Pro Tip: You can’t make money overpaying for real estate. Your goal should be to pay less than market value or don’t buy at all.
Even if you require 100% financing to purchase commercial real estate, as long as the price is significantly below market value, the banks will be easier to work with. Let’s say you find a piece of commercial real estate for 80 cents on the dollar, and you want to finance the entire purchase. The bank will think it’s helping you finance 80% when really they are financing the entire purchase. Some banks will only lend 65% of the market value, some less and some will lend more.
I needed a low priced warehouse to store materials for my construction company. I was paying roughly $900 a month to rent about 3,000 square feet at a secure and well-located property. I hated renting.
I began my search for a warehouse that was in the 10,000 to 15,000 square foot range within the City Of Philadelphia. I bid on many buildings with no luck. Although there was a lot of inventory, many of the warehouses were being bid on by condo developers who were willing to pay much more than I was.
I found a rare 13,000 square foot building near 59th & Market street in West Philadelphia. The neighborhood was a blighted area. Crime was very high and the area had been devastated by the Septa construction of the Market Street Elevated Train that went from a three year proposed project to about 16 years. Market Street was torn up for years. Protective fencing blocked the doors and stopped locals from buying at the neighborhood stores. The sidewalks and streets looked like a war zone. Piles of concrete, trash and blacktop were piled everywhere. The asking price for the warehouse started at $300,000 and three years later was down to $150,000. I offered $30,000 and settled for closer to $40,000. I believed that the eventual completion of construction of the train would bring transit-oriented development and other developers who would all help to improve the market value of properties in the neighborhood.
Since I was buying the warehouse for less than 50% of its market value, a local lender gave me 100% financing on a five-year amortization plus my closing costs. The payment was equal to the rent at the old warehouse I had rented.
After storing all my construction materials, scaffolding, and tools for about 17 years, I hired an architect to lay out potential floor plans for the warehouse and surrounding site. He came up with a plan for 24 residential units and one retail unit. I am presently exploring the feasibility of attempting to change the zoning to a six-story structure which would allow me by right to build 48 to 68 units plus one retail space.
Across the street, the City took an acre and a half of homes, lots, parking lots, and a cab company site through eminent domain. The Planning Commission has had concept drawings prepared by an architectural firm for a six-story structure that will probably cost in the $30,000,000 price range. As soon as a developer is chosen and work begins, my building should further increase in value. Presently, the warehouse and contiguous building lots are for sale in the $1,450,000 price range.
Since the building was paid off during the first five years of ownership and has no mortgage, I could sell the building and take back a large mortgage. That mortgage would act like a retirement annuity. For example, an $800,000 mortgage for 30 year amortization at 6% interest would be a $4,796 payment each month times 360 or total payments over thirty years of $1,726,560. Although it is rare for people to pay down a total 30 year loan, you understand the potential math.
I am still not sure if it makes more economic sense to sell or develop. We are about two miles to Penn and Drexel. Our local City Council person is pro economic development. I will probably continue to market the property for sale while I press on to seek better zoning which will positively affect the property value.
Later this week I will be meeting with a local hedge fund operator who I have helped with two of his families real estate transactions to explore starting up a real estate fund that would be set up to fund well-priced or underpriced real estate that would be held as rentals, rehabs and resales or to immediately wholesale. We may also explore setting up a real estate fund to build the 48 to 68 units if the zoning is approved. It would create instant financing for the project.
My next blog will discuss the decision to purchase a shore home in Ocean City, NJ that needed almost total renovation as a way to save for three college tuitions when our children were 3, 4 and 5. It took 40 written offers to get a great deal. If you purchase a very affordable investment property in an area that appears to be in the path of future development when your child is three years old, you purchase wisely, use sweat to build equity, rent out the home for 15 years, sell when the child is 18 for college tuition you can save for college easily. Sure and slow. Three kids may require three houses. This was the reason we purchased our shore home. Thanks for visiting our website.
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