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How I Used Creative (Re)Financing to Make a Small Commercial Property a Valuable Asset

Ben Leybovich
5 min read
How I Used Creative (Re)Financing to Make a Small Commercial Property a Valuable Asset

Over the past couple of years, I’ve written a number of articles in which I followed the progress on an acquisition and turn-around of a 10-unit that I purchase in 2013. I coined this transaction “the Symphony Deal.” In the first article, entitled “How I Bought a 10-Unit With 1.5% Down – A Case Study,” I described the acquisition and my value add strategy. One year later, I updated you as to the progress that has been made in an article entitled “How I Transformed My 10-Unit Apartment Building From Financially Failing to a Stabilized Asset.”

Well, I hadn’t planned on writing a follow-up until next year, but there’s been material change in the status of the building, so even though it’s only been 3 months since the last time I wrote about Symphony, here comes the next installment.

Related: No Money Down Real Estate: The Untold Dangers Every Investor Should Know

Please read the previous articles for all of the details. However, just to set the scene, Symphony is two 5-units sitting next to one another at the end of a dead end street. It’s in a subdivision, which lies in one of the two most desirable school districts in my town, surrounded mostly by SFR and a few small multi-families.

The buildings were constructed in 1980. The units are all 2-story town-homes with two different layouts. The units are all-electric and are sub-metered. The water service is sub-metered to each unit as well. The sewer and garbage are billed to the owner.

I purchased Symphony for $373,500. My financing package included a portfolio note for 70% of the purchase price and a private note for 25% of the purchase price collateralized with a blanket. This left me having to come up with 5%. However, after all of the pro-rations and credits, I needed only about $5,300 out-of-pocket to close. Symphony was bought for $373,500 with 1.5% out of pocket – not exactly 100% financing, but might as well had been.

The portfolio note was a 20-year amortized loan with 5-year re-sets — typical. The private money was on an interest-only 7-year balloon, without prepayment penalty.

Years One and Two

In the first 11 months of ownership, I was able to cash flow a miserable $3,000. I had evictions, turn-overs, and about $15,000 of CapEx.

In 2014, however, I was able to cash flow $12,000. I only had to evict once in 2014, and I cut CapEx in half. I was getting ahold of the delayed maintenance in Symphony. Basically, I cash flowed $1,000/door on an annualized basis on a fully leveraged transaction…

So what’s new?

What’s new is that last week I closed on a refinance of this project. Symphony appraised at $450,000. This meant that I was able to wrap the existing first with the private blanket into one fully amortized loan.


Creative finance is all about being able to get into property without using your own money. For some it is an absolute must since they do not have any of their own money. For me, at this point, it is more of a choice, since what I have is a skill-set and time, and I figure that’s what I can bring to the deals, and that’s enough. Other people can bring the money…

Having said this, I do not have any more balloons in my portfolio at the moment. You see, you cannot play this game in the beginning without utilizing balloons. Why? Because money to collateralize an acquisition can come in the form of either equity or debt. Debt is a lot easier because it’s secured, and as such, offers much more recourse to the investor.

Equity (partnership) is all based entirely on track record — folks are more so investing in you, not the project, and until you have a track record, that’s just hard.

For this reason, if you are at the beginning of your journey, understand that balloons will necessarily be a part of the game. Now, there are ways to do it (and ways not to do it), but now is not the time for this discussion. Just understand, when you sign on a balloon, you need to know how you’ll get out (there are three ways of getting out) before you get in!

And understand something else: there is a time in your career to do balloons, and a time not to do them. Balloons indeed add substantive risk to any transaction, which must be discounted in your underwriting model and business plan!

So balloons were necessary for me, but I’ve got none left. And I am quite content with this fact.

2015 Projections

First, this refinance lowered my monthly debt service by about $135/month. This is $1,600+ of annual cash flow that I didn’t have to work for.

Secondly, a stabilized 1980 building should — all-electric, and without central AC — not need $7,500 of CapEx every year. I’ve replaced all roofs and a lot of the flooring, appliances, and plumbing. If I can run this thing on $5,000 of CapEx in 2015 ($500/door), there’s another $2,500 of cash flow.

Symphony hadn’t had a vacancy in 6 months; it is stable. In short, I anticipate cash flow in the range of $15,000 – $16,000 in 2015 and on.

Finally, and this is just a side-note, my new debt is $351,000, which means that I get to stick $100,000 on my balance sheet. But that’s incidental…

What’s the IRR?

Well, to answer this question, I’d have to anticipate an exit — which is fine, but what the hell am I going to do with the money if I sell?! That’s a real problem, you know. In 5 years Symphony will put as much in my pocket via cash flow as it would if I sold for capital gains, and considering I have no money in the deal, even if adjusted to NPV (net present value), those cash flows are more than anything I can do with the proceeds from the sale.

Related: The Book on Investing in Real Estate with No (and Low) Money Down

But, just for conversation’s sake, let’s figure out the IRR if I were to sell in 2017, a 5-year hold. Let’s presume a sale price of $425,000 – $25,000 under the current appraised value. Let’s also assume cash flow’s going forward of $12,000; though, as outlined above, it is reasonable to expect that Symphony can do better. Finally, let’s not take into account any principle pay-down over the next three years, since if I did that, I’d have to also recapture depression to be fair, and that’s more than I want to get into here.

Thus, Distributable Capital = Sale Price – Starting Balance + Cash Flow for that year:

Screen Shot 2015-03-17 at 1.50.42 PM

The cash flows look good. The capital gains on the backend look healthy as well. But what drives the IRR is the fact that the initial capital was so low — $5,300. Does no money down work?

This Transaction With 25% Down

Here’s what those numbers would look like with a 25%. Notice the initial contribution is now $93,375. However, the cash flows are up by $7,000 across the board due to the fact that the starting debt is lower, and so is the debt service:

Screen Shot 2015-03-17 at 1.50.58 PM


While 24% IRR is extremely attractive, it clearly cannot compete with 100% leveraged IRR.

But, again — if I did sell, what would I do with the dough that can generate better returns on that equity? I’m sure that someday someone will make me an offer that I can’t refuse, but for now, $12,000 – $16,000 of cash flow works well for me.

No money down, baby…

What are your thoughts on structuring commercial deals in this way? Do you still have doubts about no money down investing?

Leave your opinions below, and let’s discuss.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.