First time commercial real estate deal, lots of questions

3 Replies

Hello All,

I'm fairly new to the website but have been listening to the podcasts for 6 months or so.  Anyways, between my fiance and I we own 4, 2 unit properties (live in one unit) and we're under contract to buy another one.  However I also have a lead on a two properties right next to each other.  They are both 5 unit buildings that are fully rented totally about $4300 a month in rent.  With initial conversations the owner currently wants 400K for both.  This is not in the best part of town although it's getting better.  I was informed by a neighbor that as recently as a couple years ago, the one house was basically a brothel, it's been cleaned up once the neighbors got the police involved but I imagine the tenants aren't the best.   From the outside they are fairly rough shape but guessing with about 10K they could look good on the outside.  I have not seen the inside yet, so this post may be premature.

Biggest issue I have. I don't currently have 25% to put down to finance these units through the bank.   However the owner owns the units outright.  What I was thinking is that I could ask him to hold the note on these with 5-10% down.  This would allow me to make initial repairs without being strapped for cash.   Another benefit would getting him to move down on price, letting him know that he would be making money on the interest.

I believe one of the units has a new roof on there but the other one is getting older.  From the outside both foundations seem decent.  Besides windows, I didn't see anything that yells out to me that would be a huge expense right away.

Between the two houses it's 5 2 bedrooms and 5 1 bedrooms, I don't have the numbers in front of me but he said he's getting between $300 and $600 per unit (most being closer to $300).  I think those are pretty low and could get rents closer to $500 on the singles and $700 on the doubles if not more.  

I guess my question is, how would this all work with the owner holding the loans?  A lawyer would draw up the paperwork?  What can I use as leverage in negotiations?  What hidden costs am I not thinking about (closing costs, commercial property taxes, etc)?  

If I can get him to lower 300 range plus holding the note at 6-7%, I can sell it as I won't refinance for at least 3 years, so he'll get the interest money but within 5 years so he'll eventually get paid in full.  Trying to be a bit creative here.  He said he's 70 so he's looking to sell eventually but not in a rush.  

Sorry this is a bit of a jumbled mess, I'm trying to put all my thoughts out there.

Hello @Gregory Evans , this sounds like a really interesting deal.  I once lived in an apartment complex which was really just two buildings across the street from each other with the same paint job and owner with a small shared community outdoor area.  In other words, seems like a unique way to increase the value of the two buildings by consolidating them as one entity.

So of course first you'll want to find a real estate attorney with experience specifically in deals where the seller holds the note.  They should have no problem drawing up specific terms of the deal to present to the seller.  Not sure what town this property is in but you can just call that local County Tax Assessor and they should be able to give you all the numbers on that.  

As far as other closing costs, THIS could actually be your leverage!  You will both save big money because their is no loan origination fee, no escrow fee, however you will need to work with a title company too formalize whatever your attorney draws up.  Also, the seller may require specific types of insurance to protect themselves but ultimately another bit of YOUR leverage should be that he will have the opportunity to foreclose on you if you don't meet your end of the deal.  

So for your leverage:

-seller avoids some closing costs (YOU actually save a ton of closing costs..)

-seller has the ability to foreclose on you and keep the payments you've made to that point (and the property he would potentially be repossessing would be totally upgraded on your dime

-seller receives steady passive income which may be very attractive to someone that age

As far as other leverage, the most important thing to do would be to find out more about HIS needs.  You can try to find out his goals and shape the deal to help meet them.

I think you could actually get a better idea of how this would work by checking out some of the bigger podcasts videos I've watched recently regarding mobile home investing.  It tends to work similarly where you buy and sell for payments because traditional financing is not an option just like in your situation.  One of the podcasts I was referring to was episode 208 with Jack Baczek as well as anything John Fedro has put out.  

I hope this helped a little.  

Thank you!  @Alex Bekeza .  I'll be sure to look into all this.  I'm hoping to see the place in the next week or two.  I think it could be a big win if I'm able to a deal!

Hello @Gregory Evans ,

An other strategy I would look into is to use a Master Lease to secure the property. Basically you "lease" the whole building and you are allowed to "sublet" the Apartment homes to individual tenants. You structure it so its a NNN deal and you pay for every thing and pay the owner a guaranteed payment. What ever you make above your costs is yours to keep.

If you go this way be sure to have an option to purchase it. Once you secure the property you can start to add value and exercise your option to purchase it once you have the financing for it. 

@Brandon Turner has used this (and other techniques) to purchase his first Apartment. You can read about it in his book titled: How we bought a 24-Unit Apartment Building for (Almost) No Money Down: A BiggerPockets QuickTip Book

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