How I Bought My First $1.5M Commercial Building

How I Bought My First $1.5M Commercial Building

In late 2016, we bought a 10,135 square foot retail building in Deer Park, Washington.

At that point, it was the largest and most expensive building I’d been a part of acquiring.  Quite frankly, I was a bit scared that we could pull it off.  Up until then, the most expensive building I had purchased with partners was $390,000.  The building we were contemplating was almost four times that price.  It made my heart race considering it.

However, we believed the building to be well-built, positioned great and priced right.  That’s the trifecta when looking at a commercial project.

We made our offer on the building and then conducted our due diligence.  My investing partner and I believed in the project, but our partners thought the price needed to be a bit better.

Then we did what we previously thought unthinkable.

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Cleaning Up after Forty Years – Rosewood Retail - Part 4

Cleaning Up after Forty Years – Rosewood Retail - Part 4

In May of 2017, a tenant at our Rosewood Retail property moved out.  Spokane Vitamin Supply had been in the building for more than forty years.

We had only owned the building for seven years, so we didn’t enjoy their entire run of tenancy.  The business had changed ownership at least twice.  In our records, there was a transfer of ownership in 1993 to Mr. Smith (not his real name).  Then in 2015 the business was sold again to the Williams family (not their real name).

Initially, Mr. Smith was going to close his business instead of renew his lease.  He was an older gentleman and didn’t actively run the business anymore.  He operated the business as a way to keep a couple employees working since they had been loyal to him for so many years.  The employees were now ready to retire which would allow him to shutter the business.

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When Revaluing a Property Doesn’t Go Your Way – Rosewood Retail Part 3

When Revaluing a Property Doesn’t Go Your Way – Rosewood Retail Part 3

Roughly six years into the ownership of our Rosewood Retail property, one of the partners decided she wanted to sell out.  A couple years prior, Bobbi (not her real name) had gone through a divorce and a year later relocated to another state.  She was involved in another partnership with us and had chosen to sell her portion of ownership earlier.  It had gone very well for her as detailed in The Little Property That Could – A Partner Wants Out.

Now, Bobbi decided she wanted to sell her portion of the Rosewood partnership.  After running the numbers, the news wasn’t good.

If she still wanted to sell her 25% stake in the partnership, Bobbi would actually get less money than she originally put in.

It was a tough reminder that an investment property’s value is tied to its net income which is a function of both income and expenses.

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The Buy-Out or How a Lease Termination Can Benefit You - Rosewood Retail, Part 2

The Buy-Out or How a Lease Termination Can Benefit You - Rosewood Retail, Part 2

As time moves forward, things will change at any investment property.  You are incredibly lucky if your tenants stay in place for a multitude of years and steadily pay rent.  This reduces the associated costs and headaches of vacancies.

At our Rosewood Retail property, everything proceeded nicely for about two years.  Then we were approached by one of the tenants who stated they wanted to terminate their lease early.

The medical billing service was ceasing operations.  The doctor associated with the service was joining a larger organization and, therefore, needed to shut down his practice.  However, they still had three years on their contract.

When you’re faced with this scenario, it’s an interesting proposition, but an exciting opportunity.

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It Always Starts with One – Rosewood Retail, Part 1

It Always Starts with One – Rosewood Retail, Part 1

It’s embarrassing to admit, but when I was a property manager, I didn’t know how to invest in commercial real estate.  In my area, most property managers don’t own investment real estate.  I’d imagine that trend continues beyond my part of the country.  Perhaps it’s because property managers spend so much of their work time around real estate that they don’t want to do it on their personal time.  Maybe it’s an employee versus entrepreneur mindset that holds them back.  Whatever the reason, it’s a strange reality to encounter.

No one shows you how to invest while you’re working on their properties.  They don’t have to do that, now do they?  If you ask them, though, most investors would be happy to share their investing stories and insight with you.  However, when I was a property manager I didn’t have the courage to ask my own clients how they developed their portfolios.  Instead, I remained a guy collecting a check to manage other people’s properties, helping them achieve their dreams while mine seemed like a distant mirage.

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A Refinance That Cleaned Our Clocks

A Refinance That Cleaned Our Clocks

In 2012, as the market struggled to improve, interest rates continued to fall.  They were in the mid 4% range at this time.

I was keenly aware of this, especially since we were paying 6.5% interest on a seller-financed contract for a little office property that housed a janitorial firm.

I’d run the numbers on the property and realized we had a great opportunity.

Based upon the rent the tenant was currently paying and stabilizing cap rates, our property was now worth substantially more than we paid for it.

I’d read about refinancing a property and pulling cash out to purchase another property.  This seemed like a perfect opportunity to make that happen.

I took the idea to my investing partner, Kevin.  “What do you think?”

“It sounds like a great idea.  Let’s do it."

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A Deal That We Cleaned Up On

A Deal That We Cleaned Up On

In the summer of 2010, my investing partner cold-called the owner of a small office building.  It was located on Trent Avenue and had a small, clean warehouse with it.  As the area changed over the past forty-plus years, it had become eclectic.  Industrial users are mixed in with ethnic restaurants, specialty retailers looking for cheap rent sidle up next to little office buildings.

The subject property was a brick building constructed in 1922 that originally had been a post office.  After a period, the use switched to one of the first Rosauers grocery stores in the city.

In 1979, a cinder block warehouse with an over-sized roll-up door was added.  The previous owner was able to park his car and store his RV in the building. 

The owner, “Bob” (not his real name), had run his insurance company out of the building since the mid-1970s.  The building was in great shape with nice mill work inside.  The basement was partially finished with a private restroom and sauna.  (Side note - I’m surprised at how many saunas I’ve seen circa mid-70s when touring commercial properties.  I saw another one last week.)

Kevin asked if Bob might be interested in selling his property.  As luck would have it, Kevin called at the right time.  Bob had just sold his book of insurance business and indeed wanted to sell his property.  Then Kevin asked a great follow-up question, “Would you be interested in carrying a contract (a.k.a. seller financing)?”

Bob thought this was a fantastic idea.

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The Little Property That Could – Part III - Time to Expand

The Little Property That Could – Part III - Time to Expand

Bruchi’s Cheesesteaks is a local favorite. Serving subs and cheesesteaks since 1990, they’ve grown to seventeen locations and recently opened a store in Sacramento, CA.  Bruce and Susan Greene have done a great job with the company, especially with new competition from national sandwich franchises coming into the market.  

In late 2015, I saw a listing for a recently built Bruchi’s Cheesesteaks in Cheney, Washington.  Bruce and a partner owned the building and the Bruchi’s restaurant leased it back from the partnership (much the same way we had structured the Jacobs Java deal).  Bruce and his partner decided to end their business relationship which meant selling the real estate.  However, the Greene’s wanted to keep the business there. This was a “sale / leaseback” scenario - they wanted to sell the building and then lease it back from the buyer.

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