A Real Good Strategy For Commercial Deals

Hello To Everyone In The DG Family:
I have been receiving alot of really great private messages here, alot of wonderful people, asking great questions.

The main topic of the questions regards being able to actually do this if you are new, have been doing residential and want to move up, etc.

Allow me to say this. While commercial properties bring greater revenues, there is a risk involved, however, if you structure your deals correctly, then you limit the risk.

There is risk in everything you do. There is risk in residential just like there is in commercial.

There are alot of really great strategies that can be used to acquire properties that are commercial. I don't use many of them because I have my preference in the techniques I use.

In a earlier thread, I mentioned the term residential-commercial. Allow me to again, state what that is. Residential-commercial properties are multi unit residential apartment buildings that are 5 units and up.

With commercial properties, there is a term called cap rate. Cap rates are very simple to understand. The higher the cap rate, the better deal you will receive.

The lower the cap rate, the not so great deal you will get. Properties that carry a high cap rate are properties that have issues, such as low occupancy, bad management, a seller who just neglects a property because they don't want to own it anymore, etc.

These are properties that don't have nice amenities, nice grounds, etc.

Properties that have low cap rates have already been made pristine or near pristine and will require a top purchase price.

The goal is to buy a property with a high cap rate, resolve the problems, bring the cap rate down and sell, receiving a higher resell price.

Example. I can buy everyday of the week in Houston, TX properties that are high cap rates, ranging from 10 to 20 cap. This means that they have a problem or a group of problems. These are easily fixed over a period of time.

I can buy these properties for $1,000,000.00 to $8,000,000.00. Once I resolve the problems, these same properties can be sold for anywehere from $7,000,000.00 to $19,000,000.00. They started at a cap rate of 10% for example and I purchased it for $1,000,000.00 and I took it down to a 6 cap and could sell it for $7,000,000.00, for a profit of $6,000,000.00.

I can provide the website of the brokerage that has these same types of deals all the time.

Here is how you buy apartment buildings for example, with no credit and very little money out of pocket.

1. You locate a property where the seller needs to sell. I did not say wants to sell. These deals are everywhere.

2. Look for properties that the seller will seller finance. They are everywhere, and if the ad or listing does not say it, make an offer based upon seller financing.

quick note: Just because the seller or listing says nothing about it, propose it anyway. The way your going to structure the deal, will require the seller to and if they like the terms of your proposal, they will go ahead and do it.

3. You will get a package on the property, including the financials. Often times, they will provide one year prior, ask for the current years income and expenses. Expenses should never be to the point where you cannot pay youirself a salary for owning the building.

Quick Note: If the property generates income of $400,000 and has expenses of $395,000, this is a pass. If it has the same income for example and it could be any number, I just chose this, and the expenses are $350,000.00, then you can pay yourself $50,000.00 per year salary.

Also, the expenses must include debt service payments as well.

4. You will write what is called a LOI. We don't use Purchase offers in commercial. A LOI is a letter of intent. In My LOI's, I spell out all the terms I will buy under. Most LOI's don't get that in depth, mine do.

5. In The LOI, you will propose what is called a LLC BUYOUT. This is where a new LLC is formed to signify the new ownership entity. The seller becomes a 80% majority owner and you, the buyer, becomes a 20% minority owner, just until a point in time that is agreed upon, where you will buy them out and thus become 100% owner.

6. The seller refinances the property as a cash out refinance, and out of that comes their current mortgage payoff and they keep the balance of the monies. The loan is taken in the name of the new LLC.

quick note: Since the seller is a majority owner of the LLC and is signing the loan docs as the majority owner, once you buy them out, the LLC continues making the payments on the loan, because the mortgage company or lender recognizes the name of the LLC and not you.

Also, since the seller is refinancing, your credit or lack of it never comes into question.

7. The seller than carries a second mortgage for the difference between the purchase price and the new loan, and they are bought back into the new LLC after the closing as a minority partner, with their ownership percentage, equal to the amount of the second mortgage, so for examplke, if they refied for 75% and carried a 25% seller held second, their ownership in the new LLC is at 25%.

Now why would a seller do this? simple, they never sold the property, they sold the LLC and the tax liability is low to non existent.

This is it in a nutshell. What did you accomplish? you acquired a property without credit qualifying, a property that is generating income and immediately begins paying you.

You got in without anyone questioning your experience level, because anyone that is smart enough to engineer this type of transaction will be experienced enough for any seller.

I have alot of money, that is no secret, enough that I would never have to employ this strategy, but I still do to this day.

This is the very same strategy I structured for JimmyB and his hotel and he will come to the table with $500.00 and the seller said don't worry about that, but I told him to pay it.

Any questions, drop me a note.