Add to the Portfolio or Swap

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Add to the Portfolio or Swap

Mark Sullivan
Member since 2021 · 7 posts · 4 votes

Looking for some input on how others would approach this situation. 

Currently own two properties under different LLC.

LLC "A" has a commercial property, no loan/debt, with a 15 year NNN left on it valued at 5-6 Million (recently a broker offered us this if we were interestd in selling). The profit is 200k per year with this LLC but only has 1 tenant.

LLC "B" owns a multifamily 2 unit in a highly desireable location. Both Units are rented out, value of property is more than $900k. Property has no loan on it or debt.

Owning the multifamily has it's challenges as everyone knows when you compare NNN to multifamily. I'm more willing to move off "LLC B" property because of the work required to keep this going.


The question: A commerical property in a highly desireable location which could fetch $6+ million and generates about $400k after expenses became available and I'd like to add to our portfolio instead of doing a 1031. The unit has 7+ units and is mostly rently. The leases look like (3) 10+ years and (4) 2-4 year leases

How would you approach and I know there's going to be different schools of thought and that's what I'm looking for. And maybe the answer is it can't happen without selling both to get this one. But love to hear from others

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Tim DelaneyPro Member
Buffalo, NY · Member since 2018 · 790 posts · 530 votes
1y
Quote from @Mark Sullivan:
Quote from @Tim Delaney:

One missing piece of info here is how much cash you have available to invest at the moment.

My initial thought was sell LLC B and hopefully you have a few hundred thousand available on top of that to buy the new building. If you don't have the extra cash, can you get creative with a private lender or partner stacked on bank debt? The problem is that your debt payments are going to basically wipe out that $400K profit unless there is room to increase revenue or reduce expenses. You say that it is "mostly rented" - is that $400K a pro forma assuming 100% occupancy? Or is that actual so you have the ability to add more to the bottom line?


 Thank you Tim for the response. Figured there would be a few data points left out of the equation' that I would need to circle back with :) .

There are additional units not rented at this time which could be rented to increase the income. I'm not factoring this in right now, going based on the numbers I see.

Definitely able to put down additional funds to be creative with a lender, at the numbers you are thinking. Trying to figure out if the juice is worth the squeeze. 

While the debt would whip out most of the profit for 'x' amt of time, it would seem to be logical to take on the risk at a net zero income for x amt of years if after that point, the cashflow is all positive. I'm really looking to add to the portfolio not do a 1-1 or 2 for 1. 

But THANK you for you information and hope to continue the conversation. 

 If you are trying to continue holding the other two properties then you should pull out some equity in the form or a cash out refinance on one or both or use a portfolio loan as @Jimmy Murray suggested. Use that as a downpayment on the new larger asset. Just make sure the other two assets can still cash flow with the debt you put on them.

I have an 10 unit commercial property that is basically cash flow neutral because of large Capex expenses that come up every year. I would not necessarily advise being cash flow neutral or negative before you account for these types of things. Mine may be different though because I am still responsible for HVAC and many other large items on the property. That said, if you can afford it and have the reserves, and more importantly think you have a decent chance of increasing revenue with the vacant units then I'd probably go for it.

Podcast Guest on Show How to Buy Yourself a 6-Figure Income Stream
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  • Tim DelaneyPro Member
    Buffalo, NY · Member since 2018 · 790 posts · 530 votes
    1y

    One missing piece of info here is how much cash you have available to invest at the moment.

    My initial thought was sell LLC B and hopefully you have a few hundred thousand available on top of that to buy the new building. If you don't have the extra cash, can you get creative with a private lender or partner stacked on bank debt? The problem is that your debt payments are going to basically wipe out that $400K profit unless there is room to increase revenue or reduce expenses. You say that it is "mostly rented" - is that $400K a pro forma assuming 100% occupancy? Or is that actual so you have the ability to add more to the bottom line?

    Podcast Guest on Show How to Buy Yourself a 6-Figure Income Stream
    0Reply
  • Michael DiossaPro Member
    Investor · RI · Member since 2023 · 191 posts · 163 votes
    1y

    @Jimmy Murray might know more.

    1Reply
  • Jimmy MurrayBusiness Member
    Investor · Warwick, RI · Member since 2013 · 220 posts · 119 votes
    1y

    @Mark Sullivan have you researched portfolio loans? 

    It sounds like the commercial property you are looking at is a slam dunk. 

    Based on how I am reading your summary it sounds like there is solid equity in the 2-family in order for a bank to cross-collaterize assets. 

    [email protected]401-829-1533
    Lyon Property Group4.5632 Reviews
    WebsiteView Page
    1Reply
  • Mark Sullivan
    OP
    Member since 2021 · 7 posts · 4 votes
    1y
    Quote from @Tim Delaney:

    One missing piece of info here is how much cash you have available to invest at the moment.

    My initial thought was sell LLC B and hopefully you have a few hundred thousand available on top of that to buy the new building. If you don't have the extra cash, can you get creative with a private lender or partner stacked on bank debt? The problem is that your debt payments are going to basically wipe out that $400K profit unless there is room to increase revenue or reduce expenses. You say that it is "mostly rented" - is that $400K a pro forma assuming 100% occupancy? Or is that actual so you have the ability to add more to the bottom line?


     Thank you Tim for the response. Figured there would be a few data points left out of the equation' that I would need to circle back with :) .

    There are additional units not rented at this time which could be rented to increase the income. I'm not factoring this in right now, going based on the numbers I see.

    Definitely able to put down additional funds to be creative with a lender, at the numbers you are thinking. Trying to figure out if the juice is worth the squeeze. 

    While the debt would whip out most of the profit for 'x' amt of time, it would seem to be logical to take on the risk at a net zero income for x amt of years if after that point, the cashflow is all positive. I'm really looking to add to the portfolio not do a 1-1 or 2 for 1. 

    But THANK you for you information and hope to continue the conversation. 

    0Reply
  • Mark Sullivan
    OP
    Member since 2021 · 7 posts · 4 votes
    1y
    Quote from @Jimmy Murray:

    @Mark Sullivan have you researched portfolio loans? 

    It sounds like the commercial property you are looking at is a slam dunk. 

    Based on how I am reading your summary it sounds like there is solid equity in the 2-family in order for a bank to cross-collaterize assets. 


     I have not, what can you suggest are pro's and con's going a portfolio loan? Do you have personal experience with these?

    0Reply
  • Jimmy MurrayBusiness Member
    Investor · Warwick, RI · Member since 2013 · 220 posts · 119 votes
    1y

    @Mark Sullivan if you are a buy and hold investor these loans work great. The struggle comes when you plan to sell, pay close attention to how the bank would treat the loan in the event you would sell.

    Even though its a bit more work, banks are typically open to these loans as it provides them with additional collateral in the event of default. 

    [email protected]401-829-1533
    Lyon Property Group4.5632 Reviews
    WebsiteView Page
    0Reply
  • Tim DelaneyPro Member
    Buffalo, NY · Member since 2018 · 790 posts · 530 votes
    1y
    Quote from @Mark Sullivan:
    Quote from @Tim Delaney:

    One missing piece of info here is how much cash you have available to invest at the moment.

    My initial thought was sell LLC B and hopefully you have a few hundred thousand available on top of that to buy the new building. If you don't have the extra cash, can you get creative with a private lender or partner stacked on bank debt? The problem is that your debt payments are going to basically wipe out that $400K profit unless there is room to increase revenue or reduce expenses. You say that it is "mostly rented" - is that $400K a pro forma assuming 100% occupancy? Or is that actual so you have the ability to add more to the bottom line?


     Thank you Tim for the response. Figured there would be a few data points left out of the equation' that I would need to circle back with :) .

    There are additional units not rented at this time which could be rented to increase the income. I'm not factoring this in right now, going based on the numbers I see.

    Definitely able to put down additional funds to be creative with a lender, at the numbers you are thinking. Trying to figure out if the juice is worth the squeeze. 

    While the debt would whip out most of the profit for 'x' amt of time, it would seem to be logical to take on the risk at a net zero income for x amt of years if after that point, the cashflow is all positive. I'm really looking to add to the portfolio not do a 1-1 or 2 for 1. 

    But THANK you for you information and hope to continue the conversation. 

     If you are trying to continue holding the other two properties then you should pull out some equity in the form or a cash out refinance on one or both or use a portfolio loan as @Jimmy Murray suggested. Use that as a downpayment on the new larger asset. Just make sure the other two assets can still cash flow with the debt you put on them.

    I have an 10 unit commercial property that is basically cash flow neutral because of large Capex expenses that come up every year. I would not necessarily advise being cash flow neutral or negative before you account for these types of things. Mine may be different though because I am still responsible for HVAC and many other large items on the property. That said, if you can afford it and have the reserves, and more importantly think you have a decent chance of increasing revenue with the vacant units then I'd probably go for it.

    Podcast Guest on Show How to Buy Yourself a 6-Figure Income Stream
    1Reply
  • Mark Sullivan
    OP
    Member since 2021 · 7 posts · 4 votes
    1y
    Quote from @Jimmy Murray:

    @Mark Sullivan if you are a buy and hold investor these loans work great. The struggle comes when you plan to sell, pay close attention to how the bank would treat the loan in the event you would sell.

    Even though its a bit more work, banks are typically open to these loans as it provides them with additional collateral in the event of default. 


     Jimmy  - Thank you for the input, definitely buy and hold. Are there providers you have worked with that you might suggest?

    1Reply
  • Mark Sullivan
    OP
    Member since 2021 · 7 posts · 4 votes
    1y
    Quote from @Tim Delaney:
    Quote from @Mark Sullivan:
    Quote from @Tim Delaney:

    One missing piece of info here is how much cash you have available to invest at the moment.

    My initial thought was sell LLC B and hopefully you have a few hundred thousand available on top of that to buy the new building. If you don't have the extra cash, can you get creative with a private lender or partner stacked on bank debt? The problem is that your debt payments are going to basically wipe out that $400K profit unless there is room to increase revenue or reduce expenses. You say that it is "mostly rented" - is that $400K a pro forma assuming 100% occupancy? Or is that actual so you have the ability to add more to the bottom line?


     Thank you Tim for the response. Figured there would be a few data points left out of the equation' that I would need to circle back with :) .

    There are additional units not rented at this time which could be rented to increase the income. I'm not factoring this in right now, going based on the numbers I see.

    Definitely able to put down additional funds to be creative with a lender, at the numbers you are thinking. Trying to figure out if the juice is worth the squeeze. 

    While the debt would whip out most of the profit for 'x' amt of time, it would seem to be logical to take on the risk at a net zero income for x amt of years if after that point, the cashflow is all positive. I'm really looking to add to the portfolio not do a 1-1 or 2 for 1. 

    But THANK you for you information and hope to continue the conversation. 

     If you are trying to continue holding the other two properties then you should pull out some equity in the form or a cash out refinance on one or both or use a portfolio loan as @Jimmy Murray suggested. Use that as a downpayment on the new larger asset. Just make sure the other two assets can still cash flow with the debt you put on them.

    I have an 10 unit commercial property that is basically cash flow neutral because of large Capex expenses that come up every year. I would not necessarily advise being cash flow neutral or negative before you account for these types of things. Mine may be different though because I am still responsible for HVAC and many other large items on the property. That said, if you can afford it and have the reserves, and more importantly think you have a decent chance of increasing revenue with the vacant units then I'd probably go for it.


     Thank you tim, that's the direction I'm leaning on and it's good to hear others repeat what i'm thinking

    0Reply
  • Jimmy MurrayBusiness Member
    Investor · Warwick, RI · Member since 2013 · 220 posts · 119 votes
    1y
    Quote from @Mark Sullivan:
    Quote from @Jimmy Murray:

    @Mark Sullivan if you are a buy and hold investor these loans work great. The struggle comes when you plan to sell, pay close attention to how the bank would treat the loan in the event you would sell.

    Even though its a bit more work, banks are typically open to these loans as it provides them with additional collateral in the event of default. 


     Jimmy  - Thank you for the input, definitely buy and hold. Are there providers you have worked with that you might suggest?

     @Mark Sullivan I'm based out of Rhode Island so not sure if my providers lend where you are located.

    Biggest thing here, I would look for a portfolio lender. So someone who lends based on deposits and relationships rather than a broker who would sell your loan.

    [email protected]401-829-1533
    Lyon Property Group4.5632 Reviews
    WebsiteView Page
    1Reply
  • Henry ClarkPro Member
    Developer · Member since 2020 · 4k+ posts · 4k+ votes
    1y

    OP.  You need to sit down with someone and do this on paper.  Far too many decision points for a post.

    1.  What is quality of all the tenants on existing and potential?

    2.  What rent escalations are built in?  If none, your losing money, on either the existing or potential.

    3.  Potential. Not fully rented, but in a highly desirable location?  How long have you factored open occupancies?  How much money per unit to refit for a new tenant?  $50,000 or $100,000 per unit?  Is that factored into your returns?

    4.  Are you retired and is this your sole income?  Trading off current cashflow for principal payoff in the future?

    5.  Risk/Reward.  What is the return on the duplex?  It may be your most profitable asset.  If its trouble check on PM.  

    6.  What are true returns for comparison, before or after Income taxes?  Existing $200k on a Value of $5-$6mm is 3.6% on $5.5mm before/after taxes?  Potential $400k on $6mm is 6.7% before/after taxes?  Are these primarily Cash flow or Appreciation type assets?  What inflation factor are you using?  What Rent escalation is in either the Existing or potential assets?

    7.  Cross Collateralization is the best.  This will have a 3/5/7 year balloon and terms get revised.  What interest rate escalation factors will you have?  Do some scenarios to see the impact on your cashflow.  Currently rates on commercial are going up and not down with Fed rate decreases.  If you take a loan at 8% today.  Currently neither of your Existing/Potential are earning 8%.  They would have to add value through Appreciation or principal payoff to make the numbers work.  What happens in 3/5/7 years if it goes up?

    8.  What is your outlook on inflation?  If Inflation goes up to say 8 to 10% at the end of 2025 and stays up for an extended period due to Feds printing cash, you will lose cash value if your rent escalators don't follow it.  Normally you would think your asset value would go up if inflation goes up, but if the Fed is put into a position to print money to meet Fed Interest payments, US assets will probably devalue.  Forget whether any of this is correct.  Point is what is your outlook?  What is your Risk tolerance level? Run your numbers.  You're sitting good right now.  By buying this new asset you will be exposing yourself to risk, which is good if the returns match it.

    0Reply
  • Mark Sullivan
    OP
    Member since 2021 · 7 posts · 4 votes
    1y
    @Henry Clark

    Thank you for the information and time spent responding, VERY HELPFUL! I meant to respond but just got back from a long business trip. 

    Mix of 10 tenants but 2 of them being major franchises with 10+ year (with renewable) leases in place.. Very desirable place with high end shopping. I don't want to get into specifics but we passed on the property for a couple of reasons you mentioned. Risk/reward was not something I was comfortable with after looking at numbers and a few things not grandfathered in if a tenant left. 
    1Reply
  • Dominic M.
    Property Manager · Northern Virginia & DC · Member since 2020 · 157 posts · 69 votes
    1y

    I'm curious, what worked for you when acquiring your first two deals? Did you bring debt or 100% equity to acquire these? 

    Connect with lenders and brokers, see what rates are out there, underwrite the deal and see if it makes sense after debt service. 

    A good lender should be able to piece together a strategy with you, whether that's cross collateralizing or not, underwrite each option with conservative numbers. 


    0Reply
  • Mark Sullivan
    OP
    Member since 2021 · 7 posts · 4 votes
    1y

    First two deals were cash, we were running business out of the locations and had the opprotunity to buy.. no brainer :)

    1Reply
  • Dominic M.
    Property Manager · Northern Virginia & DC · Member since 2020 · 157 posts · 69 votes
    1y

    Love that! i'm happy to help in any way I can if you need any lender, broker, contractor references etc etc 

    0Reply
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