Discover what a great commercial deal looks like so you'll know what they look like when you come across them. And you'll learn this lesson from the example of beginner investor who just closed on his first commercial deal. You'll be inspired and educated by this powerful video:
Meet Steven Nguyen
Steven worked as a pharmacy manager in a hospital in California, and rapidly climbed the corporate ladder over the past eight years. He was confident that healthcare was a stable career, but ironically during the COVID-19 pandemic, his hospital laid off 20% of the healthcare workers, himself included. For him that was huge wake up call. He had already started investing in single family homes, but he stumbled upon my YouTube channel, and it opened his eyes to the power of commercial real estate. He realized that with just one commercial deal he could achieve his cashflow goal and reach financial freedom. Whereas with his single-family investments in would take ten years or more. This realization made him pivot 100% to commercial real estate.
4 Components of a Great Commercial Deal
#1: Priced Under Market
A great deal must be priced under market.
Student Deal: Steven purchased the property for $520,000.The owner wouldn’t give him a price and instead asked for an offer. Steven looked at the tax record and offered that price, which the owner accepted with the condition that the property was sold “as is”. When the bank did the appraisal, the property appraised at 750K! Steven got instant equity, but it gets even better!
After Steven settled the contract, he had a full onsite inspection completed. He flew to Oklahoma and walked through all 26 units with an inspection team. He had inspectors for the roof, termites, pest, electrician, plumbers, a whole gamut of inspectors. The owner was present for the inspection, so he saw how thorough it was. The inspection report was comprehensive with quotes for all the deferred maintenance. Steven provided the seller with the reports and exact quotes. It was a fully transparent process.
Initially he asked for 120K in repair credits, which the seller rejected. However, he was willing to reach an agreement on a lower amount of repair credits, narrowing it down to those items that needed immediate attention. Steven consulted with his property manager and was able to narrow it down to a new roof, furnaces and water heater replacement, and work on some potholes in the driveway. They settled on $66,000 in repair credits.
Steven was able to get $66,000 in repair credits when initially the property was sold “as is”. By always referring to a third party, Steven built trust and kept the process transparent, and they were able to solve problems together. He bought the property for $520, with a $66,000 repair credit and the bank appraised it at $750,000. That’s 290K of equity built in immediately! Now that's what a great commercial deal looks like!
#2: Rent Upside Potential
The property must have the ability to raise the rents. As you raise the rents, you increase the NOI and the property value goes up, forcing appreciation.
Student Deal: Since the seller was self managing the apartment complex, he didn't raise rents much for most of the tenants, which means there is huge upside potential with Steven's deal. The rents average $450 to $500. After consulting his property manager, Steven believes he can raise the rents about $50 to $150 per unit conservatively, depending on the one bedroom versus two bedroom. After turnover, renovations and raising the rents, we predict the property will double in value.
To summarize, the rents can be increased by $150 per unit, per month, times 26 units, times 12 months. That's about an extra $46,800 per year to his bottom line on his NOI. The property is in a seven cap market, so divide $46,800 by 7% cap rate, it comes out to be a forced appreciation over two and a half years of $668,000. It's incredible! This is the power of commercial real estate.
#3: Good Neighborhood
The property needs to be in a decent area. If it isn't, the price and rent upside potential will be irrelevant.
Student Deal: When Steven looked at the property on Google Street view, it didn’t look that great. However, when he went there he was pleasantly surprised by what he found. Despite it being in a C-class neighborhood, the property was clean and with no trash anywhere. It was obvious the tenants really cared about the property. He drove around the neighborhood during the daytime and at nighttime to get a sense of the area. It was a quiet, clean community, surrounded by single-family homes.
#4: Solid Property Management
We recommend that you do not manage the property yourself. Instead you need to hire a good property manager. This is a crucial component to a great deal.
Student Deal: With the property in Oklahoma and Steven in California, he needs boots on the ground. We were able to recommend an amazing property manager with lots of experience in managing multifamily apartment complexes. They have a strong pulse on the market and give him real world practical advice. For example, they are cost effective with renovations in terms of how much to spend to maximize rent value. The property manager gives monthly reports that they automate through rent manager, which Steven reviews and then they meet monthly to discuss the plan.
4 Keys to Closing Great Commercial Deals
Key #1: Off Market Lead Generation
You need to be able to generate deals off market. The deals you find in LoopNet or MLS, aren't going to cut it. We don't play where everybody else is playing, and that is what we teach the students of our Protégé Program at Commercial Property Advisors. We go direct to the property owner.
Student Example: Steven purchased a 26-unit apartment complex without the use of an agent or broker. He found the deal off-market and worked directly with the owner, who was an attorney. The owner preferred email communication, so Steven used this method to build rapport by being highly responsive and prompt. Steven took small consistent action daily. He was very responsive to the owner’s needs and questions, building a connection over time.
Key #2: Structure both Conventional and Creative Financing
You need the knowledge and ability to structure both conventional financing and creative financing.
Student Example: Through a mortgage broker, Steven chose to use traditional financing on this property, with 20% down at 4.2% interest, amortized over 30 years. For this first deal, he wanted to self-fund it to prove to himself that he could negotiate and finance a deal. After successfully completing this great commercial deal, he’s hoping to start getting other investors involved and syndicating deals.
Key #3: Expert Analysis and Exit Strategies
You need to have the expertise on how to do an analysis and be an expert on exit strategies. Exit strategies are often overlooked by people when constructing deals. But exit strategies should be established at the beginning, because it sets the stage for the rest your deal.
Student Example: Steven’s investing strategy is to buy and hold. His exit strategy for commercial real estate is buy it, add value, and then cash out refinance within three to five years. It's a lot of work to find a deal, to stabilize the deal, renovate and then cash out refinance. So, Steven wants to pause and reap the fruits of his labor. His hope is to cash out refinance, pull out all his initial equity and use it to buy more commercial real estate. His focus is on the four recession resistant assets:
Key #4: Get Help
Don’t try to do a commercial deal as a beginner by yourself, especially if you're 40 and over because you can't afford to make a mistake. This will probably be the largest financial investment you make in your life, and you can't blow it because you don’t have time to recover.
Student Example: Commercial real estate investing can be intimidating, and it wasn’t any different for Steven. He said, “If you asked me a year ago, what do you think about owning an apartment complex in Oklahoma? I'd say you're crazy. I can barely do a single-family home here in California.” By joining our Protégé Program, we were able to give Steven the guidance he needed to successfully negotiate this great commercial deal. And he is very coachable. He took consistent action everyday, breaking down big problems into small problems. He never took no for an answer and kept taking small daily consistent action, never giving up. If you kind of have that mentality, you'll eventually land a great deal too.
5 Qualities that Contribute to Success
- Be Coachable: Steven did exactly what he was instructed to do.
- Take Action: Steven acted consistently over time. He practiced a principle the Japanese call kaizen, which means continuous improvement over a long period. So, he took what we taught him and did it consistently month after month.
- Be Transparent with the Seller: Negotiating $66,000 in repair credits with a seller isn’t easy, but Steven was successful because he honored the buyer/seller relationship. He was transparent through the entire negotiating process.
- Have Stable Property Management: I was able to recommend my property manager to Steven, who is excellent. And having a good property manager is crucial because it makes his business scalable. When you find a good property manager, stick with that them and build your business around that property manager or company.
- Establish a System to Build the Business: We meet with Steven every month to establish the systems so he can build his business and go for his next deal. You need to put your systems in place to make sure everything is operating correctly. Steven's goal is to do more deals through syndication.