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Welcome to the Commercial Real Estate Mastery podcast, where you'll learn the correct way to identify, negotiate, perform due diligence on, renegotiate, finance, turn around and operate real estate in today's market -- a market in which volatility creates opportunity, and sound principles defeat fads and bubbles. And your host is a 25-year commercial real estate veteran and co-owner of over $1 billion in real estate assets, Frank Rolfe.
One of the key attributes to any property is occupancy. Some are full, some are empty. But there's a whole difference in strategy based on what type of property you're buying: one that's filled with customers or one that's trying to claw their way into gaining more customers. This is Frank Rolfe with the Commercial Real Estate Mastery Podcast. We're gonna talk about the difference between trying to buy properties that have high occupancy and low occupancy.
Let's start off with properties which have high occupancy. Now, you would think that having high occupancy was a bad thing in some cases 'cause you think, well, if the property had a lower occupancy and I buy it, I would have more potential going forward in filling it. And that's a kind of logical assumption. But there's one big problem with that, and that's the concept of stabilization. So the way a lender looks at any commercial real estate property is it's got inherent risk. And banks don't like risk because all a bank can hope for in life is getting their capital back plus interest, but they get no upside in that property. You, on the other hand, are buying a property and you have goals of vast amounts of profit as you improve the cash flow. But they don't share in that.
So they're prone to go for properties that are far more conservative than many buyers would prefer. And what it means is, if you have a property with lots of vacancy, they will often say, "Well, I don't think I want to do this loan because I'm scared. I'm worried you will be unsuccessful and get the thing up to a higher occupancy." And what stabilized occupancy is typically defined by, based on the asset class you're looking at, is about 80% occupancy and higher. Banks view properties that are 80% occupancy as being infinitely safer than one that's, say, 70% occupancy. Now, I don't know why that is, and I didn't set those rules, but that's what most banks in America have adopted. They like an 80% occupied property, which they then consider to be stabilized. So what really works against you when you have a park or a property or whatever it is you're buying that has a lower occupancy than 80%, it's really hard to get a loan. So those high occupancy properties have one huge benefit, which is liquidity, because banks like them. And because banks like them, buyers like them.
And as a result, when you have a property with high occupancy, you're more attractive to almost everyone. And that makes that deal much easier to finance and to sell. And that liquidity you pay a premium for when you buy a property with greater occupancy. And the trade-off is you do not have the ability to push the net income as much by filling it, but you have a property which is much safer, which is what lenders like. Now, on the flip side, when you look at buying a property with lots of vacancy, you have the upside. If you buy a property that's half occupied, what you're really buying effectively is buy one, get one free. Buy that 50% side of the property that's full, and you get the other 50% that's empty as an additional bonus. That's very attractive to many buyers. They say, "Wow, well, that's a great way to make money. This buy one, get one free property thing, I like that." But the trade-off is, can you get it financed?
As a result, when you're buying properties with low occupancy, one of the methods you'll utilize to get a loan is seller financing. Because you can't get the financing in the regular outside world marketplace, but the seller can bridge the gap. The seller can take the property which has low occupancy and make that loan attainable because they're the bank; they create the loan. And that's why, as a strategy, when you're looking at buying a property with lower occupancy, see if you can get seller financing, because otherwise you may not be able to get debt on the property. So seller financing is a key strategy move when you look at low occupancy.
Another key strategy move at low occupancy is can you get it higher? Can you fill it? Sometimes those properties that have abnormally low occupancy have structural problems, which means they can't get it full because there's no market for it. We all go to these big shopping malls, we see they're half empty, and sometimes you're walking through and you think, "I wonder what would work in the shopping center? Is there any kind of retail store that might work in here?" And you know people in the retail biz are thinking about that all the time, like, what can we do to make money in retail? But it's really hard because most people buy things online. It's really hard to open a freestanding store, pay those employees, make any money at all. So it's really, really hard then to fill that vacant shopping center space. But then you look at another kind of vacancy, maybe a mobile home park. It's easy to fill mobile home park vacant lots. All you have to do is bring in a used mobile home or new mobile home and run a few ads and the phone rings like crazy and you get it out the door.
So another strategic part of buying low occupancy is, can you fix it? Now, some people are up for the challenge, and they've failed miserably. A lot of people who have bought office buildings assume they could push the occupancy, and they haven't pulled it off. There's a giant office building in St. Louis, huge, mammoth, the AT&T tower. Someone bought that thing thinking they could do something with it. They bought this giant office building for only $4 million years ago, and it's still sitting empty. Why? They've been unable to put together a plan that anyone believes in enough to fill that building up. And they've therefore probably taken a bath on the investment because it only made any sense if they could get it to a higher level of occupancy and they failed.
So when you're looking at low occupancy properties, you've got to figure out A, how to finance it and B, how to turn it around. But at the same time, if you can figure out a niche where you can buy stuff with vacancy but you have the power to fill it, look at what it can do to your net income. If you bought something half full and you fill the other half, you would double the net income. That's doubling the value. Some people have learned methods to fill vacant properties quickly. In the RV park industry, people have learned that often mom and pop were not advertising the property aggressively or even at all on the internet. And a simple Google search of RV parks in this one market, they don't even show; they have no SEO at all. These same buyers have learned that they can buy an RV park like that, get it an online presence, social media reviews, and next thing you know, the phone starts ringing and the occupancy can jump from 25% up to 80%, 90%, 100% virtually overnight. That's a smart strategy. But yet somebody else may look at a commercial building, a warehouse building, and find they can't get anyone in it because the ceilings are too low and they don't meet the current levels of the way that people do inventory control.
So the bottom line is, it's not always a genius stroke to buy things at low occupancy. It can be scary, it can be risky, but it can also be highly profitable. This is Frank Rolfe with the Commercial Real Estate Mastery Podcast. Hope you enjoyed this. Talk to you again soon.