How do I buy a large commercial building?

Question

Background:

I have lived in my personal residence for 3 years. I house hacked and rented 2 spare rooms on Airbnb that paid for the mortgage, utilities and more each month. I have done renovations and and sold the house and will have 60k cash after closing next week. Some of that will go to pay off some debt and the rest I want to invest in a commercial building.

I have several years experience owning a short term rental business with 10 apartments that I signed a multi year lease on. This has given me a great deal of business experience in the hospitality industry and real estate market.

I now want to buy an actual hotel or mixed used building.

The hotel is 30 rooms, in a great location with new hotels being built around, it needs a lot of work and could great increase revenues with nicer rooms and leaner operations. Building Cost is estimated around $700-$800k. I know with renovations it could be bringing in close to $1m a year in gross revenue.

There’s also a 5 year old mixed use building. 48 apartments upper floors and 5 retail spaces in the bottom. Excellent location, but half of retail space has been vacant for years. I could Airbnb one floor of apartments to significantly increase NOI. Building cost is about $3m. Gross income is about $600K.

How can I take my 60k from my house and buy one do these buildings? I’m ready to hustle and make this happen!

Aaron W. · Answer

@Luke Easley Sounds like you have a great opportunity right now.

You appear to have the experience, but may lack the financial ability to acquire and rehab the properties. Have you considered bringing on partners to finance this? Even if you are doing all the work and all you need is a key partner to help sign on the loan as someone who has the financial backing to help you get a loan that may be sufficient.

You can raise money from multiple people to try to acquire the buildings. At a building of this size, you'll probably want a team to manage the different aspects of the project. Find out what you are good at and find partners for the rest.

Best of luck!

Ronald Rohde · Answer

You need more money. Either equity partners or more cash. I'd budget 30-50% of PP for these shaky, rehab intense, high vacancy deals.

Aaron W. · Answer

There's really no one-size-fits-all approach to partnerships. Depending on the number of partners you are bringing on and the value they bring to the partnership, you will split it in a way that is fair to all parties. If they are only bringing the capital, then you could make a proposal to them on how much that capital is worth in the partnership and see if they accept it.

Best of luck!

Luke Easley · Answer

@AJ H. Thank you. Yes I will definitely need a loan and some partners. I know a several folks with big pockets that could potentially put into some money. I guess my main question is, how should I structure the equity between us? This was my idea and I have the experience to run the building, so I want to make sure I have as much ownership as possible.

Jacob Franz · Answer

Hey Luke, I would echo some of these other comments. With your cash on hand, you are going to need to partner with someone to get both the down payment together as well as the balance sheet that will make a bank feel comfortable lending on these assets. On a commercial deal, you are doing very well it you can get 80-20 financing. Given that these building are distressed, it is unlikely you are going to be able to find a bank willing to go that high on LTV. Banks are also going to require a personal guarantee on deals like these where there is no credit tenant in place. So again, someone with a large balance sheet is going to need to be brought in to make the deal work. The other option is to continue looking for properties that are accessible at a lower price point that you could take down yourself.

The only other comment that I would add is that hotels can take more to operate than many people realize - particularly getting a new hotel up and running. If you do decide to try to partner with someone on that deal, you should try to find someone with experience in this space. There is a lot of dumb-tax to be paid on getting a hotel up and running if you aren’t familiar with that world. It is best to be avoided if at all possible.

Peter M. · Answer

@Luke Easley You seem to be short on cash but you could talk to local banks about SBA loans. Unfortunately right now most banks are backed up with PPP loans. They make so much money from the government off the PPP loans that normal SBA are getting put on the back burner.

Bryan Danger · Answer

Based on rough quotes Ive gotten from Commercial brokers, you're probably a bit short/tight on cash.You'll also likely need to show tax returns from a business or LLC, so maybe best to work on a few more smaller/residential projects to get the cash you need and to focus on making the business look good on paper.Then go after the commercial deals you've got your eyes on!

How do I buy a large commercial building?

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