Help me find my first "cash out refinance" commercial property?

Question

Step 1: Where to find the properties. Obviously LoopNet (CoStar), which I'm told is used by 93% of the top 1000 commercial brokers in the country. It seems like it would be a daunting task to find and contact every individual commercial brokerage. But is it necessary?

Step 2: What to look for? Obviously, I'm looking for something with value-add potential, and probably looking to refinance/sell within 3-7 years. I think it would be rare to find a listing that plainly says "value-add opportunity," so I would need to develop my own skills at recognizing these things. Also, I've been talking to some contractors lately and seems like I could build anything (house, apartment complex, condominium, hotel, retail center) for between $100-$110/sq. ft., so perhaps it would make sense to build at times.

I'm opening my LoopNet app right now. What do I look for? This is just practice so price/financing is not an issue. I also registered for CBRE Dealflow. They asked my acquisition criteria and I don't know what to tell them because I'm still in the research phase and I know they hate time wasters.

Aside from LoopNet, should I just register with a select few commercial brokerages, such as CBRE, Marcus & Millichap, and Cushman Wakefield?

Brian Schmelzlen · Answer

I think you will be overwhelmed if you do not have a solid grasp of what you are looking for.

It sounds like you are looking for a B or C class building so that you would have the opportunity to do some value-add.

Are you looking for office buildings, retail, etc?

How many tenants do you want (1 big one, or a number of small tenants)?

What type of tenants do you want?  If you want primarily medical profession tenants, it will dramatically narrow down the number of buildings that would work for you.  Certain buildings will tend to appeal to other types of tenants; professionals would be interested in different things that retail businesses, etc.

What amenities are important to you?  Do you care if the building has a parking lot?

What location appeals to you?  Are you really willing to invest anywhere in the country, or do you want to invest in Florida?  If you want to invest in a specific state, are you really just interested in a certain city (or even certain areas of that city)?

Finally, what price range are you looking at?

I wouldn't waste a commercial broker's time until you have thought about all of that.

Jeff Kehl · Answer

@Patrick Philip you sound like me. I tell brokers I will buy anything I can make money on and they just roll their eyes. You really need to get more specific than that or you will get nowhere.

Two suggestions.

One, take a hard look at yourself and what sort of experience, skills and passions you have. If you don't like and enjoy real estate just stop right now and find something you enjoy more. It will be more profitable in the long run.

Second, it sounds like you have focused on a geographic area in Florida. That is perfect and coincidentally I think it's a great area.

But you must pick a sector within that. Multi-family, retail, office, industrial, student housing, senior housing, single-tenant net lease? You should look at some of that and decide what speaks to you.

If you do this and you're still in the ' I just want something I can make money off of mode', let me suggest this. I look for things no one else wants.

I'm currently buying medical office and retail because there's a large supply of the former in my market and because the popular media has convinced everyone that Amazon will put the latter out of business.

Those are the kind of things you need to look for. Since you are in Florida let me suggest a few things, senior housing and beach rentals.

JT Olmstead · Answer

@Patrick Philip I was in the exact same boat you are in now, a year ago. I looked at my Agent and said: "I don't care what kind of Commerical Property is it as long as the return is good, it's not MultiFamily, and it's in the State of Arizona".To his credit, he started showing me properties. After looking at several, I realized that I DID, in fact, care about more than that. I put together a spreadsheet and started analyzing deals to the best of my ability. The more deals I analyzed, the more I refined my spreadsheet, the more accurate my calculations were getting.During and after my first deal I learned a bunch of stuff and further refined my model so my expected outcome would better match reality in the future. There are simply too many unknown variables about a property to refine your numbers to 100% accuracy but the more you know about a property, the better your "Guesses" are going to be.As you noted, the down payment requirements on even Small Commercial buildings (< 1MM) are still hefty. It's going to be almost impossible (On Non-Residential at least) to find anyone (Outside of Hard Money) willing to take a Down Payment of less than 30% on a Non-Owner occupied. This is ESPECIALLY true for distressed properties and new commercial investors. It's a double whammy in that department. Add to that the costs associated with TI's and Repairs and you're usually talking about non-inconsequential amounts of money (for most).My first deal was a purchase for 585k and in total, I had to come up with ~300k cash in Downpayments, TIs, and Repairs. That's a lot of money to try and recover when at best you're looking at a Equity Recapture loan of 75-80% LTV after stabilization. You could certainly look at a sale and 1031 to another property in order to recapture more of that money but that adds another layer of complexity and cost.

Jeff Kehl · Answer

"But how do I identify value- add potential, and how do I estimate the "ARV" after improvements are made?"

If this was easy everyone would do it and we'd all be rich :)

But I'm game, here's a few tips.

'Value-add potential' - You need to buy stuff from the bargain bin. Distressed, hated, no one else wants it. This takes guts and is easier when the economy is horrible. It's harder when the unemployment rate is 3.9% and everyone wants to buy property. But there is always something that no one wants. I look at the absolute cheapest property around and ask what else it could be.

Two examples, if you make money please send me a commission :)

1) There are many old factories/industrial properties in rural America these days that you can pick up for way below the cost of rebuilding them. If it is legal, marijuana production is a perfect use case. Just look in the Denver area. Marijuana not legal, think Brewery or growing mushrooms or vegetables like lettuce.

2) Old shopping malls. Best case is a multi-family apartment building but there's also college campus, senior care facility or mixed use.

Need other ideas? I'm full of them, send me a property and I'll give you an opinion.

ARV is somewhat easy. Find what other similar comparable properties are selling for. A good broker will help you with that.

It gets a bit tougher if you're trying to push values in a certain area but you just have to plan for that.

JT Olmstead · Answer

The Jury is still out on that one but it's not looking good for 100% recapture. Based on what I've learned from this deal, however, I think I'll get closer on the next one. The majority of financiers I've spoken to on the matter have indicated that they prefer to see at least a portion of your contributions remain in the deal.

Patrick Philip · Answer

So did you eventually get all your cash back on the refinance on that one?

Patrick Philip · Answer

I think once I got the hang of it, I could make a nice MS Excel spreadsheet that would run the numbers real quick.

Another reason why everyone isn't doing it is because you need MONEY (at least a down payment) to do it. A 20% down payment on a commercial property is pretty damn expensive. You also need the ability to qualify for a commercial mortgage.

Jeff Kehl · Answer

@Patrick Philip one thing to consider is that the market right now is not great for finding distressed properties. You still can but just keep in mind it's easier if you wait for a recession.

I'm a big fan of both methods you mentioned. I drive around all the time just looking at commercial properties. And Loopnet is a very good way to get started. You can also call and talk to some of the brokers you see on there. But one caution I would give is try to narrow your search down more before you do that or your just wasting there time. So pick retail strip centers or small office buildings or something else and start looking.

Two additional methods.

Look at the big commercial brokers like Marcus & Millichap, JLL, CBRE and any independents that are in your area. They usually keep all of their listings on their own website.

Also, nothing says you can't contact owners of commercial properties directly.

None of this is easy or everyone would be doing it.

Patrick Philip · Answer

How do I find the bargain bin?

I know how to do this with SFH residential by going through wholesalers, but that doesn't work with commercial.

The only channels I know are traditional retail listings like LoopNet. And other than that, just driving around and happening to come across rundown buildings.

Bryan O. · Answer

That capability is based in experience (yours or another's). Analyze properties. Talk to people who own, buy, or sell them to know what reasonable expectations are. Build your calculators so you fully understand where the building is at currently (income and expense) and then understand the math to figure possible costs and value after you fix it up.

Help me find my first "cash out refinance" commercial property?

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