How to Invest in Commercial Real Estate

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Episode 140 - Navigating Investment Fears: A Deep Dive into Commercial Real Estate Psychology

by Criterion, Braden Cheek, Brian Duck
February 27th 2024

Exploring the psychological hurdles of investing in commercial real estate, this episode demystifies fears, addresses common misconceptions, and guides investors towards making confident, informed ... More

Because there's no, there's no judgment from society. Like when you're riding a bike and you fall, everyone's like, hey, get back on, do it again. Try it again. You might fail again, but try it again. But with money, nobody does that. Ok? It's judgment. You lost money. You're a fool. You, you're, you're foolish. You just started investing and you lost money. All right, welcome back to another episode of how to invest in commercial real estate. And we are super excited today for our topic. We're gonna kind of address the psychology of investing. We know that it's really hard for people to part with their money. And so today we're gonna walk through some of the, the reasons why some people don't invest. What are the areas of struggle? What are the fears that they have the unknowns? But first let's get into a couple updates. Rayden. What do you have for us? Yes. So we are finishing construction. We have a lot in construction still, but we're finishing construction on a lot of assets and we have a lot on the market for sale right now and we are countering a lot of offers. We're getting a lot of offers. We're starting to see a lot of activity on that. So we're optimistic that we can, we can get some stuff sold here pretty soon. Um, I know, you know, that's a big update on all these development deals, right.

We build it, we sell it. When are they gonna sell? People are ready to get their money back. Yeah, of course. And they're ready to get that redeployed in the next deal, which is the Burleson learning experience we're currently funding for right now. So um super awesome deal. We'll mobilize construction here in 30 to 40 days. We already have our civil permit in hand. Um Architectural drawings are almost done. We'll get those submitted in. We've already got our signed contract with the, the contractor that's in budget. We've got the construction loan. That's about we, we are good. So excited to get that little bit of room left for investors out there watching this, maybe depending on when this release is. But yeah, we're still fundraising it right now. It's been up on the site for about a week now. So, yeah, if, if you're interested, go to the website, check it out there may still be room. Um If not, we'll get you on the next one because we should have the big sale lease back under contract. Um Now, I mean, by the time this comes out it should be under contract, we're circulating um entity names and we're circulating the PS A for signature. We've negotiated the lease, we've negotiated so much stuff, but we're almost under contract and I know we've been talking about it forever.

We've had a bunch of people email that said, hey, send me information about the, the big sale lease back deal and we will get it out soon. So super excited about that one. Love it. Well, ok, what else? Well, no, that's it. I, I was just gonna say, if that's all the, the, the updates, I was gonna say, you know, you're talking about the psychology of investing and, and you know, we have people who listen to the podcast, they watch the podcast, they know what we do, but they're telling us they still still won't invest, still don't want to invest or just, just can't really pull the trigger on it. So, why do you think that is? Well, first, I wanna, I wanna give an update on how we got this topic today, Brady and I having lunch and uh a really good friend of mine came up and he was just saying, hey, and we were like, hey, we, we were discussing the podcast and what topics this is literally an hour ago. And he's like, hey, you need to go over, you know, like the scarcity mentality and you know, the, you know, the, the fear of doing your first deal. This is somebody who watch, watches our podcast that's known me for a long time and has never invested in a deal and watches the podcast and has seen all the information but still is, is trying to get over the hump of, of getting that first investment in.

So anyway, that, that's the preface of the show. So, go ahead. He said I was doing a great job, by the way, he didn't mention anything about you. That's true. Yeah. Well, you're gonna have to give me this guy's name. No. Um So, yeah, so, uh you know, in my view, I, I think it's just the kind of the unknown, right? Because there's a lot of things that people can invest in that are sort of the norm, right? They're 401k at work. Uh They can go find a, you know, they got a friend of a friend who's a stockbroker so they give them money and, and, and this guy or woman uh picks stock for him. And so, but, but investing in commercial real estate is not the norm. Yeah. What, what were you saying before the show? Uh It's really people kind of stick inside their, there's a circle of influence. And so if you've got, you know, five of your best friends that are making money in commercial real estate, chances are you're not gonna have much of a hesitation in doing a commercial real estate deal. Uh You know, but if you don't have any friends in commercial real estate that can be a barrier, all you know, all they're doing is 401k and, uh, Roth Ira and all these kind of traditional things that feel safer because everybody's doing it if everyone, you know, is doing a thing and no one's getting slammed, no one's losing all their money.

Well, then you think, oh, that's safer than commercial real estate. It may not be safer. Ok. But the perception is that it's safer because you don't know anybody doing commercial real estate. So I think that was one of the reasons we think maybe people are having a hard time. Yeah, knowledge brings comfort and security. So what you don't know about, you know, you could hear all these people making money in, in commercial real estate or real estate in general. We, we know so many people killing it in real estate. Um But if, if you're not around those people and you don't know anything about real estate, it's going to feel like you don't know anything. So then it's gonna feel like a massive risk and then you don't take massive risks. People don't take massive risks. They don't even, they don't even come close to taking a massive risk. I try not to take massive risks and I consider myself myself a risk taker like we were talking about going um What is it the, the thing where you slide on the cable zip lining in Costa Rica. I'm like, I don't know if I wanna do that anyway. So we're we're constantly looking for things to justify, not, not taking risks. So just being around people and, and starting to gain the knowledge, right. Starting to take that action.

It's like, ok, I'm, I'm gonna look into maybe how or you know, if there's, I'm not gonna use the zip line example anymore, but just for real estate, there's so many people who are just like, ok, screw it. I'm finally getting a deal. What's the minimum? I'm giving you the money and I'm just ii I can't think of it anymore and at least I'll learn and that knowledge and, and the process of going through it helps increase their awareness and their knowledge and then it doesn't feel like a risk anymore and then they're getting into the next deal because they kind of understand how it works. Right. That's a good point. And it goes back to the psychology portion of it. The risks don't change guys. Uh, the, the amount of risk that you're gonna incur in doing a real estate deal doesn't change, but I'll, I'll throw it out. We have investors that, that are, that are in 10 deals, 15 deals, 20 deals. And so they don't even think about it. Right. Uh But that first one, it's totally different on the psychology of it because you, you haven't done it before and you're like, ok, what if I lose all this hard earned money, this money? $25,000. This took me a year to save. This took me five years to save, you know, I can't just, just give it away. And what if it didn't go? Well, that's, that's what they're battling is that psychology?

It really is because when I, when people are the first time investor, like you say, one of the things that I get from them the most is how am I gonna lose my money? How could I lose my money? Am I gonna lose my money? And we have to kind of walk through it. So maybe we should, maybe we should sort of do that. What, what are the risks, the perceived risks uh in investing in commercial real estate and how do we counteract those risks? Yes. So there's an interesting uh video. Maybe we can pop it up in the, in the post edit. But basically Tony Robbins is interviewing this guy and he has him close his eyes and look around the room for anything that he sees that is brown, right? And he closes his eyes and then he says, ok, now let me know everything you saw that was red and then he did the exact same thing with red, but he popped out a different color. And the idea is that what you're focusing on, you're constantly looking for those things. So yeah, let, let's go down that path of how can I lose my money, right? Because we're, we're actually thinking about that on every single deal. We're asking, how can this, how can we get a cataclysmic failure? How is the bank suing us? How, how are we losing the investors money?

Like how could that happen on the deal? And we're, we're talking through that on every single deal because there's not a lot of ways that it could happen. Yeah. So I don't know the answer to this. So, and we didn't talk about this but Joel with your uh previous experience in precision and now precision and criterion has an investor ever lost money. Yeah. Uh That's a great question. And we have to preface it guys that, that in these types of investments, there is a chance if it's small, if it's large of you losing your capital. OK. We have to say that uh in any real estate deal where you're, especially the ones like we're doing where we're leveraging. Uh And we're putting 25% down and we're borrowing 75%. There is that chance? But, but I've been doing this now, I've been real estate investing for over 20 years. Uh And uh I've been syndicating with investor dollars since 2010. And um good news for my investors. Any of the money amount of money that I lost, I did it with my own money before I started taking investor dollars. But we've done now, could it be 50 deals? 75 deals even more? And we've never lost a dollar of investor equity.

And so that's important because if you want to know the odds of a, a catastrophic failure of you losing all of your money. Well, that's never happened in the history of my investing career, but uh I'm not saying it can't happen, but you have, you have three guys and with Andy, our business partner down in Fort Worth, you have four people. And like Brayton says, we're literally trying to find what are the ways that we're gonna get hurt on this deal. And we're bringing all the experience, all the mistakes that we've made, the years that have cost us money and we're bringing all that experience to the table to, to make sure that that doesn't happen for you guys. And that's, that's what we want to tell you is that we're not the chance is there. But, but, but losing 100% of your capital would be a very, very rare event. So, what are the alternatives to losing 100% of your capital? Well, let's stay on that for a second. And this isn't a great analogy. But, uh, do you think any, anybody's ever lost money in stocks? I've lost money on a lot of stocks, of course. Yeah, because I've made money on some, but, you know, I, I've lost money. So this is a, this is a good point. It's a little different, but it's vastly different.

It's, it's total freaking opposite. Right? Because stocks are a public market. Like, I, I know Monday morning, the stock market is going to open and I know I can sell all of that shit. I know the bank could, could come and take it and sell it. If, if I was trading on margin or whatever, there's a public market for it and you can sell it. And I think that is what screws with people and that's why they lose money in stocks is because they, there's a public market for it. But then that's the same reason they're not giving us money. It's because they're like, well, I, I wanna have control over my money and I, I like to be able to sell it when it's high and, and buy it when it's low and I'd like to see the value every day like that. Yeah, we're, we're, I wish we were selling stuff faster for better prices, but we're selling it and, and we're selling it for good prices, especially considering the economy and especially considering what we underwrote. So, yeah, it's not a, it's not a liquid public market. It's very illiquid from the limited partners perspective. And even our perspective, we're in control of the deal and it's a liquid, like I can't sell that Monday if I wanted to.

Yeah. People really don't like the thought of not having control. Right. They're giving us their money and then they're just, you know, they, they, they can't see the value go up or down every day, they're just kind of relying on us. Whereas with, uh, other equities like the stock market, they can sort of, they can just kind of go into their account on you like to have more control because they can push a button and get all their money back. You know, if you invest $25,000 in a mutual fund, if that thing loses value at any time, you just like, push a button and you get all, you get what, you know, 98% of your money back that control, I think is comforting to people. And that, that may be another reason why people have a hard time pulling the trigger because once they give us 25,000 or 50,000, they kind of have to let it go for a year 235. And so there's a lot of trust there. And so if they, you know, going back to it, you have these factors that, that I want people to have takeaways. You have a lack of, uh, of education or knowledge of the subject. That's number one, it's, it's the fear of the unknown. Then you have, uh, the fear of loss like money. Uh, well, I'll get back to the, to the psychology of that part, but you have the fear of loss and then, uh, what was the, the last one is the, is the lack of control.

So those three things are, most of the psychology of why people can't pull the trigger. But I think maybe the biggest one is this, this idea of the fear that people have of losing money. And I, I just want to spend a couple of minutes on that because that really drives a lot of behavior in society. And, uh, you know, we were talking about it before and I brought up the example of riding a bike. Um, people are willing to fail at a lot of things in life until they learn, ok? And so, you know, because there's no, there's no judgment from society like when you're riding a bike and you fall, everyone's like, hey, get back on, do it again. Try it again, you might fail again but try it again. But with money, nobody does that, ok? It's judgment. You lost money, you're a fool. You're, you're, you're foolish, you just started investing and you lost money. And so in the shame, ok? That we feel and that paralyzes us guys. Um So you never invest or you invest in a savings account in the bank and you feel more secure that way and that safety and security keeps you from venturing out. Uh but it doesn't have to be real estate.

We're just encourage you to get past the psychology because uh you're never gonna get rich, saving money. You're never gonna get rich with money in the bank. Inflation will always outpace your uh interest rate that the bank is paying you. So when your money's in the bank, it's, you're not losing it, but it is going down in value. So you are essentially losing a simple make money, right? So let's, let's talk about cash and what I would consider the different levels of risk tolerance that most people have and just kind of the correlated investments in, in between ca cash is trash. Like if you haven't figured that out in the high inflationary environment we're in right now, then, then you're living under a rock, right? Like you have to buy things as soon as you start buying appreciating assets like real estate, not only is inflation, not working against you, but it's working for you because it's helping drive rents and uh that's directly correlated to the value, the appreciation of your property. So you're not losing multiple percent, you know, 34567, maybe in some years percent on inflation on your cash. But now you're appreciating 3456 7% a year on that asset.

And then you get to the next level which people are like uh let's buy a CD or a bond or a high yield, you know, uh form of debt, you know, it's maybe four or five or, or 6% you know what I mean? Still very, you know, risk averse, not really doing anything for them. The next step is maybe a public market, you know, historically, you can invest in the S and P get a A, you know, 9.5% return, eight, maybe 8% return over the past 30 years. It's, you have control. You can put it in a variety of different places. You can do it on an app. You can do it through Merrill Lynch or, or whatever. And then the next step is really where, where people lose it and, and they don't have it. But um in, in this book we're reading and I got for us right now, Tony Robbins is interviewing Ray Dalio and they go into some of the statistics about how much wealth is actually stored in private investments outside of the public stock market. And I, I believe there's way more wealth stored in private investments, way, way, way more wealth and the average return of that wealth invested in, in private illiquid nonpublic companies just like we're doing with real estate.

Um The average return of that is 15% right? It's 50% higher than what you would get in the stock market. But those people had to get comfortable with giving their money to somebody else and letting their money and their relationship and that connection and that investment work for them instead of the control that they have to have over their Robinhood app or their Merrill Lynch account like I have, I have to see this, have to know what clothes is today. It's like, dude, I, I love giving money to people. It's like you worry about it. Let, let the money and the investment worry about it. I, I don't wanna have to worry about like what apple stock is doing or, or what interest rate my cash is on. Like II I don't want a ton of cash. I want enough cash flow to live on and then the rest can just kind of go to make more cash flow so I can live on it. I mean, that's, it's like a river of water. I don't, I don't need this big damn, this big reservoir. I just need like a little bit every now and then. So to that point, I wanna talk about that because we started the podcast because we wanted to make commercial real estate uh accessible to people. We wanted to make it uh easy to understand and to get more people in the investing game because we know it changed our lives and we wanted to change other people's lives.

But if you're, if you're listening to the podcast and you're, you haven't got over the psychology of, of investing in a real estate deal with us with uh you know, not expert. I mean, I hate to call myself an expert, but we've been doing this a long time. You're never gonna get to where you're doing it on your own and that's the ultimate goal. And, and so what I'll say is, you know, if you think back, if you haven't ever invested. And you think back, uh you know, the first deal you saw from us, let's say five years ago, if you would have put a little money in that deal, we would have made you money and think about how many more deals you would have been invested in over the years because you did that first one. Ok. And so, but the longer you wait to do the first one, uh you know, you're, you're just delaying the opportunity to make above average returns. Uh And once again, it doesn't have to be with us. It, it can be with any, any uh what's perceived as a riskier investment that has a higher return profile. But until you do that, you're, you're never gonna be able to get in the game that private equity is, is playing in which are above average returns. Uh And we've already done shows on the difference, you know, 8% versus 15% does on your money over over a generation.

It's life changing. And so that's what we want to do is to help you guys uh get over that psychology uh hurdle in order to say, you know, hey, uh I can do this. It's, it's most likely gonna make me money and real quick. Uh Before I pass it on, I want to talk, we, we talked about losing all of your capital, but things don't go well in our deals, we've had so many deals that that, uh, didn't go perfectly. Yeah, mistakes, mistakes are made. We're, we're humans dealing with other humans. Yeah, we, we trusted an individual, we trusted a contractor, we, uh, trusted tenants to actually pay on their, their lease and sometimes that, that stuff doesn't happen the way we want it to, to happen. Uh, but if you wanna talk about it, we can give you example after example of, well, that was a, that was a problem for us that we had to find a solution to and that's part of it. We don't stop, we don't run away, we don't uh we don't act out of fear and say we're never gonna do that again. Each time something doesn't go right. We get better at our job. Uh because we have all that, that experience and experience is a, is a necessary teacher to help us know, OK, what pitfalls?

What are the 100 mistakes that I made over the last eight years? And how do I incorporate that into this deal to make sure those don't happen again? And so each deal gets a little bit better. But could there be a deal? Like we have a deal? I'll mention a colonial building down on Cherry Street where everything that could go wrong kind of did go wrong. COVID hit right after they, they started widening the street, the construction, they canceled the market uh place that they, you know, the fresh weekly farmers market canceled roof problems exterior updates. Uh We basically had almost 100% turnover, literally, almost 100% of the tenants moved out. Ok. So we've had to pause distributions, but I promise you we haven't lost a dollar of, of capital. Uh, and I think that that eventually we will, uh, double if not triple everybody's investment and something that has gone, uh, has not gone very well at all from a standpoint of things going. right. But that's what's great about real estate is that it's very forgiving in that sense. And we're taking a lot of nec necessary precautions, like on that deal, we, we over raised uh capital.

So we had money in the bank for things that did happen. So, you know, if you have a sponsor that doesn't, you know, raise any extra capital and doesn't, hasn't made any of the mistakes we've made and doesn't foresee some of the things that could happen then yeah, there may be some additional risk there. But anyway, I get, I get asked regularly why we do this right? Because hold on, I gotta put my phone on silent. I get that regularly why we do this because it kind of looks like it costs money to put the show on because it does, right? It's expensive. And I get asked on the other side by, by partners of ours. Like why are, why are you guys taking $25,000 investors? What are you, what are you doing and I love telling that story because we do it. We do it for you guys like we have no business taking $25,000 investments. It, it doesn't make or break the deal. We love having you. That's why we do it. We love having you. And we love when somebody says this is my first deal. I'm excited to get in for 25,000. I freaking love that. I live for that and I perform and we rise up to that challenge. We talk about it all the time. No, it's, it's super cool and uh obviously it would be a negative if that first deal didn't go well.

But if that first deal goes right for them and we, we do everything we can to make sure it does go right. Then we've changed their lives because they're gonna invest in the second one and the third one and the fourth one and their, their financial picture over the next 1020 years is gonna be drastically different all because we got them to take that step and some people uh don't take the step unless we're out there telling them how easy it is. We're, we're doing the podcast, we're talking about how to do it, what the risk star, all of that stuff gets them over that hump in an, in an asset class that they never would have invested in in the first place. And so 10 years from now 20 years from now. I hope we have an army of podcast listeners that have invested with us. And they're like, man, now I, now I'm in with 10 different sponsors. I don't even invest just with criteria and I'm, I'm invested with this guy over here and this apartment person over here and this, this fund out of California here. That would be awesome. Uh So that's to your point. That's just why we like, like talking about it and doing it because it is so influential in our lives. Yeah. And everyone loves it. I don't know, maybe, maybe, maybe not, but like buying Apple stock now, like it's gonna make you some money if you bought Apple Stock or Netflix Stock or Amazon Stock a decade ago, like you made great money.

But those companies were private companies and the people who really made the money invested in those companies when they weren't public, right? So just look into the statistics of real estate returns, private equity returns versus the stock market because it's, it's just freaking huge. And I think that's the biggest hold up for most people is how like I have to invest in the stock market. How could the stock market go wrong? You know, I can't give it to these guys. What if Brian gets hit by a bus? You know, like some people ask us that like what happens if you guys die? Like we're dead, you know, there's, there's management companies there's we have infrastructures. I'm just saying like the the real estate is not dependent on us surviving to cash flow and appreciate and be a good investment. But it just it goes to show how little people know about real estate investing. Like just get in, do some, do some research, do some data or get some data, invest in a deal, talk to a friend that's invested, talk to a management company, like start to learn and then it's not risky, right? Because you just actually understand for this to cataclysm fail.

Like all of these things would have to happen at the exact same time. And the probability of that happening is just like so slow. But at the exact same time, the probability of it being within our normal projections is, is very high, very high. And at the same time, the probability of it be ex way exceeding expectations and being an absolute home run, which we've done numerous times. We had accidental home runs, right. Our, our Plaza West Deal, the Lucido deal. Um I know Stephanie promenade in, in Las Vegas, right home run where you're mitigating the risk, the probability of it performing with, with what you thought is very high. But that probability that you know, 10 to 20% that you're gonna accidentally hit a home run and get somebody a stupid return is there on every deal. It really is. All right guys. So the point I wanted to make on that is the risk of the deal isn't changing. The only thing that changes is your knowledge, that's it. Uh, you know, the guys that invest with us on 10 deals, 15 deals, they don't see it risky. But, but, but someone who's never invested, they think it's risky.

The risk profile is the same. It's only your knowledge that, that is what changes the risk. That's why we wanted to call it kind of talk about the psychology of investing. It's that point. Exactly. So if you are uh struggling, if you aren't sure that you want to get into commercial real estate that you, you have some fear, hit us up, ask us your questions, right? How many deals that have not gone the way you wanted it to? How many investors have reinvested with you? What are the chances that my deals do above the returns that you're talking about? What are the chances that the deals do less? Right? Email us, call us, we'll walk you through it and it'll be zero pressure to invest. We're trying to get you over that hump because once you're over that hump, you're gonna invest multiple times and it's gonna pay off for you. So, all right. Uh Till next time. Uh Thanks guys. See you.

Episode 140 - Navigating Investment Fears: A Deep Dive into Commercial Real Estate Psychology
Episode 140 - Navigating Investment Fears: A Deep Dive into Commercial Real Estate Psychology
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