Unique buy/hold/flip, "house" hack in a retail environment

[Michaele Arneson]

Investment Info:

Small multi-family (2-4 units) buy & hold investment.

Purchase price: $300,000
Sale price: $400,000

This investment doesn't fit any of the categories available, but it uses multiple principles discussed regularly in BP.

Properties: Two side-by-side, shared-wall commercial/retail units within a historical street retail district. Property A approx. 3,000 sq feet; Property B approx. 2,000 sq feet. While owning these properties, the business also purchased (see below) paid rent to us, we rented Property B to a separate business, we updated, and we sold for $100K profit + note interest.

What made you interested in investing in this type of deal?

We weren't initially looking for this type of deal. We had been looking to get into the fix/flip market in late 2004/early 2005, but this opportunity "found" us, so we took a leap of faith.

How did you find this deal and how did you negotiate it?

We found combined deal of commercial properties and business through the MLS while looking for single family fix/flips. We negotiated through the real estate agents to obtain Property A at $168,000 and Property B at $132,000. However, sellers would only sell properties both together and with the existing business operating from these properties. Business was bought for $125,000.

How did you finance this deal?

Sellers financed the bundle of Property A, Property B, and Business. Total down payment was $50,000, $20,000 each for each of the properties and $10,000 for the business. Down payment funds were obtained from a HELOC on our primary residence (so no real cash out of our pockets). Interest on the properties was initially 5.5%, adjusted after 6 years to Prime (3.25%), with a balloon due after 15 years. Interest rate on the business was initially 5.5%, adjusted after 4 years to Prime (4%).

How did you add value to the deal?

The properties were built turn of the 20th century and previous updates to systems (electrical, plumbing, HVAC) were shoddy at best. We updated/replaced these systems and updated physical interior and exterior appearance. Also, when we bought the properties, even though they were two separate property parcels, the interiors had been converted into one space, so we "uncombined" the units so they could be used and sold as distinct properties again.

What was the outcome?

Property A was sold to a cash buyer for $225,000, fully paying off the notes for both properties. Property B was sold for $175,000 to the lessee of that property, but because the sale of Property A had allowed us to pay off the note for both properties, we were able to carry a new note for Property B's new owner, with a 5% interest rate and balloon payment after 15 years. (I now operate the business from home as a "side hustle" while working towards REI as a full time pursuit).

Lessons learned? Challenges?

We learned the value of having funds available through a HELOC, we learned how to "house-hack" in a retail environment, we learned that seller financing obtained (and given) allows opportunities that traditional funding often times doesn't, and we learned that being able to seller-finance and earn a steady passive income without having to maintain the property is a great way to go!