Scalability - How to buy something bigger

[Evan Manship]

I have a question for full-time real estate investors who have purchased mid-size commercial properties (multi-family, office, retail, etc.)

Many of us on this site are investing in single-family homes, some multi-families, etc. I am curious how you scaled your businesses into rolling your profits and expertise into acquiring larger apartment buildings. What advice would you give to investors who are stuck looking into more deals that revolve around residential investing when we want to move up to the world of commercial eventually?

How did you do it and what would you do differently?

[Christopher Telles]

The answer to this question is... it depends.

It depends on how you view risk, where your comfort level is in using leverage, and how creative you are in structuring a transaction.

I can't say it is right for everyone, but I've kind-a-sorta operated in a manner of go big or go home.

My 1st true investment was an SFR i bought with zero $ down on a land contract. I paid $235,000 for this 2bd 1ba home that I converted to a 3bd 2 ba home.

My next deal was two side by side industrial buildings I would have never thought I could afford to buy. They totaled over 60,000 square feet and they had earthquake damage, a tenant in default, and a two year running lawsuit between the landlord and the tenant.

I bought this deal creatively with seller financing. The seller carried a 85% 1st TD fully amortized over 10 years at prevailing interest rates then about 7% if memory serves me correctly. I borrowed the 15% down payment using a HELOC on my home.

The HELOC I paid off rather quickly after resolving all of the issues. I had this property cash flowing within 60 days of closing having resolved most of the legal and tenant issues before my contingency expired.

Now back to... it depends. For a conservative investor who is not comfortable using leverage in the manner that I used it to buy this deal this transaction would never work. If an investor was risk adverse then they may not be comfortable buying a building that has earthquake damage, and impending lawsuits between landlord and tenant. If your not comfortable using creative financing techniques or don't know how then this deal would get put together.

I was comfortable buying this deal because I knew I could execute. I also knew I could back out if I needed to before I got in over my head using my contingencies. The construction and landlord tenant resolution didn't scare me. I listened carefully to the seller and I knew what their hot buttons were. They wanted continued cashflow close to what their rents had been before the tenant quit paying rent. 

The absolvement of seller risk and indemnity from financial consequences (I indemnified and assumed all of the financial risk for the lawsuit between the seller and tenant) along with the increases payments that go along with a 10 year fully amortized mortgage delivered what the seller wanted. The seller didn't know what I had planned so their agreement delivered what I wanted. It was a win win transaction for both parties.

Now, it depends how an investor would accept or reject the above risks and issues. For some they wouldn't, but for others like me the risks are weighed and assessed and then a decision to withdraw or move forward is made. I'm glad I moved forward. This transaction literally cash flowed over $2 1/2 million and increased in value five times its original value over the holding period before it was sold.