Commercial Real Estate Hacking?

Question

Been doing a lot of reading about house hacking and using the BRRRR but I already like the house I live in and don't want to uproot my family (I wish I'd read more on it before we bought the house we're living in right now, oops....) and then it occurred to me that because I own a business I should do commercial real estate hacking.

The more I think about it the more it blows my mind about the probably half million of business revenue I've thrown at renting various commercial spaces over the last decade. Not to mention hundreds of thousands in building infrastructure upgrades into a commercial building that wasn't mine! Ouch... That could all be equity in my company instead of lost revenue.

Throw in the potential for buying extra space and leasing it out to other businesses to create extra cashflow.  Seems like an obvious route to me.  The possibility of using my businesses financials as well to help qualify for the loans... Etc. Add that to the fact that my business right now has outgrown my current space and our biggest limiting factor is lack of space. We could easily triple our gross revenue in a year if we had triple the space, and we would own the building. I could probably even raise some venture capital for the down-payment.

The biggest issue is I've never done any real estate deals before and I get the feeling its not going to be an easy path to start out on. But hey, the only way to eat an elephant is one bite at a time.

Basically my question is has anyone done this before? Anyone in commercial real estate have any pointers, books, ideas to send me in the right direction? You don't need to say I'm totally crazy to try and skip small multifamily properties and focus energy on commercial real estate... I already know that part.

There's no question I'm going to make this dream a reality. I just need to figure out the how.

Joel Owens · Answer

You need to perform a rent versus own analysis. Even if you own the building tax accountants usually have you set up a lease to yourself from the business etc. Also when you go to sell you need to show income from all spaces.

The SBA loan is one of the better tools when occupying the 50%.

If you have some money for down payment then owner finance is another option from an owner.

A small business broker or similar might can help to locate a building. This is more of the mom and pop small balance commercial under 1 million type stuff. You will need someone who can spend a lot of time working on something like this for maybe a smaller check.

I do not focus on these types of deals. I also avoid commercial property management, tenant representing as a leasing broker,etc.

I like transacting existing buildings for buyer broker commissions and then my syndicated deals as a sponsor. The other avenues are low yield activities for the time invested which is why a local guy doing smaller stuff closer to where you have the business makes sense.

Nationally if people are looking for high quality buildings that are 3 million and up then I typically have options. If it is 300k,600k type buildings value add I stay away from those as commission to me is maybe 9k to 18k and not worth it for the time involved. I will buy those myself and do the project so I make hundreds but not sell it to a buyer to make 10k commission. I guess I could always assign it for a higher fee but still lot's of moving parts and hurdles with SBA buyers.

Damon Pendleton · Answer

I’ve done two commercial buildings so far like this and  I’m always looking for opportunities to do it again and again. I like it because I pay myself market rents and I know I have at least one tenant who always pays on time every month.

There is nothing mystical or hard about it. Make a list of what you need in a building (think about the next 3-5 years if you’re in growth mode). Then interview some commercial brokers, and start talking to some lenders. Also you can qualify for SBA loan of your company occupies over 50% of the space. I can refer you to the broker I used who specializes in SBA loans if you’re interested in going that route after researching the issue (I get nothing nor have any relationship with them other than being a former client).

Account Closed · Answer

I'm a licensed CRE Agent in Austin, TX, so mind you I'm biased as hell.

Commercial can be an excellent route to go down. The tenants are all businessmen, the opportunity to add value is exponentially greater, and there are significantly more types CRE product than residential giving you more freedom to diversify your portfolio and make investments in unique ways that aren't available when dealing with houses and plexes.

• Want to get the benefits of multifamily investing without dealing with tenants? Public Storage
• Want to work with a bunch of small business owners? Retail
• Want to work with small businesses and get benefits of multifamily? Office space

All of this being said, your first step should be finding a solid agent in the areas you're interested in buying. Do NOT try to go at Commercial alone, it is far too complicated and far too litigious.

Bob Floss II · Answer

@Anthony Burroff If you can use money from your business accounts without draining your reserves and putting your business at risk, I think it sounds like a great idea.

Chris K. · Answer

@Anthony Burroff

Really depends on the type of business and type of building. For example, I suppose you could describe McDonald's business model as "commercial real estate hacking." And they do it very well. On the other hand, many businesses --- including very large, sophisticated ones --- have no interest in owning real-estate and instead would prefer to lease. It all comes down to the business philosophy, opportunity costs, etc.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Andrew Syrios · Answer

Interesting concept. I technically did it for the first two years after I moved out to Kansas City. I lived in the basement of our office here until I could afford to move out. Fun times.

Alina Trigub · Answer

@Anthony Burroff You have a good idea and great feedback. I want to ask another expert to chime in and help you out. @Joel Owens perhaps you can help.

Ronald Rohde · Answer

Yep, owner occupied can be a great investment tool.

Anthony Burroff · Answer

Howdy Folks,

Thanks for the generous response to this thread. I apologies for the delay in my response! I was busy with work, & life then I had to run off on a family vacation reunion.

Lots of great encouraging information here, and certainly some things to think about. That is something I really like about this forum people are quite encouraging. If I mention commercial real estate to people in the real world all they see is the barriers to entry. Here you folks see the big picture!

Thanks about the SBA loan information. @Damon Pendleton I would be glad to have a reference to a good broker thank you!

@Joel Owens & Bob Floss You bring up excellent points on doing a rent vs own analysis and making sure I don't compromise my business finances by making the purchase. Its clear that a large down payment could severely limit my expansion efforts and put my business at risk by having less liquid capital available for the expansion and unexpected expenses. Doing so without educating myself and proper financial planning could actually slow the growth of my business or even spell the death of it without proper consideration to all the facts.

I will never forget when one of my attorneys told me the number one cause of business failure is growing too fast. I didn't heed his warning carefully enough, and I lost one of my first businesses because I tried to expand too quickly. I put too much investment into the initial expansion into the new location, hired on too big of a team too quickly and more or less was overconfident and didn't prepare for all of the unexpected costs. It was a very costly painful but valuable lesson I certainly do not wish to repeat.

This is going to require some careful thought and planning. An idea that comes to mind is that my business would actually do just as well to have multiple smaller locations as it would to have one larger location. It would be wise to keep the current location keep the revenue intact and postage stamp out multiple locations each with the plan of buying a building where I could occupy over 50% of the space.  Keeping the same business structure and size at each location. I know from experience management of the location gets more complicated when you put more eggs into one basket.

@Bob Langworthy Thanks for reminding me to vacuum the truck. I loved that podcast. I'm going to go listen to it again. Its encouraging to hear this idea is working out well for you.

Regards,

Anthony

Commercial Real Estate Hacking?

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