What does it take to generate a 97% return on investment with commercial real estate? It requires work, sacrifice, risk and a high level of skill and knowledge. It also involves getting out of your comfort zone and admitting what you don’t know. To try to attain this on your own is too risky, however all of this is possible in one or two years if you have a high-level mentor willing to get in the trenches with you.
How to Get 97% Return on Your Investment
I have a protégé named Kevin that works hard, is diligent and has fulfilled all these requirements. He purchased a commercial property with seller financing, meaning that no bank was involved at the beginning. He provided the down payment on his own, and completed minor renovations on the property, which enabled him to increase the rents by 30%.
Kevin increased the property value by $536,000 just by raising the rents 30%. As the NOI goes up, so does the property value. Keep in mind, this was not a five or ten year process, this was all done in a little more than a year.
The property value increase of $536,000 enabled us to execute our ultimate exit strategy. Kevin was able to refinance and pull out his entire down payment, meaning that he no longer had any of his own money invested in the deal, yet he still owned the property. This makes his overall return on investment 97%.
Kevin’s Deal
Kevin lives in Panama City, FL. where he runs a small family business as a commercial flooring contractor. He started working in real estate 4 years ago and about two years ago he joined our Protégé Program.
Why Commercial Real Estate?
Kevin knew a lot of people who had already jumped into residential real estate and the “fix and flip” market. For this reason, he felt that commercial real estate would be more profitable as there were less people investing in that segment of the market. He also felt that it would mentally challenge him more than residential real estate.
Creative Financing
Kevin located a 24-unit apartment complex. He soon discovered that the numbers for the property would make it difficult for him to obtain bank financing. The seller, who was a real estate attorney, knew that Kevin was being mentored by Commercial Property Advisors and felt comfortable that Kevin knew what he was doing. He was also an owner who lived six hours away and didn’t have time to invest in the property. As a result, he agreed to a creative deal and was willing to finance the deal for 24 months. This gave Kevin time, allowing him to make payments until the end of 24 months when he was able to refinance and pay the seller.
The Down Payment
The property was purchased for $925,000, with $50,000 earnest money, and another $100,000 due at closing. Kevin received $50,000 in loan from his parents, another $50,000 came from Kevin’s savings, and the remainder was either borrowed from someone or owner financed.
The Exit Strategy
Our exit strategy was to do a cash out refinance by cashing out the money Kevin had invested in the property and then refinancing with a loan from Fannie Mae. At the time of purchase, the units were renting for $550 a month. Kevin began renovating 17 of 24 units. The units were given a cosmetic renovation including paint, new flooring, new toilets, and installing washer/dryer hookup connections. No major construction was needed.
Over two years he was able to increase the rent to $775 a month per a unit. This in turn increased the property value from $925,000 to 1.46 million dollars. Because of the increased property value, when it was time to refinance, he was able to cash out all the money that he had invested in the property and enough to replace six roofs on the building as well.
Words of Encouragement from Kevin:
“Listen to your mentors. Work diligently and smartly. You will find a deal eventually, and then just work hard to pursue it… work hard, listen to your mentors and follow their direction, and you can be successful.”
Learn more about Kevin’s story on my YouTube Channel
Summary of Kevin’s Deal
Kevin purchased 24 units for $925,000. After his down payment of $150,000, the remaining balance was financed over the next two years by the seller. The down payment came from two sources: Kevin’s home equity line of credit, and a loan from his parents.
- 17 units were fully renovated, producing a rent increase of $225 per unit.
- The other 7 units had a slight increase in rent of $50-$75.
- The renovated units plus the remaining seven units rental increase is approximately $4,200 per month more in cash flow.
- This is about $50,000 more per year, and as I stated before, the NOI going up results in the property value going up as well. The result was an appraisal for $1.46 million.
- Kevin bought the property for $925, 000, and over the course of less than two years, increased the value by over half a million dollars.
Exit Strategy
Our exit strategy was to refinance the property with a Fannie Mae small balance apartment loan. In the refinance, Kevin reimbursed himself and his parents, and paid his loan to the seller. Additionally, he received enough money back to replace six roofs on the property. Once all that is finished, he keeps the property and the cash flow.
3 Keys to Kevin’s Success:
1. Kevin was a good student.
2. He discovered the seller’s motivations.
3. He focused on his exit strategy.
