It Is Possible to Buy Low in a Hot Market

Although it’s more difficult, you can buy low in a hot market. You just have to take the time to shop and keep in mind that “one man’s trash is another’s treasure.” Look for sellers with big equity.

Once, I was looking for a building, because I was entertaining the thought of putting my own office in a building, but I wanted to own the building. Since my girlfriend owned a hair salon and she was renting, I wanted to put her business in the building, too.

A friend of mine called me with a possibility—a two-building complex. However, both buildings were vacant, which was not something good to see. The back building was a spa, but both buildings needed to be renovated.

When we walked into this back building, it led into one room with two beds and a hot tub, while another room held one bed with an attached steam room. Other rooms held beds and hot tubs. My friend told me that it was a full-service spa, but I knew I was looking at something that had served quite another purpose. Although we were in a very, very hot market, everyone knew what this building had been, so cultural memory was going to be an issue.

If I bought this property and tried to turn it into something more acceptable to the community, I would have to be very, very careful. I knew that I could use the front building for my office location, but I didn’t want that back building. This property had 4,000 square feet, with price per square foot to buy buildings in this area running between $125 and $150 a square foot. That calculated out as $500,000 to $600,000 for the property value, based on potential rent.

They were only asking $399,000, because of the renovations needed to the front building, and both buildings were vacant. I offered them $270,000, which they countered with $300,000. We ended up buying the building for $300,000 and my bank handled the financing of 80% loan-to-value. The final loan worked out to about $240,000. In the contract, I noted that we would buy it and procure the financing from my bank, but the seller would have to carry a $40,000 second mortgage, to which they agreed.

This meant that I had to come up with $20,000 to close. Since the listing agent was the person who showed me the property, I wrote myself in for a commission on the selling side of $12,000. So, out of the $20,000 that I needed to obtain, $12,000 was commission. The guy who was selling it to me told me that he had three people who wanted to rent the building immediately. However, I couldn’t sign a lease until we purchased the property.

So I said, “Okay, I’ll write a contract to buy the property, but the contract will be subject to you or the current owner putting a tenant in the back building, for $1,800 a month on a five-year lease.” I wrote that in because $1,800 was my entire cost to carry the whole property. He found a tenant and wrote him in. I’ve replaced the tenant twice, but it’s still a five-year lease.

The tenant came to me and said, “I want to sell my property.” I told him that he needed to recruit the new tenant and qualify him under my terms and conditions. I ended up closing on this building and was able to buy low in a hot market. The day I closed the property paid for itself from Day One.

Remember, even in a hot market, you can find this kind of deal, if you take your time and shop!

So we rented it and the bottom line for both buildings is roughly about $47,000 a year. My total cost to carry both buildings is about $27,000 a year. There’s a $20,000 net income from the buildings on $13,000 (including closing costs) cash investment. So cash on cash can work out okay, if you structure deals properly.

Key Points

This account illustrates several real estate investment guidelines:

• Unless you’re in the leasing business, never buy a vacant building.

• The entry level into this market is no different than what is required to get into the residential marketplace. However, in this arena, you can get far more cash returns, in both net operating income and cash on cash. When you buy low in a hot market, you can also structure the deals, so it costs you very little cash.

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