Combining Real Estate and Business for Greater Profitability

[Don Konipol]

I’m not big on THEORETICAL.  I’ve read lots of theory of what could work, but haven’t seen much proof of concept of these theories. So rather than add another “sounds good, has anyone done it” strategy, I’ll merely lay out an actual transaction I completed (a number of years ago), which combined RE and Business for greater profit.

I purchased an auto repair facility at bankruptcy sale for $115,000. For $10,000 more I purchased the equipment, inventory, furnishings in a separate transaction.  I spent $4,000 repairing equipment, and $12,000 on additional equipment. Further, about $1,000 for a thorough “cleaning”.  So, I’m all in for about $142,000.

I then sold the “business only” including equipment, etc. (not RE) to an auto shop operator for $90,000.  I accepted $40,000 as down payment, and a note for $50,000 secured by the equipment, inventory, etc.  More importantly the rent was set at $3,000 per month double net (tenant pays insurance and property taxes, landlord pays for any building repairs).  

So, I've got $40000 of my $142,000 back, I'm "in" for $102,000. Meanwhile, I'm collecting $2,000 per month on the business sale note for 30 months, and $3,000 per month real estate rent for the term of the lease (5 years with 4% yearly increases). Lots of ways to calculate but simplistic is I'm collecting $5k per month on a $102 k investment. Like a 60% annual ROI.

Someone comes along and makes an unsolicited offer to purchase the real estate.  Normally I wouldn’t be interested but they offer $375,000.  The tenant has “right of first refusal” written into the lease (yes, he had legal representation).  The tenant decides to try SBA loan, and is successful.  I collect $375,000 at closing for the real estate, plus the now $35,000  balance owed on the business note. 

I invested $142,000.  I had cash back of $40,000 down payment on the business sale, $27,000 collected in rent payments, $18,000collected in business note payments, $375,000 for real estate sale, and $35,000 balance of note - total $495,000 - on a $142,000 investment - in about 12 months time. 

Next time I’ll tell you how I LOST $75,000 on a “sure thing, can’t lose, no downside” investment.  LOL,