3 Lessons Learned Buying Our First Commercial Property as Residential Investors

Mike DeHaan: [0:00] What is going on collecting keys crew? Welcome to this week's Friday Focus episode, everybody. If this is your first time here, the collecting keys podcast is the show where we teach you to make massive income, not just passive income with your real estate investing business. And on these Friday episodes, we do a quick deep dive into a random thought, or idea or something from the week that just like is in a short monologue style of episode that, you know, allows us to, I don't know, do a little bit of a deep dive on something as like a one on one host. So sometimes it'll be me, sometimes it'll be Dan, sometimes we do these little deal case studies. Either way, these are our short Friday episodes for you guys to enjoy. If you aren't familiar with me, I am your host, Mike DeHaan. And you can follow me on Instagram at mike underscore invest if you kinda wanna see what I'm about or what I look like. And I'm mostly known as the guy who burned the bridges from my engineering career a few years ago, and then ultimately bootstrapped a multi 7 figure real estate company despite having no previous real estate experience. So I have a bunch of different podcast episodes and everything out there about that.

Mike DeHaan: [1:06] If you want any of those, shoot me a DM at Mike_Invest@Instagram. I'd be happy to point you in those directions. Anyways, over the past five years, I have been focused almost exclusively on a residential real estate. But currently, we are under contract to buy our first commercial property. And I figured a great episode for this Friday folks today would be to dive into the three primary lessons I have learned so far as we go through the process of buying this commercial asset. We have not closed on it yet, so there is a possibility that we end up not buying it. But we are still in the due diligence phase and are very seriously planning to move forward. And, you know, the things that I have learned are that just like this kind of asset is very, very different from residential, and there was a bunch of things I was not expecting. So let's dive in. First off, I did not realize how expensive renovations were on commercial assets versus residential properties. We have done hundreds of residential properties literally, and I was not prepared for how much more expensive these commercial renovations would be for kinda like the same thing. And, honestly, the place that we're buying, it's like a distressed office space. It's just under 6,000 square feet. It's, like, not anything fancy. It's honestly kinda like a giant brick box.

Mike DeHaan: [2:20] To just like a great location. But we are getting quotes in like hundreds of thousands of dollars to redo the offices, you know, throw up some paint, do some flooring, fix all the utility stuff, which is a lot of the expense. And, you know, we've done complete gut rehab houses that are, like, 2,500 square feet for, 50 k. I was absolutely not aware that a building that's, like, I don't know, twice the size was going to be 10 x the cost. Like, the main things that we're really learning about are fire protection requirements, which makes sense. You need to have a commercial property, but I didn't realize that a sprinkler system costs, $200 to put up. Like, isn't it just like a bunch of pipes and sensors? Like, what the fuck? I guess, don't expect that at all. As the class you've been going through it, sort of like our our original base estimates on expenses have just been blown out of water. You know? And there's, like, fire protection stuff that's required there, and then, you know, higher durability materials in general are needed, and those tend to be a little bit more expensive than me to put in residential properties. But I mean, it just gave me a really harsh perspective on the money that's needed for these types of deals. And, you know, it was a learning experience as we got in. And the plus side is because we were buying it as what we thought was just like an a plus plus plus deal.

Mike DeHaan: [3:32] We're learning all these things. Our budget is increasing rapidly, but it's still like an a deal after that because we thought it was so frickin' solid when we found it originally. So, you know, something we're learning. I'm sure there's different ways you can approach it. But, yeah, it's been a learning experience so far there. Number two, when it comes to lenders on these kind of deals, I didn't realize how much more room there was for negotiations or how kinda like different the lending options were. You know, when it comes to residential property, if you've been in that space at all, you know, you can look at hard money, you can look at like Fannie Freddie loans, DSCR loans, commercial residential loans. Everyone kind of offers like the same products. You can find stuff that's like a little bit different, but it will be within a percentage point of each other, typically have similar LTV requirements, DSCR requirements, things like that. With commercial, things are just like completely different. Something that caught us off guard was immediately our primary bank that we have done dozens and dozens of loans with, and we held most of our cash there. They won't even lend on it if it isn't fully stabilized. Like, we figured that we would just be able to text our banker there like we always do the residential properties. He would give us a basic idea. He was basically just like, no.

Mike DeHaan: [4:44] We don't even touch these kind of deals if they're not leased. I'm like, okay. Well, that sucks because that was something that we were banking on. And, you know, normally with our residential stuff, we literally just text them, they go and they do a drive by or do like a outside inspection, whatever they call it, and we get a refinance or purchase done in like a couple of weeks. This one, are having to start from square one. And then as we were shopping around, we started to find that we had a super wide range of different LTVs, different interest rates, all sorts of different lending requirements around us and the property itself. And then like the bank that we ended up going with, they're they're a local bank, and they're actually lending us 80% of the purchase price, plus all of the estimated renovation costs once we get a a made out professional budget from a contractor. And that's despite it not being leased. And that's like such a stark contrast from our other lender that we have a very, very good track record with that won't even touch it. We have this new lender that doesn't even know us. They hadn't even seen our tax returns, we started working with them. And they're like, yeah, we'll basically fund the entire thing plus the renovation for you without even sort of a proof that this property is valuable, just not a lease at all. And, I mean, you'd be very, very hard pressed to find a bank to do that on the residential side. But on the commercial side, I mean, there's just different options. So it's so so important to make sure that you're shopping around and nurturing these relationships.

Mike DeHaan: [6:05] Okay? So that was like a thing. Very interesting to sort of go through that and sort of see what exists in that that side of the space. The third thing, the level of the service providers when it comes to commercial properties is so different from residential. You know, from like the contractors, to lenders, to property managers, brokers, you know, whatever. There's so much more professional in the residential space. Right? You know, we're not working with like whoever, like, had a pulse and decided to show up to work that day or or answer my call regarding the deal we're trying to close. You know, people are responsive. They work fast. They're very to the point. There isn't a lot of like willy nilly talk, like, being around the bush sort of behavior with a lot of these. There there's a lot less trying to like hunt people down or worrying about, like, contractors trying to, like, embezzle you with money. Like, honestly, I can see why most commercial investors are kinda like uptight corporate types. You know, like, there's they've never had to not be, know, you they've never really had to get their hands dirty. Like, it's very obvious to me that, you know, most of these commercial investors, now understand, they've never had the honor of, like, having to deal with a potentially drunk contractor who reeks of cigarettes, who had incorrectly installed a staircase at your rental unit and is now trying to shake you down for more money in a Home Depot parking lot because he needs an advance on the rest of the work. And if that sounds oddly specific, it's because it is, and that is something that has absolutely happened to me. K? If you're on the commercial end, that just doesn't seem to be a thing. Like, you're working with, like, legit companies.

Mike DeHaan: [7:38] Probably also why it's more expensive, but I will say it is very tempting to just stay in that world and not have to deal with some of the weirdos, especially on the project side. So very, very different. Same with the lenders, same with the brokers. Like, it's just a whole different vibe, and it's been very refreshing overall from our past experience from Prudential. So in case your career is what we're planning to do with this space, we are looking at either turning into like a co working type of space where we would basically rent office suites, or we are also looking at basically establishing it into larger office suites and trying to find some long term tenants with it. Because like the neighborhood it's in has a lot of smaller businesses that needs sort of small office space because most of the you're by is like really big. Or we also have a couple of triple net leases that we are looking to potentially put in this property, and they would be able to renovate and do what they want with it. And that would just be the ideal situation because then it would truly just be passive money at that point. So, you know, still trying to figure it out. But either way, we've learning a lot of lessons along the way.

Mike DeHaan: [8:38] So anyways, that's what I have for you so far. Once we get close and start operating, I'm sure I'll have some more lessons for you. I'll do another episode at that point. So what are your thoughts on commercial real estate? There any gotchas I should be watching out for? Send me a DM at Mike underscore Invest on Instagram, I'd appreciate any insights that you have. Like, seriously, I'm very open to learning new things. Don't be afraid to reach out. Let me know if you think that it's probably something that I should be thinking about. Anyways, I appreciate you listening to my Friday ramblings. You all have an awesome weekend, and I hope you don't, like, I don't know, die or have something terrible happened. That would make it real bummer for your weekend. But appreciate you all listening, and we'll talk to you guys next week. See you.