As you read last week, my journey to investing in real estate was preceded by home ownership... five times over! It’s not normal to own five homes and then get into real estate investing, but I’ve learned that there’s no conventional path to property investment. The important thing is we eventually did it – and if you’re interested, you can too! I will share what we’ve done so far, where we plan to go, and the highs and lows along the way. My goal is to help remove the doubt from starting and help alleviate the fear of investing through genuine reflection and transparency. Without further adieu, let’s get into our first property.
The Search
Finding your first investment property is a long, time-consuming process. Because you’re still learning what makes a good investment, you need to sift through numerous properties, run the numbers, and then decide if it’s the right investment for you. Like many in the pre-investment stage, I would look and look without taking action. In fact, when I first moved to Colorado, I was analyzing some properties that looked like great deals. I had a spreadsheet that tracked the list price, what I was pondering for an offer, and what I expected cash flow to be. Of course, I did not take action – only to see them increase 150% in value over five to six years, not to mention the cash flow they likely would have generated! Yes, it was a remarkable time in the market that we are not likely to see again soon (low borrowing rates, high appreciation, and climbing rents), but that doesn't mean we "missed" the opportunity. The conditions were special, but the business case for real estate investing remains.
While my hesitancy cost me, and thinking the residential market was overpriced, I pivoted to commercial real estate. Why, you might ask? Because my next door neighbor (a kind, older gentleman) told me about it. Nothing in great detail, literally five minutes of chatting while bringing in our trash bins. He shared the benefits of commercial real estate and how little effort it takes him to maintain the property. Intrigued, I was full-on ready to start analyzing commercial properties. Sure enough, there appeared to be great deals on the market.
I started looking at small commercial buildings (e.g. strip malls, business parks, etc.) that would provide stable returns without the hassle of residential tenants. I was meeting a commercial broker to look at a 5-unit mixed use building, and getting some lunch at a nearby restaurant. Looking across the street, I saw the broker hanging a “For Sale” sign at a small office building – a roofing company. I took note and met with the broker at the 5-unit. After touring the building, I realized it required more work than expected and was not a good investment. I asked about the roofing company, and the broker explained the company is moving to the outskirts of town. She gave me the marketing materials and I went on my way.
The Deal
After doing some due diligence, this seemed like a fantastic opportunity. What made it special was the zoning, called “commercial convenience”, where it was commercial by default, but could be converted into residential with a conditional use permit. Given that the adjacent properties were residential and mixed-use, converting it to residential would not be abnormal. The other consideration was two entries at the front – the roofing company operated on the left side, while the right had a small room and bathroom they used for bible study. It became evident that this was a great opportunity to convert this building into a residential duplex. Given the price per square foot, we could really maximize our return by doing so, and even considered short-term vs. long-term rentals. I ran the numbers and saw how much potential it had; however, it would require a significant remodel to convert it.
We decided to write an offer. Remember, this was 2021, and the market was at its peak! Our offer was aggressive – 2% below list price, quick close, and essentially a cash offer (via HELOC on our primary residence). We ended up agreeing on about 1% below list and went under contract. As part of this process, we assumed the risk that the property may get denied for conditional use as residential. Understandably, the sellers did not have the time or interest in seeing if we could convert the property, especially with several other potential buyers ready to write offers. After going through our inspection and the rest of the closing process, we signed and became property investors!
There is so much to this deal that I will be pausing here and continuing sharing next week, where we get into the nitty gritty of the remodel and share the highs and lows today. Talk to you next week!
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