I often talk a lot about fix and flips because that is mostly what I do and I love teaching that investing strategy…
My real estate investing business is mostly rehabs and rentals. For the past 5 years or so, I’ve been building a big-profit portfolio of passive cash flow.
So today, let's talk about something different - let's talk commercial investing…
Think multi-million dollar:
- apartment complexes
- multifamily units
- multi-use buildings
- even residential assisted living…
And that last one is exactly what I want to share with you today. I’m going to take you inside a commercial investment and walk you through one of my real-life deals to demonstrate how this strategy can work.
Commercial Case Study
So, I got into a really cool residential assisted living and memory care facility deal.
Quick Sidebar: Memory care is a distinct form of long-term skilled nursing that specifically caters to patients with Alzheimer’s disease, dementia and other types of memory problems. Some assisted living communities/facilities have 24-hour supervised memory care units in a separate area on the premises.
When you’re buying a new commercial building, typically, the property is bought with:
- 80% bank financing
- 5%-6% interest rate
- personal guarantee (could be more than one person)
Why the personal guarantee?
Well, if you’re borrowing $5,000,000… you may not be worth $5M! Meaning, you may not have the capacity to pay the whole loan back on your own.
But that’s the nature of commercial buildings… usually, they’re so BIG that not just one person could pay the loan back.
So, with commercial investing, you really have to focus on the actual deal, your exit strategy, the build-out and operation… and less about your personal assets.
But, that doesn’t mean you can just forget about the personal guarantee – your butt is still on the line for borrowing all that money.
It’s All About Who You Know: Private Lenders
So, if you’re getting 80% from a bank, usually, the other 20% comes from private money lenders.
For this deal, I got $200k from a few private lenders. This handful of lenders each called me back right away when I presented them with this opportunity.
And—for me—a typical percentage I offer my private lenders on this kind of commercial deal is a 10% fixed interest rate on their money. So…
- Your private lender partners (with 20%) bring the equity
- The bank (with 80%) brings the debt
A Few More Deal Numbers…
Let’s look at a few more stats on this deal…
- It’s a 10,000-square-foot vacant medical office building
- I bought the land and building for $300,000
- I’m going to redevelop and reposition it into 24 units of memory care in 20,000 square feet
- Construction should take 8 months
I’m looking at paying $150 per square foot of my redeveloped 20,000 sq. ft., which means I’ve got a total construction cost of around $3M.
But wait, there’s more…
We also have to factor into that overall number the “soft costs” such as:
- prepaid insurance
I’m expecting to bring in $5,500 per unit per month. With 24 units at 100% occupancy, that’s $1,584,000 annual gross.
But, better safe than sorry… so I always make sure to calculate in a 5% vacancy rate ($79,200), which gives me an adjusted gross income of $1,504,800. After we consider a 60% expense ratio for the facility’s nurses, executive director, vacancy, etc., my net operating income (NOI) is $500k-$600k.
Not too shabby.
And, something I really like about this commercial facility is that it’ll be a stable investment—I mean, you don’t see elderly people being evicted.
So, What Happens Now with the Deal?
Well, we get to work...
The property is repositioned with value-add improvements, we do the build-up, lease it out and increase the rents.
See, we want to get this commercial building to its optimal use in the highest possible rent roll.
Then, typically around the 2- or 3-year mark, when the building is leased up and stabilized, the bank construction loan is paid off with permanent financing.
How Do I Get that Permanent Financing?
Well, once the building is stabilized and 75%-85% occupied, I’ll do a permanent refi loan with:
- Freddie Mac
- Fannie Mae
And, through the permanent financing long-term loan, the private lenders are paid back their principal and 10% interest, and the construction loan is paid off.
Why Private Lenders Jumped at this Deal
So, here’s a BIG reason why my private lenders jumped at this opportunity with me…
They’ll get to keep their share of the 20% of the building equity—but they have $0 cash in the deal.
And, when I do the refi, and the building is revalued and re-appraised, the numbers show that my private lenders will get about a 35%-40% return on their investment.
Sweet deal for everyone involved.
This commercial investment is a really cool deal and I’m excited about its awesome potential…
Perhaps you might consider a commercial property deal too.
With commercial investments, you have to know what your exit strategy is on every deal. How do you get out of the building?
You need a solid plan for build-up and lease-up, and you MUST know what your exit strategy looks like.