I just bought my fourth rental property of the year (all of them are commercial properties). I was not expecting to buy so many rentals this year since I bought zero last year, but there were some deals that were too good to pass up. This property came up for sale on the MLS for $110,000 earlier in the year, and I jumped on it, offering full price the same day it was listed. The property has about 1,300 square feet of retail space as well as 2,000 square feet of work space in the back. The property should be a great rental, and the previous owner is renting it back from me for at least a few months. I wasn’t sure this deal was going to happen as it took 11 months to close from the time my contract was accepted!
How did I find this property?
I was looking at my hot sheets one morning when I saw a very cheap property come up for sale. I was not looking for cheap commercial properties at the time…only cheap residential properties. I had not bought any rentals for over a year because prices had increased so much in Colorado and rents had not kept up. This property was listed for $110,000, and I immediately drove by it. I sent an offer without seeing the interior but did add a 5-day inspection clause. The only reason I asked for the inspection was so that I could inspect the interior and make sure it was not destroyed. The seller accepted my contract, and the listing agent seemed surprised I wrote a full-price offer so quickly. I have since learned that things move much more slowly in the commercial world than they do in the residential world.
I was able to inspect the property the next day, and the interior was in great shape. The building was being used as a furniture restoration business and had been there for over 50 years! I talked to my local portfolio lender to get financing set up and was ready to buy my first rental in over a year. However, we ran into a few bugs while trying to close this property.
Why did it take me over 11 months to close on this property?
I got this property under contract on January 3rd, 2017, and it closed on November 8th 2017. I wanted to close much sooner, but the owner had IRS tax liens that prevented us from getting clear title. He worked very hard to get them cleared up with his attorneys and the title company. Three different times, we thought we had a clear to close, but something else from the IRS popped up. On November 1st, I was notified we had the clear to close, and the seller wanted to close in one week. That was too soon for my lender to complete the loan, but I wanted to get this deal done before anything else happened! I used private money to buy the property.
How much income will this commercial rental property generate?
I have bought 4 commercial rental properties this year, but I have not leased any of them out. I jumped into commercial real estate with both feet, hoping I was buying some great properties. However, I still have a lot to learn as I have not even tried to rent out a commercial property yet. I had an idea of what I thought my properties would rent for, but commercial is much different than residential. I thought this property would rent for $1,500 to $2,000 per month based on the square footage and use. I did not know this when I first made an offer on the property, but the previous owner wanted to rent it back from me for a little bit. He offered to pay $1,500 per month for two months, which was awesome because it confirmed I have some idea of what I am doing. He actually called a couple of days ago and may want to extend his lease to 6 months or longer. I am happy having him pay $1,500 since I do not have to find a new tenant, and he pays rent immediately.
If I plug the numbers into my cash flow calculator, I am making over $300 per month in cash flow with my private-money loan. That loan has much higher interest than a bank loan, and I planned to refinance the property with a lower rate loan once it was rented out. If I put 20% down on a commercial loan amortized at 25 years, I would be making $400 more per month! That is over a 30% return on my money.
What is different about my commercial rentals compared to my residential rentals?
I have learned a lot about commercial real estate. I have learned to be patient, as things seem to take much longer for everything. I have also learned financing is much different. I would get 5- or 7-year ARMs on my residential rentals with a 30-year amortization. There was no balloon payment on those rentals, and I had to put 20% down. With commercial properties, I have to put 20 or 25% down, and there are no 30-year amortizations available. Some lenders have said they would do a 25-year amortization, but most will only do a 20. The loans have a 5-year or 7-year fixed rate period but also have a balloon payment at the end of that time. That means they can call the loan due after 5 or 7 years if they wanted to.
Once nice thing about using private money on this property is if I wait 6 months or a year to refinance it, I should be able to finance 100% of the purchase price since I got such a great deal on it. With the property renting for $1,500 per month, it should have no problem appraising for $150,000 or more. Another nice thing about commercial properties is the tenants pay almost all of the expenses. This tenant pays all the utilities, the maintenance, and in some cases, even even taxes and insurance. The tricky part about commercial real estate is it can take a very long time to find tenants, and some may want you to fix up the property for them.
Sorry I do not have more pictures or a video of this property. It is being used by the tenant as an active business, and I have not even been inside of it for 11 months! If he moves out or I get a chance to inspect it, I will take more pictures and a video. You can see the videos of my other rentals on my YouTube channel. I also just got a $2,100,000 offer accepted on another commercial property last week. If that deal goes through, be ready to gets tons of information on that property.