5 Things I Learned from Buying an Office Building | GP 18

5 Things I Learned from Buying an Office Building | GP 18

Is getting a mortgage from the bank the best way to finance commercial property? Should you invest in a turnkey building or should you be looking at investing in a fixer-upper? How much will it really cost to buy an office building?

In this podcast episode, Alison Pidgeon speaks about her experience with buying an office building and the 5 lessons she learned.

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In This Podcast

  • 5 lessons learned

1. There are lots of ways to finance commercial property

  • Getting a mortgage from a bank.
  • A loan from a private investor – this is called a promissory note.
  • Assuming the mortgage – take the mortgage over from the owner of the building.
  • Get a grant/loan for economic revitalization areas and or minority business owners.
  • A loan from Small Business Administration.

2. There are many different strategies for investing

  • Buy a turnkey property – you can just move in and there is not a lot that needs to be done to the building.
  • Buy a property that needs significant renovations and you will greatly increase the value once it’s finished.
  • You may also want your practice to be the only tenant or you can have other tenants cover the cost of the building.
  • Even if a building is listed for rent, you can still check if they are willing to sell or you can lease to own.

3. It will always cost more than you think

  • There may be delays but you will still need to pay taxes, mortgage and the electric bill, etc
  • You may need to get architectural drawings done which costs about $10 000
  • Unexpected expenses may come up such as new flooring etc.

4. Treat your building as a business

  • Alison has her building registered as a separate LLC and recommends that you do the same, speak to your lawyer about this.
  • Keep good records of the building to be able to see how much things cost and what you had done to the building in case you want to sell it in the future.

5. Ask the experts

  • Hire professionals familiar with commercial real estate.
  • Talk to different lenders and ask for recommendations about other people to talk to about different financing options
  • Do your own research – read books (see below book recommendations) and listen to podcasts.

Books mentioned in this episode

Useful Links:

Meet Alison Pidgeon

Alison Pidgeon | Grow A Group Practice PodcastAlison is a serial entrepreneur with four businesses, one of which is a 15 clinician group practice. She’s also a mom to three boys, wife, coffee drinker, and loves to travel. She started her practice in 2015 and, four years later, has two locations. With a specialization in women’s issues, the practices have made a positive impact on the community by offering different types of specialties not being offered anywhere else in the area.

Alison has been working with Practice of the Practice since 2016 and has helped over 70 therapist entrepreneurs start and grow their businesses, through mastermind groups and individual consulting.

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Podcast Transcription

When it comes to keeping your practice organized, you want software that not only is simple but the best. I recommend TherapyNotes. Their platform lets you manage notes, claims, scheduling and more. Plus, they offer amazing, unlimited phone and email support. So, when you have questions, they are there to help. To get two free months of TherapyNotes today, just use promo code JOE, J-O-E, when you sign up for a free trial at therapynotes.com.

You’re listening to the Grow a Group Practice podcast. Whether you’re thinking of starting a group practice, or in the beginning stages of a group practice, or want to learn how to scale up your already existing group practice we have lots of great content for you.

Welcome to the Grow a Group Practice podcast. I’m Alison Pidgeon, your host. I am excited to share with you this solo episode today, where we’re going to be talking about the five things I learned from buying an office building. But before we get started, I just wanted to kind of let you know what’s happening here. So we’re still under quarantine, under shelter in place status due to the Coronavirus, and my kids and my husband and I have been at home now for a good, I would say, two months or nine weeks now maybe, so it’s been interesting to say the least to try to homeschool two elementary school kids and then also have an infant that you’re trying to take care of, all the while also trying to work full time. So yeah, good things have come out of it, silver linings, and then also really tough things. But one thing that has been cool is that in order to kind of have some peace and quiet, I have been going over to the office building that I own to do some work. And even though it’s empty, we’re not providing sessions in there right now, we’re doing all telehealth, it’s still very peaceful and nice to be in there. Because everything is exactly how I like it. The pink color, the flooring, it’s clean, unlike my house because of my three kids. So just been enjoying going over there and working out of the office by myself.

So, I hope you’re all doing well. I know Coronavirus has really turned our worlds upside down and I hope that you’re all healthy and safe. I think too, this is interesting that I’m doing this episode now, because I think it’ll be interesting to see what happens with the real estate market. You know, I think a lot of people are going to be giving up office space and or, unfortunately, businesses are going to fail. And so, there’s going to be a lot more office space available on the market. So, if you’ve been thinking about buying an office building now might be a really good time. You might have a lot of leverage when it comes to negotiating the price or just, you know, to having more selection available. When I was purchasing my building in 2018, there was a lot of competition. There were multiple bidders for office buildings. We lost actually three different properties before we ended up getting the one that I bought. So, I’ll just be interested to see how all of that plays out in the next several months and years.

But the reason I like talking about this, buying an office building, is because we talk a lot about how do we build up passive income? Or how do we generate multiple streams of income? And typically, we need an office. And so, if you are the owner of that building, or that condo, or whatever it is, then that is passive income. Eventually you’re going to own it outright and it’s just going to be generating income for you. So, if that’s something you’ve never thought about before, definitely educate yourself on that topic, and also talk to other professionals and just see if it makes sense for you. You may be pleasantly surprised at how affordable it is and or you don’t need a humongous chunk of money to put down to buy a building. So, here’s five things I learned about buying an office building.

So, tip number one is there are lots of ways to finance a commercial property. So, I think if your only frame of reference is buying your own home, this is completely different from that. So when you’re buying your own home to live in, you are typically getting a mortgage from a bank, or you’re just paying cash for the whole thing, and like those are the only two ways to finance your own personal residence, whereas a commercial property, there are lots of ways. So, one of them is the obvious kind of getting a mortgage from a bank. You could also get a loan from a private investor, sometimes it’s called a promissory note. This is actually what I ended up doing because I didn’t have the down payment money. Because I had to put 15% down with the bank to get the mortgage and I didn’t have that, so I got a loan from a private investor. You could also do what’s called assuming the mortgage. So, you somehow, I’m not exactly sure how this works, but you can take the mortgage over from the owner of the building. You could also look at getting grants or loans for economic revitalization areas and or minority business owners – definitely ask around if there’s those types of programs in your area. And too, being a woman counts as being a minority, in case you weren’t aware of that. So, there were programs that were available to me because I own 100% of my business. And then there’s loans through the Small Business Administration, which might be more of, like, a second choice after a mortgage from a bank. You could probably get much better terms from a bank than you can from the SBA. But if that’s your only option, that might be a good thing to look into. So, all that being said, there are lots of ways to finance, and definitely ask financial professionals, real estate professionals. There’s books on the topic. I’ll be sharing some of those book titles with you towards the end. So, you can definitely go about this a lot of different ways.

So, tip number two is there are many different strategies for investing. And so, I think part of it is deciding what exactly you want out of owning a property and just sort of the process by which you want that to happen. So, let me explain that. For example, you might want to buy a turnkey property. So, you might just want to buy a property that you could do very minimal… maybe it just needs some paint and everything’s in good shape. It’s already, you know, structurally, the layout is how you want it. So, you can essentially just kind of move right in and it’s good to go. So obviously, you’re gonna pay more money for a turnkey property because it doesn’t need any work done to it. But for some people, that’s a great option. The other option would be you might want to buy a property that needs some significant renovations and then you are going to greatly increase the value once it is finished. So that is the situation that I was in. I bought a property that was a dentist office and had been a dentist office for 50 years and had never really had any major renovations done to it. Over the years they had updated the flooring, or painted, or things like that. But it definitely needed to be gutted and totally rebuilt on the inside to make it suitable for our needs. So yeah, so probably the… I kind of got it appraised informally after we had it renovated and so I bought it for one sixty-three, and by the time I was done it was worth two fifty. So, yeah, I mean, that’s pretty awesome.

Another different strategy in terms of investing is you might want your practice to be the only tenant or have other tenants to cover the cost of the building. So, then your practice is there kind of rent free. You can obviously have your practice pay rent to the building – so I have a separate LLC that owns the building and then a separate LLC for the counseling practice. So, I’m like paying myself rent, but it’s like going from one entity to the other, and they’re separate bank accounts and everything is separated out. So, I’m the only tenant in there, the building is only 1200 square feet so there was no room for anybody else. But that is a very sort of common setup. If you have a building big enough to have other tenants, they could be covering all of your costs and also turning a profit for you. And so maybe the practice doesn’t need to pay rent, or maybe the practice does pay rent, and then you can have that be income for you. So, there’s a lot of different ways you could set it up. So definitely ask a financial professional, what makes the most sense.

And another thing that I learned from going through this whole process is even if a building is listed for rent, ask the owner if they’re willing to sell it or do something called lease to own. So I was surprised when I would see ‘for rent’ signs, and I would go to the building and you know, call the number on the sign or whatever and just say like, hey, I know it says for rent, but I really want to buy, like, are they willing to sell? And like 90% of the time, they were like, yeah, we’ll sell it. And sometimes they had a price in mind, and sometimes they didn’t. But I was really surprised at the frequency by which people were willing to sell, so definitely worth asking. Or the lease to own option would be like, you’re kind of renting it for a period of time. There’s different ways to set this up, but maybe some of the rent is going towards eventually buying it, or maybe you can have it written in the contract that you sort of get first right of refusal if the building does go up for sale. So definitely ask a realtor how you could set up that kind of scenario.

So, tip number three is it will always cost more than you think. So, I definitely learned this the hard way. Something that I was very optimistic about was that we’d be able to get permits right away and the renovation would happen quickly. Unfortunately, it got delayed by about four months, because we were going back and forth with the township about the permits. So, all that time that building is sitting there is called… the money basically, you’re paying, are carrying costs. So, it’s sitting there not being utilized, no one’s paying rent on it, but you’re still paying the taxes and you’re still paying the electric bill, you’re still paying the mortgage. And so, you’re gonna have to have some money set aside for those carrying costs because it can be unpredictable sometimes how long it’s going to be before you could get your tenant in there. Something else that I ran into was in the beginning, it seemed like the township wasn’t going to require architectural drawings. And then they decided that yes, we had to get architectural drawings done. These are very, very expensive. It costs about $10,000 to get these drawings done. So that was a huge added cost that I was not expecting because we were initially told we didn’t have to have them.

And then the third thing is that unexpected expenses are going to come up that you didn’t anticipate. For us, doing a major renovation, when you start ripping up the floors and the walls, you never know what you’re going to find and so they ripped up the floor and found out the sub floor was rotted and then to replace that, you know, tacked on expense, and on, and on. So, again, you just probably want to have more money saved up just as a buffer because these unexpected expenses are going to come up.

So, tip number four is to treat your building like a business. So, like I mentioned earlier, my building is actually a separate LLC. And so that would be my advice to you, is to get a separate entity – business entity – set up, whatever that means in your state. Definitely ask a lawyer about that and ask what the best structure is from like a legal perspective because things tend to vary state by state. So just let him or her know you want a separate business entity for your building and then they hopefully can make a recommendation for you. And then you also want to keep good records that you could show a potential buyer in the future, like, you want to keep track of like, oh, when did we replace the roof? Or when did we get a new furnace? or how long has it been since we had the gutters cleaned, or whatever the case may be. The person I bought it from – the dentist – did not keep good records of the building and so it was really hard for me to do my own due diligence because he didn’t really have any documentation at all about when he replaced things or how much things cost or anything like that. So if you want to sell your building in the future, even if it’s not for 20 years from now or whatever, it’s still good to keep track of all those things, because then that will help you substantiate maybe the price that you’re asking for or something like that. So definitely keep good records of all those things.

So, number five is Ask the Experts. Hire professionals familiar with commercial real estate. So, this is a mistake that I made. I did not hire a commercial real estate person and I did not hire a commercial general contractor. I ended up hiring people who were friends of mine that I met through a networking group and they were lovely people and good at what they did, but they were more on the residential side of real estate services and general contracting services. And so, when we ran into some issues with the bank and with the township, they were a little out of their element with how to help me. So definitely make sure… don’t just call up the realtor that sold you your personal residence. Definitely ask around for recommendations for a commercial realtor.

My next tip for you would be talk to different lenders and ask for recommendations of other people to talk to about financing options. So even going from different banks, to credit unions, and different financial institutions, the amount that you have to put down on a mortgage and interest rates really varied widely. I ended up putting 15% down; there were some banks that were asking for 30% down – that’s a humongous difference. And also, the interest rate varied by several percentage points. So definitely ask around and don’t just go to your bank and just assume that’s the best deal for you because it may not be.

And then the last tip I have for you is definitely do your own research. I read several books, I started listening to podcasts. This will help you sort of familiarize yourself with the whole kind of world of commercial real estate investing. Because like I said before, it is quite different from buying your own personal residence. And there’s a lot of moving parts to it and especially, depending on what kind of building you buy… I looked at anything from a 10,000 square foot building down to a 1200 square foot building, which is what we ended up buying. But when you’re looking at a 10,000 square foot building, that is quite different in terms of now you probably have tenants, and you have different commercial grade HVAC systems, and things like that. In my building, all the stuff that’s in it is pretty much what you would find in a house, so it was very familiar to me. But once you get into a bigger building, you may be dealing with stuff that you have no knowledge of. So, you definitely need to do your research. And one of the first podcasts that I listened to is called Bigger Pockets and a lot of what they talk about is more residential investing for people who are doing it as an investment, but they do have some episodes about commercial real estate investing. So, I definitely looked through their episodes and tended to pick those. And so that was really helpful in understanding like, what was my goal, what was my strategy going to be with investing? And they’re pretty entertaining guys. So, if that’s something that you like to do, listening to podcasts, I would definitely recommend that.

And then there were three books that I used that I would also recommend to you. So, the first one is called How to Win in Commercial Real Estate Investing. And the subtitle is ‘Find, evaluate and purchase your first commercial property in nine weeks or less’, by R. Craig Coppola. So, we’ll put this information in the show notes for you so don’t worry if you didn’t catch all of that. But that was really good to sort of… He sort of walks you through like the step by step by step process of how to actually like, find different real estate properties, how to evaluate if it’s a good deal or not. There’s something called a cap rate that you should really understand which basically is a way of kind of calculating how much cash flow or how much profit a building is going to make for you just based on the costs versus like the potential income from tenants paying rent. So, having an understanding of all of those things is obviously super helpful.

And then the next book that I recommend is called ‘The Due Diligence Handbook for Commercial Real Estate’ by Brian Hennessy. So, the due diligence period is when you put an offer in on a building and they accept it, but you have not yet gone to settlement, you’re in what’s called the due diligence period. So that is usually maybe around, I don’t know, 60 days or something like that. And that is basically your opportunity to collect all the information you want to collect from the seller, to get inspections done, to just make sure that you’re clear about everything and like, what you’re getting into and there’s no surprises, and that you definitely want to go through with buying the property. So, he walks you through, what is this due diligence period? What are the things you should be asking for? What are things that maybe you don’t need to worry about? But it was very helpful for me to know like, okay, I… because I didn’t even know what questions to ask. When you go through buying your own residential property, it seems pretty cut and dry, like, you just get the inspection and they kind of tell you what you need to know and that’s the end of it. There’s a lot more to it for a commercial property, so definitely check out that book.

And then the last book is called ‘The Art of Commercial Real Estate Leasing’ and that is also by R. Craig Coppola. And this is basically like, if you were gonna have other tenants in your building, how would you set up the lease? Obviously, setting up a lease is something that I would recommend you use a professional for, you know, get a realtor or a lawyer, whatever makes sense for you. But basically, there’s a lot of different factors and ways that you can set up a lease. Obviously, you want to protect yourself in that contract. So, you make sure you’re not getting taken advantage of by the tenant and you’re kind of maximizing the potential of the property. So that was also helpful just to see all the different things that he recommended or possibilities of how you could set up a lease that would make it advantageous for you as the property owner.

So those are my five tips for buying an office building. So, let’s summarize here because I know I went through those a little quickly. So, the first tip was there’s lots of ways to finance. So even if you think that you may not be in a financial position to buy a building right now, definitely start asking people or consult with a realtor; I’m sure they would be happy to talk to you for free just to kind of give you an idea. Or talk to the bank; they’ll talk to you for free about what does it take and how much would I need down? Start looking at different properties in your area and just see what things are going for. There’s no harm in doing research and I think the more you’re familiar with your area and what’s available and what things are going for, just the better prepared you’re going to be, even if you’re not ready to buy a building this year. It’s just gonna help you when you are ready.

So, tip number two, there’s many different strategies for investing. You know, my strategy is definitely what they call buy and hold. So, I bought the building, I plan to own it for the next, you know, 20-30 years, whatever makes sense. And obviously, as I pay off the building, I’m going to start realizing that cash flow, and it’s going to hopefully appreciate over the next 20 or 30 years and be worth a lot more than what I bought it for. So, that’s my strategy. Maybe I’ll sell it when my kids go to college or something, or maybe it’ll be part of my retirement. I don’t know. But yeah, it’s definitely my strategy to buy and hold it. Also, my strategy was to buy a fixer upper and improve it.

So, tip number three was, it’s always going to cost more than you think. You should definitely have money set aside. Obviously, you need to set up a budget for what it’s going to take to buy the building or renovate it or whatever. But then you also just want to have kind of an emergency fund or a little nest egg there because it will probably cost more than you think.

Tip number four is treat your building like a business. Definitely keep it separate, in its own entity, have a separate bank account. Do all of your due diligence with having contracts set up, or leases set up. Even though I have a lease between myself and myself, I actually do have a lease. And so, everything’s in writing if there’s ever a question about it, or the new owner wants to see how I had the lease set up, or what the terms are or whatever, that’s all there.

And then number five was asked the experts, hire professionals familiar with commercial real estate. So definitely can’t stress that enough, how important that is. This is obviously a humongous investment, and a big decision, and I always appreciate having feedback from people who are experts in that area.

So, I hope that was helpful. I love talking about real estate; it is something that is kind of a passion of mine. I like looking at residential real estate too. And I’ve always loved interior design and decorating and so it was so cool that I got to take that building and really make it my own. We kind of fit out the inside of the building and made sure all the walls were soundproof because we knew it was going to be a counseling office. So, we wanted to make sure like that was something that we spent a lot of care making sure that that was going to be as soundproof as possible. So what we ended up doing was – in case you are ever in the same situation – what I learned was one of the cheaper ways to soundproof walls is staggering the two by fours that are inside the drywall so that way, if there’s nothing for the sound to travel through, like, the wood, then it won’t travel to the other side of the drywall. So there’s two by fours in the wall but they’re not touching both sides of the drywall so it’s not touching you know the drywall that’s facing the hallway and the other one is not then touching the drywall that’s in the office. So hopefully that makes sense. But that has worked out really well and also doing the, like, rubber doors sweeps on the bottom of the doors really helped too. So yeah, so I would say it’s pretty soundproof. We still use sound machines.

I also wanted to make sure there was really nice lighting in there, so there’s no fluorescent lighting at all. There was a drop ceiling in there – we took that out and we drywalled the ceiling. And there’s also what’s called LifeProof flooring on the floors, which you can get at Home Depot. And it’s, I think, guaranteed like forever in a residential home, and like maybe 10 years commercially, so they’re the vinyl planks that look really cool now, kind of looks like hardwood, but it’s vinyl so it’s kind of soft when you walk on it. There’s not that loud, clicking noise when you’re walking on regular hardwood floors, so that helps with the noise as well. We have two bathrooms in there, and I did subway tile halfway up the bathroom wall, which looks really nice. And one of the other things that we were able to do was we built in a kind of little hospitality table. So there is a countertop with some cabinets and like a little fridge underneath, and that’s in the waiting room and so there’s like a Keurig sitting on the top, and then there’s waters in the fridge, and we can keep like supplies and stuff in the cabinet. So, we’re able to have a cute little nook, so to speak, where we keep snacks and coffee and stuff for the clients.

Something else that was really important to me was to have a separate bathroom for staff. So, we actually have an admin room and you walk into the admin room and then from there, you walk into the bathroom, and that is the bathroom for staff. And I felt like that was really important, because I always feel like it’s kind of awkward when you have to, like, use the same bathroom as your clients and like you’re in between sessions, and they just got out of their session and they want to use the bathroom and then obviously, staff wants to use the bathroom. So just in order to avoid there being like a line at the bathroom, that’s the other reason I did that as well. So, we have four offices in there and the admin room, like I said, with the staff bathroom, and then in the waiting room, there is a client bathroom. And yeah, I just really love the feel of it when you walk in there. It’s very calming but it’s kind of cheerful at the same time. We painted the walls this really pretty blue-green color. And yeah, I just love being in there.

So it was definitely quite the emotional roller coaster to go through the whole process of, like I said, we bid on several other buildings and lost all of them and then going through this whole process of buying this building, and then issues with permits, and things got delayed, and thought we were going to be in there by Thanksgiving and we didn’t open until March, and my staff was getting a little cranky because they were trying to share the current offices that we had, and we were kind of bursting at the seams, which is why we were moving into that new space. So, there was a lot to that. But now that it’s done, and we’re in there, I’m so happy that we have the space. I love being in there and the clients love it as well. The staff, I think, is really happy with how it turned out. So I am, you know, totally happy with my decision. I know it’s maybe not for everybody, but it was definitely a really great thing for me, and I hope in the future to be able to buy more buildings. And yeah, I think it’s a great investment. So, if you’re interested in potentially buying your own office building, like I said, do your research and see what you can find out. So, I hope that was helpful and I will talk to you all next time.

Grow a Group Practice is part of the Practice of the Practice Podcast Network, a network of podcasts seeking to help you grow your group practice. To hear other podcasts like the Imperfect Thriving podcast, Bomb Mom podcast, Beta Male Revolution, or Empowered and Unapologetic, go to practiceofthepractice.com/network.

This podcast is designed to provide accurate and authoritative information in regards to the subject matter covered. This is given with the understanding that neither the host, Practice of the Practice, or the guests are providing legal, mental health, or other professional information. If you need a professional, you should find one.

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