How to Invest in Commercial Real Estate

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Episode #021 - What your Property Manager DOES NOT DO for your Commercial Real Estate Investment!

by Criterion, Braden Cheek, Brian Duck
February 17th 2021
00:21:45
Description

On today's episode we have Brian Duck and Braden Cheek from The Criterion Fund, & Joel Thompson from Precision Equity going over everything your property manager does not do! Today we dive deep... More

you'll have those and when you get into the commercial property game, you're gonna have to deal with lawsuits and that's going to be part of your job as an asset manager. Yeah. I don't think anybody should freak out when that first happened because it's gonna happen and your heart's gonna race. But it's part of doing this business. It really is master Welcome back to how to invest in commercial real estate. My name is Brandon, this is brian and Joel and today it's it's really just a day in life, right? So after you close on the commercial real estate property, you've kind of got a job. You know, I don't want to say like passive income necessarily. It's pretty passive if you do all that, it works not over. Yeah. So quick disclaimer this episode is fully assuming um that you hired a property manager. So we're just going over what you would do if you're gonna go and hire a third property 3rd Party property manager that just didn't come out right? You're an asset manager or portfolio manager at this point where you have one asset you're managing or several.

Yeah. And you've got things, you may have investors, you probably have a loan. You know you have all this stuff and and somebody's got to manage that. It's probably not your property management company. So today you could just define us like what your property management company. Oh may I just re titled the episode What your property management company doesn't do boom re titling on the fly. All right. So the first one is just a little stupid stuff in my opinion. So every day, not every day, I don't know why I said that a couple times a month your property manager is probably gonna reach out with with something, right? Hey, we may need to switch trash companies. What are your thoughts on executing contract versus contract be? Hey, we have a tenant that's not, you know, paying maybe or a group of tenants is not paying. How would you like us to proceed with eviction or taking possession back to the space? It could be just little things popping up, right that your property management company doesn't want to do. They aren't the bottom line authority. You are, you are the asset manager, the asset managers, the bottom line authority. They make the comfortable, uncomfortable decisions that the private management, the company doesn't want to do.

And I mean, you know, for lack of better words sometimes shit just happens and the asset manager is, who has to deal with it another way to put that as your job is managing the manager, the management company. Yes. Uh, so that, that's gonna be the day to day fielding their questions, helping them decide on on issues like Britain was just talking about, Yeah, another couple of big ones is just insurance and property texas. So you can kind of set them up and put them on this like, you know, auto, auto systematic cycle, but find a good insurance agent insurance in my experience is extremely hard to bid. So find somebody that you trust, find somebody that you, you know, feel comfortable working with. But you've got to ensure the property every year it's gonna renew. You've gotta monitor how you're paying for it. It's common to not pay that all at once. You know, maybe you're financing it, maybe you're building it back. You can have portfolios of insurance, right? I mean insurance can be extremely complicated, lean on your experts is all I'm trying to say. You've got to manage them. So like that's gonna be a theme, right? There's a bunch of different people on your team helping you manage the asset, somebody's got to manage all of them and the, the insurance agent will give you a few different choices on the coverage is that you want, depending on deductibles that you want and certain coverages that you, you may not have to pay for it, but you might want to, yeah, it's not too much difference than probably your home insurance on your car insurance.

I mean deciding on deductible, very similar, very similar, but on a property level and just like your home and auto, you're gonna get a good initial rate from somebody and then every year they're gonna come to you and they're gonna say, hey, it's really tough out there rates are going up. I tried my best, but this is the very best, right I get you and two or three years down the road, you're going to have to shop that because magically, uh, they're gonna come in and say they did the best for you. And then three years later, someone else is going to be able to beat it. That's just how the industry works capitalism at its finest. Yeah. So, um, so there's some management going on there. You're trying to make sure, uh, Well, if it's a multi family deal, you're paying 100% of that, uh, insurance or you, you and your investors are on the retail side. You are passing that on most likely to the tenants, but you want to keep that as low as possible. Uh, the lower you keep that, the higher you can get away with on the rent side. So yeah. And you can, you know, ensure the moon. So, I mean, you can go go to town on that. But generally speaking, you've got to monitor it. You've got to know when to file a claim, how to file a claim, who your guy is or a girl for that matter.

I mean, just anybody, you insurance is complicated. You've got to have an insurance person that's, that's, that's it, uh, taxes. Um, yeah, specifically property taxes, right? Property taxes. Uh, you're going to want to be monitoring those and challenging them if you feel like there's an ability to get the value down, the assessed value down. Yeah. So as soon as you buy it, it gets re assessed at the new purchase price. There's no, not, not always not every state is different actually and how they assess property taxes and when they do it. Yeah. In texas that's nondisclosure state. So it may, it may not get assessed right away at the new purchase price because you don't have to disclose the sale price. Okay. Uh so they can, they can have ways to find out. I think in Arkansas It's every like 2-3 years. Okay. I did know that one. So I mean it's just you're gonna want rears to yeah. So you're gonna want to figure that out for whatever state you're buying in and understand that tax picture and and manage it effectively and protest the value when you, when you think you can.

Yeah. Because you know, just like you said on insurance, you know, the treasurer, the tax man, the property tax man comes around and says, hey, that's a nice property. Got there and it's looking full. It looks like you're making money. We need some more taxes. Our school system is hurting our, you know, whatever, right. And you've got to know that you can dispute that. How many people realize they can negotiate with their tax assessor and there are companies and attorneys that specialize in those protests so that maybe that you could hire one of them to help you and they work on contingency right? So they only charge you if they get you a tax reduction. I love I love commission contingency payments because I only pay when they perform. Okay, well that's property tax, but you've also got to worry about uh what do we call income tax or whatever you got to. You've got to manage that too. Right. Yeah. So if you're an LLC, you know, you're found like a form 10 65 Did I get that right? I think so. I don't know. Okay, well I think it's form 10 65. It may be a different form if you're an S corp or or or something else. Um The biggest thing is somebody's got to file a tax return for the partnership.

You've got to look at the operating agreement and how you're paying out um dividends. You gotta look how you're distributing taxable liability or gain for that matter. Um So all that's gonna be spelled out in your operating agreement, you give the operating agreement to the tax person, um Tax person file your taxes, you're going to have a bookkeeper. Right? So your manager, your management company is probably gonna be your bookkeeper. They're gonna take care of the day to day, write all the checks. Keep all the books, you're gonna get that at the end of the year. It's three reports, you're gonna get a journal entry of balance sheet and a piano and then you're gonna shoot that over your accountant with closing statement and then they're they're gonna set it up on autopilot and you know, probably stay in touch with them quarterly accountants. You know, when big things happen, when properties close, um, whether it's a buy or a sale, um, that relationship can be a big one because you can just have, I mean taxes, right? You can, you can be a pro on taxes. Like what do they say about billionaires in taxes? You know, millionaires read about how to make more money, billionaires read about how to save money on taxes, something like that. But that needs to be a big part of your plan is maximizing the tax efficiencies that real estate provides.

Oh yeah. So how did you say that in one, I stumbled on that for like five minutes and you just said that. So managing your investors is going to be a part, a little bit of a part time job. They may have questions. You're gonna be wanting to be getting all the financial reports out to the investors and letting them know updating them on how the assets going, uh, sending their distribution checks, hopefully every quarter like you told them. Uh, so that's part of your job as an asset manager, keeping you informed is important. They want to know what's going on. Yeah, I mean, we just take people's money now. I mean, you send them out updates, you'll probably send them a gift, You probably take them out to dinner, you're maintaining the relationship, It's all, it's Guys, it's 100% relationship based relationship based game that you want them coming back for the next deal. Absolutely. So you need to maintain the relationship to relationship just like anything else you gotta maintain and keep it happy. Got to manage the investors and send the money. Some of the times we've had to deal with is lawsuits. Um, We've been sued by tenants at multi family properties. We've been sued by tenants at retail properties and so customers at retail properties.

Uh, I don't think I've been sued yet by a customer at a retail property, have we? I mean somebody parked in my parking lot and I had a flat tire and tried to send me a lawsuit letter. Okay, that's true. We got to, we got threatened with a lawsuit and auto Vegas property because he had his laptop stolen out of his car, uh, that he left his window down or something and he thought we should have had security to make sure that didn't happen. So yeah, it can be that. But you'll have those. And when you get into the commercial property game, you're gonna have to deal with lawsuits and that's going to be part of your job as an asset manager. Yeah. I don't think anybody should freak out when that first happened because it's going to happen and your heart's gonna race. But it's part of doing this business. It really is. Yeah. Big warning on that. Um, when you get into a lawsuit, you probably should contact your insurance company within a month. Just heads up uh you should probably contact your insurance company within a month and just love to know because it may be something you're already paying to ensure. And your insurance company is a legal team ready to fight for you. I'm ready to go and you know, they're yeah, they're going to cover the cost of the suit.

So, Right, and why somebody would ask, well, why is because um there are going to be responsible for the potential damages, the lump sum that they would have to pay out somebody because we have insurance against that. So they have a legal team to fight that battle for us to make sure that the damages they potentially payout or as low as possible. That's why they do that. Yeah. One time we had an apartment complex and someone uh sued us for uh an H. V. A. C. System and we we wanted to try to make it go away because we don't want big settlements on our insurance because it raises your rates. So we're like, oh, we're gonna just try to handle this. Well, it didn't go away and we didn't immediately let the insurance company. No. And it almost cost us our coverage because, you know, once you start down the road of defending yourself, then they say, well, we didn't have a chance from the beginning to post the defense that we wanted to. So really important. Yeah. If you get too, don't, it's not a big deal. I've been sued a bunch. It rarely amounts to anything, but that's why you have insurance and you let them handle it. Yeah. And since we're on, you know, we touched on insurance and lawsuits right there, all of this is negotiable.

You know, so you have something that burns down. It's just like, you know, a car or home insurance. They're gonna say, hey, we're gonna give you a million bucks and you're gonna say politely, go to hell, I'll take to, you know what I mean? It's cat and mouse game constantly with lawsuits and insurance and threatening, right? People perceive you like, oh, he's got this big commercial property. He's got a million dollars in his back pocket. If I just call him and complain, I'm gonna get a gag order and people, people do it right. You just got to accept that for what it is and uh, and move on. But that's why you have insurance and legal teams. My business partner has a quote when someone sues him, He just says, get in line. So it doesn't worry him at all. That's funny. Okay. You're gonna negotiate, um, lease renewals, especially on a retail deal. The management company will be giving you guidance based on their experience, but you're going to be the ultimate authority on what you're going to rent, that space for and how much you're gonna be able to push that rent? So that's a big thing uh that you're gonna do is the asset manager. You want to try to maximize that value by increasing the rents.

Yeah. And you have some asset management um or asset types like multi family that are, are more management intensive when it comes to leasing. So when you have an apartment complex, the management company is going to release all of his apartments. Right. That's part of the responsibilities. Right? Yeah. You may sit down with them. Um uh you know, maybe once a month and and go over strategy on how to increase occupancy or on how to push renewal rates or just making sure the ask, you know that apartment matches up with the net operating income. You need to pay the debt and to pay the investors like. But on a day to day on a multi family you're not probably gonna be getting involved if you have a third party manager but it will be a strategy session with that management coming to maximize rent. So yeah, there's a lot of those that are in the future, you know, in some asset classes, you're negotiating lease renewals years before they expire and and multi family. The management company may be doing it. There's there's a lot of different types but there's typically always leases and somebody's gotta renew them. You're the guy girl person person Brian. What do you got 1? Yeah. What about Capex expenditures?

I think that's a big one. Right? Yes. Who you've got to decide, you know, if there's a new roof or are you going to repair the roof if there's a leak? Um Did you and your plan was there, were you going to increase the um um the um shrubs and just improve landscaping, landscaping? Uh and then parking lot repairs? Yeah. These big things. The management company may have suggestions for you, but ultimately pulling the trigger on Capex, which is gonna take capital is going to have to come from you And management companies as far as their paid. Um they're paid to manage the property and they make a compelling argument and they say, hey, we're not paid to manage general construction. We need a construction management fee to manage the construction. So then they're charging you, you know, 6 to 15% maybe of the construction project just so they can manage the contractor. So you can step in and do that. You can step in and say, hey, you know, we have this renovation, Don't worry about it. I know your job is that, but I'm gonna take care of this and you can do the same thing with the lease renewals.

Right? So lease renewals. All this power, you can kind of give to them on their extra fees. But if you don't wanna pay it just do it. Yeah, I think I'd want to have a lot of control over capital expenditures for sure. Yeah, it's a very big guessing game on what needs done, when it exactly needs done and how much you're gonna pay for it. Are we going to put a cadillac on it? Are we gonna go with the Honda version? You know, so that's, that's a big part of uh, managing the asset And hopefully you've thought about what cap ex expenses you might have in the first 3 to 5 years and you've raised or allocated money for that. So you're prepared. Yeah. I I think one of the next big things is monitoring the cash flow. You know, making sure everything is going according to the investment plan that you pitched your lender yourself, your investors, everyone in the beginning, right. You projected that it made some sort of money. You don't want to lose control of that and then have a surprise at the end of the quarter or something. I mean, you got to really pay attention that. Absolutely, Absolutely. So you're creating budget, you know, 3 to 6 months for the year ends and then that's kind of just painting the picture for the next year, ideally you hit it, you beat it and then month over month, you're getting a report.

And one of my favorite columns is just comparing against budget, right? Because I want to know how bad we suck six months ago setting our budget, we we should have planned for this and you can get pretty close, especially with good asset management and, and good property management. But yeah, because you're rarely going to beat your budget. Um, you know what, what ends up happening is if everything goes according to plan, you're gonna be on budget and then what things did you not foresee or what, you know, what negatives did you have that brought you down? Absolutely. Well, so refinancing as another part of asset management, you may not have an asset that you refinance, but I think the asset managers job has to always be in tune with lending market understanding where rates are and if there's an opportunity to lower the rate, increase cash flow or to, uh, increased leverage and get the investors the initial investment back. That's what you gotta always be monitors. We've had deals where we've, we've refined and, and given capital back to the investors. We've also had deals where we just lowered the interest rate and improve the cash flow and then then the cash distributions go up.

So are you refinancing with the same lender, a different lender? Both. Yeah, it's been both. Um, you should always be shopping if you're getting local bank. Dad, uh, typically there's not a pre pay and if you're getting five year money, you should, you should not accept prepaid from local lender and just declare that it's a pre payment penalty. So if you pay off the loan before the five years, then they charge you a fee, you know, 125% right? And I would say steer away from from that, just tell him you don't want to pre pay penalty. Uh, but if you go longer than five years, then you're typically going to have to pay a pre pay of some kind to any lender, local bank, Fannie Freddie cmbs, all of them are going to have some type of a pre pay structure. So you want to limit that as much as you can. It gives you flexibility. If rates move that, you can take advantage of them, right? So we go Get alone. You know, we buy an asset um, and we plan on keeping it for 10 years. You know, we bought this asset, broken arrow. It's called red bud. We're planning on keeping it 10 years, 17 years, something around there. But if rates just like drop through the floor in year six, why would I go pay 4% or 5% or 6% whatever I'm at on my current loan.

When I could go get a new loan, it wouldn't cost anything but some closing costs and go lower the interest rate on potentially millions or tens of millions of dollars by a point. If you do that by a point that could be six figures and savings just by asking, right because you're paying attention When we have a alone right now that we're looking to refinance and it has a 2% prepaid current on it. But I'm gonna be able to lower the rate point in a quarter a year. So when you look at the math, yeah. So there's eight years left on that, that lead or that alone. So I can, I can earn a point in a quarter a year and it only cost me too. So I'm making a 60% kind of a year return On that investment of 2% defeat really quickly pays out in less than two years and I keep making the residual after that. So I wonder from The bank's perspective if they did the math to see if the 2% pre pay would be worth not lowering the rate and keep them alone for the rest of eight years and you don't have to answer that because they may be local, but I'm just saying you got to do the math. I mean it's just simple.

Just like add it up. It's like if you're trying to refinance your house or something or your car or whatever. I mean the last deal we were negotiating basis points. So there's 100 basis points in an interest 1000.1% point. Um, so I mean you're, you're negotiating decimal points guys and I think we negotiated like to 4.01 or something and like it's 94%, like the.01 on $5 million bucks matters guys and you've got to negotiate. So we had a loan in Vegas on a $10 million dollar loan and right before we closed, interest rates spiked and it ended up being a really bad interest rate. Well now I could refine that at, You know, uh, 1.3 points lower uh, on a member of $10 million $130,000, a 130,000 a year. And just for lowering the interest rate. So just everybody listening to think about that, you're in a game that can pay off seriously uh, with the interest rate.

So it's, it's to your advantage to really work hard at this game, this part of the game. And what I want to stress is if you're not comfortable with investing, get comfortable with the fact that when you put the money in the bank, they're investing it for you. Like, hey, if you don't want to do this, bro, I'll use your money and I'll invest it, make a spread on yours because that's what they're doing, it's like figure it out and do it yourself. So the bank isn't making the money, you are. Yeah. All right. One of the last ones I think, um is I put on your analyzing the market, but it's just being astute and understanding the markets where you own assets. What's happening in those markets. What are capped rates, doing what our rents doing to where you're always in a position to maximize the value for yourself and your investors. Whether it's, hey, I'm not pushing rents high enough, I'm not keeping up with the market or, uh, man, this market is exploding. Cap rates are, are lowering. This is, this is an opportune time to sell. I should take advantage and get my investors the best return possible. So that's, that's really, that's the last stage of being an asset managers to analyzing the market and making sure you're being a good fiduciary for your investors.

Yeah, absolutely. Somebody's gotta be making that decision. Um, you know, ideally you get big enough to where you're sitting on the beach in the Bahamas, maybe if you want to, and then you're going to go higher. An asset manager, big massive commercial real estate, institutional level. Commercial real estate investment companies have teams, you know, maybe 50 100 asset managers may be more. You know, none of this is stuff that you personally have to do. But you, if maybe you start out doing it and then you train someone to do it and you pay them a fee to do it or salary to do it. And you can be, uh, in the Bahamas somewhere anyway. What your asset, not what your asset manager doesn't do, man, I messed it up, Your property manager doesn't do This is all about asset management. Um You know, it's pretty simple. You're managing a bunch of different specialized people. I mean there's there's not much to it. You've got to have some market knowledge, you've gotta pay attention and be aware and be educated in what you're doing obviously. But at the end of day you're managing the dream team. Dream team is taking care of your assets. So that's what's important. That's the day to day. Um I mean really nothing other than that.

It's pretty simple just maximizing your profits, maximizing your investment. It seems so casual when you say that but you want to maximize the crap out your profits. Let's take some work though. Yeah. And what you focus on expands so focus on it. Pay attention to real estate and uh it'll probably be better than if you didn't focus on it. All right. Um That's it. Make sure to check us out on the website. It's how to invest in sierra dot com. Make sure to like and subscribe. If you subscribe, you actually have to turn on notifications to get notifications. We upload every Tuesday and friday and remember if you want to look at brian's face while we're talking. Go to the youtube channel, you can see it in person. You can. All right, that's it guys, mm. Mhm

Episode #021 - What your Property Manager DOES NOT DO for your Commercial Real Estate Investment!
Episode #021 - What your Property Manager DOES NOT DO for your Commercial Real Estate Investment!
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