Has anyone ever BRRRR'd a Commercial Property?

Question

I am traditionally more comfortable with the BRRRR strategy in SFR's and small multifamily buildings and have successful at completing over 400 of those types of transactions for our investors, however; a new model has come to me, almost by happenstance.

In our market, in Kansas City, SFR home prices have only continued to climb in the 80-130k price range making it harder to find subject properties to BRRRR. I am not saying it CANNOT be done, I am saying the level of effort that it takes to find one of these properties has become increasingly more difficult. As an investment property specialist and investor myself, I started to search for a  new model that would allow us to provide our investors a healthy return while being able to return their capital. I believe I have found it in a new asset class: commercial buildings.

I have been saying for some time now, that the "riches are in the niches." I believe the higher barrier of entry, the lower your competition will be.

Now, anyone can go buy a bunch of ugly bricks and make them pretty bricks, so how does this model work? Just like Stephen Covey taught us to start with the end in mind, We are starting with the tenant first. We are using our network in the KC market to find the best local good credit tenants who are looking to expand their business or open another location, then we source the property, then we raise the funds for the deal.

Has anyone done this before? Sample deal I have under contract below.

Mixed use bldg - airbnb, retail and event space/art gallery

Purchase price - $775k

Rehab - $800k

Holding Costs - $50k

ARV based on income, see below -

- 3 AirBnB units generating 175k a year (40k, 40k, and 95k)

- 4,000 sq ft of retail storefront generating 20 per sq ft = 80k per year (also paying insurance, utilities and maintenance)

- An event space in the basement renting conservatively for $2500 per month = 30k

- Total Gross Rents - $285k at 40% expenses (should run lower) = $171,000 NOI at a 7 Cap = $2.4MM

I would think this building will be worth 200 per sq ft  = 8,000 x 200 = $1.6MM and 4,000 x $150 = $600,000 = 2.2MM

Someone please tell me if I am crazy?

Jeff Kehl · Answer

@Logan Freeman I agree with the above. Read the biographies of any really successful real estate investor and you'll see that most of them did value add on commercial properties. BRRRR is just a new term for it.

Jeff Kehl · Answer

@Logan Freeman I've dipped my toe into commercial Brrrrs recently and I'd say more people don't do it for a few good reasons. 1) The monetary amounts involved are generally very large. 2) There aren't great lending alternatives unless you're doing a stabilized multi-family 3) People spend their entire professional career in some of these areas so it's a bit difficult for a new-comer to enter. 4) You can sometimes wait 2-3 years between tenants 5) There are underlying things going on with each market to learn, and monitor.

A couple examples.

1) The mall in my town went bankrupt and was for sale for a very low price towards the tail end of the recession. I thought it was a no-brainer investment to buy a huge building like that for a small amount of money. But even a small amount of money was a few million dollars and absolutely no one would lend on that. Meaning you or people you knew would have to have that kind of money.

A company came in and bought it all cash. They've been doing malls in small towns forever and had the connections to bring in some new tenants. And they even spent some money on capex to make it better looking.

But even then, small town Malls are just not a popular place to shop anymore and then their Sears went out and then their Toys r US closed. There's still a JC Penney and Belk but they dont seem very busy even during the Xmas season.

They have filed plans with the county to knock down the sears side of the mall and build restaurants in the outlots but who knows if that will work.

So, Commercial BRRRR is very hard even for people that have been doing it for years.

2) A limited-service hotel came up for auction in my town. I researched it a bit and learned all sorts of new terms like rev par and average daily rate but abandoned it after I could not determine 1) What the supply/demand picture was like in our area 2) How I would finance it and 3) How I would manage it.

I enjoy learning new things so will continue to study commercial opportunities but so far, from what I've seen and bought I'm better off sticking with residential.

Logan Freeman · Answer

@Jimmy Klein we closed on our first hotel last Wednesday. Another one closing in February. Would like to speak with you about your experience on that asset class if you're open to it?

@Jeff Kehl Agreed, why do you think most investors don't understand or attempt these types of deals?

@Lee Ripma Thanks for the feedback, I am building 3 AirBnB units in the lofts, to which I own a few already and know the expenses on these pretty well. As for the retail tenants, I am striving for NNN leases, so we will not have any costs there (hopefully). With the location where it is, it should be do-able. I am new to working with leasing agents - so this will be a new adventure.

I have a great group of brokers finding us deals, some decent firepower behind us, and a team that has a lot of experience. I am excited about this "new" model and think we've found a bit of a hunny hole here in the KC market.

Logan Freeman · Answer

@Jeff Kehl thank you for your thoughts and all of your points have been thought-provoking. They are also an encouragement. MJ Demarco taught me that anything that is "brain-damaging" and the barrier of entry is high, there is $ to be made. We get rewarded in proportion to the size of the problems we solve. We had a ton of success completing 100+ BRRRRs on small multifamily and SFRs this year, however in my opinion that market in KC has continued to be more and more saturated making it very difficult unless you have a unique acquisition strategy. Maybe @Andrew Syrios has some tips there.

I am using syndication to fund our deals, and have the team with the commercial experience. Just took down 2 hotels on the plaza.

What I am running up against right now is finding the right tenants before we source the properties and then how picky they are.

Interest rates are definitely my #1 concern, However; I did recently listen to a podcast by the real estate guys that was reassuring.

Thanks for all the thoughts.

Andrew Syrios · Answer

I've seen it done with apartments, although they financed it up front with a syndication and then refinanced out of it shortly thereafter.

Rich Kniss · Answer

@Logan Freeman, the square foot values  when you are done seem about right to me. On the event space, I'd want to understand the parking a little more. On street parking is fine, but perhaps you can drive up rents by make an arrangement with a neighboring business to use their parking spaces in the evenings. Just a thought.

Lee Ripma · Answer

@Logan Freeman

That's great, I hope this project goes well for you! Keep us posted on your final product!

Jimmy Klein · Answer

Yes done it on hotels. My group has bought a couple hotels and we were able to refi and get our invested capital back. Our investors were thrilled of course since we returned their investment back. This doesn't happen all the time, as someone above mentioned it has to be done on deals where NOI is higher than initially. In addition, your taking on significant debt so you have to manage accordingly.

Has anyone ever BRRRR'd a Commercial Property?

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