[0:00:13.9] MF: Welcome to the InvestFourMore Real Estate Podcast. My name is Mark Ferguson and I am your host. I am a house flipper. I flip 10 to 15 houses a year, I own 13 rental properties, with a goal to buy 100 by 2023. I’m also a real estate agent. I’ve been licensed since ’01, I run a team of nine and we sell close to 200 houses a year.
So on this show, we like to interview house flippers, landlords and the best real estate agents in the business. So stay tuned for some great shows, if you want more information on my rentals, on the numbers, how I buy properties, check out investfourmore.com.
[0:00:58.9] MF: Hey everyone, it’s Mark Ferguson with InvestFourMore. Welcome to the episode of the InvestFourMore Real Estate Podcast. Today, I’m going to be talking about commercial properties. I have bought four commercial properties this year, 2017. Even though I don’t really plan on buying any. I planned to try and buy a really big one but bought four smaller ones. So my home investing strategy has changed recently for number of reasons that are in my control and also beyond my control.
So, we're going to talk about all about the commercial properties, why I’ve been buying commercial, why I like commercial, and what my plans are for the future, as well as a big multi-million dollar commercial property I have under contract right now. Hopefully, I can talk a lot more about that the start of next year but I can give you some insight on what’s going on with that property as well.
So, before we get started, of course, check out my books on Amazon. They've all been doing really well and they’ve been a huge source of passive income for me myself, which is kind of cool. For rental properties fix and flip, being an agent, mindset, negotiating, I’ve written books on all those subjects that give a lot more depth and insight than what I can give on one podcast or one article. So, make sure you check those out.
All right, so, my first property that I bought in 2017 was a small little shop. So, I don’t know if I even consider that a commercial rental because I’ve been using it to store my Mustang and then our supplies for our fix and flip properties. We’ve got 22, we’ll actually 21 flips going now. We just sold one today. With those flips, we have a lot of supplies that we'll buy from Home Depot in bulk — carpet, flooring — and having a place to put all that has been awesome and saved us a ton of money, because we can buy in bulk and it made it really easy for contractors to pick up stuff and get things and have place to store extra supplies and extra appliances, things we have laying around.
So, that’s been super nice. But it wasn’t really something I planned on doing this year. It was just kind of out of the blue. A friend of mine had a small little shop, like a thousand square feet, but has really tall 20-foot ceilings, called me up and said, “Hey, I want to lease my little shop I've had it in a few years I don’t need it anymore, can you help me sell it as an agent?” And I thought, “Hey, this would be perfect for me.”
So, we talked and negotiated over text message, which I love to do. Ended up coming up with a deal where, you know, he didn’t have to pay commission to have any agents involved and I got a little better deal because of that. So I ended up buying this little shop for $72,000, ended up putting all my stuff in there, had an extra place for cars since I've kind of, run out of room at my house. It is a win-win situation. Now, it’s still a rental property I feel, because I had some storage units before that, that I was paying for, for some of my supplies and I was able to get rid of those, save a bunch of money and own a piece of property instead of paying for a storage unit.
So win-win for me and if I ever decide to get a different place, store my materials somewhere else, this place would rent for $800, $900 a month probably and cash flow, make money right away. So, it’s not just a good business decision but it'll be a good investment if I do decide to rent it, it would make me money. So, that’s kind of the first one that fell onto my lap this year. Not something I was really expecting, but a really cool little, you know, asset to have. It's been really convenient and very nice for the business.
Another one that I ended up buying was a bigger commercial property in a small town, 7,500 square feet. That was commercial or rental property number 19, if you guys want to look it up on the website and that one again, randomly, I was looking on the MLS, I saw this place it has it's price changed a bunch, it had been on the market for a while. It had gone from $500,000 to $450 to $400 and I ended up buying it for $292,000.
So, I thought that was a great deal. Again kind of a cash flow playing where we have to fix it up a little bit, get some tenants in there, it's got value ad potential. It’s got an unfinished basement that we could possibly finish, add more units to the property, make even more money and that’s been a really cool property to work on. So you can see all the details, if you look up rental property 19 on my site or go to Resources on the InvestFourMore Blog, and under that I’ve got my rentals, which list all my rental properties right now with links and videos and so, that property has been kind of an exciting one to buy.
Another one I bought was one I just closed on a couple of weeks ago that actually got under a contract in January. This is rental number 20 and that one was an MLS deal, were it popped up for $110,000. I saw the price, I'm like, “Oh, man, there's nothing for sale that cheap.” I wasn’t even looking for a commercial property then either, but I'm like, "Man, it's so cheap". Did some research, checked it out, I figured it'd rent for at least $1,500 a month, maybe more. Put an offer in the first day, got it under a contract. They had a ton of IRS tax liens on the property, so it ended up taking 11 months to clear the close. But we finally bought it last month and the owner, which is a furniture restoration business, is renting it back for me for six months now for $1,500 a month.
I'm super excited to have that immediate cash flow, rents for — I mean, I think I can get more rent if I had a new tenant in there, but he's already there. I don’t have to do any renovations, do any fix up, and he will be paying me that rent plus all the utilities. So, that one will cash flow extremely well too, and all these properties I think are worth a lot more than I bought them. Once I get them rented, once I get cash flow coming in and the bank sees that, the value will be much greater than what I paid for them.
Then, finally the — another property I bought this year, I bought on Facebook, which is interesting. One of my contractors sent me a text and said, "Hey, I just saw this place on Facebook, thought you might be interested.” And I was a 1,600 square-foot shop for $79,000, which is again, incredibly cheap. Called the guy, set up an appointment, he had like, 17 appointments set up in two days, ended up getting 8 offers on it, told me he is accepting, you know, the best offer, wasn’t going to tell anybody else what the other offers were. So had nothing to go on, but I knew the place was worth a lot more than $79,000. I offered $101,250, I got it, we closed on it.
We just finished fixing it up a little, painting it, cleaning it up. Again, those videos are on the blog if you look under my rental properties. That property I think, will rent for $1,300 to $1,500 a month. We've kind of, just started trying to lease it and have had quite a bit of interest in it and again, took very little work.Took like, $7,500 to fix it up. Will cash flow great. Once I get a tenant in there, it's very low maintenance usually with commercial. So, I’ve kind of gone all-in with these properties. It's been fun, exciting, to see them and, yeah, hopefully they become a good investment. Because really, the only one I have rented right now is the one where the owner’s renting it back for me for $1,500 a month and I know some of the risk with commercials that takes longer to lease, can be more expensive to lease if the tenant wants you to fix things up, properties can be vacant for a while.
But, now the real question, why did I switch from commercial to residential? Or from residential to commercial, I should say? The first 15, 16, rental properties that I bought were all residential properties. I’m an expert in residential, I’ve been an agent, investor in residential properties for 15 plus years. So I’m familiar with residential, I love residential, I know how to get really good deals on residential, as you know I have 20 some flips going, I have to get really good deals on those to be able to make money flipping.
But the problem was the market here in Colorado. You know, I'd made a plan in 2013 to buy a hundred rental properties by 2023. That’s kind of my 10-year plan; how to buy all those properties, create a ton of cash flow, a ton of net worth, a ton of equity, and it was going pretty well. You know, little behind this aggressive goal. I love aggressive goals. But in 2015, I found myself stretching my criteria, buying older properties, properties with not as much cash flow in neighborhoods I wouldn't normally buy in to keep buying rental properties. And, the biggest problem was prices in Colorado were astronomical. I mean, just insane.
In 2011, 2012, the median price in Greeley, Colorado, where I’m at, was about a $110,000. Now, for a couple of years we'd had super low inventory, the foreclosures were drying up at that time. But, prices had not gone up, we just shrinking inventory. Well, 2013, they started to shoot up and from 2011 and 12 and that, right around there to now, which is the end of 2017, prices went from $110,000 to $290,000 for a median price. So, they've almost tripled in 6 years, 5 years.
It’s been crazy. It’s been awesome for the rental properties that I own, it's been great for some of the flips I own that I've had a longer time. But at the same time rents have gone up maybe 50% at the absolute most. So, some of the properties I had rented, you know, like the first rental property I bought, I bought for $96,000 at the end of 2010. That was a really good deal at that time, and I rented it for $1,050 to my first tenant. So, that was a cool, really awesome experience, obviously. But, now that property I still have it, is probably worth $280,000 in that range and it rents for $1,500 a month.
So, as you can see, the value increased, you know, more than doubled, you know, a lot more than doubled. But, the rent only went up 50%, less than 50%. So, the numbers, the ratios, just aren’t there to cash flow anymore. Even if I’m getting super amazing deals, you know, the properties I was buying before, I was buying for $100,000, doing some fix up, renting them for $1,200 to $1,300 a month. Now, those same properties, if I was getting super awesome, like amazing deals, I'd be buying them for $200,000, doing some fix up and renting them for $1,500 or $1,600 a month. It’s just — it doesn’t make sense. You’re losing money with those ratios.
So, I stopped buying rentals, I didn’t – you know, I had that goal to buy 100 but sometimes goals have to change, strategies have to change. You can’t predict everything. So, I took almost a year and a half off from buying rentals, focused on the flipping business. I went from flipping, you know, 8 houses one year. Now, I’m going to come close to 30. I don’t think we’re going to quite get the 30, which was going to be really awesome if we did. But I think we're going to fall short of that this year. But still, you know, takes a ton of money to flip that many houses. So, I’ve taken the money I was investing into those rentals, put it into the flipping business.
But now that I've found, you know, I either wanted to buy out of market with my rentals, find a new market different area, I went to Florida. Or second thought, is buy different types of rentals here. A lot of people ask me, “Why don’t I buy a multi-family?” Well, multi-family is just as expensive in Colorado as single family. The numbers are not good, cap rates are like 5 or 6% from multi-family properties, really hard to make any money on them. So, even if you go in the bigger apartment complexes, it doesn’t get much better.
So, what I ended up doing is stumbling upon some commercial stuff, I’ve been interested in commercial for a long time just because I knew there’s no shop space available in the area, very low vacancies for small, kind of, warehouse shop spaces. So, I'd always had this goal of buying a really big warehouse, split it up in a bunch of small shops and rent it out. That was extent of my commercial, you know, goals. Then, I kind of stumbled upon these other smaller cheaper rentals and the numbers are so much better, as I was telling you. You know, I’m buying for $100,000, $110,000, renting them for $1,300, $1,500 a month where, if this is a residential property, I'd be buying it for over $200,000 to get that same amount of rent plus putting much more money into repairs and fixing it up. So, I’m just making much more money.
Now it’s obviously there’s more risk in commercial usually because everyone needs a place to live. If the economy goes bad, not everybody has to have a place for their business, you know, they can work from home, they can make things work. But at the same time our economy is doing fantastic, really low unemployment rate and there is a shortage of commercial space, small spaces like this. So, I think there’s a ton of opportunity here that’s kind of what I’ve been shooting for with my commercial stuff and, you know, the biggest question was, “How hard is it to lease? How much money do we have to spend to lease? What's that process going to be like?” And, so far it hasn't been too difficult for the ones I've tried to lease but, you know, I haven’t tried to lease a lot of them, yet. So, that will be a big question.
The other weird thing about commercial real estate is, you know, dealing with these bigger projects, which I will talk about here soon and even some of the smaller ones, it is just a different game than residential. The commercial brokers are very different, the sellers are different, everybody has to be extremely patient, you now, I’m so used to working really fast, getting offers in the same day. Getting, you know, not doing an inspection, not doing any of this closing at 15, 20 days, you know? With these commercial properties, it's like everybody’s kind of walking through concrete cement to get this done, to get contracts signed. It takes a couple of weeks sometimes, to get your loan, it takes two, three months, to do inspections, it takes 30 days. It's just really hard for me to be that patient. But it’s been a learning experience and it’s been fun at the same time.
So, this new adventure and commercial, has been exciting, has been fun. I did not know everything about it before I started buying properties. You know, I just kind of had to jump in with both feet and like to say that the best way to learn is just to do it. I’m sure I've made some mistakes and learned what not to do next time. But at the same time I also knew that these were good deals that if I bought them right, you know, cheap enough no matter how many mistakes I’ve made, it's probably still going to work out as a good deal in the long run. And, that’s kind of how my attitude has been with rentals and flips as well. It's just, if you buy them right, you’ll usually be okay in the end. But, if you don’t buy them right, you can get yourself into a lot of trouble.
All right, so, the bigger properties are the more exciting ones, I know, for a lot of people, but there are also a lot more stressful. So, I had a property under contract earlier this year. It was 280,000 square feet, a big old, kind of, warehouse manufacturing facility, two floors, had 20 acres, a bunch of, not water rights with it but a huge water tap and I ended up getting that under contract. It was off market, got it under a contract for a couple of million and my plan was to split it up into small spaces like I said, actually make a drive-through, through the building, but the project died mostly because the property had been vacant for like 15 years and people vandalized it, all the electrical wires were ripped out, the plumbing was bad, the roof may — had some issues, almost all of the 200 and some windows in the building were broken.
Landscaping was non-existent, road access was a problem, and in the end I had two contractors bid, you know, my dream, my thoughts, for what this property could be. Which included, you know, doing a bunch of walls, drive-throughs, had to completely redo the entire heating system, air conditioning, redo all the electrical, redo the plumbing, and it came to $5 million dollars to renovate this building for both bids. So, that was a little higher than I thought was going to be, but still could have been workable. Because this property's probably worth 15 million dollars if it was fixed up and performing but it would take a really long time to get all the work done, to get it rented out to get it to that point and really what the killer deal was the sellers had leased part of that land to another business and destroyed the access to the property.
So, it’s really almost impossible to get a decent road to the property and that lease was three years long. So, I have a feeling that maybe holding that property for a very long time until that lease expires or they figure something out and create new access to it because it’s just — it’s a mess. So, that was the start of the year I had it under contract for a few months, you know, did a lot of due diligence with the contractors. I even drew out architectural designs for my plan, talked to lenders about financing, all kinds of things. Had some partners who were lined up, but really the repair cost and the access issue is what killed that deal.
But, it was a huge learning experience, really fun, and I actually took a ton of videos of it when I was working on it. I want to go back and do a video now showing what the property looks like and I’ll – when I get that all together, I'll post it up and kind of write a full story about that property and that project and what happened. But that might take some time for me to get out there and actually do it. So, look out for that it will be coming eventually. The other big commercial property I have is one I just got under contract last week. It’s another multi-million dollar property 70,000 square feet. It's got a grocery store, restaurant, a coffee shop, kind of a little smaller business as well and 8,000 square feet of vacant space.
So, this one, a commercial broker who I'd been working with brought it to me, I’m giving up my commission to him. So, he's double-siding it, it's one great way to get deals if you have a couple of people who are connected and have some pocket listings. This one, I think is going to be really awesome deal as well. I have a partner, first time I've partnered with anybody in four to five years since I stopped working with my dad. So, that will be interesting. But, you know, big project, we're financing with a local bank here, putting 25% down. It’s right now at about a nine cap rate. So, it makes a good amount of money every month and that doesn't include the upside of being able to lease out the 8,000 square feet that’s vacant and we've got some escalators built in for the businesses who are currently there. So, their rent will continue to go up every year as we own the property, as well.
So, we literally just got our contract, we're going to do some inspections some work on that, due diligence, but that one set to close start of the year, everything goes through, everything goes great, obviously I will be talking a lot about that property doing some videos, case studies, showing you what is going on there. So, again that’s another really cool project I’m working on now. That was a goal of mine in 2017, was to buy a 50,000 square foot or larger building. So, I’m not going to do it in 2017 but it might be done in the first month of 2018. So that’s pretty close. It’s been really cool, too, to be able to buy rentals again. Like I said, you know, I was kind of disappointed when I had to stop buying rentals. My goal was put on hold I wasn’t making any progress, I even sold a couple of properties that weren’t my favorite because the market had done so well.
But, now things are kind of getting back on track again. I don’t know if I will get to a hundred properties in, you know, by 2023 especially since I'm buying a really big one, you know, that's got multiple units, multiple tenants in it, multiple units that takes up quite a bit of resources as opposed to buying, you know, 10 other rental properties. It's been, yeah, a great experience with commercial, a lot of fun. I enjoy the idea of commercial renters, it is also easier to evict them than residential. You don't have to go through the whole process you do. So, that’s one nice thing. A lot of times in these commercial properties that tenants will pay all the utilities, plus they do maintenance, plus they might pay taxes, plus they might pay insurance for you.
So, on this big deal that I’m buying is built into the leases that the tenants there pay and share the property taxes on top of their rent. They pay a share of the property insurance on top of their rent. They pay a share of the common utilities on top of their rent. The grocery store maintains the parking lot in front of it. I don’t have to maintain it at all. If something, you know, breaks inside their building, they’re responsible to fix it, not me. Now, if the heating systems or something like that goes out on some of the smaller units, that might be something I’m responsible for. But with the bigger ones those tenants take care of everything.
So, it’s really interesting, you know, seeing how the leases are structured, how things work, and plus the commercial also has much longer at leases, you know, some are 10 years with options for another 10 years. Some are five years and you can really get locked in for a long-term income. Something else that I’ve learned with commercial recently, I had no idea about, was tenant finishes or T.I; tenant improvements. Which, you know, a lot of times the landlords, the owners, will help the tenants fix up properties, fix up for them, spend thousands, tens of thousands of dollars on improvements for the tenants and then sometimes, that's just the cost the landlord absorbs. Sometimes, the rent is raised for it, sometimes the tenants slowly pays it back, there's all types of ways to do it.
You know, in this property there’s the possibility of spending $200,000 dollars on one of the back units get ready for a tenant and that blows my mind that the owner would pay that much to get a tenant in there. Now I know it increases the value of the property; the more rent you have the higher the, you know, income value approaches based on the cap rate. But, it still drives me just really surprising to me how much money can be spent on tenant improvement when I think you can get other tenants in there for less money or just fix things up a little bit beforehand, but there’s a lot of things I have to learn in this game.
So, that’s what's going on that property, like I said, is about a 9 cap right now, which I think is great, because there's one down the street that just sold at a 7 cap, which would make this one worth a lot more then we have it under contract for even if we don’t get anything else rented and of course, there's always the small possibility I may start my own office, which I've talked about before, and move into part of this building.
So, there's all kinds of things going on, my head, all kinds of things going on the end of this year. A little crazy but fun, as well. I’ve got, what? 21 flips going, buying a multi-million dollar commercial property, possibly starting my own office, possibly moving into this building, all kinds of stuff. Plus, I’m going to Disneyland. I'll actually be in Disneyland as you guys are getting this podcast. So that'll be fun.
All right, so that’s all I’ve got for this one on this show. Hope you guys enjoyed it. If you have questions always leave a comment below and I'll respond to you. Hopefully, I can give you a lot more information on this property as things get going after I buy it as well and then I also have that video coming of the other big property I tried to buy in and tell you much more about that one as well when I've got that already.
Alright, thanks for listening, hope everyone has a great holiday season and we’ll be back soon.