It’s been a little while since I’ve had an opportunity to write for BiggerPockets, but it feels great to be back in the saddle! For those of you that don’t know, my wife and I have had the awesome privilege of hosting our own show on HGTV for the last two years. The show is called Flip or Flop Atlanta and has aired 28 episodes (two seasons) featuring our single-family flipping business based (not surprisingly) here in Atlanta, GA.
When it comes to real estate, I’ve always subscribed to the notion that inspiration produces motivation—and, in turn, action. As such, I’m a big believer in showcasing real-life examples of actual real estate deals in an effort to inspire and motivate other investors in their businesses. Whether it’s implementing a new acquisition strategy or employing a creative sales technique, listening to how other successful investors have structured and profited from a real estate transaction always contributes to my own evolution as a real estate investor.
Because of this, I thought my first article for the beginning of 2019 would be in this same vein. I would like to share with the BiggerPockets audience what I still consider to be my “best deal ever.”
The Deal: Jumping From Single Family to Commercial Investing
It was May of 2013 when a friend of a friend approached me about an opportunity to be a passive investor in a boat and RV storage facility he wanted to build near Atlanta’s largest recreational lake. I didn’t know anything about this guy or about boat and RV storage facilities at the time, but I took the meeting and heard the details on his plans. In all honesty, I wasn’t sold on his new construction project, but I did become more intrigued as to the feasibility of owning a commercial property like this.
Interestingly, that very same week I caught wind of an existing boat and RV storage facility on the other side of the lake that was bank-owned and had recently fallen out of contract with another buyer. Talk about serendipitous!
Being a single-family real estate investor, I honestly didn’t know the commercial space very well. In fact, I didn’t even know where the facility was located! I had just heard rumors of its existence. I quickly found a local commercial agent who specialized in these types of properties, and she was able to hunt it down for me. Amazingly, once I found out where the facility was located, I realized one of my good friends actually stored his boat there. Not only that, I convinced him that we needed to partner on the deal.
We quickly determined the property was on the market for $2.3MM. It was an eight-acre facility with approximately 500 parking spaces, most of which were covered. It was located on a well-travelled road only two miles from multiple boat launches, came with a great office building, and had two convenient gated entrances. Not only that, the bank was actually willing to contribute $70K towards repaving certain portions of the parking lot.
While all of this looked good, the big question in our mind was why the property was only 65% occupied. From what we could tell, the property was producing about $20-22K per month in revenue with about $10K in expenses, which, in terms of cap rates (4-5%) wasn’t all that attractive.
Transforming an Under-Performing Property
Knowing that the property definitely had potential, we put it under contract with a long due-diligence period. Beyond inspections and regular due diligence items, our priority during this time was to determine if it was a solid property that was simply under-performing or something we just needed to pass on.
The big hurdles we needed to address before moving forward on the project were:
- Could we increase the occupancy?
- Could we find more capable property management?
- Could we find financing that would make this project feasible?
Over the course of a few months, we met with the property management company multiple times and determined that their on-site manager simply wasn’t a good fit for this property. Not only did she live in the office (never a good thing), but her book-keeping was atrocious. That said, we actually hit it off with the owners of the property management company and struck a deal where they reduced their management fee and agreed to replace the manager with a more experienced manager. As part of this arrangement, we agreed to own the marketing component, believing that our efforts would produce better results than the previous manager (who had done little to nothing previously).
Related: Your Belief That “You Make Your Money When You Buy” is Holding You Back From the Best Deals
The Financing: SBA Loan
During this due diligence period, we also went shopping for a commercial loan. In talking with the local bank where I do most of my banking, we found out that this particular location qualified for a very favorable Small Business Administration (SBA) loan. Apparently, it was just rural enough to qualify for a commercial loan up to 85% loan-to-value. Talk about hitting the jackpot!
Armed with a plan in place for property management and an SBA loan, we ended up negotiating the bank down to $2.2MM and closed on the property that fall. As part of our SBA loan, we had included an escrow account to make some needed repairs and improvements. We quickly spruced up the property and brought on our new on-site manager to begin cleaning up the books and delinquent accounts.
I wasted no time implementing a very basic marketing plan to increase occupancy. Having come from the single-family world where marketing is our lifeblood, it seemed like a no-brainer to start with the basics: a website, pay-per-click ads, bandit signs, and regular Craigslist ads using a virtual assistant.
Our assumption that the property was under-performing was quickly confirmed. Simply by implementing this very basic marketing plan, our occupancy increased from 65% to 85% in the first two months! We were elated. Not only that, our new on-site manager had cleaned up our leasing processes, began increasing rents and turned the office into a well-oiled machine.
Knowing that our property was on its way to maximum occupancy, our next order of business was to further enhance our cash position in the property. As I mentioned, the loan we put in place was already very favorable with only 15% down. However, we decided to free up some of that cash to invest in other projects. To do this, we went to two of our investor friends and offered them each 5% ownership in exchange for $150,000. This $300,000 actually enabled my partner and me to recover the majority of our original down payment and still retain 45% ownership each.
Over the course of the next two years, we continued to maximize revenue on the property and drove occupancy all the way up to 99%. We had effectively turned this property around, and we were reaping the benefit in monthly cash flow. Of course, as in any partnership, there comes that point where you have to decide whether or not to continue earning income or cash out and find other places to invest your money. Ultimately, my partner and I decided to do the latter.
An $800,000 Payday
We put the property on the market and ended up selling it for a little over $3MM. In just over two years, we took this under-performing, glorified parking lot and turned it into an $800,000 payday!
I have flipped more than 700 houses over the last 13 years and have had a handful of whoppers during this time. However, this commercial project has by far been my best single deal to date.
The best part about this project was that it wasn’t out of reach for a single-family guy like me, and it wasn’t rocket science. I used the same bank that I use to finance single-family projects. I used the same marketing techniques I use in my single-family business. I actually used the same property management company I now use for my single-family houses. I even used investors that I also use as private lenders in my single-family business.
The only difference was that this property happened to be a commercial property that ultimately produced a monster profit.
I hope this inspires you to take massive action in 2019 and find that whopper of a deal that shifts your thinking and opens new doors to larger profits!
What do you think of this deal? What would you consider your best real estate buy ever?