Good Deals are Often Complicated

[Don Konipol]

I’ve always stressed that a thorough knowledge of real estate principles, real estate law, and real estate finance is imperative for a sustainable profitable career as an ACTIVE real estate investor.  Which is one (of many) reasons I believe that these mentorship’s teaching nothing more than one specific “method” are mostly worthless, and often dangerous. 

I’ve had a good number of successful investments in my 47 year real estate investing career, as well as more than a few bad ones.  Here’s a successful one that recently wound up that illustrates that we need to move beyond the simple to structure deals with maximum wealth building. 

5 + years ago I came across a property with 2 retail/warehouse buildings.  The owner had $1.35 million of high interest mortgage debt (hard money at 13%) as was looking to refinance the loans (each building had its own loan) in default.

Building one had main road access, was 12,000 square feet, 90% occupied, rent roll $216,000 annually, with about $40,000 annual operating expenses.  Building two  had recently lost its tenant at 8800 square.

Mortgage Interest for the two buildings was $175,000, debt service about $200,000, resulting in negative cash flow let alone any cash for tenant buildouts for the vacant building.   Further, the owner had personally borrower $200,000 from relatives that was overdue. 

We offered to purchase 60% interest in the properties for $400,000, $200,000of which would go to the owner to pay off his personal debt, and $200,000 would go into working capital.  Once we finalized the transaction, we placed the 2nd property for sale. Within 6 months we sold to a buyer needing warehouse space for $1,050,000.  We paid off the $400,000 loan on this property, distributed $300,000 to us three owners, and refinanced the $13%, $950,000 loan paying down $300,000 to a new loan of $650,000 at 4%.  

With mortgage interest at $26,000 annually down from $175,000 and the same revenue, we now had a positive net income of $150,000.  Our 60% share was $90,000 per year , on a net investment of $200,000, or a 45%annual return.  We enjoyed this return for 5 years, and recently sold for $2,350,000.

[James Jones]

Don, this is such a solid breakdown and honestly one of the clearest examples of why newer investors shouldn’t get stuck thinking every good deal has to fit one “method” or one box.

A lot of people only look for simple BRRRRs or basic flips, but deals like this are where real wealth is built:

• You solved a real problem for the seller

• You structured the capital in a way that reduced risk

• You used disposition on one asset to strengthen the other

• You lowered debt cost dramatically

• And you built a long-term cash-flowing position with almost no competition

Most investors would’ve walked because the surface math looked bad – negative cash flow, defaulted loans, vacancy. But when you understand the underlying levers (debt structure, capital stack, tenant mix, valuation, and time value), you see opportunities others can’t.

This is the kind of nuanced thinking I wish more new investors focused on instead of trying to force every deal into a BRRRR template. Real estate gets easier when your toolbox gets bigger.

Thanks for sharing this, it’s the type of case study that pushes people beyond the basics.