a beginner investor, and they were willing to share information and be helpful. Often people think the buyer with the most money gets the best deals, but that isn’t always true. Building a relationship with the seller can make all the difference.
Purchase Price: $ 1,080,000
Financing: Chris financed his deal with a traditional commercial loan from a lender recommended by the seller. The seller had a great relationship with the lender and referred the lender. Again, this highlights the importance of having a good relationship with the seller. Chris was able to get a loan for 70% of the purchase price and used the proceeds from selling his two business for the down payment.
Upside Potential: The park and mobile homes were well maintained and managed. However, the rents were significantly below market. Out of the 20 mobile homes, Chris has raised the rents on 16 in the last eleven months. There was also upside opportunity billing back utilities. The previous owner was carrying a lot of that expense, and Chris has been able to bill back some of that expense to the tenant.
Forced Equity: Between the rent increases averaging $200 and billing back utilities, Chris has increased his cash flow by $3,200 a month. That’s an increased NOI of $38,400/year and at a 7.5% cap rate, Chris has $500,000 in forced appreciation on this park. With just the mobile home park, Chris has created enough equity to almost recoup his $600,000 down payment for both investments.
Exit Strategy: Chris plans to buy and hold, and then do a cash out refinance.
Apartment Building Investment
Chris purchased a 23-unit, apartment building. The units are 1 and 2 bedrooms, as well as some studios.
Purchase Price: $875,000
Financing: Again, Chris financed this deal with a traditional commercial loan, with 20% down/interest only for the first year.
Upside Potential: There was rent upside potential with this deal as well and Chris was able to raise the rents of the units averaging out to $200 a unit. Also, the previous owner carried majority of the utilities and Chris was able to bill back the utilities. After eleven months he only has one renewal left.
Forced Equity: Chris has increased his cash flow by $4,600/month. That’s an increased NOI of $55,200. At a market cap rate of 7.5%, Chris has $736,000 forced appreciation in just eleven months.
Exit Strategy: Chris plans to buy and hold, and then do a cash out refinance.
In less than a year Chris has created $1.3 million in forced appreciation. Amazing! However, not only has Chris created equity, but he has also created time. In fact, one of the things Chris asked me after he closed on his deals was, “What do I do with all my time now? I have too much time on my hands!”
So, what is he doing with his time now? After he sold his businesses, Chris moved back to his hometown Nashville, and he is spending a lot more time with family and friends. But he also plans to continue to actively look for other properties and opportunities. His short-term goal going into 2023 is to double the number of doors. He is currently at 43 and his goal is a hundred total within the year. He is focusing his energy right now gaining more experience apartment investing, but in time he would like to explore investing in storage and office space properties.
3 Tips from Chris
Thinking of transitioning from being a small business owner to a commercial real estate investor? Here's 3 tips from Chris:
Get Help: “Get coaching from someone that you trust. That's been invaluable to me, to have someone that can educate and instruct me, guide me, and help give me confidence and keep me making positive steps daily. That's been huge for me. Just that coaching and mentorship that I've gotten from you and the team. I couldn't recommend it anymore, honestly.”
Don’t Wait: “Start now while you're in business. I wish that I had done it a year or a couple years before. I'm still thankful, but I wish I had started while I was still bringing in income. I wish I had set aside some time to start the real estate journey during that time. I think that would've been helpful.”
Have the Right Mindset: “When entering this new environment, just enter it with excitement and with passion and not fear and skepticism. Be excited about it just like you are with whatever business you're currently in or have been in before. Know that there's opportunity on the other side, and the help that we need - seek it and get it. Appreciate and use it. There are people that are here to help, so just take advantage of it. Don't go it alone. I would not, could not. Honestly, I don't know where I'd be. I just would've not started.”
From Small Business Owner to Successful Commercial Real Estate Investor
In under a year Chris went from being a small business owner to a successful Commercial Real Estate investor! He purchased a 23-unit apartment building for $875,000. In less than a year its value had increased to $1.6 million. He also bought a 20-pad mobile home park for $1,080,000 that is now it's worth $1.58 million. Chris's portfolio is now worth $3.18 million! He still owes $1.45 million, but he has generated a net worth $1.72 million in less than a year.
Chris invested $600,000 from the sale of his franchises and he's tripled that with commercial real estate. And not only has he generated wealth, but he also has time to spend with his family, his friends, and focus on other aspects of his life now. That's the benefit of commercial estate investing. If you are a small business owner looking to make a change, follow Chris's advice; get help and don't wait! Apply to our Protégé Program here: https://www.commercialpropertyadvisors.com/protege-program/
Steve E. Wilson says
Congratulations and thank you Chris for sharing your journey to success. Very encouraging!
Dongjoo Yang says
Awesome Chris thanks for sharing 👍