Commercial Property 1 million, what worked for you?

Question

Hello! Please let me know what has worked for you and what your great ideas are.  We own a home with some accessible equity immediately (maybe 75K), have a decent amount in 401ks.  Looking at a commercial property for around 900k-1 Million purchase price.  The location and potential are great, but I don't have 250K in the bank. What did you do for financing?  Favorite lender? What kind of rates am a I really looking at?  Minimum amount down?

Bill Tracy · Answer

My experience is that partnerships almost always come with to much heartburn.  For us, we had many smaller deals that we sold out of to fund a larger commercial investment.  We sought an out of town owner who had owned for a fairly long time (5+ years minimum), and who was losing money every month based on obligations for their note.  We looked for what we considered a good building with low occupancy that we thought we could correct.  Having owned the building for almost six weeks, it appears we were correct.  We have several tenants in the hopper, so to speak, and the cash flow is improving nicely.  We did not finance because the strategy we were using was specifically looking for properties that would not qualify, reducing the competition, and ultimately, the selling price.  This converted to a non financed cap rate of about 8% at closing, then with some swift expense adjustments brought that up to about 11%.  With the new tenants we will be at around 16%, and ultimately at 21% or so fully occupied at a very attractive lease rate.  This obviously does not count market appreciation, which is a bump to the return rates noted.

Erika Noonan · Answer

Will they be looking at income for 2018 only? Due to changes in the property,2019 will be higher producing.

Greg Dickerson · Answer

@Erika Noonan you should check with some local commercial lenders. As long as the property good cash flows, quality tenants in long term leases and has a DSCR that meets their requirements usually 1.25 or higher they will fund the loan. You just need to find the banks that like to lend on these types of small balance assets.

You will need good credit and income but they will qualify the property on the cashflow and the quality of the tenants.

Erika Noonan · Answer

Oh yes, and this is a mixed use property.  Current owners have a few businesses and Airbnb the livable space.

Erika Noonan · Answer

Hey Kristine.  We do have a home in another city we rent as a nightly rental as well.  Yes have thought of patterning, but I've only had examples in my life of things going south with partnerships. I know it can work, but would like to see if there is any reasonable way to make it work without partners.

Kristine Jefferson · Answer

Hi Erika-With no experience you may be able to get a Freddie Mac small balance loan.  However, for you first purchase have you thought about partnering up? You don't want to stretch your finances too thin or put it all in one place.