Disclaimer: This is a very long post detailing how I acquired a large, out-of-state commercial property. I hope you’ll find it helpful. If you have any questions or feedback, feel free to leave a comment below or drop me a message.
My Cash Goals
Prior to this deal, I owned a duplex and a fourplex. Both properties have appreciated substantially since I purchased and rehabbed them, but produce little cash flow. I have other businesses I work in aside from multi-unit investing. My 18-month goal when taking on this project was to increase my passive income (cash flow) so it exceeded my active income (wages)—an aggressive goal. In preparation, I sold one of my aforementioned properties to raise money for a lucrative multi-family property to rehab and hold onto.
My Search Criteria
- A value-add property (a building that needs work; yet once the work is done, the value increase should exceed the renovation cost, creating equity)
- A max purchase price of $450,000, with a cash flow of at least $4,000 per month upon completion
- 10+ units (the more units in the building, the lower my risk)
Note: Single-family investing is not my thing, but perfectly fine if that’s your strategy.
How I Search
Finding good deals is usually about relationships and marketing. However, I don’t ignore online listings. I search frequently for properties that meet my criteria. In this case, I found an out-of-state, broker-listed, 33-unit property that was listed near my target price.
I read for hours every day, and I know which geographical areas are doing well and which areas aren’t. Of course, I’m not as familiar with out-of-state markets as local investors are, but I do my research and network with area experts when I find an interesting deal in what seems like a good area. I searched in a few states, and in this case, I found a deal in South Carolina.
I called the listing agent to get some information. The property had:
- 33 units spread across 6 separate buildings
- 14 of 33 units rented
- 4 of 33 units completely gutted on the inside
- 15 of 33 units in varying stages of rehab
As a value-add investor, this was music to my ears.
The 14 rehabbed units were 100 percent occupied and collecting rent, providing income to cover a debt payment while completing rehab work. I saw an opportunity to buy this place, complete the rehab, stabilize the property, and gain some equity to leverage for the next deal. The catch, the agent said, would be getting financing for this property, which was best suited to a cash buyer. Banks would be wary of the smaller rental market (around 45,000 people) and the condition of the property. I told the agent to give me a few days to explore some options.
After some market research, I discovered that companies were investing in the area, unemployment was down, rents for this property were well below market, and there was a long waiting list of Section-8 tenants because there weren’t enough units in the city—great.
Validating the Deal
A meeting with my CPA yielded a referral to one of his financial clients. This client was a mortgage broker focused on risky lending. I got in touch with him on Friday evening and had a pre-qualification letter by Saturday morning. Keep in mind it was only a pre-qualification, not a pre-approval (meaning the lender isn’t obligated to finance the deal), but it was a good thing to have in my back pocket nonetheless.
I made a trip, toured the property, and met a very genuine and honest seller who told me exactly what to expect—positive and negative. While I was there, I spent time in the city talking with hotel clerks, gas-station attendants, property managers, real-estate agents, and just about anyone else who would tell me about the neighborhood. I drove up and down every street within two miles and noticed that the local residents really took care of their properties.
Making the Offer
The pre-qualification said financing would cover up to 70% of a purchase price up to $400,000 (this helped with negotiations). It would also cover 100% of renovations. I had enough cash to meet these terms, with enough left over to begin construction and hold onto some reserves.
So I put in an offer of $350,000, which included 30 days to come up with the financing (I anticipated a few bumps). A few hours later, another bidder offered $375,000. Multiple offers—not good. I was willing to pay up to $400,000, so I matched the other offer and put emphasis on my pre-qualification letter. It worked. The seller accepted my offer.
Putting Financing Together
I estimated repairs at $300,000, but I needed a professional to validate my assumptions. I’m not a contractor, and I wasn’t familiar with local prices. I asked for referrals to general contractors from a local lawyer, a regional Real Estate Investors Association president, and the listing agent. Then I scheduled another trip to South Carolina and slotted six local contractors for one-hour walk throughs throughout the day.
In the end, the rehab estimate totaled around $400,000—$100,000 more than I had projected. After further research and discussion, I realized the contractors were high-balling the estimates for four units that needed completely new interiors. They were in a separate building where there had been a fire a number of years ago, and I needed an architect to determine what would be salvageable, how to configure the units to meet current code, and to help get a permit issued; without firming up the scope, it was difficult for the contractors to give an accurate estimate. Those four units represented most of the inflated cost. Meanwhile, the clock was ticking on my 30 days for financing.
Upon further analysis, the seller’s agent pointed out that if I didn’t do any work on those four units, the rest of the property could be completed for $120,000. Worst case scenario, I could bulldoze that building and still easily meet my cash-flow goal. Going ahead with the project still made sense. So I sent the contractor estimates to the mortgage broker, explained the discrepancy, and the broker got to work underwriting the deal.
Selecting a Lender
Unless you’re a cash buyer or have a standing relationship with private lenders, securing financing is likely the most difficult hurdle to closing a multi-unit deal. The referral from my CPA was a solid one. However, from past experience, I knew it was not unusual for a lender to pull out at the last minute—so I made a few other phone calls, just in case.
I called about 25 lenders and brokers in total. Some were from my personal list, some were referrals from my contacts.
- Local Community Banks in South Carolina were a pleasure to deal with but couldn’t help me since I was from out of state.
- Major U.S. banks that I had banking relationships with were just too big for this deal.
- Mortgage Brokers were 50/50: About half said they wouldn’t do this deal because of the construction loan and because I couldn’t put down 30% of the total cost (I was looking to put down 30% of purchase price). The other half said the deal would be no problem.
At this point, five mortgage brokers were reviewing my paperwork, saying they could get this deal done. I was honest with the brokers. I told them I’d spoken with others since I knew the deal was tricky. It’s important not to give anyone…