How to Invest in Commercial Real Estate

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Episode #006 - Things we wish we would've known when we started investing in Commercial Real Estate.

by Criterion, Braden Cheek, Brian Duck
December 22nd 2020

In today's episode we have Brian Duck and Braden Cheek from The Criterion Fund, and Joel Thompson from Precision Equity going over things we wish we would've known in the beginning of investing in ... More

Yeah, I would say a really good indicator of how you need an attorney is when you talk to them. If you feel like an idiot, you definitely need them and they're probably really good. Yeah. How's it going guys welcome to episode six of how to invest in commercial real estate was up today. We're going over things. We wish we would have known when we started. Um that's a lot of things. So we'll just give you a few brian. Well one we've talked about on, on a podcast before is is um we wish we were about bigger deals, right? I wish we were buying bigger deals right now. And we're actually, we're moving towards that way, right? We we we say we we wish someone would have told us that uh goals talked about the fact that he bought houses and was flipping houses and that's how I got started. But you know, flipping the house isn't easy. And uh I'm not sure Joel now that you've bought some other deals, whether you think it was harder or the same or easier or what uh yes, what you've done since then, if I knew the power of commercial real estate and in the bigger deals and I could've saved myself a bunch of years, uh headaches, dealing with learning how to flip a really cheap rental house, it's been in all that time, like all the time driving the neighborhoods, looking at $20,000 houses and then figure out how to get along and how I'm going to fix it up and what contracts are going to use all of that time.

Could have been spilt. It could have been spent uh looking at how to flip an apartment complex, let's say with 50 units or 100 units. And it and it just, you know, took me, oh, a few years of time. So that's that's why this one is important. So you're making $10,000 a month on an apartment by all the leases there rather than one home where you're making $200 a month net on uh that yeah, it's not that people can in the meantime work on a small deal, but they need to be trying to buy bigger deals. Trying to do that. That's the point of that is just try to find and buy bigger deals. Well, I think the next one is a good segue from this. Um I think the best way to buy bigger deals is the partner of the people doing those deals. You know, if you want to buy a bigger retail deal, go find somebody buying big retail deals and and bring value, bring money, bring debt, bring the deal, go to and say, hey, I want to do this big deal. It's a little over my capitalisation limit. But it's a great deal. I've got this lender teed up. I've got some investors. Um and I'd love your help on it. Yeah, absolutely.

Be willing to even work for free. Uh you know, part part of going through this process is not always needing to be paid for everything you do. You know you may not be bringing much to the deal but work for free for that person that you're partnering with, you'll learn how to buy that bigger deal with them. Maybe even allow you to sign on the debt with them just to be involved. And that will help you quicker. You know more quickly get into bigger stuff. Don't be afraid to to lean on the experts because uh if if you think well I'm not sure how to how to do this contract. Well just know you can go find a lot of attorneys that do know how to do the contract and don't worry about that. And then when you worry about well how do I get a loan for this? We'll go to a mortgage banker. He's gonna help you through it. He wants your business and he's going to tell you all the different ways to, to, to raise debt and and to get debt and so uh no matter what it is just know that you can rely on somebody else to do that for you and help you with it anyway. Yeah I'm I mean Joel are you an attorney? I'm not an attorney? I'm far from an attorney playing on tv brian.

Do you even have your real estate license? No I mean what's that? Yeah I have mine but I don't really use it. Um I mean there's so many things that you need for commercial real estate. But you, it's like when your toilet backs up and you need a plumber, you call a plumber. When you need to raise money, you need to get an attorney. Well, so uh, there's a few other experts that we, I didn't do a good job of leaning on and uh, you know, when I would go to buy a property, lean on the broker, get yourself a buyer broker have them kind of vet the deal. If they, if they can get on board with it, you know, it at least help bet your numbers. Um Plus they don't want to sell you a shitty deal that doesn't work out because then they can't sell you another deal. They want repeat customers. And yeah, obviously an attorney is going to protect you in the contract. They'll have languages and protections to make sure that you don't lose money or get screwed or miss a date. So that's important. Uh, you know, in the beginning we didn't know to, to higher property condition report. Uh, you know, so I was, I was going around looking at this apartment building. I have no business evaluating what's behind the walls and what's, what are the, you know, the hot water borders look like there's about 5000 and wood rot on this deal.

Yeah. We, we bought some stuff without knowing the inherent problems and a lot of it could have been solved by, by just hiring the professionals to tell me exactly how much time is left on that roof, what condition the hp A CSR in if there is wood rot or termite damage or all these things and that's what they do for a living. They, you know, they'll investigate the plumbing, let's say on a retail deal underneath the slab, things like that. So it's really important to get, make a list of experts and involve them in your deals and they'll make sure that you don't make any big mistakes. Yeah, I would say a really good indicator of how you need an attorney is when you talk to them. If you feel like an idiot, you definitely need them. And they're probably really good. I think that's Joel uh, quote actually you said I need, I think it was about an accountant or something and you said, you know how I know we've got a really good accountants. I feel like an idiot every time I talk to her or something. Yes. Uh, so you'll progress in your knowledge and so your experts will need to get better and better as you get more and more experience. So, an accountant that may work on your first deal or a real estate attorney that may work on your first deal, it may not be who you ultimately need when you've got a bunch of deals in the, in the pipeline.

So for me, I do appreciate when, when the expert knows a lot more about their subject than I do. Yeah. You know, something that's just like along that. Um, what I would say is, I wish I had known you could, you could partner with somebody. So in the case we were just talking about, okay, you're hiring an attorney or you're going to a mortgage broker or something, but there's ways that you can partner with somebody else. Like if you have found a deal, but, but you don't know how to raise the money and you might have to go to somebody and give them some ownership or you might have to go to a crowd street. We've talked about that. You might have to give them some money to help you raise the money and partner with them. Or maybe you have some have some land where you can put a power center on, but, but you're, you know, you don't know how to attract the big, the big box people and, and maybe you go partner with someone who's a broker, developers, people are developer. Yeah. Yeah. When we wanted to get into, um, development and construction and you know, we had kind of identified early childhood education, it's a good asset class for us to invest in. We didn't just go say, hey, we're going to go build a school and we're going to do it in Denver.

It's insane. We, we found partners and people we trusted and people who had built a lot of those before and had great relationships and we leverage that we brought plenty to the table. They brought a lot to the table and now we have a great deal. It's good partnerships working really well. Yeah. And and we've gotten several other from that same partnership. You know, now now it's repeat. Um we can recycle forms, You can recycle that relationship. You can cut passed a lot of B. S. Because you have that relationship with him. Now. Absolutely one tip that I want to tell people that I'm really not good at is is having the courage to ask people questions. Uh there's plenty of people that know what you don't know about what you're trying to do. And I was just early on, I was so self conscious, I didn't want to look stupid. I didn't want people to know how much I didn't understand or you think you're wasting someone's time. I feel like they, they're not gonna want to answer my question and I'm wasting their time and that is the opposite of what you should do. First of all, most people are happy to tell you, they're not give you their knowledge, maybe it makes them feel good that they know what they're talking about, Maybe that it makes them feel good there helping someone.

Um And so that's that's true. But don't don't ever feel like you can't ask someone a question. I think if you, you see someone purchased a retail deal in your market, uh, because that information is available, go to go to and say, hey, I'd like to set up a meeting. I'm investing in retail as well. And I wanted to talk to you about that deal. Why do you like that deal? Would you buy it per foot? Who did the loan on it? You know, all of these are keys. Now. You have a lender that, you know, will do retail. You know why an experienced person thought this was a good deal, Do that over and over again, take him to lunch, buy him coffee and learn from them and just be asking everybody as many questions as you can. Yeah, that's good. I, I think that's a really good point mainly. Um, I mean, you have to be able to humble yourself and ask questions. You have to be able to accept what you don't know because you're, you're taking too big of a risk with these real estate properties to just assume you know everything and you don't, and there's gonna be people that will, will definitely be able to help you along the way. There's no doubt about it. But the first step is asking the question and the answer is automatically no, you don't know what you're doing.

If you don't ask it, it's no, and no, you don't know what you're doing. And I would say in reaching out and asking these questions, you're giving yourselves opportunity for partnerships uh and and deals and an idea flow. Uh and so you never know your one contact away. Your one idea away from from getting in this game and changing your life. And if you view it that way then you're gonna be making as many of those connections and asking those people as many questions as you can. If you have a question, feel free to send it over to brian too. He loves answering questions. I do. I love it. Well, another one, I think the last one we're going to cover today that I wish I would've known when I started out is how to underwrite a deal and you know underwriting can have a, I didn't even know what the word meant for like the first half of my real estate career, Let's define it. What is it? Well, uh it really is the financial financial modeling of the asset to see what the cash flow is going to be. And it's also the evaluation of the probability that that cash flow is going to materialize in the future.

Okay, that's how I use it. Okay. But when you're let's say you're you're purchasing a multi family asset, I thought the people that were trying to sell it to you, I thought they would come to you with that information with the pro form on that, don't they? Just give it to you. Yes. And uh on my first couple deals, the big mistake that cost me time and money was, I assumed that they were telling me the truth. Whoa. So you didn't ask a question and it got you in trouble. I didn't, you know, I just, I didn't understand how to financially analyze and model the deal from my perspective. So if they said, oh, I, I collect this much money and then these are my expenses and, and this is how much money. I just, I just didn't know how to not trust that. Uh, and so you really need to get good at at modeling your own deals. Um, with, you know, there's commercial real estate software, we have a model we use, uh, and then also knowing where the risks are because obviously this is a projection of what we think the cash flow is going to be, but where the risks of that not materializing, where the soft spots in the chain.

That's right. Or, or where can the numbers be off? What, Where can the seller may have missed something left out something. Uh, You know, an example is, uh, I think you mentioned it before, real estate taxes, uh, you know, a lot of people don't like in retail. Uh, the real estate taxes will reassess usually on a purchase price. So if it was, if it was purchased or if it was purchased or sold, you know, several years ago and the taxes are way low and now they're about to double because you're buying it at a higher price. Uh and they're not tripling at least is where the tenants are gonna absorb that, you're absorbing it. And so that that's a that's like a little area that you need to know. Uh and there's probably 25 of those areas that will help you assess where all the risk points the soft points are in the cash flow and you'll be better able to understand what you're, what the performance is gonna be after you buy it. Yeah. Yeah, I would agree with that. Due diligence is super important. You you have to just like we talked about in the previous episodes and um uh specifically going over asset classes and knowing what indicators to look for. Like when you're buying an office building, you want to look at job growth when you're buying a multi family, you want to look at where those people are working and everything like that.

Um It's the same thing with underwriting, you you have to be able to know why you're asking the questions and you have to be able to figure out um that that soft spot, you have to be able to know, okay uh you know on average maintenance costs at an apartment are $3500 per door per year. On average, the real estate taxes for something like this should be this. And and I think we talked about that in another episode and it comes from experience and it comes from underwriting deals. But going through even if you have no intention of buying it whatsoever and just underwriting it and and projecting assumptions and then waiting a year or two, somebody's going to buy it. And you'll be able to figure out how close you were. But the process of going through the underwriting it is really valuable and you get better at it over time. You make better assumptions, better guesses. Um You could ask your lender, you know, lenders are always underwriting it as well. So when they're evaluating their deal, your deal, they're going through that cash flow and they're assessing risk. So uh something I didn't do a good job of but but asked ask your lender hey how are you guys looking at this?

What are the risks? What what are you guys modeling here? Uh And that that will even give you some insight. So when your underwriting is it just you guys, I mean is it one person, is that multiple people double checking the underwriting? Do you guys have somebody outside the company do the underwriting and kind of help verify or or how much time and you're spending on that because it's important. Um You know, I I typically give a quick run through with with our model and and everything that I know and I'll come up with, what I think is uh the n. Y net operating income. But if if we move to contract, that's when I want another set of eyes on it. So definitely we'll ask uh my mortgage broker or my lender what their underwriting is. And then we've also hired third party, there are third party people that will go through all the leases and will audit them. And and we'll build a financial model based on their view of those leases. And so then you've got another third party kind of confirming hey is is her his N. O. I. The same as mine. Uh And it just helps identify risks in that cash flow.

So I'm I'm driving to a point here, how often are all of those underwriting, you know, reports or outputs or you know whatever reports you get from the underwriting, how often do they match exactly like mine and somebody else is yours or even somebody else in your company helping you with underwriting? Your you said you wanted another set of eyes on it when you're getting that fresh set of eyes on it. How often does it just match to the penny? Well it never matches to the Penny. Well even even within, I mean $5 $10,000 probably. Oh maybe half the time. Because you know in these models there's assumptions uh you're assuming rent growth or you're assuming a tenant may leave or you're assuming some Capex expenses in year two or three. And so everybody's gonna make different assumptions and that's that's what the underwriting process is about, is identifying the risk and making assumptions on what that future cash flow is gonna look like. So they're never gonna always match as you usually make different predictions about the future. But asking the question and getting those other people look at it helps you identify those weak points out to identify those discrepancies maybe of hey, you know, it was.

Anyway. Anyway, I think it helps that multiple set of underwriting eyes when me and brian do a deal, we're both underwriting it and we hire a third party, you know, the brokers doing it and the seller of the deal is giving you some sort of offering memorandum. And if those, you know, four or five reports aren't pretty damn close, there's there's something going on and I wanna keep digging and that's important. Yeah. Well, um you know, I think that these are some of the most important things um that I wish I would've known in the beginning. I think they'll help hopefully we're gonna told people, you know, from our experience go after bigger deals lean on the experts. Don't be afraid to partner with people. Ask questions, ask questions and learn how to underwrite. Yeah. Make sure you learn how to underwrite. Yeah, I love it. Well, if anybody out there has any questions while you're listening or watching this, feel free to put them in the comments or send us a message. As always check us out on the interweb. It's www dot how to invest in c r e dot com. Thanks for having us. Thanks. Mhm.

Episode #006 - Things we wish we would've known when we started investing in Commercial Real Estate.
Episode #006 - Things we wish we would've known when we started investing in Commercial Real Estate.
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