I joined the Diamond Inner circle in August of 2010, and WOW has it been an incredible ride. We have closed 15 deals in less than ten years, which I have always dreamed about but wasn’t sure how to do it. With the Commercial Property Academy and Scott’s help, I was able to obtain that dream. One of the things Scott talks about is planting the seeds and waiting for them to grow. Well, I planted a seed with a broker back in 2016, and it turned into $650,000.
A fellow Diamond member and I purchased a retail center in May of 2017 in Maple Grove, MN. It was a small center at only 13,395 SF with just three tenants, but the seller had filed for divorce and no longer wanted the property. We purchased the property with 90% seller financing and went to work. In November of 2018, we sold the property for a $625K profit, and we had only put $100K down to purchase the property. After the sale, I continued to talk with this broker about doing another deal. We also talked about maybe investing in commercial real estate together.
Fast forward to April of 2020. I received an email from this very same broker about a gas station deal he had under contract in MN. He asked if I would like to partner with him on this deal. The property was on 1.285 Acres and 3,743 SF, with a Speedway gas station downstairs and a home health care office upstairs. It was listed at $1,480,000, a 9 CAP rate. Knowing the market well as the broker grew up in this area, he knew that this property was priced below the market. The CAP rate for a Speedway gas station with 17 years left on the lease would go for a 6.5 to 7 CAP rate. We started our due diligence and kept saying to ourselves, what are we missing? Is this too good to be true? As most of your know, everything in the country closed down at the end of March 2020 due to Covid-19. This gas station was one of five gas stations out of 160 in the entire portfolio that Speedway decided to close during the shutdown.
Knowing that this gas station was not open was concerning, but we dug into the due diligence to find out if this was going to be a good deal or not. We spoke to the seller and informed him that we would not close on the property until Speedway opened back up for business. He agreed. As we continued our due diligence, we found out the Speedway would be reopening this store and that this was just a temporary closure. We knew that the gas station operator was backed by Marathon Oil and would be able to pay the lease off if they didn’t open back up. The lease was worth about $1,580,000 in lease payments, which would give us enough money to pay off our loan and make $100,000 if the gas station closed. We would also own the property free and clear, which we thought we could sell the land for $500,000.
We obtained a loan from a local credit union for 80% LTV and had to bring $300k to the closing for a down payment. We raised $200k from investors and asked the seller to carry back a loan for $100k. Our strategy was to hold the property for one year and then sell it for $2,150,000 at a 6.5% CAP rate. This would allow us to pay capital gains rates on the profit by waiting a year, and we would still have 16 years left on the lease. In the weeks leading up to the purchase, we received a call from a fellow broker that we knew asking if we would be interested in selling the property to his buyer. We talked it over, and knowing that Coronvirus was still going on and with so much uncertainty, we should entertain the offer. We went back and forth for a week and finally landed on a price.
We closed on the property with no money out of our pockets on July 7th, 2020.
On July 23rd, 2020, we signed the purchase agreement to sell the property.
Seventy-three days after signing the purchase agreement, we sold the property for a purchase price of $2,150,000.
I planted the seed with the broke back in 2016, and that seed grew to $670,000 profit, and we plan on partnering on more deals in the future.
I have already started planting a new seed with the gentlemen that sold us the property. When I told him we would be paying his loan back quickly, he was very excited for us. I asked him if he would like to roll his money he loaned us into the next deal we do, and he said yes!
Plant those seeds, my friends!