Here's How Much It Actually Costs to Buy a Commercial Building

Every real estate deal we've ever done is small-scale residential until now. We just bought a historic 9-unit building in the best neighborhood Indianapolis has to offer, but it comes with some serious issues. 1920 build, knobby tube wiring throughout, and it is severely under rented. Today, we're breaking down the whole deal for you. If you don't know us, we're the co-founders of Roots Realico, a local real estate team that cares deeply about our city. Our day job is helping people buy and sell real estate, but our side hustle is investing. And today we're going to break down our first commercial deal. Let's get into it. So Tyler, how did we buy this 9-unit building? Yeah, the way it came about, I I think we both kind of realized we wanted to get in commercial because we weren't seeing um I guess the returns or economies of scale to put it in a succinct way from single families. Um like there just wasn't a lot of margin there. And so we're having all these guests on the podcast come on talking about their development and scaling up and realizing you really do have to scale up into multiple units to have the economies of scale to pay for things breaking and renovating and achieve bigger honestly just spread in margin. Um so that was kind of stewing in the background and essentially through a mutual connection from I got coffee with this guy a long time ago who I thought nothing would come of it. Turns out his cousin owned a nine-unit in Mering Kesler. And he texts me out of the blue, "Hey Tyler, my cousin owns a nine unit in Mering Kesler. You should grab a beer with him and see what it's all about because it sounds like he wants to make moves." I'm like, "Oh, great. Maybe I'll be the listing agent on it or find a buyer for him." So, I sit down and he kind of walks through like, "We want a 1031. You know, we bought at a great price. It's appreciated a little bit. We want to do something with it." And so, I'm sitting there thinking like, great, I'm going to get this listing, right? I'm going to find you a buyer. But the more I started to think about it, the more I was like, shoot, maybe this is ours. Tyler's like feverishly texting me like, I think I got us a commercial building. I'm like, no, I don't want that. I don't want that. That sounds so scary. I'm broke right now. I don't like liquid poor. I don't want this 9 unit. Right. And also, you're giving great feedback on the price cuz they wanted 1. 2 million, which was like double what they bought it for. And you're essentially like rich. We sat on a whiteboard for days. It felt like trying to make the numbers work to raise the We didn't have the 300,000 down payment. No. Right. So, we sat on white board. How do we raise 300,000 and pay our investors 8%, 10%, whatever. It's like numbers don't work at 1. 2. Not at all. We should just be the agents. We should just be the agents. Turn around. I put it on our newsletter. We provide a great offmarket deals I think on there, including this one, a 9 unit apartment building. Sure enough, uh the owner of a co-working space that we've hosted events for is like, "Hey, actually, we have some money. We sold a business. We need to land it. We don't want to pay capital gains, so we're going to, you know, 1031 into um uh property." Awesome. 3% commission on a $1. 2 million deal. And he's like, "I'm going to loop in my business partner." Business partner jumps in. Actually, numbers don't work. 950 verbal. Send it. Like, okay, buddy. This is going to go nowhere. So essentially the investor I'm working with from the offmarket buyers list says 950 verbal. So I send 950 verbal to their broker and they're like actually we crunch numbers and we don't think it's going to appraise for 1. 2. They said 950 works. So then I was like well I need to bring this to Max to talk about it because that's crazy. They just dropped the price 250,000. A quick aside most people overpay for insurance or worse they're undercovered and they don't realize it. We partner with Jackson Blevens at Core Insurance Solutions. He's a full-ervice broker here locally in Indianapolis who handles everything from home, auto, boat, he can do it all and he understands the retail side and investor side of the game. If you want someone who can shop the market for you and tailor correct coverage for your property, connect with Jackson in the description below. And we knew the investor through local connections. And we also knew that he loves doing partnerships with uh investors. Like he wants to not have to be in the deal for the longevity of it. He likes to do the work and then be able to have somebody to rely on to operate it. Tyler, we can be the perfect guys for this. And 950 was what our whiteboard kept saying it was worth. We just thought there we didn't honestly have the cohes to go write the offer and then raise the capital. we needed somebody else to be bold to go make the offer and then we could be the vehicle that gets to the end uh of it. And it's awesome because like single families leading up to this gives you so many scars. You just learn so many lessons along the way. And we were able to take those lessons, apply them through the purchase of this building. And we actually got a little bit better. Let's get into the numbers. It wasn't 950. That's not where we settled. We ended up kind of dwindling down further, right? one of the investors who he's so much more commercial experience than we did. Uh again had the con to say actually let's go 925. Uh I think I don't know if it was the renovation or something. He's like some reason he wanted to go 925. And I'm like again like I don't know. We put in the offer 925 and they're like sure$ 925 still works. So purchase price $925,000. We also negotiated a $50,000 credit for the knob and tube on the front end because there's knob and tube wiring from the 1920s. That's going to be a huge factor. They knew any buyer was going to have an inspection request that. So, we went ahead and negotiated that on the front end, which is huge that we got that paid for on top of the 925. Ginormous. Uh, and so we're able to get into this deal and we're going through escrow and I'm just like the whole time we have to document this journey and that's why we're making this. We're going to do a couple episodes about it. And the way that it's going right now, we've like where we're at today is we've bought the property and we're demoing one of the units and we found out at the closing table what's our monthly payment going to be on this property cuz it's nuts. Yeah. We originally thought our monthly payment was going to be like 56,000. It is 3,700 which is interest only for 2 years. Interest only two years. So, we bought the building 925 50k credit to get to a payment of 3,700 interest only. So, let's think about that. What are the other important numbers that go into it? Yeah. So, we think it's going to take about 15,000 a unit to renovate it, which is 135,000 total. 135,000. to Reno. These are under rented units. Yeah. Right. It's like grandma's unit basically. And it's a crummy unit. What are the current rents bringing in right now? 99,900 a month. It's about a,000 and some change. So, we bought it 925 basically settled up at$875. We've got 9. 9K coming in in current rents and we need to dump another 135 grand in to bring it back up. What do you think we can get to on the back end? What what is it going to appraise? Where is our ARV? Yeah, ARV by raising the rents and the net operating income because commercial is based on the income. We are factoring in we can raise the NOI from 42,000 to about 86,000 from their actual P&L to like our net operating income. At a six cap, 6. 5 cap, that would be 1. 3 million. 1. 3 m. Let's go. What does that do to the cash? Right. So, well, we the debt bank debt on it is 697,000. Yeah. 700K. Right. So, one you can refinance and we can pull fully pull out what their initial capital they put in is and which they put in roughly 170 grand, let's call it. Our investor's capital is 170 grand. 170 grand. Yeah. The profit from 1. 3 from what we put in all in at 925 plus 35,000 renovation is it's a $240,000 profit essentially from this is what it's worth. This is what we put into it. Cash in 170 cash out 240. Yeah. Simple. Because the coolest part is because of the credit that we got, we almost can cash flow the full Renault with that monthly payment, which is what makes it possible to be there's probably going to be a 50k discrepancy, which will really net net zero, but this Meridian Kesler 9 unit could be a full 100% burr. What makes no sense? I didn't I've been preaching for the mountains, the burrs are dead. And to underscore, this is cash out including them getting their principal back. Yeah. So like that's this is profit, right? Which is Yeah. We this is like after paying everything off. So it is a true burr. The burr in small commercial is just way easier because it's based on the numbers and the income. So if you find an under rented apartment building, commercial building, you raise the rents through what you put in, you renovate it on a budget wisely, you can actually do a cash out burn is what we're finding. Yeah. And moreover, we had outside investor capital. So it's like we're paying their money off for for us. It's an a limited return. We put zero in, right, to this deal. And we just like genuinely want to provide housing in this neighborhood for what we're noticing is like young working professionals that mom and dad live in Meridian Kesler mansion and there's nothing that they can afford within distance that actually is reasonable. And so being able to provide that housing for that demo is going to be huge. That's kind of who's living there right now. But just upskilling the rents currently, like what are some of the drawbacks if you were a tenant to live in this building? Pause. A quick break from the episode. The lender you choose will make or break your experience. That's why our team at Roots consistently works with Rnado Lima from Approved Mortgage. He communicates clearly, moves quickly, and understands both retail and investment loans at a high level. When my guy Renado's on the deal, things move steady. When you get serious about buying, click the link in the description and contact Renado today. Right. Kitchen is like literally no room to move or breathe in the kitchen. It's tiny. Bathroom mold on the ceilings that we saw. Old 1920s tile, old claw style tub that's like falling apart. Uh knob and tube wiring, pretty big hazard uh in there from an electrical fire standpoint. And everything is just outdated. Like it's just like beautiful from the like charm aspect, but just not when you actually think about livability. No dishwasher, no inunit laundry. You have to go out in the freezing cold to like go to the laundry room, that sort of stuff. Yeah. Imagine in the winter you have to walk outside to clean your underwear. Like it's awful. It sucks. It's keeping the rents down, too. Yeah. Yeah. And and keeping them, you know, fully capped on like their lifestyle and what they would be willing to pay for a unit. What was the difference putting this deal together between buying your first single family home? That's a interesting question. There are some more complexities. I would say this is honestly more fun. Uh one, it's more fun to do it with others. It's more fun to do it with a scale of which if you win, you win big hundreds of thousands of dollars. That's like, oh, this is going to cash flow $200 a month. I think like that felt safe, but the reality was now that I'm inside those deals, they're not safe because when the cash flow is not coming in, it's a consistent monthly burn, right? This is actually safer. Like our monthly payment versus the rents, 99,900 versus a monthly payment at 3,700. Yeah. The the moderate medium losses are a little bit more reserved in the commercial game, but the big losses are certainly worse. Yeah. Oh, we a roof goes out. It's going to cost a little bit more than getting somebody on the roof for We might be a little naive right now. Let's be honest. Yeah, there's some things we're going to figure out for sure. Yeah. Some rosecolored glasses right after the deal. What does this look like long term for you? What like some of the lessons you're learning? What are you game planning for the future? Yeah, good question. I think that our number one goal here that we've talked about extensively is proving proving ourselves to our capital partners going out and crushing it for them, right? Like if they get their principle paid back one, that's when profits start to split for us. We have to pay them back to start to make real money on this. So going out increasing the value, refinancing, getting their money back is huge priority. But then number two is documenting and telling the story. Mhm. We have 15, 20 people on a spreadsheet that have raised their hands and said, "I want to invest with you guys. I am tired of being a landlord. I'm tired of calling to unclog the toilet. Forget about it. I have a W2 of a family. I want to invest with you guys." So, we're like, "Great. We need to if we're the horse they're betting on, we need to train. We're on the track training and sweating because we got to know what the heck we're doing before we take people's capital." Yeah. It's a lot easier to have uh equivalent partners into a deal like this one as opposed to going and being a GP. Like I like the idea of you have to be kind of an LP before you're a GP and a very active limited partner. Maybe you're bringing the deal to a GP and you're like, "Hey, I want to do this deal. Let me ride along with you." That's kind of what this feels like. There just literally wasn't enough equity to pull anybody else in besides them because of the limitation of the 1031 they needed to get the deal going. So that's what jacks me up. I'm like, either we sell, refi, whatever happens, let's get the next one going. I'm like, I'm eager. I'm ready to go. So, let me ask you a question. What are the biggest pitfalls that you see ahead? Yeah, the biggest pitfalls are uh every unit that was going to be vacant got renewed in escrow right before closing, which is like h gut punch cuz we need the tenants out to be able to doing knob and tube configurations on nine units separately. They all wanted to stay. They they like the building too much. Yeah, of course. because they're paying grandma rate rent, right? It's 950 for a two bed, one bath in Radian Custler. I would want to stay too. So, now we're going to have to like work really hard to get them out. So, I guess the biggest pitfall is the timeline. Like just timeline and commercialist, even the escro on this took months on end to put together. There's a lot of yapping before contracts, which is like totally foreign to me. I'm like, write a purchase agreement. I want to close in the next 14 days. Let's go. And this was like it took two months. It took 14 days to write an effing purchase agreement, right? like there's way more talking. So I I just think like the timeliness of things is going to be the the pitfalls. Big difference from single family. Single family it's empty. Go in not get rehab. If there's no seasoning, refinance immediately. This is a jigsaw puzzle. Literally, it's how we've been describing the leases ending in the in the knob and tube. Do you do unit by unit or all at once? Like it's complicated. It's very my head. A lot of it honestly. Luckily, it's not above mine. I love getting into the construction and like some of the work. You got the deal. You got the deal. That's why I'm here. That's what I bring to the table. Um, so I I'm excited to sink my teeth into some of the construction and get that rolling. We've got a unit demoed right now, like starting to put that back together, doing some of the design. I'd be curious from you guys, what documentation you would love to see us do? Like maybe we take the the show on the road and we go and do a pod in the common area of the apartment building. I don't know. There are a lot of people that want to get involved with this. What's coming up for people that want to get involved? Yeah. What we're doing, a lot's coming up. I mean, you just have to get uh into our network really is is what we're looking for. Um and we want to be partnered with the people that we're partnering with, not just like a foreign cash deposit, if that makes sense. Like I I is the word that Yeah, relationship and some stewardship. Um cuz I'm looking to hold assets for a long time. I don't unless if like the math literally makes too much sense to sell. I want to build it. This is a long-term hold. We're refinancing to get their capital out, right? So, they can reuse it and then we're going to hold it because it's a great area and it's going to be a rental that serves the neighborhood extremely well. Yeah. So, follow along as we document the journey of two single family investors getting into commercial. This is day one. Peace.