Larger properties are intimidating. That’s why most real estate investors start with a single family residence or duplex and increase in volume or number of units from there. Brian Murray, who owns over $40 million in apartments and other commercial assets, did the opposite – his first investment was a 50,000 square foot office building. In our recent conversation, he explained how he was able to successfully start his investment career with such a large purpose and why you can do the same, regardless of your skill set. Read more about his advice on real estate investment.
Brian’s First Purchase – 50,000 Square Foot Office Space
In 2007, Brian purchased a 50,000 square foot office building for $836,000 and began his career in commercial real estate investing. “It was in pretty bad distress,” Brian said. “It was less than half occupied. It was not well maintained, but it was very well located.”
Lessons #1 & #2 – Creative Financing & Credits for Deferred Maintenance
Since this was Brian’s first time buying investment property, he didn’t have much money and had no prior real estate experience. As a result, he was rejected from the banks and was unable to secure a loan. Enter creative financing – Brian was able to assume the seller’s existing mortgage, which was $730,000.
Brian was also able to negotiate credits for deferred maintenance. With the combination of assuming the mortgage and getting credits from the seller, Brian was able to obtain the property with very minimal cash out-of-pocket.
How do you negotiate credits?
“One of the things I negotiated was to get credit at closing equal to the value of their reserve replacement,” Brian explained. “They had a couple of other reserve accounts with the bank that I was able to negotiate credits at closing in that amount.”
However, Brian didn’t stop there. During the due diligence phase of commercial real estate investing, he uncovered a few discrepancies between what the contract and leases said and what he actually saw at the property. For example, “one of the things that was wrong was the rent roll. There were tenants on the rent roll that just plain didn’t exist. There were spaces that the rent roll had indicated were occupied that, when I went and actually physically toured the property, I realized they were actually vacant.” (This anecdote points to the importance of proper due diligence). But no worries. Brian was able to get more credit from the seller for things that he discovered during the phase. He said, “It all worked out to keep that initial amount of cash [out-of-pocket] fairly limited.”
Lesson #3 – Pay Attention to Decrease Expenses
One of the main reasons why his first experience with commercial real estate investing was so successful is because Brian was able to quickly decrease excessive expenses and make the building cash flow positive after year one. The two main expenses he cut were the utilities and the salary of the building’s superintendent, which he accomplished in one fell swoop.
The property had one employee – a superintendent. The superintendent is responsible for coming in early, opening up, and prepping the space. “That means,” Brian described, “unlocking the door, turning the lights on, checking the bathrooms, doing a walkthrough, and then just general maintenance in terms of landscaping [and] cleaning.” In this particular case, Brian discovered that the current superintendent wasn’t doing a whole lot. In fact, he had a woodshop set up and was doing side work during the workday! “The owners were from outside the area and weren’t keeping an eye on it, [so] the place looked terrible. There was trash all over in the front yard [and] there was no landscaping to speak of. It had really been let go.”
On top of that, the superintendent wasn’t controlling the heating and cooling system. “He literally would crank the air conditioner on high 24/7,” stated Brian. “If the tenants were too cold, they had to open their windows and let some warm air in.” The situation was similar in the fall, except he would do the same thing with the heat.
On Brian’s first day of ownership, he confronted the superintendent. “I asked him how to control the thermostat, and he said, ‘there’s no way to adjust it. It’s locked.’ I said, ‘you can’t tell me how to control the temperature?’ and he said, ‘no, I don’t know how.’ So that was his first and last day in my ownership.” Brian called the thermostat manufacturer and they walked him through how to unlock and program the thermostat.
As a result, Brian saw a substantial decrease in expenses. “I was able to program [the thermostat] so it turned down at night [and] turned down on weekends. By keeping a close eye on that, I cut the utilities bill in half in the first year. By cutting the salary of a superintendent [and] by cutting my energy bills in half right out of the gate, the building turned cash-flow positive.”
Lesson #4 – Reinvest Profits to Boost Property Value
After turning the property cash flow positive, Brian didn’t pocket the extra cash. Rather, he reinvested it right back into the property, an important step in commercial real estate investing, especially if the building is in disrepair. “That’s another thing I stay true to to this day: I always plow the vast majority of the money back into the properties and keep reinvesting back in. That’s a part of how you build value.”
How much value was Brian able to create? Currently, the “property’s probably worth $3 million.” That’s more than triple the original purchase price, which was $836,000!
Brian’s Best Ever advice is to “think big. Don’t be deterred … Don’t be intimidated by those biggest properties.” He said, “I think people are intimidated by the larger properties, but they really shouldn’t be because the bigger you go, the more flexibility there is in how you can finance it. There’s a lot more opportunity that opens up to you.”
This advice manifested from Brian’s first ever real estate purchase – a 50,000 square foot office building. During this experience with commercial real estate investing, he learned:
- Creative financing techniques with little to no money out-of-pocket when you can’t secure a loan from a bank
- To negotiate to get credits from the seller for deferred maintenance
- How to investigate to find ways decrease expenses
- Reinvesting profits back into the property is how you quickly build your net worth
After applying these four lessons, Brian’s more than tripled the value of his first property, and he was able to expand from one property and zero employees to 30 properties and 16 employees in less than 10 years. Consider some of these lessons when you are buying investment property.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.