Four Tactics to Buy a Large Commercial Property as Your First Investment
Investing in your first property can be a nerve racking experience. Whether you’re house hacking a duplex, rehabbing and renting a single-family, or buying a turnkey four-unit property, the novelty and your lack of experience will make for an interesting yet exciting first couple of months, or even years.
Regardless, most real estate investors start small and either remain that way or gradually progress to larger and larger projects. Brian Murray, who owns over $40 million in apartments and other commercial assets, took the exact opposite approach. Rather than start with a single-family, a four-unit, or even a 20-unit, his first investment was a 50,000-square foot office building.
In our recent conversation, Brian explained four reasons why he was able to successfully start his career with such a large commercial property investment and why you can do the same, regardless of your base skill set.
#1 – Creative Financing: Assume the Loan
In 2007, Brian purchased a 50,000-square foot office building for $836,000, which was his first investment. Since Brian is a go-getter, not only did he go straight for a large property, but he went for a large AND distressed property. “It was in pretty bad distress,” Brian said. “It was less than half occupied. It was not well maintained, but it was very well located.”
Being Brian’s first property, he didn’t have much money and had no prior real estate experience. As a result, he was rejected from the banks and was unable to secure a loan to buy commercial property. But that didn’t stop him. Using creative financing, he was able to get the deal done by assuming the seller’s existing mortgage, which was $730,000.
#2 – Credits for Deferred Maintenance and Discrepancies
For an extra level of creativity, Brian was also able to negotiate credits for deferred maintenance. “One of the things I negotiated was to get credit at closing equal to the value of their reserve replacement,” Brian explained. “They had a couple of other reserve accounts with the bank that I was able to negotiate credits at closing in that amount.”
With the combination of assuming the mortgage and getting credits from the seller, Brian was able to take over the building with very little cash out-of-pocket for this large commercial property investment.
However, Brian didn’t stop there. During the due diligence phase, he uncovered discrepancies between what the contract and leases said and what he actually saw at the property. For example, “one of the things that was wrong was the rent roll. There were tenants on the rent roll that just plain didn’t exist. There were spaces that the rent roll had indicated were occupied that, when I went and actually physically toured the property, I realized they were actually vacant.” Brian was able to get more credit from the seller for things that he discovered during the phase. He said, “It all worked out to keep that initial amount of cash [out-of-pocket] fairly limited.”
This anecdote supports the best ever advice of always doing your due diligence, especially when you’re about to buy commercial property to develop and sell for a profit.
#3 – Pay Attention to Decrease Expenses
One of the main reasons why this commercial property investment was so successful is because Brian was able to quickly decrease excessive expenses and make the building cash flow positive after year one. The two main expenses he cut were the utilities and the salary of the building’s superintendent, which he accomplished in one fell swoop.
At the time of purchase, the property had one employee – a superintendent. The superintendent was responsible for coming in early, opening up, and prepping the space. “That means,” Brian described, “unlocking the door, turning the lights on, checking the bathrooms, doing a walkthrough, and then just general maintenance in terms of landscaping [and] cleaning.” In this particular case, Brian discovered that the current superintendent wasn’t doing a whole lot. In fact, he had a woodshop set up and was doing side work during the workday! “The owners were from outside the area and weren’t keeping an eye on it, [so] the place looked terrible. There was trash all over in the front yard [and] there was no landscaping to speak of. It had really been let go.”
On top of that, the superintendent wasn’t controlling the heating and cooling system. “He literally would crank the air conditioner on high 24/7,” stated Brian. “If the tenants were too cold, they had to open their windows and let some warm air in.” In the fall, the superintendent would do the same with the heat. In short, money was literally being pumped out the window every day!
On Brian’s first day of ownership, he confronted the superintendent. “I asked him how to control the thermostat, and he said, ‘there’s no way to adjust it. It’s locked.’ I said, ‘you can’t tell me how to control the temperature?’ and he said, ‘no, I don’t know how.’ So that was his first and last day in my ownership.” Brian called the thermostat manufacturer and they walked him through how to unlock and program the thermostat.
After relieving the superintendent of his duties, Brian saw a substantial decrease in expenses for his commercial property investment. “I was able to program [the thermostat] so it turned down at night [and] turned down on weekends. By keeping a close eye on that, I cut the utilities bill in half in the first year. By cutting the salary of a superintendent [and] by cutting my energy bills in half right out of the gate, the building turned cash flow positive.”
#4 – Reinvest Profits to Boost Property Value
After decreasing his expenses by cutting both his utility bill and superintendent’s salary and turning the property cash flow positive, Brian didn’t pocket the extra cash. Rather, he reinvested it right back into the property. “That’s another thing I stay true to to this day: I always plow the vast majority of the money back into the properties and keep reinvesting back in. That’s a part of how you build value.”
With the decrease in expenses and reinvestment back into the building, the “property’s probably worth $3 million.” That’s more than triple the original purchase price of $836,000!
Brian’s Best Ever advice is to “think big. Don’t be deterred … Don’t be intimidated by those biggest properties.” He said, “I think people are intimidated by the larger properties, but they really shouldn’t be because, the bigger you go, the more flexibility there is in how you can finance it. There’s a lot more opportunity that opens up to you.”
This advice manifested from Brian’s first ever real estate purchase – the 50,000 square foot office building. During this with commercial property investment, he learned:
- Creative financing techniques to buy commercial property with little to no money out-of-pocket when you can’t secure a loan from a bank
- To negotiate to get credits from the seller for deferred maintenance
- To check contracts and leases against what’s actually happening at the property, and negotiate credits if you find any discrepancies
- How to investigate to find ways decrease expenses
- Reinvesting profits back into the property is how you quickly build your net worth
After applying these lessons, Brian’s more than tripled the value of his first property, and he was able to expand from one property and zero employees to 30 properties and 16 employees in less than 10 years. If you’re interested in commercial property investment, particularly apartment syndications, consider investing with me, Joe Fairless. Just complete this form, and I’ll contact you if you’re a fit for my next investment opportunity.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.