How I made a million dollars investing in commercial real estate with no money down, on one deal.
In 1998 my partner and I purchased the Heritage Plaza in Country Club Hills, IL for 1.9 million dollars, and in 2006 we sold the plaza for 3.8 million dollars. The Heritage Plaza is a commercial shopping center of 67,000 sq ft on about 5 acres.
Let me toot my own horn and tell you how we accomplished this. Our first obstacle to overcome was the down payment. In 1998 the typical bank required a down payment of 20%, so we needed $475,000 as our down payment, leaving us a loan of $1,425,000 at 8% interest.
1. We asked the seller to give us a purchase money mortgage in the amount of $150,000 at an 8% interest rate.
2. We found an investor looking for a high rate of interest on a loan of $150,000 at a 15% interest rate.
3. Because I am a real estate broker, and I own Parade of Homes real estate in Bartlett IL., I was able to apply my commission of $47,500 toward the purchase price.
4. We would seem to need an additional $127,500 for the balance of our down payment. On a commercial property sale you are entitled to certain prorations, such as the real estate taxes, tenant security deposits, prepaid rents, etc. With the amount of proration’s we receive we not only purchased this property with no money out of our pocket, but we actually walked away from the closing with a few dollars.
You are probably asking how we were able to pay such high interest. In 1998 the typical interest rate banks were charging was in the 8% area. The cap rate on this property was producing a 12.9% cap rate with a 75% occupancy rate, giving us a fantastic rate of return from day one. Within a few months we had the occupancy up to 92%, giving us a cash cow.