Don’t Save Up, Trade Up!

Every day I meet people who are really interested in investing in commercial real estate. Not only interested, they REALLY want to do it. So, what’s holding them back? They all tell me they don’t have enough money to afford the down payment even on a decent deal.

Well, if you’re going to be waiting for that to happen you just might never get there.

Take a look at Vanguard’s 2018 report on “How America Saves” <—- click to view/download. Look on page 8 where they mention the account balances and returns: “In 2017 the average account balance for Vanguard participants was $103,866; the median balance was $26,331”

So, that means that 50% of the people had more than $26,331 in their account and 50% had less than that. Obviously the top 1% or top 0.01% are pushing up the average a lot.

Imagine for a minute that you were at the median… you had $26,331 in your account and that’s what you were able to put towards a commercial investment. The type of property you might be interested usually costs around $750,000. So, that requires 20% down which is $150,000.

So, well, you’re not even close. Keep saving. But, if you’re now in your 40’s or 50’s and you have $26,331 in your total savings you’ll basically never get there. Unless something changes dramatically which is always possible but probably unlikely.

So, what do you do?

Well, I think you have another option. You can trade your way to the deal you want.

Take $20,000 of that $26,331 & put it towards a $100,000 deal that has maybe 2 to 3 acres of land and a small house or other building on it. Unrestricted of course. Then, fix up the house/building and lease it out. Rent should cover hopefully all of your note.

Fence the house off from the rest of the property and see if you can do something with the land….. maybe you grow something on it, maybe lease it out to a chicken farmer or put some crushed concrete down and rent out parking spaces to boats & RV’s. I don’t know, just figure something out… there are many people out there looking to use a piece of land.

Once you’ve cleaned up the building and improved it and added more value to the extra land that came with the deal, now you can sell it to the next guy. But, now it’s improved! It’s clean and has two or more tenants. So, asking price is now $175,000. You settle on $170,000 and after commissions, you end up with $158,000 and you pay off the loan which had been paid down to $75,000 so you now have $83,000 coming in from the deal + your $6,331 that you still had in savings. A total of $89,331.

Hmmm….. ok, if I took $80,000 and made that 20% of my next deal’s down payment what can I afford to buy? Looks like I can now do a $400,000 deal. Nice! Four times what I was able to afford two years ago.

And you managed to get your stash up from $26,331 to $89,331 in two years or less! Wow! Now you’re cooking with gas…. it would have taken you 15 to 20 years to save up the $63,000 profit you made on the deal if you were doing it the way you had been before…. trying to save your way there.

Anyway, you get the idea. It’s MUCH faster to trade your way to the kind of down payment you need than to try and save your way to that mark.

If you want to brainstorm how to invest in commercial real estate or what kind of deals one could do, let me know and let’s grab lunch or a coffee – my treat!

B. Regards,