All Forum Posts by: Matthew Drouin

Investment Info:

Office Space commercial investment investment.

Purchase price: $2,750,000

Back in 2023, we bought this high rise office building in Downtown Rochester, NY. It was a 50,000 sqft building that was made up mostly of NYS government tenants.

Here are the details on the acquisition:

$2.75 Million Purchase

$2.20 Million in debt sourced through a local community bank.

We had to raise $750,000 to cover down payment, closing costs, some operating cash, and some cash set aside for tenant improvements. There was about 8000 square feet of vacancy.

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

The entire investing community redlined office out after covid and we decided to take a contrarian approach and find opportunities that were overlooked and low risk.

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

We actually found this deal on Loopnet! NOBODY wanted office so it was easy to find attractive office deals. We underwrote it and it was a great buy at it's asking price. We asked for 60 days due diligence, 60 days close.

How did you finance this deal?

$2.2M from community bank and $750k from private investors.

How did you add value to the deal?

We leased up 8000 square feet of vacant space at the building with one of the already existing tenants who needed more space.

What was the outcome?

The property appraised for $4.1M and we are in the process of refinancing it now. We will be able to get all of our investors cash back at closing!

Lessons learned? Challenges?

Lessons learned is sometimes the better deal is not the one that appears better at face value. We picked up an amazing relationship with a new investor that we are excited to work with in the future.

Investment Info:

Office Space commercial investment investment.

Purchase price: $2,750,000

Back in 2023, we bought this high rise office building in Downtown Rochester, NY. It was a 50,000 sqft building that was made up mostly of NYS government tenants.

Here are the details on the acquisition:

$2.75 Million Purchase

$2.20 Million in debt sourced through a local community bank.

We had to raise $750,000 to cover down payment, closing costs, some operating cash, and some cash set aside for tenant improvements. There was about 8000 square feet of vacancy. Partnership was structured this way with investors. 10% preferred rate of return to the investor and we split the equity 34% to the investors, 66% to us. This differed a little bit from the orginal offer, as we were offering 19% Ownership and a 9% preferred return and we actually got a soft commitment from 4 different investors.

So why did we end up taking the less advantageous deal?

1.) Our investment partner on the deal has a huge balance sheet and was willing to sign on the debt with us. Since their ownership interest was over 19%.

2.) They have a ton of experience in construction and development so we determined that the relationship would be an asset which would help us in growing our portfolio especially into larger more complex deals.

That decision ended up being a life saver because 8 months into ownership, both elevators went down at the building and we ended up needing to replace one of them... A project that ended up costing $270k+!

Because of our partners balance sheet, he was willing to loan an additional $270k of cash into the deal. We would have been screwed if we did the other deal, trying to call it from 4 investors.

Another lesson learned was to always do tenant interviews during due diligence. And ask them questions like:

1.) "How do you like it here?"

2.) "Do you need more space? Less space?"

3.) "What could be improved here?"

Upon conducting these interviews we learned that one of the NYS agencies needed more space. So we toured them through the 8000 sqft of vacant space and they ended up taking it.

Not only that, they agreed to tack that space onto their existing lease and renew everything on a brand new 15 year lease!

It took a long time to get that lease negotiated (almost a year) but once we got it signed, we brought the deal back to our bank to get a 2nd mortgage put on it for cash out purposes (the reason why this was advantageous was because we could keep our 1st on at the 5.9% interest rate we locked in at purchase)

The property just appraised for $4.1M and we got our commitment letter for $1.1M in loan proceeds which will allow us to pay our investor back 100% of their cash!

Side note. Just because you lease up a building to 100% occupancy does not mean you will get credit for all the rental income. The appraiser will take into consideration a market vacancy rate which will vary based upon asset class and location. In this case it was 7% vacancy rate. So we had to get creative to get full credit. There was about 4000 square feet of vacant space in the lower level (basement) of the building so we asked the appraiser if we could add that onto the rent roll, and he said yes. So we measured up that space and provided it.

Anybody that's curious about more details on this deal or anything commercial, let me know!

PS I'm super excited to deliver that 7 figure check to our investor. Because paying your investors back their invested cash is the best thing you can do, because they'll want to do more deals. And now we have a partner with a balance sheet willing to lend it on bigger and bigger deals. That wouldn't had been the case with the other deal, even though is was less advantageous at face value...

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

The entire investing community redlined office out after covid and we decided to take a contrarian approach and find opportunities that were overlooked and low risk.

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

We actually found this deal on Loopnet! NOBODY wanted office so it was easy to find attractive office deals. We underwrote it and it was a great buy at it's asking price. We asked for 60 days due diligence, 60 days close.

How did you finance this deal?

$2.2M from community bank and $750k from private investors.

How did you add value to the deal?

We leased up 8000 square feet of vacant space at the building with one of the already existing tenants who needed more space.

What was the outcome?

The property appraised for $4.1M and we are in the process of refinancing it now. We will be able to get all of our investors cash back at closing!

Lessons learned? Challenges?

Lessons learned is sometimes the better deal is not the one that appears better at face value. We picked up an amazing relationship with a new investor that we are excited to work with in the future.

@Adam Tiller sure thing!  I’m an open book!

Back in 2023, we bought this high rise office building in Downtown Rochester, NY.  It was a 50,000 sqft building that was made up mostly of NYS government tenants.

Here are the details on the acquisition:

$2.75 Million Purchase

$2.20 Million in debt sourced through a local community bank.

We had to raise $750,000 to cover down payment, closing costs, some operating cash, and some cash set aside for tenant improvements.  There was about 8000 square feet of vacancy.  Partnership was structured this way with investors.  10% preferred rate of return to the investor and we split the equity 34% to the investors, 66% to us.  This differed a little bit from the orginal offer, as we were offering 19% Ownership and a 9% preferred return and we actually got a soft commitment from 4 different investors.

So why did we end up taking the less advantageous deal?

1.)  Our investment partner on the deal has a huge balance sheet and was willing to sign on the debt with us.  Since their ownership interest was over 19%.

2.)  They have a ton of experience in construction and development so we determined that the relationship would be an asset which would help us in growing our portfolio especially into larger more complex deals.

That decision ended up being a life saver because 8 months into ownership, both elevators went down at the building and we ended up needing to replace one of them... A project that ended up costing $270k+!

Because of our partners balance sheet, he was willing to loan an additional $270k of cash into the deal.  We would have been screwed if we did the other deal, trying to call it from 4 investors.

Another lesson learned was to always do tenant interviews during due diligence.  And ask them questions like:

1.)  "How do you like it here?"

2.)  "Do you need more space?  Less space?"

3.)  "What could be improved here?"

Upon conducting these interviews we learned that one of the NYS agencies needed more space.  So we toured them through the 8000 sqft of vacant space and they ended up taking it.

Not only that, they agreed to tack that space onto their existing lease and renew everything on a brand new 15 year lease!

It took a long time to get that lease negotiated (almost a year) but once we got it signed, we brought the deal back to our bank to get a 2nd mortgage put on it for cash out purposes (the reason why this was advantageous was because we could keep our 1st on at the 5.9% interest rate we locked in at purchase)

The property just appraised for $4.1M and we got our commitment letter for $1.1M in loan proceeds which will allow us to pay our investor back 100% of their cash!

Side note.  Just because you lease up a building to 100% occupancy does not mean you will get credit for all the rental income.  The appraiser will take into consideration a market vacancy rate which will vary based upon asset class and location.  In this case it was 7% vacancy rate.  So we had to get creative to get full credit.  There was about 4000 square feet of vacant space in the lower level (basement) of the building so we asked the appraiser if we could add that onto the rent roll, and he said yes.  So we measured up that space and provided it.

Anybody that's curious about more details on this deal or anything commercial, let me know!

PS I'm super excited to deliver that 7 figure check to our investor.  Because paying your investors back their invested cash is the best thing you can do, because they'll want to do more deals.  And now we have a partner with a balance sheet willing to lend it on bigger and bigger deals.  That wouldn't had been the case with the other deal, even though is was less advantageous at face value...

@Alev G. the litmus test I use in exploring an area is incomes and population density.

If the population density is too low and not somewhat close to an employment center it’s not going to be a Green light for me.  
In terms of incomes I use the 30% rule.  I’ll take the median area income and multiply it by .3.  That gives you a sense of housing affordability threshold.  Since I only do value add deals, I want to make sure there are rent comps and income that can afford my renovation spec. 
And then the third calculation I do is median home price.  If the median home price for an area is on par with rent, it’s generally not a good sign.  For instance, I had a 72 unit apartment deal where surrounding homes in the area were $130k and because of this I couldn’t push rents to where I wanted them to be because qualified renters could just buy a house for around the same monthly payment of my two bedroom apartments.

@Dexter Florendo Kalai Aspacio I would only do it if you didn’t bastardize the rest of the space.  For instance I did it on one of my one bed room apartments because this particular apartment had a formal dining room.

what’s a single person or couple going to need a formal dining room for?  So we closed it up, added a closet.

@Hunter Duplantis what @Gino Barbaro said is exactly what I was going to suggest.

When you have vacancy is the time to experiment and apply your original thesis.

I’m not trying to play Monday quarterback here but, you should be highly confident in where the rents should be well in advance of having a vacancy.

That being said, after confirming competition rents on websites (I’d also recommend Craigslist and Facebook marketplace), you should be in alignment there.  In regard to section 8, be careful with trying to get higher rents than market.

Your best section 8 tenants aren’t stupid and are very sensitive to location.  Just wanted to add some caution there because there’s this narrative by the S8 gurus out there that, “these people will live ANYWHERE! They don’t care because the government pays their rent!”  Not true.

I have section 8 rentals in bad areas and the churn is constant.  I have section 8 rentals in great areas and I almost forget they exist sometimes because of how long term the tenants are and how low maintenance they are.

@Matt Smith sent you a connection request so we can talk!

@Matt Smith I think this narrative is way over blown.  The systemic trouble is in a few high growth markets in the US.  The ones that had high rent growth, lax zoning laws, and general buzz about multi family gold mines.  This is not the case for the majority of metro areas across the US.

In less hyperbolic markets there wasn’t an intense amount of speculation so operators didn’t pay high and are weathering the storm on interest rate resets and are finding a way to refinance Deals with maturity walls.

I am finding that a lot of killer deals with my clients are happening in the sub 50 unit deal space for those who need to sell, because there’s much less competition in a chase for yield.  Creative financing is ruling in this transaction space.

@Grace Tapfuma I have no idea how things work in Australia but if I were you in the US…

Don’t sell the business.

Businesses usually sell for a much lower multiple of their products income than real estate does.

To be honest, you’ve built out a lot of infrastructure to create a successful business and maybe reinvesting in it would create a much better return on investment.

For which you could reinvest those future profits into real estate, once you’ve scaled your business into a money making machine that isn’t so dependent upon YOU to drive the bottom line.

I had a friend (38 years old) just recently sell his medical device company for $30M dollars and now he’s using this chapter of his life to passively invest in real estate ventures.

Meanwhile, I’ve been toiling out here for 19 years as a real estate investor and I’ve built a portfolio worth $18M and have a net worth of $5M at 41 years old.

Sometimes the grass isn’t greener on the other side.

Correct me if I’m missing something!