How to Invest in Commercial Real Estate

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Episode #015 - How to RETIRE on ONE Commercial Real Estate Syndication!

by Criterion, Braden Cheek, Brian Duck
January 27th 2021

In today's episode we go over the basics of what a Real Estate Syndication is, and how you can use it to retire after just one commercial real estate deal.

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Right, you're over $100,000 in income a year. Just by doing one deal, just by doing one deal, basically you've got a way to make a living on just one deal. Alright guys, welcome back to how to invest in commercial real estate. This is episode 15. And um you know, we've done a lot of explaining on how commercial real estate can make you tons of money, you can invest in it. It's the best asset class. But today we're really gonna supersize that jumpstarted and go into how you can make tons of money as a sponsor, sponsoring deals and buying these commercial real estate deals yourself. Yeah, absolutely. Syndication is another term, you know, I would say precision equity, where a syndicator of commercial real estate and it is we buy for ourselves, but you can really juice the returns if you become a syndicator because of some of the fees that you can get. Yes. Let's just break down that word really quick. A syndication is when a sponsor, you know, somebody like criterion or somebody like precision equity is going out and finding a deal, they're finding the debt, they're finding, you know, everything about the investment. They put it together, they send it out to a group of investors that's a key to a syndication is you're partnering with a group of people and then they review it, they decide it's a great deal.

They partner with you on it and then that's a syndication. So, um, you know, criterion or precision would be the general partner would um, you know, make sure the deal is running smooth. But anyway, that, that generally speaking syndication. So you can buy deals by yourself, not have investors and just cash or you can syndicate it. And then you can leverage, you're not only providing an amazing opportunity to investors, but you're, you're leveraging that making money as well. Yeah, definitely. So I think the best way to get into this is to probably just start with a deal. Right? So we've got this deal we're gonna buy. It's a syndication. We've acknowledged the fact that we're going to do a syndication. So what are some of the different ways that us as a sponsor are getting paid doing this indication? How is it done? Yeah. So, uh, $5 million dollar deal. You're going to raise a million million one for some extra expenses is going to be the down payment. But let's, and you can make, let's say if I'm going to buy it, I can make my 15% cash on cash on that million or million one. Right, okay. But how do you make even more money and benefit people that, you know, uh, and that's the syndication.

So Let's walk through a few of the fees. The first one that you can think about is if you have your broker's license, which you can get in about 2-3 years. You can get a broker's commission for the buy side. You don't even think it's two to three years? It's super easy, but yeah. Well what kind of percentage or what kind of fee does that door? Yeah. So on a commercial deal, a normal co broke is, you know, 1.5 3-4%. I would say, I would say 1123 would be typically 1.5% is what I've seen. And that's just on the buy side. That's just on the buy side. The typical commission on a $5 million deal, I mean, it can be as it could be as low as 2% and it could be as high as four or 5%. And so typically they're either going to split it with you or they're gonna give you a little less than half. Right? And so on this deal, let's say you get a point in half, which is pretty standard on a $5 million deal, uh $75,000. You can get uh for just buying a deal that you are already gonna buy boom, 75 1%. And you get that money when the property closes, is that right?

That's right. Yeah. Most of this is paid at closing. There's some that's paid, you know, while you own the deal, you know, if you're gonna go by this deal, you probably own it for 57, 10 years. So there's some that will be paid out residually over the ownership period. But you know, we're going to focus on the fees paid at closing right now the co broke is a big one because in order to get that you had to have found the deal Which is an important thing. But finding the deal can get you a $75,000 fee on that $5 million dollar property. So if some other broker brings you that deal they're going to keep that feed. But if if you can find it yourself you get that feed and that's a lot of money. Okay? And it's not a guarantee. Some sometimes commercial brokers don't cooperate or they didn't get a big fee and they're saying they're not gonna offer one. Um So it's not a guarantee but sometimes you you can't get it. Yeah, the next one um is a big one. That's the acquisition fee. So acquisition fees I would say range from 1 to 2% of the initial purchase price of the deal. And what that is doing is that is reimbursing your due diligence costs. Um you know that you've kind of spent researching the deal.

Um And deals evaluating deals, testing them, marketing them, putting them together, you know, legal fees, everything like that, your time. So this is kind of a fee for everything up to the point of closing maybe is that fair to say? Yeah because that deal could easily fall through. I mean you could be researching a deal, you could have it in contract and then it just doesn't work, you drop it, you lose that money. Um, but if you get it to closing, if it is a great deal, you're gonna build that partnership, that property, um, you know, your acquisition fee and that covers your time and expenses up until that point getting that deal done okay. I will, I want to add is that you're also going to be charging the expenses, the expenses to the partnership. So you're not really reimbursing some of those expensive, let's say I had some legal expenses in drafting the operating agreement or whatever that I'm gonna also build, right. Uh, but on all the deals that I didn't buy, uh, I have expenses. Maybe I traveled to colorado and looked at a deal and it didn't work and I spent time and money on underwriting on the steel in florida and it didn't work. And so you do need this feed to kinda help cover some of the ones that you're not gonna buy.

But, but it's 50 on this deal, 1 to 2 points. It's $6200 of upfront cash that you can make by getting the deal. Yeah, Yeah. I would say, you know, generally speaking, um, you know, if you're a company looking at a ton of deals, you may spend more on due diligence in finding these deals, like you said, then you actually make back and acquisition fees just because you're looking at so many. So you gotta, you gotta pay attention to that, right? there's tons more ways you can get paid. So the debt, the debt that's a big one the somebody has got to go get, excuse me, I got to go get the debt. That was a lot to get out. Yeah. The debt most sponsors and syndicators focus on non recourse debt. Uh And what that is, we haven't got into debt a lot but it's just if the deal goes south as long as you were upfront and honest with all of the information, you didn't commit fraud, you didn't commit fraud, then you're not going to be held liable for any shortfall on that loan. You can kind of just walk away and the lender takes back to asset as payment. And that's different non recourse.

Yeah there is no recourse now different from like let's say your house um let's say that you don't pay your house, your your personally signed on that. Well the bank may take it back but if the, if the bank you know, doesn't sell it for more than the loan balance, they can come after you for the difference, they sue the shit. Yeah and it's not a it's not a huge huge deal on a single family home but it can be a massive deal if they say you have a $4 million loan on this $5 million deal we're talking about and the market turns and uh they end up taking it back and commercial doesn't have as many buyers and so they end up selling it for 2.5, 3 million. Well now you're on they'll come after you for that million or a million and a half dollars. So it can be a huge thing to to uh to guarantee the debt. Now, why would this indicator do that? Well, in our position we've done it several times because uh sometimes by getting local bank debt and personally guaranteeing you can get better terms which results in higher returns for your investors. Yeah. Now why would you get better better returns? Right. Like if I'm a bank and I'm saying, OK, option a is a non recourse alone, this guy is coming to me with a $5 million dollar deal.

And if that deal doesn't work, I don't get to sue that guy. That's it. I just get the property. I just get the tenants that are in there. I just get the income that are produced at the time. But option B. Is this guy who's worth $10 million. So he's got, you know, you're only getting a $4 million loan, but this guy is worth $10 million. So if the property doesn't work out, you not only get the property, you not only get the tenants and the income that's on the property, but you get to see the crap out of that guy. Yeah. And in our case vic and I both have high net Worths now. And so yeah, there's a benefit for us signing because it gives them more assets to go after in the event that this deal, which is only, let's say a $4 million loan doesn't work well, they can go after, you know, 30 40 $50 million of network that we have backing it. And so this, this debt guarantee fee sort of pays a little bit for the liability, the extra liability that you've you've encountered. And then also because you've gone out and and do the extra liability, you've, you're actually increasing the returns for your investors because you're getting a better interest rate, is that right? Yeah. And it's not always that we we charge it.

Um, some sometimes we do get non recourse debt. Fannie Freddie is an example where they give great non recourse debt. Uh and it's better than, let's say the banks would give most of those are in apartments, yeah, apartments. But on a lot of retail deals we can get an 80% let's say 80 to 85 even percent lTv on on the debt, which will increase the rate of return on the equity placed. Uh And so that's That if we went non recourse, maybe I could get 70% LTV. Well now I've got to raise a lot more equity and I'm gonna get less, a lower return on that equity. And so we charged the fee just to kind of compensate both our Risk and taking that additional risk on. But also because we're providing higher returns. And what's that typical fee? Uh, 1-2%. Uh, we've never taken any more than one, I don't think purpose surprise or of the, of the loan amount of the loan amount. Yeah, good question. Okay, that was a really good question. Yeah. So, I mean, just between those three, you've got a debt guarantee fee for taking on full recourse personal debt, you know, and the investors are getting no debt to the, or no risk to the debt when an investor signs up with us there, you know, if we default on the debt for some reason, the bank doesn't care about the investor, the investor just walks away so that there is a fee in exchange for that, they could lose their investment.

There are no further recourse correct. Um, you've got the acquisition fee to reimburse you for your time and effort to get that deal closed and then, um, you've got the co broke fee for being a broker realtor. Just those three fees, right? There are $165,000. Just that closing On $15 million dollar acquisition, just one, let's go into, because that's not, that's not all the money you can make as a syndicator. Let's go into a few more. Yeah, because you're gonna own it, right. It's not like you just buy it and it makes you millions of dollars makes your investors millions of dollars. You know this is this is you've got to hold it, you've got to wait a little bit. It's like um you know diamonds pressure and in time, you know what I mean? So after we get into this, somebody's got to manage it month after month somebody's got to call the tenants and and collect the rent and everything like that. And brian and his case brian and I decided and we don't want to be property managers were an acquisition mode. We want to buy deals and we would focus on what we get at so you can find management companies everywhere. Um Joel's got a management company. Yeah so on the management side there's a couple different fees, asset management fee.

It's not a property management fee. It's 1% uh typically 1% of the annual revenue of the property that you take as the sponsor. And that just means that yeah there may be a management company but who's who's picking them, who's managing them day to day, who's going over the numbers whose Trying to get lower tax bills and and applying for insurance and making sure those costs are the lowest. Just managing the asset to its full potential. It's 1% every year of the revenue in this case it's probably only about $5,000 but it's about $500 a month in an asset management fee. Yeah. Yeah I mean it's you're not gonna get rich off the asset management fee is it's really a formality, but somebody's got to manage that month over month. And then you know the biggest difference between asset management fee and a property management fee is a property management feet requires, you know a lot of experience and infrastructure and staff. Um And time and that's why they're typically reimbursed more. Property management company may get 3 to 4% of revenue, maybe more. Um Sometimes um One of the other big ones are leasing commissions.

So um in retail centers, industrial centers, um Several of the asset classes you're dealing with tenants who sign really long term expensive leases, 35 tenure leases, they maybe millions of dollars in total and have all sorts of levels of guarantees. Traditionally speaking, those tenants and those landlords have real estate brokers or people with the real estate license, you don't have to have a real estate license but they sometimes have them representing them. If you are smart enough and educated enough and you know the lease renewals you can get, you can negotiate the those as an owner and take the standard market fee which is what, well it depends on a renewal you're gonna look from, you know, 123% 1% being super low end, super super low and 3% being closer to standard. And then if you're writing a new lease, the total commission is going to be about 6%. So you can split that between landlord and tenant if there's two reps on either side, If there's just one you can get all of it. But generally speaking, a lot of people who are brokering leases, they've got to go find these tenants or landlords and get all this property.

But if you own the property you can just lease it yourself and keep those fees and these are one time fees that happen whenever you renew the lease or when you get a new lease. Is that right? Absolutely. Yeah. So um, you know, we've got several retail centers and we've got several tenants and those retail centers with expiring leases, you reach out to them. You say, hey, how's your business going? Do you want to stay? Of course they do. Their business is going great. We don't. Great shopping centers, why would they ever want to leave? And we say, okay, yeah, here's your renewal. It's for 35, 10 years we're thinking, you know, 2%. The first year increased 3%. 2nd year increase. We'll give you a free month rent, whatever it is. And then we sign that least You may even charge for the document prep. Right? Like somebody's got to prepare that lease amendment. If you're not hiring attorney. If you already own that document, maybe that's $500 document and then you get signed and boom, 3% fee of the total value. Yeah. So the total lease value of for five years, the total rent paid, that's what you're getting the 3% on. Yeah. So if they're paying 5000 month for 60 months or five years, you do 5000 months times the 16 months.

And that's gonna be, you know, whatever. Hundreds of thousands. 300,000. Sure, yeah, 300,000 times 3% is $9000. So, um, that's a great way. And and and who's paying that fee? The property is the property is paying the fee. So, uh, when we, you know, you may be listening thinking, well, man, these guys are getting all these fees, the properties paying the fee. And so the investors, they can say, well, I'm kind of playing it. Yeah, it is coming out of the revenue of the property, but we're still generating above market returns for the investors. Even with this built in infrastructure. So we're, you know, we're always, uh, We're not we don't fee a deal to death at the expense of the investors where they're now, they're going to make 5% cash on cash. No, they're still gonna be 12% cash on cash and maybe 18%. Yeah. And this, you know, this example, we've been working off of this $5 million 15% a year cash on cash with the debt and everything.

We've modeled up in scenario that we've been talking about. But because you're syndicating that You know, that you could go raise that $1 million 12% cash on cash. So you can leverage yourself and you can say, hey, instead of buying this $15 million property by yourself, I'm going to go buy a few of these with a bunch of my, You know, friends, family, investor networks capital and then in exchange for getting them that amazing return to 12% because 12% amazing return comparatively speaking to a lot of other investment classes, like that's what it shows about commercial real estate makes more money. But you can go out and learn how to buy commercial real estate and manage other people's money through commercial real estate. And that's what this is about because you're making fees and cash flow splits on the, on the deal. Like we've been talking about, you've got 100 and 65,000 and closing just on this deal And we have the $5,000 a year in asset management. Then we've got, we talked about the renewal commission. So on a deal like this, I would say, uh, roughly, you might could make $20,000 on just renewal commissions.

So let's say you hire an outside brokerage to do new leases for you for the vacant space. They're out finding new tenants, but you have a tenant that is that your center that already wants to stay, uh, $20,000 a year potentially in renewal commissions. And why would somebody pay a broker to keep a tenant that already wants to say, hey, tenant, your least expiring. Do you want to stay? Yes, People do it all the time. You're only negotiating the rate. And as an owner, you, you should feel confident negotiating that rate. Well, you want to negotiate the rate anyway. Even if you have a broker, you're gonna be working with him. You might as well. Now if, if somebody wants to use precision equity to manage, I'm gonna fight to be their renewal broker because I'm gonna know better what the market rate is And how to push them up and rent. So I'll argue that I can, I can get my fee paid for by getting you better leases in better terms with your tenants. Uh, but if you're, if you're a professional real estate investor and syndicating, you may have that experience to do yourself. That's why you don't have to outsource it. But okay, so let's talk then we've already got about 25,000 a year coming in income on this $5 million dollar property.

Next next is the cash flow. So, uh, this deal is a 15% cash on cash deal. We've already talked about it. We have those in our portfolio or even higher. Uh, so these are not deals that are unattainable, but now we're going to pay an 8% preferred return to the investor. We talked about the waterfall in the last show. And, and then we're gonna split what's left 60, 40, 60% to the investor. That leaves us 40% of what's left. And in this case, that's about $31,000 in cash flow a year. And that's after getting the investors there 12%. So there are deals after where you can get all the features you need and you can get your investors their returns, they want, and they're still leftover cash flow for you, the sponsor. And so on this deal, that's 30 31,000, which is amazing. And that's, it doesn't even end there. But wait, that's not all, wait, there's more with this order we throw in free shipping and handling or, you know, whatever it is. Well, so what's the next brian, what's the next, uh, way you can earn, uh, money? Well, if you're investing on your deal yourself, that's the way you can earn.

And, and investors are gonna want to see that, right? They don't, they don't want you pitching something to him. And then you say, well, are you investing in this? No, I'm not. They're gonna wonder why you're not. So it gives them confidence. They want you to have skin in the game? Every, every investor we talked to brings that up every time. Right? So, so how much do we typically invest in Our deals? Well, we invest probably 30% or so in our deals, maybe a little bit more than you have to. But I'd say if you were investing at least 10%,, then that would give investors enough confidence to know that you've got enough skin in the game that you're going to do everything you can to make this project successful. So 10% of the 1.1 we're raising your investing or, you know, your partnership, the sponsor is investing 100 and 10,000. And you're getting, You know, the limited partners are getting 12-plus% on that. So that 100 $10,000 is paying you an extra $12, a year just from being invested in your own deal. I, I think a great thing to do would be if you don't have to have the cash that you made up front is invest that money in your own deal.

So now you don't lose 165,000 that you made when you bought it from the broker fee and acquisitions fee. Uh, you keep that invested. Now you're getting paid 12% on 100 and 60,000. Now you're looking another 18, in cash for your and you didn't lose the money. It's in your deal, right? And it's it's bought in your ownership about you purchased the ownership and then you get to take advantage of the depreciation that comes along with that. So that's another way. But another one I was thinking of is You've got a $4 million dollar loan and you're paying that loan down every month. So what's your share of uh, that equity build up that you're getting? Because that's real, uh, it's not cash flow in your pocket, but it is Uh, it is money that you're building on your network and you're gonna get that whenever you refinance or sell and on this particular deal, it's a big number. I think it's 38,000. Yeah. Just the sponsors portion of debt. You know, the 40% of the debt paid down is 40,000 40,000 a year.

So then you can begin to see 40,000 a year plus 20,000 a year and maybe renewal commissions plus 31,000 in cash flow Plus 5000 and asset management fee. And if you invested that 165,000 from the beginning, you're getting 12%, that's another 18,000, Right? You're over $100,000 in income a year. Just by doing one deal. Just by doing one deal, basically, you've got a way to make a living on just one deal. Yeah. Quick hack on your co invest, you know, using your fees to to invest that back in the deal that also doesn't generate a taxable event, right? So you're not getting taxed on the fees from the partnership because you're just taking it as discounted equity. So you know, another just a little tidbit, you'd have to make sure you did it right. Um Yeah, we're not we're not a C. P. A. Yeah, consult your person. Um But yeah, there's a chance to do some of that as well. Absolutely. And this is off of $15 million dollar deal. It's off of one. one. How many, how many deals do you close last year tool?

03. Well, I think four. Yeah. I think we only did two or two or 31. Yeah. When we closed the beginning. Yeah. Three. But you know, think about, I want to encourage people, uh they're they're working a job. They may be making 50,000, they may be making 100,000. I know there's guys that are making several 100,000, but okay, let's talk about the guys that are making $50,000 a year. They work all year every day, nine hours a day to make that money. And, and this is something that you should start to try to work on right now. Now are you going to become An expert to the point where you can buy a $5 million dollar deal and syndicated next month or next year? No. Okay. But it's it's worth the time to invest because five years from now, you could be in that spot. And what if, you know five years from now you could automatically make over 100,000 on the clothes and get yourself $100,000 a year in passive income that you never have to work for again. Okay. So what what would you work? What would you do, how much time would you put in in order to to make that happen in five years?

And then it gets it gets better because you could buy a the same deal the next year. So now it's not 100,000 year in passive income is 200,000 And then the next one Now you're 300,000 1 deal a year when you're in this game, when you've been in it for five years, let's say educating yourself. That is 100% possible. Okay? But then open your mind and say, well okay what if I bought a $10 million deal? Whoa. You know, now you're gonna double all these numbers, you could retire, you could literally retire off of one $10 million dollar syndication And once again you're not gonna be able to do that in the year two. You need to become an expert at this. You need to read study, you know, get in the game, you know, start start working on your burgers license, all these things. But I'm telling you in in five years or 10 years time. You could be in a position. So I'll flip it around at your job. Uh How much passive income can you, can you generate if you if you spent the next five years at your job working nine hours a day. It's just that job. It's not any right. Yeah, maybe you're making 20% more than you are today and you still have to be working.

So the point I'm trying to get to to encourage people is uh they spend all day working at a job that's not going to change their income. And and and this is something that if they'll just work part time for an extended period of time, they could set themselves up to quit that job uh and have money coming in from their syndication for the rest of their life. Uh And you build on that passive income right? Every deal you buy after that just builds it builds it and build it. And and really once they were able to quit that day job, how many could they syndicate was so much more. That's why brian I don't manage deals so we can focus on those higher money making activities, right? So it's it's that same thing like we could have a job and start a management company that doesn't really make much money. Or we could go quit that job, hire somebody else to do it. But recent. Well I was going to say like you were saying it may take two or three or four years to get to that the knowledge to get to that first deal. But once you do that first one, I mean, you're often running as far as I'm concerned, you're gonna learn a ton on that first deal. You'll learn a ton on the first few deals, but, but you'll be a lot quicker to pull the trigger on that second deal than you did on the first one.

And then after that, you just do them as quick as you can. See the same thing with our investors by the way, why I'm so investing LTD I'm so passionate about it is because this is the scenario that I was in. I was making 50-48 grand a year when I started this process of learning, I wasn't even learning commercial real estate. I was learning residential real estate, trying to make an extra 1000 or 2000 month in passive cash flow. Okay. But we're helping, helping you skip that step. Um but for me it was, I I was in it for the long game and I I was not trying to get rich quick and I was not trying to quit my job. Year one, what I was trying to do was build my knowledge and build passive income to the point where I could quit. And it took me a lot longer than it's going to take people listening to this podcast because I just started from scratch and we just try, we just didn't know what I didn't know. But now this podcast yeah we didn't I didn't have this podcast and the internet was just getting started back when I first started working. So in your age and I know I know well my face shows my age I think. But uh anyway this is something that people can do, that's why we want to get excited about it and we're gonna continue to deliver tools on this show and then through courses and things that we're gonna deliver that will help people make that transition uh over a several year period.

It will change their life. Well I think this was a fantastic episode. Um Make sure you guys are tuning in, make sure you subscribe hit the notifications button. We've got a super special two part episode with episode one coming at the end of this week. So make sure like subscribe business on the web, it's how to invest in CRE dot com. And again make sure those notifications are turned on. You don't wanna miss this special episode coming up the end of the week. Thanks guys. Absolutely. Thanks

Episode #015 - How to RETIRE on ONE Commercial Real Estate Syndication!
Episode #015 - How to RETIRE on ONE Commercial Real Estate Syndication!
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