How to Invest in Commercial Real Estate

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Episode #029 - How to think outside the box to fund your first Real Estate Deal!

by Criterion, Braden Cheek, Brian Duck
April 6th 2021

Most people that are wanting to get started investing in commercial real estate typically have the same problem - they need money. Today we have our hosts Brian Duck and Braden Cheek from The Crite... More

what I did. I used to get these offers for these balance transfers once you did one of them in the mail every every day. Well I couldn't apply for uh one every day. It would start to dig my credit. So I had this idea that I would just save them up and apply for these credit cards all in one night. Uh That way they would they wouldn't they all pull the credit at the same time and it would still be high And so I get approved for these credit cards like 10,000 apiece. Me, let's say it was 8-10 credit cards. And I got all these balances on the 0% cards for two years or whatever it was. And sometimes they were even longer than two years, three years and I shipped all these balances to one credit card, $80,000. And I use that as No 1 1st of all. No wonder you're not allowed to do this shit anymore is because somebody gamed the system. You ruined it for everyone. Thanks. Yeah. What is up and welcome back to another episode of how to invest in commercial real estate. What's going on today is a super cool episode. I'm super excited. Um Show is called how to invest in commercial real estate. And I thought today we break down how you actually invest in commercial real estate in the first part.

How to get started. So how do you start getting invested in commercial real estate 1st? The biggest question most people ask themselves, where is the money going to come for? Is the money going to come from? You literally read my mind, it's beautiful where is the money going to come from? How do people get money aside from the government just deposited in your account randomly? I gotta think there's a lot of people who would love to do this and you know, they hear about no money down. I hear about no money down and that turns me off. I don't, I don't want to do that. So I think there's a lot of people who just feel like they don't have the money to get started. So Joel, well, okay, you gotta start talking. I mean there's me now today. If you ask me, where does the money come from? Commercial Real estate? My answer would be different. But if you're asking me how I got started, how my business partner and I got started, hopefully the stories will help you think outside the box because uh, if you keep telling yourself I can't afford it, I don't have the money, then that's the answer you'll get. So you start, you need to reframe the question and say how do I find it? You know, how do I afford it? And then your brain goes to work to think of ways you can come up with money.

Not that I can't afford it, how do I and when I started we didn't have any money. So I leaned on the authors that I was reading to inspire me to be thinking outside the box for opportunities. Well, hold on right there because I feel like some people even get started when they, when they have money. So let's, let's talk about money and I feel like for most people, they have this stream of money, but all of its allocated all of it's being spent, none of it is set aside for the, for the dream for that. Hey, I want to go invest in real estate or hey, we're gonna retire one day and travel the world or you know, whatever it is. And I think it's, I think it's hard even for somebody making a ton of money. They could be spending a ton more money than they're making. And it's just hard to get that chunk. You know, you need kind of a big chunk to get started. Yeah, I mean that's maybe another episode because I think about, you know, wanting to help people with their budget. Uh, everybody that's listening to this podcast is probably spending more than they should be. You could, you could be living on less and saving that money up. Uh, every dollar that you're spending today, if you'd invested is worth thousands of dollars in the future.

If you kind of convince yourself of that, you'd be, you'd be more uh focused on reducing your, your expenses today to get that sum of money. Natural tendency is if you can make more income. Okay, well I can afford a nicer car, I can afford a nicer house but you still don't have that chunk. Like you're talking about forget nice cars and nice hassles. Let's talk about necessities. Like I need health insurance, it's $1000 a month of your family. Most people can't afford that or they have to get it through a job or they have to get subpar. I mean just getting like necessities going on one vacation here like hey, I'm gonna take my family on vacation. That's, you know, 5 10 grand and I mean it just adds up most incomes. They are, they're not gonna save their way to the money they need. Uh but for me when I started I was looking for opportunities to generate some money and my business partner and I, we had hooked up and he had actually had some cash saved. That was actually credit card debt and he was waiting for that right investment. And we found these, these two houses and uh man, they were cheap back in the day.

They were kind of run down in a tough area but we knew that uh the 17.5 1000 apiece wow houses. Yeah, they were, they were pretty rough. But what we knew is that if we could fix them up That we could put assisted housing tenant in there and the government would pay us $700 a month. Okay. And and so they needed some work and this this person just kind of wanted to liquidate them. So we, we buy these houses, uh, with essentially with credit card debt and we paid $35,000 for two houses. Now the key takeaway is when we go to put debt on him, We owned free and clear. Now if we were gonna go put dead on those, when we were purchasing them, you can get an 80% LTV loan to value a mortgage on those. So you just bought these houses in cash, in cash and you did the remodel in cash. Uh, yeah, the remodel wasn't, wasn't much cash that you had or you get so much on the $17,000. Yeah, it was a few 1000 you know, well we did that, we, we painted them ourselves, we were up there, uh, you know, painting them and, and they needed some carpet.

So there wasn't much money to fix these up. People can do that now. But the takeaway is if you get an 80% loan on, on 35,000, uh, you know, what, is that? 28 grand. So we get 28 of our, our 35,000 back. But what we found, which was really important is that when you own something, uh, free and clear all cache that the, the appraisal is subject to, to be different than the purchase price when you're buying it, they're going to praise the property at what you buy it for. So let's pause right there because let's just define appraisal and praised his job is literally to justify the purchase price. That's it. So normally you get a contract, you signed a contract buyer and seller, hey, I'm gonna buy this piece property for In this case $17,000. And they praise you guys out there and his only job is to take the contract and says, Hey, is this worth the $17,000 that this guy is willing to pay because market is what buyers willing to pay and what sellers willing to sell for. So that's it. That's what he's talking about. Sometimes they may say it's not worth that. But so when you? Re on, on, you know, when you're refinancing something or when you own something free and clear and you're going to put debt on it, they don't have any purchase price.

They're just going out there and they're looking at the loan value. They're looking, they're looking at camps, but also they're looking at what we think it's worth. You can influence the value when you go to refinance much more, uh, than you can, if you're gonna buy it because that purchase price, that purchase and sale contract really dictates the value. It tells the appraiser, that's what buyers willing to pay the seller is willing to sell that. Uh, so the magic of, of buying cash even though they were cheap is that we had an opportunity to get a higher appraisal, uh say, hey, we fixed this up, hey, we have a renter in their paying $700 a month. Well, Hey, that that makes it worth a lot more than we paid for just getting a renter in there versus a vacant house. Right? And so we got a person out of California, he had moved here. He was, you know, you know, thinking these houses are all really cheap. And so we got each of them appraised for $50,000 because once again their rented for $700 apiece. So, so we bought for 35,000, we we had an appraisal of 100,000. And so now we got alone for $80,000.

And you know, the payment on an $80,000 mortgage is what, 600 bucks. Right? And so we were renting them each for 700 or 7 50. And so the mortgages cash out 50 can still cash, cash, cash out 45,000 and we were still cash flowing on our Reynolds and that a light bulb went off for us and we said, hey, we got to try to do this again. And and so we went and found a package of three. This time we paid 21 22,000 apiece for the houses. But we did the same thing, We got even a higher appraisal that time. And, and so through that process, we were able to generate pretty quickly, uh 100,000 or so in just cash and we didn't spend it. We, we we had that we invested in our first small apartment complex with that 100,000. So the first deal let you buy these 33 houses, the first two house deal, let you buy these three houses, then three house deal, let you buy apartment complex. And we played the game monopoly. And, and we did, we did a couple houses, then we drop to three houses and then then small hotel, then you put a hotel, what hotel is apartment complex?

But uh, that and that, that's my exam. That's one of my examples. Um, what I hope it encourages you to do is, is the deal of the decade like we talked about is out there. It comes along once a week, but I was reading books and I was out looking at property all day and calling on sellers. So I was in the market for those deals and if you think that you can't afford it or you're not gonna get the money or you don't have any money, well then you're, you're never going to find it. You have to be looking, you have to be active. Um, you know, another example that comes to mind just, I don't recommend anyone doing this, but it just shows about how to think outside the box and be creative Is back in the early 2000s. You know, they were giving these balance transfers on credit cards at 0% interest for free. The transfer would be free today you had to pay 3% of the transaction volume or or whatever. So what they were encouraging you to do is take out this this 0% interest for 12 months or 24 months uh balance and then transferred to the credit card that you owe a balance on at 15%. Well I I came across it just by chance is I got one of those and I transfer I said hey what's my limit?

You know? And they said $10,000 or whatever and I said okay hey let's transfer this to this card. The only only problem was the car didn't have a balance. And so I didn't know what happened, but I shipped it over to this card. It 0% on the new card. So essentially you've got like a $10,000 credit on this. I have a $10,000 credit on a credit card. And so I called the credit card and said hey I've got this $10,000 I think initially I was just going to use that card uh for whatever expenses I had and then and they just have the balance over here. But they said, hey now we'll ship that we'll send you a check. I think you you will you send me a check. So I got a check for 10,000 and I have a balance on a credit card at 0% for like two years. And so we had an opportunity to buy our first what would be profitable apartment complex. And uh we didn't have the money but one day I sat down and I just wrote down every way I was gonna get money. Almost getting my father in law, my father maybe take a loan on my 41 K. All that my savings had my business partner, His savings just hit up and I couldn't get there. We couldn't get enough money.

I think we we needed you know $700,000. And so I had this idea so We went from buying to 17,000 houses real quick. So like we're buying the first apartment complex you need several 100,000 dollars. Well this was not the first apartment complex, this was about a year or two down the road where I found this it was too big for us at the time. But I just knew that it was a good deal. And so what I did I used to get these offers for these balance transfers once you did one of them in the mail every every day. Well I couldn't apply for uh one every day. It would start to dig my credit. So I had this idea that I would just save them up and apply for these credit cards all in one night. Uh That way they would they wouldn't they all pull the credit at the same time and it would still be high And so I get approved for these credit cards uh like 10,000 apiece maybe let's say it was 8-10 credit cards. And I got all these balances on the 0% cards for two years or whatever it was and sometimes they were even longer than two years, three years and I shipped all these balances to one credit card $80,000.

And I use that as No 1 1st of All. No wonder you're not allowed to do this shit anymore. Somebody gamed the system. You ruined it for everyone. Thanks. And so you know just just trying to encourage you that that things are possible when you're thinking creatively. So I got the rest of the down payment combined with my business partners money and all that we had and we were able to close on this apartment complex, we had no business buying. And now the flip side is I had a stack of credit cards that I carried around with me for two or three years making those minimum payments but it was 0%. So I didn't feel much, didn't feel too bad about it. Plus The investment was making more than 0% obviously, so I don't necessarily recommend that strategy. Uh you know my journey, my business partners journey is unique and that we just didn't have any mentorship and we didn't have any money. Uh but what I'll say is I've heard of other people doing crazier stuff than that. Uh and so there's an avenue for you to, to find the capital you need.

Um maybe it's a partner, you know, like we've talked about that's probably number one go to, but but be creative be thinking about, hey, how do I make this work? It's not, I can't afford it, it's how can I afford it? And that one change, get your subconscious going to try to find the solution you need to whatever the problem is that you have in front of you. Yeah, just an interesting dichotomy. There is is, you know, when you have money, when people who have money, they typically lack time and opportunities and they don't lack time, it's, they choose to invest their time with their family or whatever they enjoy doing and they just don't have the time necessarily to go find all these amazing opportunities for their money. So when you find an opportunity that's typically the harder part than finding the money because if you can, it's like facebook advertising, like if you can get your ad in front of enough people, typically it will convert its getting the ad in front of people, it's letting people you don't know you have this opportunity. So I mean getting the opportunity, getting the thing locked up is one of the big things for me because people think they have to go, you know, let's say you want to buy an apartment complex or any commercial deal.

People think you just have to go, oh I need money. So they go out, they start talking to their friends and they're like, hey, I want to raise money for commercial real estate, hey, I want to do the steel, hey, I need money. You know, I'm gonna raise $300,000 and they have nothing, they have the promise of investing commercial real estate and they're like, hey, I want to talk to you about something. I was thinking, you know me, you five of the guys, we're gonna put together 300 grand, we're gonna go invest in commercial real estate. If you brought that to somebody, they would say no because they like, what do you mean? We want to go invest in commercial real estate, who's doing it, what deals are we gonna buy? Where are we going to do it? When are we getting our money back? Who's signing the debt? But if you take this nice little package with a bow on it and everything and it's this perfectly gorgeous deal with a lender inside and a seller willing to sell and this nice property and you take it to him to perform in a package And you're like, hey raising 300,000 me and if you guys were putting this deal together with this property, you're gonna get money back at this time. You know, here's everything. You break it down. You give them a specific deal, right? It's super easy to get them to invest in that. It's, it's super easy and you can get started.

I mean you may get some nose, but brian, I mean, I remember when I first pitched you the deal you had never invested in commercial real estate. What I know we probably talked about this before, but what was it about that simple performer and presentation that I gave you that you thought it was safe enough? Well, it wasn't about the promise of, hey, do you invest in commercial real estate? Hey brian even investing commercial estate. No, you said, hey brian, do you invest in this deal with this return? Yeah, yeah, yeah. So it was the, it was the returns that I felt like we're better than what I was getting at the present time and in other investments. It was, I'll be honest with you. It was your experience and, and hearing some of these stories just like you told tonight, um, here in some of those stories and, and uh, felt like you would do whatever it took to get the deal done to be honest with you and then, and then the deal just the way you presented it made sense. I mean, you just laid it out, kind of like we've talked about on, on other shows, on how, you know how the whole deals work and, and how to lay them out. So it was just remember going through like a best case and worst case.

Yeah. You kind of give you a range of the returns, even the worst case. Uh, which, which um, was, you know, everything going wrong still still seemed attractive. So, um, but just laying it out like that, like you said, best case and worst case and, and um, the returns being better than I could get another investments, your confidence, your experience. Um, those are the things that that sold me on that first deal. Anything else that we should, we should mention about thinking outside the box. Yeah, I, I want to know remember we're talking about the story when you bought, what was the name of the engineering company calories, calories. Yeah. So you guys did the takeover of cowardice and, and that obviously had to cost money. You know, there's a group of you guys doing it. It was an opportunity that you got presented. But you know what, what was the amount of money I guess you had to raise and where'd you get it? I mean, it had to have been a decent sum and it had to have seen big, I would think, well actually, you know, talk about thinking outside the box. We had to do some, we had to be pretty creative on that because we had actually, we had an owner carry.

Um, so the the owner that owned the company at the present time carried some of the, of the loan and we paid them back. Then. We had a bank, a local bank in Tulsa loan us some money. So we had to pay them back. Um, then we put our own money uh forward and we actually asked the current owner, hey, if we just forego our bonuses, can that be also an additional amount? I mean it's not unlike what you're saying, it was definitely, it was a huge amount of money for us because we, I mean, we didn't, we didn't really have any money um, for us to, to all these partners to, to uh, you know, outlay a whole bunch of money. So we had to, we had to get it from, from different places, just like anybody who might be buying one of these real estates or selling these real estate seller Kerry is interesting because that that's a big way that uh, real estate investors can get into the same thing, no money. His partner in a sense with the, with the seller, have him carry the note at good terms buys you time and it gets you control of the asset. And if it's a good deal, you can make the asset can make you money and then you'll have plenty of money to pay the side, I don't know in real estate.

Could we, could you do the same thing, Could you do an owner Kerry and then go to a bank and what you can't get from the owner Kerry, can you borrow? Maybe not so much depends on the that's what we did. Some lenders don't allow that. Um but there are creative ways to do it. Um where maybe you make the the owner, uh, maybe he's an owner of the buying LLC. And so maybe at closing, he's supposed to get the money, but he gives it right back. You know, I think there's some definitely some creative ways that you could work it out or you could still do it, but some lenders, uh, they forbid an actual second mortgage. So, okay, real quick. We're talking about thinking outside the box. I know this impromptu but you got to tell the um the gap closing story of Stephanie promenade, this is that this is out of the box for sure. So we're teed up your teed up to close. This is um, I forget the purchase price 12, 12 million I think dollar deal. So, you know, 100,000 square feet of retail, decent sized deal in Nevada got it in contract.

You're working on it forever. You've got really good bank debt set up. And and and you know, you're approaching closing and uh what you have, you have two different lenders, you have first, it's interesting. So I'll just be as quick as I can and we'll wrap it up, but it was out of the box thinking because we had a had a first mortgage, but they uh said that we can't have a second mortgage. But the whole deal had been predicated on us getting a second mortgage because The first was for like 50%. Yeah, the first was terrible based on previous cash flow, it was only 50%, so I needed 30% of the down payment and I was gonna bring 20%. So that in this case it was a big number of $6 million dollars which is done. Nobody gets a 30 percent second just by the way. Uh Yeah, that's not typical. But in this case they had promised that they were going to give it to us. But uh, the first, uh the first lender, the first mortgage holder, they said, hey, you can't do a simultaneous second, we don't want a second on our closing. Well then the second bank said, well, we're not going to be an unsecured were real quick.

We're dangerous thing and uncharted territory. So the first real estate mortgage is they go and they filed their mortgage first and it means hey, if something happens to this property, we've got the first rights of recourse, if this guy defaults, we get paid back first, we get paid back, we're gonna fire sell this asset, we're going to get paid first and whatever is left over can go to a second mortgage. But in this case they didn't want to put a second on their asset. We couldn't close, but you know, they kind of said, hey, what do you do after the closing is your business. And so I needed a way to get that second on, but I needed the money to buy the property and that was the problem. And I tried to convince the second mortgage holder that they could, they could put the money in escrow and then File their second later, they weren't going to do it. And so we had to be really creative and we went out and we got basically a $6 million dollar mez debt peace. And so what they do is it's not technically a mortgage, they give you the money and if you default, they take over the owning LLC.

So it's not a mortgage. They're not, they're not securing it by the property that securing it by the owning LLC, which I own, they would take that uh and it's really expensive to do. But I got that message, that piece for two days, we we bought the property and then had time for the second mortgage holder to come in and place that second on uh very complicated structure. But once again, if if you have a deal, you know, is good, you're gonna do anything. It takes to get it to get it closed. Yeah. But general timeline, you had what I mean, 7, 14, 30 days to find $6 million 48 hours. So then you could pay it off and get another $6 million dollars for, you know, five years. I mean it was super short Timeline. So it was really tough and, and just that the fees I paid for that $6 million $200,000. So here's the point I'm driving too. When you see an opportunity, when you see that commercial real estate deal and you identify with it, you just like, hey, that's mine, I own it.

That's the deal that I'm gonna make it happen. This is the one I'm telling you this is it when you identify with it and you walk into it. Like it's already yours, you, you have to find a way to get it done. You can't live without a way of getting it done and it drives and motivates and fuels and it's got to be a good deal. I'm not saying you just like push no matter what I'm just saying. Well, we've talked about it though, that um, every time we've had a life changing deal, it's been that way. It's, it's provided challenges and I, and I had to believe that there was, there was big profit there, but then I also had to, to, to take big risk and bet it all to, to, to make that happen. I've said before, life demands that you pay upfront and in full and it will always call you to give more than you want to get that really good deal. But I love it man. Yeah it's a great episode anyway. I feel good about it. Make sure to like and subscribe checks out on the internet uh Internet interweb. I try to save both of those things at the same time anyway. How to invest in serie dot tv check box outside the box anyway.

We'll see you soon next time. Mm. Yeah. Yeah.

Episode #029 - How to think outside the box to fund your first Real Estate Deal!
Episode #029 - How to think outside the box to fund your first Real Estate Deal!
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