February 23, 2024

Commercial real estate has seen a severe drop in demand. From office buildings to multifamily and more, rising mortgage rates and unwavering cap rates are making commercial real estate a gamble more than a grounded investment. But, when buyers start exiting the market, sellers get desperate, and this chain reaction allows committed commercial real estate investors to scoop up deals worth millions more just a few years back. We have a couple of those deals coming up on this episode!

We’re back with another audience deal show. This time, we’re walking through two commercial real estate deals with serious potential, but their prices don’t match reality. First, we talk to Ben Mashat, who recently went full-time into real estate investing after scaling a successful wholesaling operation. He’s got a MASSIVE deal opportunity—a five-story office building with seven-figure potential profits. The problem? A price tag that doesn’t match today’s commercial property market.

Next, we hear from Heidi De La Torre, who’s looking at a multi-unit beachside property with impressive price comps nearby. But, with zoning issues and a seller that can’t make up their mind, Heidi is struggling with which move to make as she debates taking on a project with this many pitfalls. As always, our panel of expert investors will give their suggestions on what our guests should do next and whether these deals are even worth chasing!

Dave:
Hey. What’s up, everyone? Welcome to On The Market. I am your host, Dave Meyer, joined by the full gang today, we got James, Henry, Jamil, and Kathy. I’m excited to have you all here because I have two pretty cool announcements for you, I think you might know this, but today, this episode, we’re recording it beforehand, but is going to be our one-year anniversary episode.

Kathy:
Woo-hoo.

Dave:
So congratulations, everyone. We made it through a full year of On The Market.

Henry:
That’s amazing.

Speaker 4:
Happy anniversary.

Kathy:
Yeah.

Dave:
Well, it’s pretty exciting. I think we’ve got 80-something shows, 90-something shows at this point and so, all of them have been a real pleasure to do with all of you and with the guests, so thank you all for being here.
And coincidentally, in the same exact week, we have something else exciting. James, I’m going to need you to call your jeweler, because if you don’t know, James bought us these necklaces to celebrate a million downloads, but we just got to 2 million downloads already.

Kathy:
Whoa.

Dave:
Yeah.

Henry:
That’s crazy.

Dave:
Just a couple of weeks ago. And now, we’re at 2 million downloads just in time for our birthday, so I just wanted to say congratulations to all of you. And thank you all of you listeners, I don’t even know how many of you are out there, but every single one of you, we appreciate you listening to this show. It’s been a real pleasure. It’s so much fun and truly a dream come true to make this show and we really appreciate it.

Kathy:
So Happy to be a part of it.

Henry:
That’s amazing.

Kathy:
Love you guys.

James:
All right, Jamil, you got to get us all Bentleys. I did the chains, you’re up next.

Jamil:
Done.

Dave:
That escalated quickly and I like it.
All right. Well, we do have a great show for you today. We’re going to be bringing on two listeners to talk about deals that they’re working through. And if you listened to our show a week or two ago, we did this with residential real estate and now we’re going to do a commercial show. And we put out a call to listeners about deals that they’re doing, we got so many, we had to split it up and we picked two residential. Did that a few weeks ago. Now we’re going to do two commercial deals and they’re phenomenal. Is really exciting conversation. But before we jump into that, I want to throw it to Henry who has an update for us already about one of the deals that we heard about a few weeks ago on our residential show.

Henry:
Yeah, absolutely. So we had one of my students, Matt McMains on the show last time, pitching a deal that he had gotten under contract. And I think a lot of the feedback that he got was that there just wasn’t quite enough room and that even though he was beyond his inspection period, I think Jamil gave him the advice to say, “Hey, why don’t you go and you have a sit down, take a look at the current market conditions. Things are different than they were when you first put this in contract and try to renegotiate some room in the deal so that you could potentially get a profit.”
And so, took that advice, he went to the seller and even though he was beyond his period, he told them that he’s evaluated the deal and he just needs a little more room. And because the seller understood that and was in a position that they had room to come down and he was able to negotiate another 15,000 off of that price. And so, now he is in a safe space with that deal and he’s going to make some money.
He was in a position before where he might have had to let go of the deal and give up his non-refundable and his money and now, he is going to do the exact opposite, stay in it and make money all because what we’re doing on this show is working. So it’s a great advertisement to say, “Hey, if you get the shot and you hear the call, send your deals, we’re here to help.”

Kathy:
Love it.

Dave:
Wow, that’s awesome. That’s super exciting. That makes my day for sure.

Kathy:
It’s so cool.

Dave:
All right, so we’re going to get into today’s episode, which is commercial in nature, but even if you’re not a commercial investor interested in commercial deals at this point, you still learn a lot. All the conversation that we have is really applicable to really almost any type of real estate.
There are two terms that we throw out during this episode that I just want to make sure people are aware of, the first one is NOI, stands for net operating income. It is similar to cash flow, except it doesn’t include debt service or capital expenditures and so, it gives you, just basically, a good idea of how much income you have if you weren’t to have a loan on it and you didn’t account for any big expenses, capital expenditures like a roof or HVAC system or something like that. So that’s NOI.
The second one is cap rate, which is sort of this complex and often confused thing in real estate, but basically, what it is is a measure of market sentiment. So when a cap rate is low, like around 3%, which is an example in this deal, that means that the price of the property is super high and it’s very expensive for the buyer and really good for the seller. When the cap rate is higher, that is generally good for the buyer and not as good for the seller. I’m not going to get into the math or the details of that. If you do want to learn more about that, you can check out my book Real Estate by the Numbers, I go in to that in detail as James is very kindly holding up for me because he reminded me to pitch my book. Thank you. Okay, someone did. And so, you could check that out.
But that’s all you really need to know for the context of this episode that when cap rates are lower, good for the seller, not as good for the buyer, when cap rates move up, that is good for the buyer and not as good for the seller. Cap rate, no one sets them, they are dictated by market conditions and they fluctuate based on macroeconomic conditions, buyer demand, lending standards, all sorts of different things, but I think that’s enough for you to understand what’s going on in this episode.
So we are going to take a quick break and then, we will get into our two listener deals who are working on commercial deals right now. Ben Mashat, welcome to On the Market. Thanks for joining us.

Ben:
How’s it going? It’s great to be here.

Dave:
Great to have you. Before we get into your deal, can you just tell us a little bit about yourself and your involvement so far in the real estate industry?

Ben:
Yeah, sounds good. I think back in 2019, I was going to college for mechanical engineering and then, I decided to drop out because I just didn’t enjoy doing it. I didn’t like doing the homework, I said there’s no way I could do this for the rest of my life, so ended up dropping out.
I think a year later, I got a job doing rain gutters, making a hundred bucks an hour, making killer money. And again, I was like, “How you doing this? There’s no way I could do this.” So my best friend, and now business partner, showed me Jamil and Astro Flipping and we ended up joining the community. It was the best decision we’ve ever made in our life and that kind of brings us to today. So quit my job about four months ago and now we are full-time in real estate and we’re loving it.

Dave:
Well, congratulations that you found something that you’re passionate about, it’s not an easy thing to do. And it sounds like you lined yourself up with a great community there, which is awesome. So let’s get into the deal. What deal are you bringing us today?

Ben:
I’ve been doing single-family wholesaling single-family, and it’s been going great, we’ve been getting a lot of opportunities. And then, this deal kind of got thrown on my lap by another wholesaler. It’s a commercial deal in West Palm Beach, Florida, it’s right in Riviera Beach. It is a huge $13 million commercial building. And when it first got sent to me, I didn’t know what to do with it, I was like, I have a buyer for this, I don’t really know how to underwrite it. It’s commercial, so it’s not multi-family, I wasn’t sure if you underwrote it the same way. So I got the PNLs, I got the rent roll, I got the occupancy, how much money it makes, I could find the cap rate, but I didn’t know if it was a deal. I didn’t know if it was only cap rate or if there’s more to it.
Right now, this steel is at 50% occupancy. It’s a 45,000 square foot building on almost two acres right on the beach. The yearly taxes is $110,000. It was just recently renovated, so there’s not much value add. The gross revenue, it makes around a million dollars a year. The total operating expenses are $500,000 a year. And then, the NOI is right around $450,000 a year. It cash flows about $400,000 a year, but it’s got a huge purchase price, so I wasn’t sure how to underwrite it.

Dave:
And the NOI, operating, all the stuff you just said, that’s at 50% occupancy?

Ben:
That is proforma, so that is at 90% occupancy, it will make that much. Okay? That’s the projected.

Dave:
And can you tell us a little bit about the location before we open it up to everyone? We’d just love to just know a little bit about the location and just tell us why you like the deal.

Ben:
It’s a beautiful building and it’s a huge building that can make a lot of money to an investor if someone decides to buy it, but it’s got to be at that 90% occupancy rate. If we can get that building filled up, it will cash flow $400,000 a year. And I was looking at it, I was like, “Holy crap, this definitely looks like an opportunity. If somebody knows how to market it out and get that building filled up to good renters, there could be huge opportunity here.”
I have all these projected numbers, but that doesn’t really tell me what it’s making right now. And even if it is a deal, $13 million, that’s a big purchase price. I think I was running cap rate and with the forma numbers, I ran the cap rate and it was at like a 4% cap rate. And I know most investors are wanting like eight or nine, maybe 12.

Dave:
Am I wrong, I’m getting cap rate at 3%. Did I do something wrong?

James:
Yeah, I’m getting three as well.

Kathy:
I got under three.

Speaker 4:
Yeah, 2.9.

Kathy:
And Ben, we’re not talking about any debt service in that right equation. Right?

Ben:
Okay.

Kathy:
So it’s really not cash flowing at all once you include debt service.

Dave:
This is what they call rich guy property.

Speaker 4:
Mm-hmm.

Kathy:
Yeah.

Dave:
It’s on the beach and it doesn’t cash flow.

Speaker 4:
So James’ property?

Dave:
No, not that. No, definitely not. That’s a different type of property. I mean, talk about location though. Sorry if I missed this, is it office or retail or what kind of-

Ben:
Office space.

Dave:
And then, how long has that 50% not been vacant? Was that one tenant or was it a few tenants? And do you know how long they’ve been up for lease for? And then also, how much are they up for lease for per square foot?

Ben:
Base rent per square foot, on the first level, it’s $10, on the second level, it’s like $34, down here, it says 500, I’m not sure if that’s correct. But there is a lot of suites in the building. It’s a five story, 45,000 square foot building. So that’s why I don’t think it’s filled up. It’s just a huge building and maybe they haven’t been marketing it out correctly.

Henry:
I assume those suites are configurable as well it could-

Ben:
Yeah.

Henry:
… be a number of tenants. Do you have the leases of the current tenant? How long are they in place? And are they paying market rents?

Ben:
I believe they’re paying market rents and some of the tenants are there for the next three years, I think one’s there for the next five years. They’re all longterm tenants.

Kathy:
I mean, office is getting hammered right now and I think this is one of those situations where the owner is bleeding right now and desperate and the price is just too high.

Jamil:
Yeah, the other part here is I’m never a fan of trying to wholesale properties like this, and you know the reason why.

Ben:
Uh-huh.

Jamil:
My opinion on this type of buyer, the buyer who buys this property, there’s a handful of people, in my opinion, in the United States, that want to purchase a property like this. And so, first and foremost, finding them is going to be a task. Second, when you are positioning yourself in a deal like this, when we are doing single-family wholesale, being the principal in the deal is easy because we can get earnest money, I can back you for funds to be able to make sure that you’ve got the funds to be able to write a legitimate offer. And so, those nuances are easy for us to overcome.
But when you’re talking about a deal like this, you need to have control of this. Even if the numbers on this deal were different, I think that the numbers on this deal aren’t going to attract a lot of buyers just because of where interest rates are right now and the challenge in the commercial real estate office space it’s just starting to become difficult, so this is the first of very many dominoes that you’re going to see falling over the next couple of years.
But the buyer who wants to buy this deal is not going to want to work with a wholesaler. The buyer who buys this deal is going to want to work directly with the owner of the property, and you’re going to need to have some way to control this to stop that conversation from happening. And it’s just nearly impossible for you to gain control of this because before a seller is even going to let you contract this, they’re going to give you the full sniff test, they’re going to look at your financials, they’re going to make sure that you’ve got the capacity to do this deal.
And you’re going to be stuck in a situation where you’ve got a seller who’s going to say, “This person doesn’t have the ability to do this deal,” and you’re going to have a buyer who’s going to say, “Even if you brought this opportunity,” let’s just say you were lucky and got this under contract, your buyer is going to say, “There’s no way this guy’s going to be able to perform on this, there’s no way. So I would way rather just wait for his contract to cancel and I’m going to go directly to that seller and ink out a good deal for myself.” Because even at 13 million right now, you don’t even have a profit in there. Right?
So this is just one of those situations that I would normally advise the community stay away from because you’re going to spend a lot of time jumping down a rabbit hole here trying to figure out how do we make sense of this when really you’re looking for a needle in the haystack, and that needle for this kind of deal, they’re out there right now, but they’re not ready to buy right now, they’re waiting another 12, 18 months before they start really poking around looking for a deal.

Ben:
Gotcha.

Dave:
Hey Ben, do you know how much debt is on the property and what the term is and whether it’s assumable?

Ben:
So you bring that up, I did get one offer from a buyer and it was a creative finance offer and I believe it was 5 million down, maybe $35,000 a month for two years and then a 6 million balloon at two years. And the seller was game for that. So no, I do not know the note or how much is left on it, but I do know the seller is open to creative finance, so that’s all I know about that.

Dave:
So I would dig because that could really jeopardize your deal, right? Because if that seller has a two-year balloon coming up or something like that or whether they won’t let that be assumed. And so, that piece, I mean, good job getting an offer on that building. And now, it’s about trying to verify it. Because the hardest part was probably getting a buyer to the table for this specific deal in today’s market. Now you want to make sure that the structure set up so there’s not weird hiccups going through that deal.
And so, I would talk to the seller and say, “Look, we have a serious buyer here. You’re okay with the terms, now we got to dig a little deeper on this.” Dig into what that loan is because that can kill the deal right there. Who’s the bank? Whether it’s assumable. And then also, check what the debt is too because I’m trying to think if 35 grand a month is going to cover. So are they doing zero interest on the deferred rest of the… Because I’m guessing the loan’s below 50%, so then there’s going to be a little bit of a seller carryback on that too. Did you guys discuss rate and term on that as well?

Ben:
Yeah, I believe so. That was, like I said, the 5 million down, 35,000 a month fixed and then, I think it was either two or 4% interest on the $6 million balloon payment in two years.

Jamil:
That would be in addition to the $35,000 a month?

Ben:
I’m not sure.

Jamil:
Okay.

Ben:
Yeah, I think the 2% interest or 4% interest was just on the balloon payment.

James:
And maybe it’s just owned outright. If the seller’s entertaining that, I think they might own that, which honestly, those properties a lot of times are. Like I said, they’re kind of rich guy properties, it’s like they write a check and they want to buy it for the location because it’s really hard to own beachfront and it’s a different game. But I would really dig into that because that’s going to really make or break this deal for you. But if they are 5 million down 6 million balloons, so the seller will take 11? Okay, so they’re flexible off that 13?

Ben:
Yeah, they’re a little flexible. I think that’s why the offer didn’t get accepted. I think the counter was 13.5 million total. So I think was the counter was 7 million down and then 6 million balloon or something like that. They wanted full price and that’s why the deal didn’t go through because we got an offer, I was like, “You guys need to take us off here because nobody’s obviously interested in this space right now.”

Jamil:
How are you being compensated with the creative offer? Just out of curiosity. By the way, that is phenomenal that you were able to put together somebody to come to the table with 5 million cash to take this.

Kathy:
Yeah.

Jamil:
Incredible job.

Ben:
Yeah. how we would’ve gotten compensated was our assignment fee would’ve came out of the down payment.

Jamil:
Smart.

Ben:
So One of the guys I was working with, he tacked on $250,000 onto his down payment and that would’ve been our assignment fee split three ways. So we would’ve made a lot of money if that did go through, but we’re still in the negotiation process. I haven’t talked to the buyer in a week or so, so we’re still trying to hammer out the terms and figure it out.

James:
Did you have your buyer sign a confidential notice too, that way you protect your deal a little bit?

Ben:
An NDA? Yes.

James:
Okay. Perfect. Yeah.

Jamil:
But James, do those really do anything?

James:
No, but if you’re working with the right buyers, people have integrity. I would say if you can’t trust that buyer, if they’re going to sign that agreement and walk on you anyways, your deal’s not get happen regardless. And so, I think it’s a good practice. At the end of the day, you can’t prevent scumbags, true, but I would definitely do that because that’s a property you almost have to reverse shop where you’re like, okay, I got the opportunity, let me go out and find that buyer for it. And so, you just want to protect yourself and have good, honest conversations. But I would dig deeper into those terms because if you get that buyer on that hook, you want to be able to lock them in. And so, get every piece of term, every piece of debt, especially if there’s a carryback, which you’re probably going to need for this right now because on vacant office space, the commercial loans, they don’t have a whole lot of appetite right now. And so, that debt’s going to be very, very essential to this deal regardless.

Ben:
Okay. I guess, my question is is cap rate the most important thing or is there more to it? Because I know proforma is important because you’re projecting what it’s going to make, but what’s going to make this deal appealable to not just this buyer but more buyers?

James:
Cheaper.

Kathy:
One thing would be to find out what potential use it has, and that would require going to the city planners and understanding because maybe that’s what your buyer is thinking is office is not doing great right now, but if it has another possible use and it’s beachfront, that could be interesting.

James:
Yeah, definitely.

Jamil:
So you’re thinking like a mixed use situation, Kathy, where maybe you’ve got some retail or office in the bottom and some residential maybe in the middle units?

Kathy:
Yeah, possibly. It would just require speaking to planning. Right. But those beachfront, I see there’s a lot of development in that area and I imagine that there is value there, it’s just currently not office. Right.

Jamil:
And I would imagine too that there’s going to be some pushback likely from the residents of the area to increase density for residential units there. Again, if you’re throwing that variable into there for its desirability, then you need a much more extended timeline to get a deal like that done because that would be a contingent situation to find out if that mixed-use play could be there.

Henry:
I would be looking at neighboring office complex competition, especially if they’re full and figuring out what are they doing or what are they offering that is causing their building to be full? What are the tenants that are in that space? Because then, you can market it to your buyers as bringing in the same types of tenants because it’s proven to work in that area.

Ben:
Okay.

Dave:
And just for context, I looked it up for you, the average cap rate for prime office in West Palm Beach is 5.8%. So it’s a significant way off what the rest of the offices are trading for. And this could be a great property, I don’t know, and I don’t buy offices, but that cap rate on a half-leased place and trusting performa and you need to do a lease up in a very difficult office leasing environment right now is pretty risky. You’re basically assuming the best possible conditions and that’s not reality right now.

Henry:
I mean, even if your buyer wanted to take on the risk, finding a bank that will take on the risk is, I think, the more difficult challenge.

James:
This is kind of an end user user-operator building. One thing you could do is you could reach out to commercial real estate brokers and say, are any of your clients, their bigger clients that are well funded, is their leases expiring? Do they want to move their building into… Because that’s an A-plus property, like a big attorney firm or something like that. Maybe they want to move there because it’s more of a presence thing. But I don’t think investors really are going to be all over this, it’s going to be a user-operator.

Henry:
That’s a great idea.

James:
I would really tap into it, but at the end of the day, wholesaling, when you have something very niche like this and complex, they’re hard to dispo and there’s a lot of wasted time and effort that goes into that. I remember back, especially when I was a brand new wholesaler, I was like I got this cool piece of property but it just wasn’t a buy, but I was so distracted by the shininess of how cool it was. I just ended up wasting a lot of time. And so, going after the masses works really well with wholesaling.

Kathy:
James, I was just going to say the same thing that stay in your lane. The mistakes that all of us have made are when we did something we didn’t understand and it was shiny and beautiful and beachfront and all these things, but if you don’t understand office and you don’t know how to underwrite it, don’t do it. Or at least have somebody on your team who does know how to do that.

Ben:
Yeah. [inaudible 00:24:13].

Jamil:
What do I say all the time? Right. Play in traffic so you can get hit.

Ben:
I like that. Yeah, I like that. I’m stealing that, Jamil.

Jamil:
There’s not a lot of traffic here, my man. Yeah.

Ben:
Yeah. Yeah, definitely. I think this was very useful though because this is not the only commercial building I’m working on. Well, I’m working on big apartment complexes, I think there’s 192-unit portfolio deal in San Antonio I’m working in right now, so this is definitely helpful and I think, hopefully, I can do better underwriting the next one and get that out to buyers.

Jamil:
Well you didn’t do a bad job at all, Ben. I mean, the fact that you brought a creative buyer to the table at all, I would say that you’ve probably done more for this seller or brought more action to this seller than they’ve had since they put this property or started thinking about putting this property on the market to sell, so don’t discredit yourself, bro. You did something phenomenal even bringing a potential player to the table, so that was incredible.
But I really wanted to touch your question real fast. Cap rate, is that the end-all and be-all in commercial? Absolutely not. When you’re talking about the type of property that you’re looking at, this is a high-appreciation, high-demand area. One of the plays in a deal like this is going to be what Kathy said, first and foremost, is there a higher and better use for the property? And then, next, is the land value. You got two acres of prime beachfront in West Palm Beach. This land itself is highly desirable and appreciates at considerable levels. There’s a reason why Kathy lives on a spread in Malibu overlooking the ocean, she understands the value of a property like that. So in a deal like this, Ben, it’s not just cap rate, you are definitely getting value for the two acres of prime beachfront.

Ben:
Definitely.

Dave:
All right. Well, Ben, thank you so much for sharing this deal and your experiences with us. It sounds like you’ve made a great career for yourself already and we appreciate you sharing this with us. Hopefully, you learned something.

Ben:
Yeah, I definitely did and I appreciate the help and having me on guys.

Kathy:
And congratulations on all your success so early and being able to go after your dreams. So inspiring.

Ben:
Thank you guys, I really appreciate it.

Dave:
Thanks, Ben.

Jamil:
See you brother.

Dave:
All right. We’re going to move on to our next deal. And joining us now is Heidi de la Tore. Heidi, thank you so much for joining us.

Heidi:
Hi, thank you for having me.

Dave:
Great. Well, tell us a little bit about yourself.

Heidi:
Well, I used to be a nurse for 23 years and had a great profession and then, in 2019, I was no longer a nurse. And when people get bored, they get into trouble and so, alcohol became my trouble. And May 2021, I got sober. And again, with boredom, as a recovering alcoholic, boredom could be the worst thing, so then, I started consuming content. I had no idea what escrow was. I had never done a real estate deal. I had never owned my own house or anything like that. So I learned a lot. And as of the end of 2022, my husband had left his full-time job to join me wholesaling fulltime. We bought an RV, we did almost a hundred thousand dollars in assignment fees from May until the end of December. And now, we live in our RV with the goal of traveling the country as digital nomads, even though we are over the age of 50.

Dave:
Anyone can be a digital nomad, first of all.

Heidi:
Exactly.

Dave:
And congratulations. Well, congratulations on your success and your recovery, it’s an inspiring and great story and I’m glad to hear that real estate has helped you in your life and it sounds like in more than one way. We’d love to hear about the deal that you’re working on now.

Heidi:
This deal is in Fort Lauderdale, Florida and it actually came into our radar the end of January. And we see that there could be potential there, but this thing, as of today, I checked, it has been on the market for 265 days and it is a quadruplex with a separate unit, so basically, five rental possibilities. It is listed on the MLS as like land opportunity and it was through our deep diving that we found out that there was a structure on it, talked to the agent and then, found out that, yes, it actually is a structure.
The structure itself, but with all of the structures is 2044 square feet. It is a 1953 build on a 9,200 square foot lot. It is zoned RD-15, which is unconventional and it is about a hundred yards from the beach. It’s not beachfront, but it’s very close to beachfront. The price on it is $1,699,000. As I said, as of today, 265 days on market. The current owner, she purchased it in October of 2019 at $695,000. She owes approximately 485,000 on her mortgage. There is a $364 lien for utility services that was put onto the property November of last year. According to Broward County assessors, they have it evaluated at $1,100,000.
We did reach out to the Fort Lauderdale zoning department to redevelop the property, it would require permits, and bring the building to modern standards either through modifying or tearing down and rebuilding. They also said that a structure on that property cannot be taller than 35 feet and land use codes do not allow more than five dwelling units. What is allowed is a single-family rental or single-family property or a duplex. And if you do either of those, it does not have to go to the Planning and Development Department or you can do cluster buildings and that would have to go through Planning and Development.
We did find out the agent has not been providing us the information that we asked for as to the rent amounts. We do know that a couple are long-term rentals, a couple are used for vacation rentals, but the owner is difficult and has not provided us with the P&L statements, but we do know that long-term rental, currently, she rents at $2,300 per unit. So vacation rentals, she has been renting out at $3,200 a month per unit. And so, right now she’s currently using two for long-term, two for vacation and then, the separate dwelling, she is actually using for her own residence, so she lives on site.
That totals currently at $11,000 per month, with the possibilities, well, currently, that would average, that would be $132,000 a year. And with a projected of 52,800 in expenses, the NOI would be 79,200, which at that price point, the cap rate I’ve figured out is 4.6%.
There is growth opportunity. I did see the average rent for long-term rentals over there would be about 2,600 to $3,000 a month, I would base it on the lower 2,600. Vacation rentals can be a minimum of $4,000 per month if you were to do Airbnb type stuff and go on daily rates. So the possibility at the lowest point would be annual revenue, 158,400, expenses, 63,360, NOI of 95,040. The cap rate going up to 5.5%, but with the existing structure, I could see that could be slightly higher. Without having the information that we do need, it’s hard to tell all of that. We did look at it for the land value and in April of last year, a 6,000 square foot lot within a mile radius sold for $3,100,000.

Jamil:
What was the size of that, Heidi?

Heidi:
6,000 square foot lot.

Jamil:
And the size of your lot?

Heidi:
9,200.

Kathy:
I like the sound of that

Jamil:
Similar location or was that oceanfront?

Heidi:
Basically, that lot was the same distance from the beach that this is, it’s a little bit further south of the subject property.

Henry:
Do you have the same zoning?

Heidi:
I did not research that. I did not see if it did.

Henry:
Okay, well that may be your buyer.

Heidi:
Yeah. Yeah. I also found a single-family that sold in July of last year for 2,240,000, it’s similar build because with this multi-family, it can be converted back, it can be converted to a single-family with an ADU from a fourplex, the city would allow that. We were told by the agent that with that property the way it is and the size of it that the building could be torn down and about three townhouses could probably be put onto it and sold between two and 3 million each, but I was not able to find comps that support new builds. There’s not very many new builds in that neighborhood. So basically, bringing this property to you guys as the panel for coaching is that we’ve not been sure how to approach this and exactly every single thing that we need to look for and what type of investor we should target for this property.

Henry:
For me, I’d look at a couple of things. Essentially, it’s a fiveplex, so you can look at people interested in small multi-family. You can pull buyers of small multi-family in the area and see who has purchased small multi-family under 10 units within a five to 10 mile radius because maybe they like that area. The other thing I would need to know is what amount of renovation is going to have to go into this? If I want to keep it a five-unit, what’s it going to cost me? And then, do the math on what’s it going to cost me if I need to convert it to a single with an ADU, right, because then you have those numbers for your buyer.
Because if you buy it at 1,7 and based on the rents you were saying, you could probably hit 1%, you could probably get to no 17,000 a month if you have the right rents. But I’d assume that’s going to take a renovation to get there, and so, then, you’re not at 1% anymore, you’re not cash flowing. So I would need to know what’s the size of that renovation.
But I would try to find people who bought multi-family in a five to 10 mile radius and call them and see if they’re interested in that.
But the land play seems like a really good idea. That’s a big sale for just land that you have a comp for it close by. And so, the next thing I would probably do is find out who bought that and see if they want to buy more or look five to 10 miles out and see if there’s any new development going on and find those builders and see if they’re looking to expand because you could have a land play there, but you got to find the right developer.

James:
Yeah. And be careful though because it’s listed on market and it’s active and I will say, builders will just go buy it and they probably have already looked at it. What I like to do a lot of times on dirt plays, if the broker’s advertising it as dirt, I would guess the condition’s a little beat up to where it might not be that habitable at the end of the day. And so, that’s probably going to get you to the same strike price regardless. If it’s a beat up fiveplex, you’re going to have a heavy value add, so you’re going to need to drive the price down.
But a lot of ways that you can do that or what we do is we’re going to dig in and you can find a dirt comp somewhere. You’re going to be able to find a town home, go that whole block, all the way up. Maybe don’t look on the MLS use apps that you can go through line by line on those and find what that sale was, get the value, and then target 25 to 30% of the total buildout value. So if you have two town homes that are selling for two and a half each, that’s 5 million bucks. You want to be at a strike price at 25% of that.
And then, make sure that you get at least a two-week feasibility on your contract because the thing about wholesaling dirt is you got to grab it, secure it, market it, get the buyer on board, and then, they have to run their fees, so you’re burning up part of the fees to get your buyer on, but then, you still got to give your builder the time to run the feasibility. But typically, right now, with dirt, at least in our Pacific Northwest, I think this is very common across, the demand has fallen, that’s probably why this is sitting here. And you want to be around 25% of buildout. That’s usually a good safe rule of thumb, especially for a transitionary market build is we’re paying up to 35 to 40% before the kind of interest rates soar.

Kathy:
Right. And I do know, just the fact that it’s been on market as long as it has, there’s something about the property that it’s overpriced.

Jamil:
Yeah, and Heidi, I want to ask you about that. Can you tell me or speak to the pricing history on this? 265 days is a tremendous amount of time, has there been any price reductions? Do we have any signs of motivation on the seller?

Heidi:
It was listed. Looks like she’s gone through it quite a bit. She listed it last year in January for 2.1 million. It went contingent in February. It went back on market February 11th at 2.1 million. It went contingent again March of last year, then it fell out of contract again. So in April, she increased the price to 2.4 million. And then, she removed the listing in May. Then she re-listed it in July at 2.299 million, so 2.3 million. August did a price reduction to 2 million. The end of August, went down to 1.899 million, and then, removed the listing. Right now, I don’t see at what point this one became active, but I have a feeling that because since I’m not licensed, my resources are limited, but it’s showing that it’s been listed 265 days. Yeah, last year in May, my husband’s saying it went under contract for 1.7 million.

James:
This pricing makes no sense, in my opinion. I’m sorry, this is in irrational seller. They don’t know what they want, they want this, they want this, they want this, they want the world, then they want to cut. In my opinion, my thing, you get your number, you throw it at them, you move on [inaudible 00:39:57] because that person, they have no logic behind their pricing.

Jamil:
Also, I think, James, not a lot of motivation there, right? Because when somebody goes from 1.7 to 2.4, that’s like an anger listing like, “I’m going to show them, I’m going to put it on for $2.4 million now and we’ll see how they like that.” What are you doing?

Kathy:
Or just bad advice from their agent if they had it listed where the agent’s like, “Oh, maybe…” I’ve heard that before from agents, “We just have to raise the price, it’ll make it sound more valuable.” But I could tell you, at least from my experience with beachfront areas, a lot of times, where I live, people have their homes on the market all the time because they just want to see if some rich person comes into town and feels like buying beachfront property and they just list it really high to see if someone will take it.

Heidi:
Right. And from what we found with looking her up with the city and everything, she has had multiple code violations, 24 violations. It sounds like she’s just a very, I didn’t even know the word, just rebellious kind of a person that’s like, “You know what? I’m going to do what I’m going to do.” So I agree. I think that she probably is just one of those that is like, “I’ll see what happens,” and she can afford to leave it sitting. That was my original thought, which is why we didn’t look at it. And then, when Jamil had said, the panel, I thought let’s just get an opinion on it as to what we could do with it and where our offer would be. Because honestly, my offer, with the pricing history and what we know and if it’s going to be a teardown is exactly the land value, which is way below what she wants.

Jamil:
Personally, the way I would look at this is I think you’ve probably got something worth around a million bucks.

Heidi:
Yeah, because I was thinking like high 900s.

Jamil:
Yeah. And that’s the fair market value for this. Even going from a five unit to a single-family, just imagine how janky that structure would be. If you were going to convert what’s already there, a five unit to a single-family, I mean, that’s not going to work, that’s not going to look natural or good for that kind of area, so that’s not the play. The play on this is continuing to run it as short-term rentals and to try to maximize the nightly rate by renovating and adding value. But the property, because they’re advertising as land value is probably not in that kind of condition. So you’ve probably got a half a million dollar or more remodel on this to squeeze out. To get this to like a 1%, I think you need to buy this at like a million, put five to $600,000 into it. Now you’re in it for, after all your costs, around 1.7 and then, you cash flow 17,000 gross a month.

James:
That’s it.

Jamil:
That’s the deal.

James:
That’s it.

Kathy:
But I would also look into the insurance costs because they have gone up tremendously in any of those beachfront properties in Florida that could kill all that cash flow.

Jamil:
Here comes Kathy with the gale force winds.

Kathy:
Sorry. It’s true. I mean, yes, gale force is a term now in Florida, we’ve just seen it personally where we’re not even near the ocean, but insurance costs have gone up so much along with property tax, especially after the last one that wiped out the insurance companies, they’re vengeful right now.

Jamil:
Kind of like our seller.

Kathy:
Yeah.

James:
Yeah. Speaking of that, it’s like with these irrational sellers, just put the number on it and just stay where it is. “Hey, this is where I’m at.” And you can always check in with them, but just leave it you. I would just put your number on it, give it to them because you never know, we have had people ask for 2 million and we bought it for 700 later because wholesaling and off market, Jamil knows this, it’s just that consistency of going, “Nope, this is where I’m at.” Move on to the next deal. “My number’s still here.” And just leave it with the broker and then, you never know. Oh, and congrats on the no drinking. I’m 20 years no drinking. That’s awesome.

Heidi:
Oh, nice. You don’t even look old enough to have 20 years sobriety. Did you come out of the womb drunk?

James:
I got after it young.

Dave:
Ask him about when he used to be DJ Hundred Proof.

Jamil:
This is so good, Dave.

Heidi:
Well, thank you. Congratulations to you.

James:
It changed everything for me, so congratulations.

Heidi:
Yeah, and it does. It’s just amazing the life that I’m living right now versus where I was. And I’m so grateful and appreciative of everybody and everything.

Kathy:
Beautiful.

Jamil:
Heidi, you’re amazing. We love you. And just congrats on all of it. You’re such a rockstar. Great job.

Heidi:
Thank you.

Dave:
All right. Thank you for joining us and if either of you, Ben or Heidi, have an update on these properties in the future, either pass them along to Jamil or let Kelly know and we’d love to hear about them. It’s always exciting for us to keep track of what you all are up to.

Heidi:
Definitely.

Dave:
All right, well take care. Thanks again. All right, that was super fun. It was great to have Heidi and Ben on the show. What did you all think of the show? Do you like doing these types of shows where we have people bring their live deals on? Kathy, what do you think?

Kathy:
I love it. I love it because I learned so much from everyone here. You guys are brilliant.

Dave:
It’s so true. I like hearing everyone else’s questions. It’s funny and interesting to hear sort of the order of operations people ask in. And I’ve never wholesaled, so I really enjoyed this. I learned a lot from everyone.

Jamil:
It was interesting to me just the level that they haven’t limited themselves on the kinds of deals that they’ll do. So I just love the fact that people can explore all these different ways to really get involved in the deal and to me, that was really interesting and fun.

James:
It’s just like my morning meditation. It’s like when you get in it, I love these shows because it’s just like you look at deals. I calm down. You get excited. But I mean, both people were awesome. The fact that they’re, like Jamil said, going after some big, big stuff is pretty respectful because I know when I started, it was more like just trying to find that $90,000 house.

Henry:
Yeah, I think it’s cool because hey, I love looking at deals, but I’m such a student of real estate that I enjoy seeing what other people do in the space and how they approach their problems. Because at the end of the day, all of us, that’s what we do, we’re problem solvers. And I stay pretty close to my own lane here in my local state and the types of deals that I do, so getting to explore other people’s deals and see how they’re handling or managing the risks that they’re taking on, it’s always a great time.

Dave:
Awesome. Great. Well, we’d love to hear from all of our listeners if you like this kind of show. We’ve done two of them now, we did one a couple of weeks ago, residential, now, we’ve done some commercial ones. And we’d love to hear if this is a format that you like and we’d want us to continue. If you have any feedback for us, you can always hit me up on Instagram I’m @thedatadeli. You can find us on the Bigger Pockets on the forums there. Or we would always appreciate a good review on Apple or Spotify. And you can also find all four of these lovely people on Instagram. I’ll just let y’all shout those out. Kathy, go ahead.

Kathy:
Kathy Fettke on Instagram.

Dave:
And Jamil?

Jamil:
@jdamji, @J-D-A-M-J-I.

Dave:
Henry?

Henry:
@thehenrywashington.

Dave:
And James?

James:
It is jdainflips, J-D A-I-N-flips.

Dave:
I just had an idea, I’m buying DJ Hundred Proof. I’m getting that Instagram handle right now. I might make the switch. I will try to find you guys a photo.

Kathy:
Please.

Dave:
Well, for now, I’m still @thedatadeli, but as of tomorrow, I might be DJ Hundred Proof. We’ll just sit. Thank you all again for listening. We’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer and Caitlin Bennett, produced by Caitlin Bennett, editing by Joel Esparza and Onyx Media, research by Puja Gindoll. And a big thanks to the entire Bigger Pockets team.
The content on the show On the Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

Speaker 10:
Come on.

 

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