I bought my 18th rental property in October of 2017 for $292,000 using the BRRR strategy (buy, repair, rent, refinance). It was a commercial building that had 0ver 7,000 square feet. The property was vacant and had been used as a dentist office and doctors office in the past. The property was for sale on the MLS for many months before I made a low offer that was accepted. I thought the property was a great deal, but I also had reservations because I had never bought a commercial property like this in the past. I ended up fixing up the building and renting it to an oil company for $4,500 per month. I was extremely happy to get the place rented out, but that was not the end of my work. I had used a private loan to purchase the property that was only one year in length and had a hefty interest rate. Last week, I was able to refinance the property with a low interest bank loan that lowered my payment and allowed me to get much of my investment back out.
How did I end up buying this commercial rental property?
I was not actively looking for a commercial rental property, but I saw a huge price drop on a property on the MLS (multiple listing service). The property was listed at $379,000, and the price was reduced to $325,000. The property was very cheap considering it had over 7,000 square feet. Most commercial properties in Northern Colorado with that much space would be more than $500,000. This property was cheap because it was vacant, the basement was counted in the square feet and was unfinished, and it needed a little work. I made an offer of $292,000, and it was accepted! You can see of video of the property when I first bought it below.
Rental Property 18.
What was my financing strategy with this property?
I had planned to use a bank loan to buy this property then fix it up and rent it out. I was thrown off when my bank decided they did not want to loan on the property because it was vacant. I was thinking about canceling the contract because of this when I found out I did not have a loan or inspection objection built into my offer! I had my assistant at the time write the contract, and I very specifically said to add a 10-day inspection and 30-day loan conditions deadline into the offer. I was a dummy and did not look at the contract completely before I signed it. My assistant did not add those deadlines because he was so used to my other offers where I do not have a loan condition or inspection deadline. I had put down $10,000 in earnest money, which I would lose if I canceled the deal. I decided to use private money to buy the property and later refinance into a bank loan. I was able to get a private loan for 10%, 2 points, and 90% of the purchase price.
How did I fix up and rent the property?
I had bought one commercial property prior to this one, but the previous property was a very small storage space. I was not sure exactly how to fix up the property because commercial is so different from residential. The property did not show well and was very outdated. I wanted to make it look nicer, but many commercial tenants want to finish a space custom to their business. I decided to paint everything, redo the floors, and make some other repairs to make it look nice and hope a new tenant would not want to change everything. You can see the finished product below:
We spent about $50,000 on the rehab and repairs. While I was fixing up the property, a real estate agent asked me if it would be for rent. He had some clients who were interested in the property and needed a place to rent in the area. We showed the property and ended up leasing it to an oil company for three years at $4,500 per month. I had to pay the real estate agent a commission on the lease, but it was well worth it.
How does the lease work on this commercial rental property?
My lease for the commercial rental property is much different from my residential properties. I had never written a commercial lease before, but I have seen a few of them since I have been looking at a lot of commercial rentals. I could have used a commercial leasing agent to create the lease for me, but I would have had to pay them a commission on the entire lease. Using an agent would have cost me almost $5,000, and I was already paying that much to the other agent. So I used Law Depot to create a commercial lease with all the terms and clauses I wanted. I knew I had the other real estate agent for the oil company looking over the lease if I really screwed things up. The lease was three years long, $4,500 per month, and a gross lease. A gross lease means I pay for most of the expenses like the taxes, insurance, utilities, lawn care, and building maintenance. A NNN lease would mean the tenant would pay for all of those expenses but pay closer to $3,000 per month. The lease was only for the upper floor of the building, so I could eventually finish the basement and lease it out as well.
How was I able to refinance this property?
I was planning to refinance this property at some point since I had a high-interest private loan on it. I knew many banks would want me to own the property at least one year before I could complete a cash-out refinance. I also knew that most banks would want me to have the property leased before they would refinance it. I was also thinking about finishing the basement and leasing it out before I refinanced the property. I talked to a few banks and found one that said they would complete a cash-out refinance based on the new appraised value before I owned it one year. They were the bank that financed my 68,000-square-foot commercial property that I bought in February of this year. I decided not to spend the $50,000 or more I would need to spend finished the basement and hope for a decent appraisal with just the top floor rented out. The appraisal would be $2,500, so I was really hoping it came in close to $450,000.
The appraisal was done, and it came in at $441,000, which I was thrilled with! My lender said they had the loan approved, but there were some changes. I was planning to get a loan with a 10-year balloon payment, a 20-year amortization, and a 75% loan-to-appraised value. The lender said they would only do a 3-year balloon because the lease was only three years long and the loan would be based on the cost of the property, not the appraised value. My cost would be what I bought it for plus my repair costs instead of what it appraised for. I was not happy. I shopped around and ended up finding a lender who would do the original terms I requested and who could use the same appraisal we used. We closed last week.
What do the final numbers look like on this commercial rental property?
This property turned out to be a great investment so far. I was able to refinance much of the cash I spent on it back out; I make a lot of money every month; and I have equity with the opportunity to add value in the future. With loan fees, repairs, down payment, and other costs, I spent about $100,000 on this property. When I refinanced the property, I was able to get back $66,000. My payment is about $2,000 per month now after the refinance. My taxes are $500 per month; insurance is $200 per month; and other expenses equal about $800 per month. I make over $1,000 per month on the property from a $33,000 investment. That is about a 37% return on my investment not counting the equity I have in the property of about $111,000. If I could find ten more properties like this, I would be one happy investor.
For more information on my rentals and strategies check out: Build a Rental Property Empire: the no-nonsense book on finding deals, financing the right way, and managing wisely.