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The “Buy Box” for Buying BIG Properties


For the past year, commercial real estate has been the disappointing big brother of rental properties. As housing prices went up, commercial real estate prices went down. When primary mortgage rates were high, commercial mortgage rates were even higher. With record-setting vacancy rates in areas like office and less reliance on retail, many investors thought that commercial real estate was a dying asset class. But they weren’t entirely correct.

Investors like Kim Hopkins had thriving commercial real estate success, EVEN during lockdowns and the pandemic. Kim’s secret sauce to her high cash-flow commercial real estate portfolio wasn’t in getting lucky—it was all in her “buy box.” Kim ONLY buys properties that can’t get shut down, in markets where they’ll thrive, with tons of customers nearby. And today, she’s sharing her exact formula with us!

But that’s not all. Kim is currently debating doing one more deal before the year is up. This property looked like a home run on paper, but as she’s dug deep into it, the property may not be worth the price. From plumbing issues to overinflated income numbers, Kim uses David and Rob as coaches to help her decide whether this deal is worth doing.

David:
This is the BiggerPockets podcast. What’s going on, everyone? This is David Greene, your host of the BiggerPockets Real Estate podcast, here as always with my co-host and good friend, Rob Abasolo. Rob, how are you doing today?

Rob:
Very good, my friend. Very good. My wife gets back from Paris today. I’ve been single daddying it up, watching both of my kids for the last five days, so I am excited to sleep again. Very excited.

David:
I can imagine. And thank you for joining me on today’s show with no sleep but tons of information and a good time.

Rob:
That’s right, yeah. We have a great show planned for everyone here today. We’re going to be talking to Kim Hopkins, who is a commercial real estate investor, cue the scary music, who is making deals work today in this market, yes, that’s right, in 2023. Today we’re going to be hearing about a deal that Kim is working on, what types of commercial real estate deals pencil today, the risks associated with this strategy and how not to get yourself into thy pickle.

David:
All that and more. This is a killer show. Let’s get to Kim.

Rob:
Kim, welcome to the show.

Kim:
Hey, Rob. Hey, David. Thanks for having me.

Rob:
Yeah, glad to have you. So if I understand it correctly, you’ve been investing in real estate for 10 years now and you own 15 properties through the real estate business you and your husband run together. A few quick questions to get our listeners a sense of who you are as an investor. First one here, how many markets are you in?

Kim:
Let’s see here. We have Oregon, Washington, Utah, Texas, Arizona, California and Florida, so seven.

Rob:
Okay, so just a few here.

Kim:
Some of those are short-term rentals that we abandoned as we moved from state to state.

David:
Now you’re investing in small commercial properties like mom and pop type situations. What is it about that that drew you into it?

Kim:
Really it was a process of elimination. So we didn’t want to be fixing toilets and having tenants that were individuals so we didn’t want multifamily. We didn’t want single tenant properties because that increases your risk. If a tenant goes out on a single tenant property, that’s it. No income. We didn’t want the tenant improvement, TI, expense that’s often associated with office. And so that left us with multi-tenant and from there, we chose multi-tenant industrial and small neighborhood retail.

Rob:
So what kind of commercial real estate deals do you think are actually working today for you? You mentioned at the beginning of this that there are no bad markets, there are just bad deals. So give us a little bit of what you look for in a property, what makes a good investment, all that good stuff.

Kim:
Yes. Our buy box is single story, of course, multi-tenant. We want the tenants to be on the smaller side, about 2,000 square feet for each tenant is our goal. No tenant occupies more than 30% of the space. We look for properties that don’t have too much auto because they’re dirty. We look for properties without too much restaurants because they’re dirty. And so that’s what we’re targeting right now. And then we are looking for about a 7% cap rate, although that really has to go up at this point because of where we are with interest rates. That really is closely tied to your terms of your loan at this point.

Rob:
Can I ask you a quick clarifying question? When you said that auto places and restaurants are dirty, do you mean they’re physically dirty and thus the wear and tear is just way worse on these types of spaces?

Kim:
Yes, that’s exactly what I mean. So auto tenants seem to come with a lot of environmental issues. They also tend to park a lot of non-functioning cars on the property. And then the restaurants, we can get into this later, it’s very relevant to the current deal we’re looking at, but same thing. The restaurants, especially if they’re frying food and things like that, can really mess up your property.

David:
I would also imagine that restaurants and auto repair shops would probably require more tenant improvements. They’re going to want you to bring in some money so they can put in a big car jack or move the floor plan around. Have you found that to be the case? Because you mentioned earlier you’re trying to avoid that by avoiding office.

Kim:
Yes, that’s exactly correct. That’s why I would definitely rank the multi-tenant industrial above the multi-tenant retail. They’re going to have more TI requests. With the multi-tenant industrial, we don’t even have to paint the thing. It’s like it’s already a low maintenance space, and then the tenants are also very low maintenance. They would never call you if their toilet isn’t working. They will just fix it.

Rob:
Which is why CrossFits never have an AC in them, even when it’s like a hundred degrees outside. It’s like, do you want me to just fry up in here? Is that the idea?

Kim:
That’s why they make the Big Ass Fan. Have you heard of that company?

David:
The only frying that will be done is going to be at a CrossFit when you’re hot, not at a restaurant because Kim does not allow frying in any of her units.

Rob:
No frying allowed.

David:
You do bring up a good point though, because investors will often just get greedy for the highest ROI they can get or in this space, they’ll be looking for the biggest cap rate that they can get. And when you’re only looking at those numbers, you don’t think about the fact that in order to get that higher cap rate, maybe you got to spend $200,000 to outfit this unit so that your new tenant could come in and then when their business fails after three years or they decide that they don’t want to lease the place from you anymore, they leave and now you have to spend money to get rid of the $200,000 you spent and spend more money to fix it up for the next tenant. And so that higher cap rate is being offered in order to entice somebody into where they’re actually going to make less money.
There’s a lot of things in real estate that will take your money. It’s more than just the mortgage, the taxes and the insurance. I like that you’re pointing that out. You’re actually looking in a sense how to run a lean business here as opposed to just being greedy and going for the biggest cap rate that you can get.
What are you looking at today when you’re trying to evaluate these deals? You’ve mentioned that you don’t want to get into office space, but is there a cap rate that you’re specifically targeting? Is there a unit size you’re looking for? What does your buy box look like?

Kim:
We’re really leading with the numbers. So you could have an advertised cap rate of 7.5%, but when you get into it, it doesn’t pencil. They’re using pro forma numbers. They don’t have a big enough vacancy. So we’re really leading with the numbers right now. We targeted multiple markets this last round. We didn’t pick a particular market. We’re looking for deals that pencil with the numbers. There is no speculation. We’re not looking for a deal that only makes sense with this value add. It only makes sense if you get to these market rents. It only makes sense if you can sell at this cap rate. None of that. We’ve seen a lot of where that’s getting people right now that did have that value add speculation. And so we’re looking for deals that pencil right now, cash on cash return of hopefully 7%.
But another comment I want to make is that we are also considering taxes. And I know that a lot of people say, “Oh, don’t do a deal for taxes.” And I agree. Never do a bad deal for taxes, but that is something that you can consider. So for example, if you’re going to be on the hook for several hundred thousand dollars of taxes and you have a deal this year in your hand that is only a 6% cash on cash return and you think, “Okay, maybe next year, I’ll find a deal with a 7% cash on cash return,” you need to take into account that you’ll have … Let’s say you had $300,000 tax bill. You’ll have $300,000 less to invest next year on that deal if you had to pay the taxes. Do you see what I’m saying? So the return next year has to be much higher in order to make sense. So we do take taxes into account too. So right now, we’re a little more lenient on a cash on cash return number than we might be next year because we have these taxes to consider.

Rob:
Well, that’s one thing that I always tell people because it does seem like in general … This is something that David has taught me over the past couple of years that cash on cash return is really just like one of those metrics. It’s one of the four big metrics when considering a real estate investment. You got your tax benefits. You got your debt pay down, your appreciation and cash on cash return. And so on the surface, a 7% cash on cash return might feel small to a lot of investors, but when you consider the actual tax benefits of cost segregation, bonus depreciation, accelerated depreciation, all that good stuff, it could really transform the return profile of any given investment.

Kim:
Yes. And also, I’ll just point out, to add to that, that our 7% cash on cash is that un-sexy no value add speculation number. That doesn’t mean that that’s where we hope to be in four years or three years or anything like that, but that’s how the deal makes sense now.

David:
That’s a great point. A lot of people make that mistake too. They just evaluate a deal in year one and they don’t look at, well, what is this going to look like in year five? You could buy something with a value add component or with lease bumps of five or 6% or something every single year and that measly 6% cash on cash return is now a 17% cash on cash return. And oftentimes when people say, “Well, how do you get these big returns,” the answer is well, buy it five years ago. And conversely, don’t buy properties that aren’t going to be improving over time because you got sucked into, oh, it’s an eight instead of a 6% return. That’s the best one and it stays an 8% return for the next 30 years.

Rob:
As we get into this a little bit, tell us a little bit about the biggest risks for commercial real estate and real estate at large that you’re seeing today because this is one that seems to be shifting quite a bit.

Kim:
Yeah. I think the risk right now is no one knows what the future is going to hold. And so we don’t know where the interest rates are going. If they go down, hopefully you can get a loan that has no prepayment penalty and refinance, but how do you know when to hit that button? And if they go up and you’ve gotten a short-term loan because you have a high interest rate, now you’re in trouble. So there’s a lot of risk around where we’re headed and how these tenants are going to do.
Our industrial properties did really well during COVID. They did well during recessions, that kind of thing. But multi-tenant retail, I’m not sure how well they will do. It really depends on the market you’re in and the nature of the business. If you have a Pilates studio as one of your tenants, do people need Pilates if time gets tough? I don’t know. It depends on the people. It depends on …

Rob:
What is the story on the industrial side? Because you said that was a little bit more, I guess, protected during the pandemic. Why is that? Is it because those services are just always needed? Is it just the types of businesses?

Kim:
Yeah. Actually, so the industrial and the neighborhood retail bolstered really well during the pandemic. So for industrial, yeah, we went through all our 130 business tenants and we marked which ones were essential. Do you remember that conversation about essential businesses, especially in Oregon and California?

David:
Oh, yes.

Rob:
Yeah.

Kim:
And they were all essential so they all kept operating. In fact, I think the only one that had trouble was our CrossFit, but they were covered too because typical CrossFit goer, pandemic doesn’t really bother us that much. So yeah, those tenants did really well during COVID. If they had problems, if they said they were going to have a hard time paying rent, we would just send them the paperwork for the PPP government stimulus fund application and tell them, “Fill this out and let us know once you filled this out.” And most of the time, they would never respond and just start paying rent again.
Now, neighborhood retail actually also did surprisingly well during the pandemic. If you look at reports on retail, you’ll see otherwise, but that’s because they group the small neighborhood retail in with the larger retail tenants and those are totally different product types. So your liquor store, your CPA, your insurance company, these guys all have to stay in business, and so they did well during the pandemic as well.

Rob:
So you mentioned that the industrial side of things maybe are a little bit more padded or I guess more solid businesses to endure tough times, but then you also mentioned on the retail space that maybe a Pilates studio wouldn’t be quite as insulated. Is there a type of tenant profile or a type of tenant that you like to take on in those spaces that make you feel a little bit safer about making sure that your place is always leased out?

Kim:
The type of tenant is going to be your hyper-local tenant, so you want someone that people are driving less than a mile to. I’m okay with nail salons because they’re hyper-local. So that’s the first thing, is the type of tenant is going to be a hyper-local tenant that’s not something that is one of a kind that people have to drive a long distance to.
And then the market in that case does matter. So if I have a Pilates studio that’s in a tertiary market, even if I have an industrial property in a tertiary market, that’s going to pose a lot of risk right now. You want something that’s infill, which means that it’s not out in the sticks. And if you have a Pilates studio, the property we’re looking at right now, the Pilates studio customers are driving nicer cars than I drive. Of course, there’s a real estate joke that we all drive used Toyotas, but still, they’re all driving nicer cars than I drive, so I feel more confident that during a recession, they’re going to be okay.

Rob:
Makes sense, makes sense. And is there any other things that you do to mitigate risk in terms of stabilization of your portfolio or going into a new deal?

Kim:
Yeah. So in terms of our existing portfolio, when we refi, we do not pull out all the equity. So we’re not brewing these suckers. We leave a lot of equity in the deal because on one hand, if you pull out all the equity, that’s fantastic, you can go reinvest that so I totally see that point of view. But on the other hand, now you have this high appraised price of your property and if the market dips, now you might have trouble because your debt payment has gone up if you pull out all your equity. And so we’ve refi’ed several of the properties, refinanced several of the properties in our portfolio a year or two ago when rates were great and we left a bunch in the deal. So our LTV across our portfolio is pretty low. It’s like 50, 60% our loan to value.
And then same thing with the deals we’re doing now. I wouldn’t say that this is totally our choice, but the loan to value, we’re using pretty low leverage right now, much lower than ever before, I think. We have 60% loan to value on this last property. And then of course, if you don’t want to do a low leverage, your other option is to try to go for seller financing. So that’s a really good option as well.

David:
Yeah. There is a method to the madness of actually taking on less debt with commercial property and it has to do with the financing architecture. So with residential property, you typically get a fixed rate loan for the life of the loan, usually 30 years. You don’t have to worry about having to refinance. You get to refinance if rates happen to drop to where it makes sense. But with commercial loans, they’re on balloon payment schedules and so you’re going to have to refinance it.
So if you have a high loan balance and you got a rate of 3%, that might make sense for you, but what happens if rates jump to 6% or 7% and you’re stuck at 80% loan of value? That could be catastrophic. So keeping a lower loan balance on commercial real estate, even when rates are low, is still a smart move and a defensive maneuver because you don’t know where rates are going to go. And if they go too high and you have a high loan balance, you can get stuck there.
I think a lot of people hear this with commercial property and they go, that’s stupid. Why would you ever do that? Why wouldn’t you want to maximize how much money you take out of the deal and buy the next one? It’s because the rates aren’t fixed.

Rob:
Yeah. You always hear them say, “It’s tax free. It’s tax-free debt.” And it’s like you want to keep some of your equity in there. That way, if you ever sold your property, you actually walk away with a paycheck, that’s how I always think about it. But now that we have an understanding of what Kim is seeing in the commercial real estate markets, we’re going to dive into a deal that she just completed. But before that, we’re going to take a quick break.

David:
Hello and welcome back to the BiggerPockets Real Estate podcast. We’re sitting with a boots on the ground investor, Kim Hopkins, and talking about all things commercial real estate. We’re about to jump into a deal that she’s doing right now. So let’s take a peek behind the curtain. Kim, where is this deal located?

Kim:
This deal is located in my current hometown of Phoenix, Arizona.

Rob:
And why did you choose this market?

Kim:
We chose this market because we found a deal, Rob.

Rob:
Nice. I love it.

Kim:
We looked in probably about 10 different markets every deal we could find, and this is where we found one.

Rob:
Good enough for me. What type of commercial real estate is this?

Kim:
This is a neighborhood retail center.

David:
And what was the purchase price on the property?

Kim:
The in contract purchase price is 5.4 million.

Rob:
How many tenants are in this property currently and are there any vacancies?

Kim:
So that’s a great question. It’s about 20 tenants in the property, and I would say that we were paying turnkey prices for this property. It was advertised to us as a hundred percent occupied with tenants at market rent. But as it happens, just as soon as we got into contract, we found out that two tenants were delinquent and one unit was vacant.

David:
It seems like they’re putting filters on everything these days, even the way that deals are being advertised. Would you say that this was a highly filtered pro forma that you were looking at? Yes.

Kim:
This pro forma was very Instagrammable until you got into the details.

Rob:
Okay. So I want to go back a little bit because we asked you why you found this deal. You said it’s because that’s where you found the deal, but why did you choose this deal specifically? What was it about it that attracted you to it?

Kim:
So first of all, it’s in a fantastic location. So it is infill, which means it’s not out in the sticks. It is in a very well-to-do, even better than well-to-do, an about to be extremely affluential area of phoenix, which is exactly what you want. You see the houses being flipped around it that are those big houses on the small lot that are white and black, the trend right now. So tons of houses being flipped around it. It’s next to a Dutch Bros, who I feel like is better at picking real estate than we are. And so it’s a great location. That was number one.
Number two is that it penciled. Always, always, always lead with the numbers. And so the cap rate was reasonable. The pro forma actually was pretty fair based on what we knew at the time, and so it had a solid return. So I would say those were the two main reasons.

David:
I love that we’re still seeing penciled. How long do you think we can get away with that before the next generation wonders, why do we keep saying that things pencil?

Rob:
For as long as we’re using pencils, I guess.

Kim:
Because Google sheeted sounds weird.

David:
Are they still using them though?

Rob:
AI’ed out.

Kim:
It spreadsheeted, that could come out wrong.

David:
All right. Now on this deal, Kim, did you stick to your buy box or was there any creative maneuvering that had to happen?

Kim:
Slightly painful at the moment. I think I said it at the beginning, but our buy box includes built on or after 1980. I might have forgotten that. But one of our buy box criteria is built on or after 1980. We made an exception. We made an exception. This building was built in the late 1970s, but the current owner bought it and added a ton of value. They did a ton of rehab. They redid the roof. They redid all the storefronts. They redid the parking lots. Anyone want to guess what I might be missing in those renovations?

Rob:
Oh, the toilet, the sewage, the pipes.

Kim:
Wow. You have not seen the things I’ve seen. Those sewer scope videos look like the worst colonoscopy you’ve ever seen.

David:
You do make a great point, Kim, because a lot of investors just don’t think about the fact that after something goes into the toilet, it has to go somewhere and there’s a way that it gets from your property into usually the city’s lines, and you’re supposed to put a camera through that and see what they look like. So I’ve seen tree roots growing into the actual pipes and creating clogs in there, and then some kid flushes a stuffed animal down the toilet and it gets stuck in there and it creates this blockade that can be incredibly expensive to fix, especially if you have to drill into the concrete or the asphalt of the parking lot, then you have to find what part of the pipe that it was at. Was this a problem with this specific deal for you?

Kim:
Yeah. So we went against one of our deal criteria. And the pipes are old. They have a finite life. They’re cast iron and they’re at the end of their life. So that is definitely a problem for us.

Rob:
Okay. I have lots of questions about this, but it’s okay. We can talk offline about the sewer on this.

Kim:
Oh, go for it. I would love to talk about this deal. I’m hoping this is secretly a private coaching call because I got questions on whether or not we should move forward.

Rob:
So when this happens, is it one of those things where you have to kick every … because usually, let’s say in an Airbnb or in a long-term rental if the water turns off, you got to put them up in a hotel or you got to figure it out. But this seems like a pretty massive underground renovation across the entire property. So do you have to shut down businesses while you make these repairs?

Kim:
Yes. I learned a ton about sewers that I didn’t really want to know and still don’t, but basically the pipes are doing what’s called channeling, which is where the bottom of it basically erodes. And so the bottom is the earth. And if you catch it soon enough, you can do what’s called pipelining where you blow epoxy through the pipes and you line it and you basically create PVC pipes inside the old cast iron pipes. And this is fantastic because you can do this in theory without disturbing any of the tenants. On the other hand, it’s for this property, like a hundred thousand dollar expense, so you really want to know that it needs to be done.
And I think you can guess. If you have someone who’s a pipe liner come out to scope your pipes, it’s just like having a roof inspector who does roofs, what do you think they’re going to say? Right. It needs to have been done yesterday. And so it’s a hard decision of whether or not to wait because if you wait too long, the pipes can collapse and then you do, like you said, have to dig through the ground, disturb tenants. It’s a big problem.

Rob:
Wow. So please tell me, were you able to negotiate any concession, the purchase price credits, anything with the seller?

Kim:
Yeah. So the two issues, just to recap, are these pipes, and then the other issue is these delinquent tenants. And usually, that’s not a big deal. I actually can’t remember the last property I bought where there weren’t a few delinquent tenants that just magically showed up as soon as we got into contract. The issue here is really we’re paying a turnkey price for this property. This does not have the same returns as the property we bought last year. We were told that it was in perfect shape and it was a hundred percent occupied and all the tenants are paying market rent. And so that lost income in year one, that’s not something that we should have to eat. This was advertised to us as turnkey, not value add.

David:
So once you uncovered the backed up colon of the property, how did you use that information to go back to the seller and try to negotiate a better position for yourself?

Kim:
Yeah. So we asked the seller for a phone call. I would be lying to you if I wasn’t scared, but all my friends who are like Cutco salesmen were like, “You got to ask for a phone call. You can’t do this email garbage. You got to ask for a phone call.” So I literally reread, never split the difference, and I asked him for a phone call and he said no.

Rob:
He knows that he has to make concessions. He’s probably scared to negotiate because he’s the one with no power.

Kim:
He did not want to talk with me. And so what we typically do, I don’t know if this is what you guys do on your end as well, but what we typically do is send a long email with lots of numbers that explains why we think we deserve this credit. And I just felt that wouldn’t hit home enough here. It wouldn’t be enough of an impact. So I did something new. I did a presentation, like a Google sheet presentation, and then I did a Loom video, walking through the presentation. And so I sent him a link to the Loom video, not even the presentation, so he had to listen to my voice, and I walked through showing exactly what these delinquencies would do to the income for us in the first year. And then I also walked through the cost of the sewer and showed him all the models, showed him the videos that we took of the sewer scope and asked for my credit request.

Rob:
I think that phone call solved like 90% of the problems in real estate, to be honest. I was actually thinking about this last night. Everyone is so dang scared to pick up the phone and actually negotiate like we used to back in the day, back in my day, and I had a situation where I was negotiating back and forth with the realtor who happened to be the wife of the seller. I presented a couple of options and then finally he just called me, he’s like, “All right. What are you trying to do?” And I was like, “Well, in your offer, it doesn’t actually cash flow, and I’m trying to put together a deal that actually cash flows for me.” And we actually struck a deal. So very good on you because I know it’s very nerve-racking to probably talk to a seller. It’s always a nerve-racking experience to break the realtor barrier, but I think it’s so important.

Kim:
Yeah. Well, I tried. I ended up sending the Loom video instead, but I tried for a phone call and I think the Loom video was second best.

Rob:
And so what happened? Did he say yes? Did he give you the money back?

Kim:
So he sat on it for a week and a half, and we finally followed up with him while we were on vacation and he said no. He said that he thought that he could fix the delinquencies himself. He didn’t think that the sewer was a big issue. And so he said he wouldn’t offer us any credit, so we ended up pulling out of the deal.

Rob:
Were you close to saying, “Let’s just do it anyways,” or were you resolute on it from the get-go?

Kim:
Well, it’s not exactly where the story ends. So we pulled out of the deal. We got back our earnest money. We told the lender all the things, completely done, off to moving the elf around the house and Christmas shopping, the important things this time of year. We pulled out of the deal. And then two days ago actually, the broker called us, the seller’s broker, and he said that he was willing to offer a hundred thousand dollar credit. I didn’t say initially, but we asked for $350,000 off.

Rob:
$350,000 off or $350,000 credit?

Kim:
$350,000 off the purchase price is what we asked for.

Rob:
So fast-forward to today, you get a phone call from the broker and they say, “Hey, the seller wants back in. He’s going to give you a hundred thousand dollars off the purchase price.” Great, okay. And then?

Kim:
So we said, “Thank you very much, but call us back if it’s 200.”

Rob:
And has he called you back? Has he called you back?

Kim:
So called an hour ago and it’s up to 130.

Rob:
Okay. Hey, that’s progress. Is this the final number? It keeps changing.

Kim:
Well, we could call him on speaker right now but …

Rob:
That would be a first in BiggerPockets’ history. I would love that actually, but okay. Okay, so 130. So where are you at? What do you want for this?

Kim:
I’m on the fence, to be honest with you.

David:
Even though we’re interviewing you, can we talk you through this?

Kim:
Yes, I would love that. Send me the bill later.

David:
Because I feel like we’re in the middle of the negotiation. We’re not hearing about a deal that was done for five years ago. Here’s what my thoughts are. If rates drop or stay lower, the seller is going to feel like I don’t have to give her money. I’m going to get another buyer. But if you see another rate bump, what someone is going to be willing to pay for that property is going to change because now all the numbers that you put into the Excel sheet change, and that means that he’s going to be more likely to come back and say, “Okay, you can have your 200,000,” but at that point, you don’t have the rate that you wanted so it’s probably going to be even more. Has that been communicated through the brokers like, “Hey, let the guy know that we’ll buy it for a $200,000 discount at this rate, but if rates go up, he’s either going to have to pay for me to get a lower rate or it’s going to be a bigger discount later.”

Kim:
Yeah. So our rate is locked, and one of our contingencies is that we close before the end of the year because we want to take advantage of the tax write-off that I was talking about earlier. But we have made the point to him-

Rob:
80%?

Kim:
Yeah. We have made the point to him that if rates go up, he’s going to have a hard time finding another buyer.

Rob:
I think he’s having a hard time finding the buyer now. He called you, right? If he called you and he is trying to strike this up again, you’re probably it.

Kim:
Yeah. I think the issue here I’ve realized is we are looking at two different properties. So the seller is looking at a property that he bought at a great price. This property was in bad shape. It was seriously in need of love. The property was practically vacant, it was dilapidated, all those things. And so he’s looking at this property that he bought at a great price. He also owns it in cash, so a lot less risk there. And so his point of view is what’s your problem? There’s a couple of vacancies. It’s part of doing business. You just fill it. Who cares if it’s $20,000 in TI to rehab this unit? Big deal. Because he’s sitting on a gravy train.
But us, we’re looking at this property where we paid a premium price. The returns weren’t great to begin with, but we were okay with it because it did meet the basic fundamentals. It wasn’t great returns, but basic fundamentals, fixes our tax problem, and we were thinking we were being handed something that was very low maintenance. Now we’re sitting somewhere where we’re going to rush to close on this deal before the end of the year. And honestly, that’s a big factor for us. We are interested in our quality of life. We’re about what’s your hourly rate? Not how much do you make per year? It’s a lot of work right now. So we’re going to close in the middle of the holidays on this property and then we’re going to inherit all these problems.

Rob:
Here’s my thought, and David, you can tell me if you disagree. I think he’s going to go up a little bit more than that 130 just based on where you’re at and the fact that they called you. But I don’t think you should take that hundred and let’s say 50 if that’s where you end up and subtract it off the purchase price because I don’t think that’s going to be significant in your overall monthly mortgage. I think what will be significant for you out the gate is getting $150,000 credit so long as that works out with the banking. There’s a limit to your credits. And David, you can chime in on this, but I would take that as a credit so that you can save that money in your down payment and use that to pay for that giant expense. And then at that point, you’re now looking at the deal that you were analyzing initially. That’s how I’d approach it. What do you think, David?

David:
Commercial financing may not allow that to happen, the same with residential financing, because you’re dealing with conforming loans. The rules are pretty clear of how much a seller can contribute to a buyer’s closing cost. It might not work the same in the commercial space. When they take it off the purchase price, it doesn’t really affect a whole lot. You just borrow a little bit less money.

Kim:
Well, we’re keeping our loan amount the same, so we would be saving that money as cash in the bank. We would be putting … If he gives us a $200,000 credit or off the purchase price, we’re going to be paying $200,000 less.

David:
Yeah. So it would be the same in your position. What if he goes in and makes the changes for you?

Kim:
I’d be very interested in that if he wants to deal with the sewer. The question is can he do that post-close? Do we trust him?

Rob:
It gets a little dicey because there are the sellers who won’t take that risk because the deal could always fall through. Case in point, this deal already fell through for that reason. And then you could always have some contract that makes him do it afterwards. But that always is a risk in and of itself. So it’s a hard one either way.

Kim:
Yeah. And I feel like I want to make sure I actually listen to the principles we talked about earlier in the show. I want to make sure I’m not speculating on getting tenants to market rent. And another issue is that we actually were planning to self-manage this property since it’s in our hometown. And do we want that headache? Do we want to take that on? We’re going to do the leasing as well. And just uncertainty with where the market is headed. Are we worried about the Pilates tenant? Are we worried about these tenants that are delinquent? Will we be able to re-let the space? So I’m getting cold feet.

David:
I don’t know that you’re wrong. I think in this position with the way the market is headed, it is more likely that things are going to soften in the commercial space then get tight. So you’ve got that on your side. And maybe Phoenix has been isolated from this a little bit and so the seller doesn’t realize that there’s going to be a lot of commercial properties that are going to start hitting the market with much more competitive prices than what we have seen because rates are so high. And as these balloon payments start coming due, refinancing will not be an option, and a lot of these properties were something that people put money in together to buy, so they have to sell it to pay back their investors.
I think we’re going to see more inventory hitting the market now than what we have before. And so time is on your side to find the deal. Time is not on your side for the tax part. So that’s really what you have to weigh. Is it worth taking the hit on taxes to buy the better deal or not? But I really appreciate you sharing the details of this story because this is real life real estate. This is exactly what happens. I was told this and then it turned out to be that, and then I said this and then they said that, and the story is always changing.

Rob:
Here’s what I would say. I think I would move forward, so long as I could get assurances that the owner was going to fix it beforehand or immediately after closing.

Kim:
Interesting. I like that idea.

Rob:
Because to me, it’s the same deal. If he’s going to pay for it through this concession, through this credit, however you want to slice it up, then it’s effectively the same deal. You just have to make sure that the repair gets made.

Kim:
Interesting. Yeah. And usually, we look for … What we say, we usually look for problems that go away with the seller. So give me an income statement that’s written on a napkin all day long. I have no problems that go away with the seller, but these are all problems that don’t go away with the seller. They stick with us as soon as we close. So that’s our hesitation.

David:
Well, I think you’re doing the right thing. Stick to your guns. If you have to take the hit on your taxes, and that makes more sense than buying the property, do it. But I’d also look at, if I was in your position, if I have to pay 70 grand more than what I wanted, would the tax benefit overall make up for that 70 grand? So even though the deal might not be what you wanted, big picture, this does make more sense. And if that’s the case, then you just ask yourself, let’s say your tax benefit was 40 grand but you’re going to have your 70 grand apart from where you want to be so you feel like you’re 30 grand in the whole, is this property in such a great location and such a great asset that that 30 grand is worth it? Or with your experience and your knowledge and what you do, Kim, could you just go find a better deal that you could make that money back somewhere else?

Rob:
All right, everyone. If you want to hear an update on this story and follow along in the process, be sure to follow Kim on all of her social medias. Kim, where can people find you and get the juicy update and conclusion to the saga?

Kim:
Yeah. So to learn more about what we do and get on our list for updates and opportunities, they can go to our website, which is ironpeakproperties.com. Follow me on LinkedIn under Kim Hopkins. And then lastly on Instagram as MoneyPlusHappy. And hey, maybe we should put this to a vote. If you guys hear this, go ahead and weigh in on what you think we should do with this deal.

Rob:
All right. Comment in the YouTube comments if you’re watching this on YouTube. Let us know what you think.

David:
All right, Kim, it’s been great having you here. Thanks so much for sharing your story with us. I’m sitting on pins and needles myself, waiting to hear how this story plays out, so I’ll be curious to hear myself. But we’ll let you get out of here for today. Thanks so much for being on the show.

Kim:
Thanks so much for having me guys.

David:
This is David Greene for Rob, shipped his pants from Kohl’s, Abasolo, signing out.

 

 

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