Buying Commercial Real Estate even when you are broke.

Buying Commercial Real Estate even when you are broke.

I know that when I wrote a title like buying commercial real estate even when you are broke, a lot of people are going to throw the BS flag before they even get past the title.There is a lot of merit to that gut reaction.As real estate investors, we get barraged with fake sales pitches from the guru crowd and fraudulent funders.A lot of those fake sales pitches are tied to finance. In the commercial real estate world finance is as much mystery as it is legend.There are people who claim that you can finance anything.I am here to tell you that, that is partially true.You can finance anything in commercial real estate as long as the deal is good enough, and you have the infrastructure.I have spent that past two years assembling the right infrastructure for my club and I will now explain to you all, how and under what circumstances you can buy commercial real estate in the real world, even if you are broke.

I love to teach people how to buy real estate with no money, but up until very recently that has only been applicable on single family and small multi-unit rentals.I can teach a monkey how to do a subject too deal with no money in his pocket.

What if you have no money and you find a killer deal in commercial real estate?What do you do with that?The guru class will tell you that you need to just go out and raise private money.That all sounds nice but like many of you, I didn’t grow up with a bunch of wealthy friends.My childhood chums are more likely be inmates at a state institution than they are to be private lenders.I can’t call up uncle Bob and ask for a quick loan of a million dollars no matter what the deal is.

The first thing you need is a great deal.If you are trying to buy commercial real estate then you have better not be paying retail price.You need a bargain.Money is not available to you if you deal is average.Average deals are for cash buyers.

To find a great deal, you will need to find a motivated seller.Motivated sellers are usually motivated by some sort of problem.They have a health issues, financial problems, maybe they are facing a divorce, or their mismanagement has caused their business to tank. The sellers problem is your opportunity.

A lot of the techniques that real estate investors use to find motivated sellers in the single family market apply in the commercial real estate world. You can use direct mail, online ads, networking, etc.What makes the search for motivated sellers in commercial real estate interesting is that you can also find great deals on commercial real estate websites.You can find commercial real estate on your local MLS, but there is no true commercial MLS.You can do a Google search for commercial MLS type websites.Sites like Loopnet, Costar, BuyBizSell, are just the tip of the iceberg.There are commercial real estate sites for hotels, self storage, multi-family and more.You just need to find them.

You need to focus your search on anything labeled as “value add”, distressed, under performing, or any other term that indicates a motivated seller. “Value add” is a great keyword.It means that value can be added to this project if you have the money and the smarts to fix the problem.

This next step is very important.Once you have a property with a motivated seller.You need to identify a problem with the property and come up with a solution.This is where we separate the rock stars from the groupies. For example, if you have a 100 unit residential property and occupancy is horrible, then you need to have a plan to get occupancy up to or above market occupancy rates.This plan needs to be based upon reality and magic fairy dust cannot be a component of your plan. Maybe you found a hotel that is in disrepair and the profit has tanked.Then you need to be able to articulate how you would upgrade the hotel, rebrand it, and return the business to its former glory.

If you are going to attract other people’s money to your project, then you need outside proof of your turnaround plan.This outside proof will not come from your buddy from high school got a job at an accounting firm.You will need to pay for a feasibility study. This is basically a fancy book report that says that a third part professional is verifying your belief that this is a good deal. This study can cost you up to $25,000.You will also need to spend a nice chunk of cash to get an appraisal based on that study to get your funding.I know a lot of you just stopped reading because you don’t have the $40,000 that you need to take this to a real funder.Let me help you. You don’t need any money.What you need here is a line of credit and there are companies out there that will give you and your business a line of credit to cover that cost.You need to apply for that line of credit before you need that money, so there is a tiny little catch there.

Before you go charging off into the dark corners of the internet looking for great deals to buy with other people’s money, there is one more criteria that you need to be aware of.Everything that I am talking about only works if your project cost is above $5,000,000.I can go into the reasons for the floor price but who cares.If you want to buy commercial property with no money, then you need to start shopping above 5 million dollars.Simple enough?

With a feasibility study and a appraisal proving that you deal is in fact a great deal, you can no go after 100% financing for you commercial deal. The easy part is the first 70%.You can get that from a bank in the form of a bridge loan (short term) or a mortgage.If you can come up with the other 30% then you are a hero.The other 30% of the financing is what stops a lot of commercial buyers dead in their tracks.

You can easily raise the next 25-30% of the money by taking on equity partners.These are people who will give you money for a verified good deal in exchange for a percentage of your deal.How big a percentage is negotiable. These are very smart people and they will want more than 30% of your deal.For a simple discussion, let’s just say that they want 75%.That might sound like highway robbery in most cases, but let’s be clean you are getting 25% of a $5,000,000 deal, and you have nothing in the deal.That is $1,250,000 in equity for you.Are you willing to accept $1,250,000 in value once this property is paid off, in exchange for the zero that you have into this deal? If you answered no, please stop reading this article and never speak to me in public.

It is possible in this example that you may still be 5% short.That is a big problem if you don’t have the 5%.For this final piece of the puzzle you have two options.You can either ask the seller (remember that he is motivated) to owner finance that last portion for a time that is acceptable to you both.You want the seller carry-back to be at least as long as it will take you get the property performing to market standards and refi out.If you can get him to carry financing above and beyond what you need to cover the gap between the bank and your equity partners, you may be able to get a fat check at the closing table. Don’t focus on that part, just get the deal done you greedy bastard.

Now you have a way to buy a multi-million dollar property with no money of your own. That is pretty sexy.As sexy as that is, this entire plan will fall into the tenth level of Hell if you don’t have a feasible exit plan. Your equity partners will insist upon it.They want their money back.They want a great return, and they want a future steak in this property.They are not dumb.

Your exit plan has to fall into one of two potential paths.You will either get the profit up and sell the property at a new valuation, or you will get the profit up and refinance to pay off the equity investors.You will generally have three years or less to accomplish this feat.

Let’s go back to our minimum deal at $5,000,000 (it feels good to call that a small deal).You have located a great deal and arranged the finances to buy it.Then a year later you have this property up and running.You have increased the net operating income and the new income valuation (A function of NOI and market cap rate) is now $7,000,000.You have raised the value by a paltry 28.5 %.  There is a $2,000,000 profit to realize.You get to keep 25% of that number or $500,000.Not a bad deal for someone with no money.The deal is better with larger numbers or of you and your partners decide to keep this deal and cash flow off into the future.

If you want a review of your project, feel free to contact me

To your success

Josh