Our village south property here at 100,000 square foot retail center here Across the board were up 2030%. And so what was under a written at a 12% cash on cash. Uh, this next quarter, July one will be paying 25% by the end of the year. We may be paying 30%. And remember that's after that's that's the return to the investor. This just operational cash Flow were, that's after our split, we're splitting the cash flow and we're taking 25% were giving the investors 75% and the 75% of the cash flow is still 30%. Uh so literally they could have their money back in three years. Of course we've been delivering those returns now for five years. So most of them have close to their money back already. Master all right, what is up? Welcome back to how to invest in commercial real estate. I am Brandon and I'm here with brian and Joel and today it's all about just the massive opportunity that's out there in commercial real estate. I mean, it's it's literally endless when you think about commercial real estate and everything involves, you know, from, from land to apartment complexes, shopping centers, industrial, I mean, commercial real estate is all around you see it every day and somebody owns it and they're getting the advantage of it and it's been a secret for a long time and you know, it's kind of the basis of the podcast is just breaking down how much opportunities out there and how easy it can be to go and get it.

You know, when I first started getting into commercial real estate, I couldn't drive by a building without asking myself this little retail shopping center, how much someone making on this this multi family deal? How much are they making on that? But the thing is everybody is making money on every single building that you're driving by. And right now what we're seeing with money getting dumped into the market uh is the money flow into commercial real estate is really driving up prices and value, especially in multi family. And we're having a little bit of a harder time finding deals to deliver what are traditionally really high cash on cash returns to our investors, even though we've got several deals going with both criterion and precision, we're still trying to hit 11 12 13% cash on cash. And the deals we pitch so far are still doing that, but they're getting harder and harder to find. Yeah, it's amazing to me that uh you can still do that in real estate. I'm, you know, I keep waiting for it to to go away. Uh I think we've said on this podcast before, Traditionally I've always invested until now in stocks.

And so people think it's great if you buy a stock that's paying a dividend of 2% or something and and averages uh 9% return a year. They think that's fantastic. And here I am, I'm shooting for, you know, double-digit cash on cash and maybe somewhere around 20%. And the compounding on that is just unbelievable. Yeah let's dig in there because you know the past 18 months has been you know, kind of a shit show. You have you have Covid and even with people that are traditionally investing in the stock market or or just whatever they traditionally invested outside of real estate, Covid hits and you're going to completely re evaluate that you may have had, you know, a big selloff, it may have gone down now, it's you know back up and people have all this money and you know crypto and there's I mean there's does coin, there's AMC, there's Gamestop, there's all these stupid things that people are doing with their money but now more than ever you're seeing so much buying power on the sidelines and man it is just it is acting, I mean it's it's going in there and and and buying massive massive opportunities everywhere. There's just so much money out there right now, it's stupid and I think people with all the Covid and all the money that's gone out there, people are wondering how we're gonna pay for that and if inflation is going to take off, I was talking to an investor last week and I was just telling man, I just love I can sleep at night with real estate because I don't have to worry about some big huge um dip in the market or in crypto or something like that.

And and I tell them literally, I think to myself, my my uh real estate goes up every single day now, maybe it's 0.1% or 0.15, I don't know what it is, but it goes up literally every day and I don't have to worry about a big dip. I mean we don't invest in necessarily in these, you know, something like a new york skyscraper or something that really could good um good um go down in value quite a bit. But um anyway, so I just I just love the stability of it. Yeah, absolutely. One of my favorite things is cash on cash. And and you know, cash on cash is simply stated. The cash you get every year in distributions. So like we send out quarterly checks. So if you take the quarterly checks and add them all up and you divide that by how much you invested originally in that investment, that's your cash on cash, that yields a percentage. And we're typically shooting like 12% and getting 12% in cash every quarter. I mean we we even kept up our dividends and Covid, I mean paying out every single quarter and and that's We put a couple properties on hold for a quarter or two.

But now pretty much every property that we have, we're back online giving distributions and a 12%. I mean the market Is that all time highs, it's not going to continue to do even 12% were paying you in cash, 12%. And so you can go reinvest that plus you're reducing your risk by getting more money in your pocket. Uh but that's not your only return. I mean you're you're literally making 20% a year compounding on that money, we just give you 12% a year back in your pocket. Yeah. And we're going in, you know, an underwriting were typically underwriting fairly modest rent growth. You know, you pull up co star, you pull up the database of of information, your market and you can see what neighborhood and surrounding rents are and you can pretty you can get a feel for that, but they're typically horrible. They're typically really low, they're typically on the safe end, you can typically get a lot more if you're buying in good areas with good growth, you know, that those stats just haven't shown yet. And I mean, I mean sometimes you can you can get these properties where it works, which is 23% annual income growth, but you could be getting four or five times that because of how under market they could be.

You know, we're looking at a deal right now and I think the cap rate, you know, on the building is a little aggressive, but on the back end I'm looking at it and the rents are just so low, it makes me feel so good about it because, you know, you can underwrite it with just normal market assumptions that make everyone feel safe and that are easily achievable, but you can easily get, You know, a lot higher rent escalations and then the returns get get stupid, you know, that those 12% returns could turn into whatever our latest deal outside of ST louis Missouri I underwrote through 4% rent growth. The rents are drastically under market. Uh It's funny, we just closed last week my CFO brought me a renewal lease and and we're already going to propose to the tenant that's wanting the five year renewal. We're already gonna propose an 8% year one And and then 4% a year after that. So in 30, in five years will be 30, higher on rent. And I didn't underwrite that, that's the upside of doing these types of deals.

And it would be risky to underwrite that nobody wants You to underwrite that. They don't want me to write that. So what I'm doing is delivering really solid returns with conservative underwriting, people will say, Oh, you're not really gonna get 30% across the board on your property. But the thing is we we have done it, we have properties right now where we've done it, our village south property here, it's 100,000 square foot retail center here across the board were up 2030%. And so what was under written at a 12% cash on cash. Uh, this next quarter july one will be paying 25% by the end of the year, we may be paying 30%. And remember that's after, that's, that's the return to the investor operational cash Flow were, that's after our split, we're splitting the cash flow and we're taking 25% were giving the investors 75% and the 75% of the cash flow is still 30%. Well. Uh, so literally they could have their money back in three years. Of course, we've been delivering those returns now for five years. So most of them have close to their money back already. Um, so I just, I just think if people have money, Uh, sitting in account making zero Or they have all of their money, let's say in the market, hoping to get a 9% compounded return, they need to get some of it in real estate where they can get 12% in their pocket, not, not just in an account, not including the appreciation, the paying down the debt.

Yeah, I mean, there's so much, so many ways the tax leveraged, uh, you know, tax leverages with real estate. I just don't think people realize how powerful it is. Once again, there's risks. Uh, but I was talking to an investor today with the way we underwrite deals. The, the, the chance that we overperformed, given our conservative underwriting versus having a couple of tenants leave. And underperforming is its way higher that we overperform. And, and brian you can speak to that because you've done a ton of deals with us. We've overperformed on most. Yeah. Generally, uh, they've overperformed rather than underperformed. But let me make an important point here on the structure of how we syndicate. So let's say a tenant does move out. Uh, Underperforms. Okay, Who takes the hit? This indicator takes the first hit because we're paying an eight pref. So let's say I'm gonna pay a 12% cash on cash. I pay eight, pay 8% to the investor, and then I split the remaining cash flow some percentage to get the investor to 12. So let's say the deal level cash flow is 15. Okay, Well, so if we don't hit 15, and and we only hit, let's say 11.

The investor gets the first eight first, and then they get, let's say two thirds of the that that other 3%. So the investor goes to 10. I go to zero as the syndicator, and the investor goes from 12 to 10. Okay, I don't think people understand that. I just want to make sure. So we can take a huge hit in cash flow. And and the sponsor takes the brunt of that hit. And the investor takes very little hit because they get the 1st 8 of all of the cash flow once again, I think that's a great benefit to investing in real estate and doing it this way is that even if the deal doesn't perform, it has to drastically underperform for you to really take it on that cash flow. It's a good point. Yeah, we didn't, we had an interesting deal. We had, uh, that same exact same example. It was during Covid. And at the end of the first quarter, you know, most people were operating right along with your business plan. Then at the end of March, it's, it's like a bomb and nobody wants to distributions after that. So we, we said, hey, let's, let's put a pin in this. Let's see how the next quarter goes, Everything seemed out, you know, to be okay.

And, you know, we handled well and we didn't suck up all of that cash and we still had it. So the way our operating agreement read is that we evaluated that 8% preferred to turn quarterly. So since we didn't distribute it, and the first quarter, that technically the second quarter, you know, it was, it was lost from the first quarter, but that wasn't fair. You know, we, we literally just deferred it in our essence. So, I mean, we, we gave the investors of the full 8% refer to turn out and who got hit on that deal was, was us because the 1st 8% always goes to a limited partner and we're getting in front of people and people are actually, you know, asking the nitty gritty and and you know, really trying to wrap their heads around on how they're getting paid and what they're investing in, how the entity structure is set up and you know, just everything when we can actually explain it and when I feel like they actually understand it, that's typically when they're like, yeah this is awesome, you know? And then and then they do the first deal, they do the second deal, they get some checks and like this is true, this is actually happening. I didn't get scammed and then it just keeps going and then before you know it you've just got this relationship, you know like duck, you know you guys have been investing together for for so long because it just it's such a good asset class to invest in and it's real, there's a lot of great investments out there, but I bet that most people don't have investments where they get mailed to check every quarter.

Uh Sometimes people invest in stuff and then two or three years, five years later they it does really well for them. So I'm not saying there's not great investments that aren't real estate. Uh but I'm just saying uh it's it's my soul income right now is my invested dollars. I wouldn't say soul, but most of my income comes from my invested dollars and me getting distributions at the end of every quarter. And that money that was close to passive income as you can get. That's fantastic. Let me ask you guys about uh inflation because there's a lot of talk about inflation and typically inflation is is bad for the stock market. And the reason is because your certificate of deposits going to go up so people think well I can be more secure and I can just go make my three or 4% in a. c. d. now and I don't have it. I don't have to take a chance on the stock market. Plus they think that that a lot of businesses costs are gonna go up. So that's worse for the stock market and for these businesses so their earnings are gonna go down. What about commercial real estate? Are are you guys able to keep up with? Let's say if if if inflation goes up, can you charge more for rent? And and also does the value of your commercial real estate go up because inflation is going up.

Can you can you guys talk about that just a little bit. Yeah it's a great point. Uh So if you just get a salary, let's say you make 50 to $70,000 a year, 100,000 or whatever you make. Uh Typically that salary is not going to keep up when inflation starts to run. Yeah It's gonna be two or 3 percent. That's right. And so you're so what what inflation does it eats away at the value of the dollar And you're buying power is less because costs of goods are going up and you're getting a salary. Yeah. Easiest way to explain is if you have $5,000 in 1978 by your fridge, if you kept that $5,000 and your if you have $5,000 in 1978 by your car. But if you put that 5000 in a bank today will buy your fridge. Yeah, basically. And so how you hedge against inflation is to have assets because assets will go up in value. Because because just by nature of the dollar is losing value, correct? And and so how we hedge against inflation and property is we raise rents so every year if inflation is higher we we up rents which increases the value of that asset over time.

And it just makes sense because the less the dollar, the more dollars are in circulation, the less the dollar is worth, the more people are willing to pay for income producing asset. Yeah that replacement cost is another thing, you can look at a lot of times you can buy great assets for um cheaper than its it costs to go build a new one where you can get comparable rents. So if I can go by an older center for $100 a square foot, I know that I can't buy us like we we bought a center in broken arrow around $100 a square foot, there's a brand new shopping center being built right next to it and it's probably several $100 per square foot. I would 100% much rather be in our, my deal than that deal just from a risk standpoint. That's a good point automatically pushing prices up. We're trying to build an apartment complex right now, it costs are astronomical. So the more cost to build new, yes, the more people will be willing to pay for something that's older, correct? So maybe it cost 20 years ago, it costs $80,000 apartment complex.

Well now it cost 130 140,000 and so, uh, people are willing, that's what's pushing all these older prices up is because it costs so much to buy new, they're coming down and wanted to get something a little less. Um, well the next thing is, is kind of debt and 10 european properties, you know, a lot, a lot of people flip houses and the biggest growth inhibitor to flipping houses is you run out of lenders. You know, people stop kind of giving you money, you kind of stop being able to collect the houses because it's, they write the loans differently commercial loans, you can just get typically better and more loans and your risk from their perspective the lender, which is why they're willing to give you more loan dollars is it's because it's getting less risky every single year. The rents are typically going up, The principal balance on the loan is typically going down. You know, it's, it's proven in really fast and then they're lending us the dollars because it's an investment. So over that few years, you're really going to, you're really going to tell you that out. Yeah, Well I think that that was a pretty good segment.

Uh, we encourage you guys if you don't have money in real estate, get some of your portfolio and real estate. If you want to learn more about how the metrics were cash on cash, internal rate of return. All that hit us up on email. Hit us up on the website. Absolutely. Thanks. We'll see you next time. Thanks. Yeah, yeah.