I've been paying distributions 12-13% to my investors every quarter for four years. And I've never been to the property. So so I invested in one of your deals and you've never been to the property of it. What is up guys? Welcome to episode 002 of how to invest in commercial real estate. My name is Brandon and I'm joined by my co host brian and Joel. What's up guys? What is going on? Thanks for time. Thanks for coming back. Um today is episode two and we're going to walk through a typical real estate deal. So you know, we've done a couple of million of transaction volumes so far and we're just gonna walk through what one of our deals looks like. Um you know, from start to how we found it uh ending. We've closed. What do we do now? Um So you know, let's let's kick it off. What do, what do ideals look like? Where do we start, where we get them? Yeah, so let's let's dive into the one you guys purchase? What, a little over a year ago? Uh in broken arrow. Yeah, Okay, red red bud. Um Yeah, so that is a good deal. That was the first deal we did under the criterion flag. So Um we like that one.

It's in broken arrow, Oklahoma. And it is a 20,000 square foot retail shopping center with about a dozen different businesses in there in front of Walmart? Um that you can see up here. So yeah, so so how did you guys uh how'd you guys find that deal? Yeah, so a lot of our deals are sourced through um real estate brokers, so real estate brokers obviously only get paid when they're selling and closing deals. So they're building up lists of buyers and real estate investors that as soon as they get a listening or a deal they want to send it out to as many potential buyers as possible. Um And I was fortunate enough to be on this guy's list. Um It was a real estate broker down in Dallas, so it wasn't even in my market. Um Even though he was selling the property in our market was just a blast email he sent out to, yeah, hundreds of people, his entire list, his entire list and may have been thousands of people. I mean probably hundreds. I mean that's common thing to do with real estate brokers, They get a listing and maybe even before it's done, they're sending it out to all the, you know, prospective virus that they can't because they want to get that sold as fast as possible because that's when they're gonna pay, that's their job, it's slightly different than residential and that residential, they put it up on a multi list service where everyone can see it.

Commercial real estate is a little more uh they want to protect a little bit more. So you have to get on their list. They don't just um there's not there's a few sites that most listings are posted but some, some brokers want to get the full commission. They don't want to co broke it. So they want, they want to send to their list first, right? And they're gonna have a lot of, you know, private information that they don't want to just publish. Um you know everywhere, you'll probably have to sign a light confidentiality agreement which just says you're not gonna blast all the information about the property out. Um But it was really just an email um and it was over a period of time and we just watched it and watched it and got a few emails and you know, we underwrote the deal went in and you know, when you first get a deal like this, you do a quick and dirty, that's kind of what I call it and you just go through and analyze it, see if there's tendency like see if it's an area you like see if it's good income and you can kind of throw out a lot of bad deals just by your quick and dirty. Um So what initially what kind of attracted you to this particular deal that said, hey, I'm gonna go through the process of doing a model underwriting it.

Um Are there some keys that you look for? Yeah, I think so. Uh charlie is super excited about that obviously. Um But yeah, we are located in Tulsa Oklahoma and this is in Broken Arrow. So it's um in the Tulsa market, so we're super comfortable with it. Um, it's in a great built out part of town with existing retail and, and really good traffic counts for our market. Um, which is probably, You know, 40, cars a day, right at that intersection, people coming in and, and shopping or driving by, or it's six lanes, you know, for those not familiar with Tulsa, it's 71st is a, not a highway, but a main street cutting right through the middle of Tulsa. It's six lanes all all the way through. So yeah, connecting Tulsa and Broken Arrow. I mean, it's, it's, yeah, it's a busy thoroughfare and it was located right in front of walmart. Um, and, you know, their traditional development style where they have the out parcels of, you know, fast food or, or quick service retail or your traditional retailers that follow Walmarts, I mean, there's a dozen retailers that will be next to every walmart ever.

Um, so you can kind of rely on on that in those sentence. Um, uh, the biggest problem that I didn't like and that kind of kept me away from center is that there was a Gamestop, Gamestop just really wasn't doing well. Um, at that time. And um, you know, it didn't make us excited about it, but the rest of the deal was good enough to where we still watched it. Um, we still monitored it underwrote it, they had some long term leases in there. Um, rex Sander wrote it assuming Gamestop might, uh, might leave. Right? And we wanted to see if we were still able to, uh, make a good return on it without them. Yeah. And you know, the other hesitation I would say in the beginning is that there was probably, you know, a third of the leases, we're gonna expire within the first year to 18 months of our ownership. So there was a little bit of risk there. If we didn't get some of those lease renewals, um, we may have a vacancy and, you know, we would have to go find a new tenants. There was, there was caution, but at the same time, that's why you watch it. So, you know, we probably found out about the deal and In April of 2019 and we ended up closing on it in November.

Um, we probably put our first offer in, you know, maybe september ish, I think that's right. And there's a lot of, there's a lot of retail in that area. So we knew, even if some of these leases didn't get renewed or whatever. We knew we could, uh, and we had compared the, the other lease rates in the area and they were all either about the same or even higher. So we knew we could get some, uh, some new leases in there. What I like about these types of centers, is there a lot of smaller, uh, footprints. And so, you know, if you have a vacancy, it's 1200 square feet, it's maybe, you know, 5% of the center versus getting some bigger box stuff that struggled as of late. And if you lose it, it's a huge hit to the cash flow where this uh, you know, you have maybe a small hit to the cash flow and you typically, you can find more users for that that size. Yeah. And especially in a full walmart parking lot with, you know, restaurants in the centre and people coming to eat, you know, it's already full. It's not relying on that. It's got good walk ability. So those should be really easy to backfill.

Yeah. Are those the same things you look at Joel? I mean some of these things that we talked about high traffic count. A big shadow anchor tenant. Yeah. For retail, it's, it's different than multi family. The location matters way more for retail because it's not, people will live in a lot of places, but people aren't going to open up a business if they don't feel like they're going to be successful. So this is very well located right in front of a Supercenter and right on a six lane residential street with high traffic counts. That's a real big plus I, I typically it sounds weird. I like the look of a center. You can just looks nice and and relatively new. Uh, what I want to spend my money here. Yeah I think it's somewhere you would go. Another thing I look at is market rents and you know, can I easily replace this? If I lose a tenant, you know I'll give an example of like a Starbucks. Starbucks is an awesome tenant and people say oh I I'd have to have a Starbucks. The problem is is that you're buying that at a really low return rate and the rent maybe 40 bucks, $45.50 dollars.

So at the per square foot per square foot per year. And so if they if they bail or even just at the end of their least they don't renew. Maybe they're going to go to a new location. I mean you may back feel that at 20 or $25 a foot half the rent. Yeah. And so you're not only did you buy it at a skinny return? Your return is gonna get wiped out. Uh If you're not gonna be able to fill it with a Starbucks like company where we've just had success in these older, they call them second generation. So it's not the brand new Chipotle uh type of tenant. Uh Starbucks, it's kind of a second generation where you've got some decent credit or mom and pop tenants but your rent per square foot is maybe $12, a foot. Where newer stuff a mile down the road is 25 a foot. And so if you lose a tenant you have a competitive advantage to be able to lease it back up. Yeah, that's a really good point. Um, that you can, you know, kind of tie back into red, but when you're looking at the price per foot that you have to rent that for to get that return, um, you know, a big thing you think about is how much you want to buy that per foot on the purchase because if you're building or if you're buying a building $100 a square foot versus three or $400 per square foot, the income you're going to need to make the same return is a third.

So it's, you know, it's theoretically a lot safer because you, you're not taking as much risk saying, hey, um, I'm buying a premium tenant at a super expensive rate with a super high price per square foot on the building. And if they leave, I'm gonna have to go get that again versus you know, a smaller cheaper mom and pop space. It's easier to lease that because it's cheaper. And, and you know, the barrier to entry is a lot lower. Yeah. So then we've kind of talked about why you like it. Uh, you're getting ready to, to make an offer. Tell us how you go about determining a purchase price. Obviously some of it is conditioned on what the seller's asking, but I'm sure cause you were looking at it, the seller was kind of in the market range, how do you decide on the number? Yeah. So obviously you know you need to be underwriting deals in the market and make sure you're not over paying for that market. So brian and I are looking at you know a dozen deals a week if not more, you know it could easily be doubled at some weeks and you're gonna know this is a good deal for this market and this is a bad deal for this market most of the time by the cap rate or you know the income or the price per foot. Just a few key indicators that you can say, okay that's normal.

Next thing you wanna do is just take in um a couple assumptions, you wanna kind of plug in what debt you think you're gonna be able to get because that's the majority of the capital stack. Um You know a lot of times we're getting 75 to 85% of the capital on a deal from the lender. So that's a that can be a big variable just you know in market conditions on debt that that can swing fast. So building a little buffer for yourself and then you want to go in and plug in what returns you need to get for yourself and your investors And just reverse engineer it. You know if I can get a 17% return and I can get debt for You know 4% interest rate on this deal then that's going to make me happy. And I need I need this price in order to do those things and you know maybe that's $4 million 17% return. But if you were paying 4.2 you're only getting 15% return. Right? So I mean it's a couple points you wanted 17% but you may end up taking 15%. So that's kind of how we do it. Is we reverse engineer based on what returns we need.

Yeah. So uh for those that aren't too familiar you you're buying at a capri what was the cap? Right? You bought this deal at uh quarter about 18 quarters. Okay. And so you're buying at eight and a quarter. That means if you paid all cash it's gonna yield you or should in theory yield you 8% return eight and a quarter percent return on your money. Okay? So then but we want to get to 15 or 17 or higher. So then how do you do that? How do you take this? You know Because a copper, it is a strictly unlettered return. If you bought it in cash, if you bought that $5 million 8% cooperate you're making 8% on that $5 million dollars a year. Yeah. So the key and this is why real estate is such a great investment is the leverage that you can get on it. And so when you say, Hey, the bank will loan you 80% of the purchase price, But you're not paying 8% on that money even though you're earning 8% on the deal, you're paying, what was the rate on this deal? 4.01%. Okay, so 4%. You're borrowing 80% at 4% yet, you're making eight and a quarter percent on the whole value.

That's where your spread comes. Right? So, okay, that's that's that's good. Yeah. So, you know, we started the negotiation process obviously, you know, with any negotiating, you, you negotiate, you know, there's, we could do episodes, entire episodes on, on commercial real estate negotiating. I'm not gonna dive too far into the weeds on that. But I would, I would say, you know, it's a process. It's a lot of give and take. You've got to be able to walk away. Um, These big deals take a lot of time. We have gotten in and gotten out of contract and gotten back in contract on deals and then gotten out and gotten back in and then closed them. Um, you know, you, you can't be scared to put your foot down at the end of the day, it's a big deal and you need to be able to emotionally detach yourself and and walk away from the deal and no, you know what a good price and what good returns are. But sometimes that's hard. We had another property here in Tulsa that was in a very good spot. And, uh, tried to negotiate and offered a really competitive price. And, uh, you know, it's almost like buying a house or something. Sometimes you get emotionally attached to these things just like you do your own home and you've got to be able to walk away.

I sometimes negotiate to a fault which has resulted in and a lot of the precision equity deals producing some really high returns, but it also has is buying less than I want to buy and buying less than my investors would like me to to buy. But yeah, so give the watchers or the listeners just a couple points on negotiating. You know, how you can find things to get, um, you know, discounts or credits to the closing maybe after you already negotiator or what your thought is. You know, maybe we're in contract on this now, but you know, we're assuming everything they told me is true and, and maybe it's not, you know, maybe the roof is older than they thought. So, you know, they're going to discount that are, you know, what are some of the things you're looking for when you're negotiating price. Well, so there's probably a longer discussion to be had on negotiating because it's pretty involved and complicated. But a couple of ways that I think you can get, uh, some success in negotiating is you know, I'll just kind of ramble off some off the top of my head. Properties that have been on the market for a while um for whatever reason or another.

Now you can say well it's been on the market, it's been picked over, agree, but also the seller may be more reasonable to a lower offer than he would have been otherwise. So he didn't want to sell at a certain price. This happens all the time and well I'm under contract and one in bixby Oklahoma right now where uh the broker they had it under contract and they tried to get a discount and they would not sell it Uh for less than than $2 million. And we we come along after they fell out of contract. The guy had already been through all this long process and I offered some nonrefundable earnest money and was able to get a net purchase price of 19 that he just refused to the guy two months ago. So that's $100,000. And and hope and hopeful perceived value just by being the right timing. Uh So that's that's the way that you can you can do it um you know, having having leverage like uh properties are struggling. Uh they're going into foreclosure, maybe some vacancy. Yeah vacancy. And then you know like you said when you get an under contract, there are also then ways to to get further uh so let's, let's go through that we've, you know, we've made the offer on the property through a letter of intent and you know, we'll go and dive deep on our letter of intent and you know, well maybe even give our copy or our, our version away.

It's pretty simple. It's a word document. The letter of intent is basically just a non binding contract. It's super easy. It's, it's a word document with a dozen points that says, hey, You know, here's roughly what I'm thinking because these contracts, you know, these big properties can be cumbersome. There can be a lot of, you know, little minutia and points that you have to negotiate on. So you put the most important doesn't on there. You know how long you're gonna take to inspect, how long you're gonna take the clothes. You know, typically those are 30 days of peace, maybe 45, maybe 60, depending on the side of the deal. The purchase price obviously. Um, uh, what else is going on the other a lot of times, uh, isn't the uh, seller gonna want some non refundable money at some point. Yeah, you need to talk about earnest money. Um, so you know, you're putting up a deposit. Now that says, Hey, here's $25,000 at the title company. Like a residential deal, most people have bought a house, you know that earnest money check the right and then after your inspection period that is typically non refundable. So if you don't close on that deal, you walk away from that money, which can be a sizable sum that can be a lot of money. We'll agree there's a lot. Well we'll go over maybe even specifically on that.

But so you guys, let's go back to Red Red, but you're, you're under contract, uh you you let's say you've done your due diligence, you've maybe done a property condition report, the bank has ordered the appraisal. How did I'll just ask you, how did you decide on uh the lender who loans on, on these types of deals? Yeah. So um we use local banks or credit unions for these type of retail shopping centers. Um They're, they're typically, you know, super reasonable to work with as opposed to like A CMbs um company or a life insurance company or you know, bigger, more non um, you know, non guaranteed debt institutionalized yet. So we're working with local banks um here in town and I'd like to just meet you. So we've, you know, if you're trying to go someplace where the money is coming from out of town, uh maybe it's a little harder, but on these local banks um before we approach them we try to find out who we might want to go to in the future and we sit down and have coffee or or lunch or dinner with them and once they get to know you, then it seems like it's a it's a pretty good relationship and there willing to work with you a lot of times you get yes we have to, you know personally guarantee a local bank debt, is that right?

Right? You have to personally guarantee it, which just means um you know the bank not only gets the first real estate mortgage on the property, but they also get the right to sue you um and they will if you foreclose on the debt or if you don't make the payments. But they also an advantage with the local banks. It seems like to me is that if something does go wrong, they're willing to work with you, they don't really want to own that asset. They want you to succeed um You know, they do their own due diligence on the property because they don't want to make a bad loan. And if something was to go wrong then if you need some sort of special circumstances then they're willing to work with you. You know, I would say on that point, banks are in the business of making money via interest on these loans, right? So they want them to work and they want to place these loans, they get they get these loan officers and these banks get paid to allocate this money in in these deals. So you know, you're kind of the customer when you're buying a deal in a sense with the bank depending on how, you know competitive the banking market is that you're at. Um, but a lot of the times, you know, I mean Joel, you might have to three lenders bidding on a deal in the beginning.

Obviously you're gonna try to weed that down to, you know, one or two at the end and, and really just proceed with one after your inspection period. So what is the typical terms that uh, investors or sponsors can, can get on a retail deal like this from a local bank? Yes. So there's a few things you need to pay attention to its who's guaranteeing the debt and you know what that guarantee is for, Is it for all of it does step down. Um Is there a pre payment on it? Is there, what is the interest rate on it? What is the Amateur Ization or how long you're going to pay that back? Um If, and then what is the loan term and then if the long term is different than the Amateur Ization term, you need to, you know, make sure that you can make that balloon payment Because that's a big deal. If you have a ten-year alone and it's a motorized for 25, you've got a massive balloon payment because you're not paying that off in, in 10 years, you're gonna have to refinance it or sell it? Yes. So uh, my experience on retail, local bank lending is typically 20-25 years on amortization on a retail deal. 25, believe it or not makes a big difference on your cash flow.

So we've always tried to push banks to do 25 and usually there's a local bank that will do a 25 year. And yeah, it's cash flow, right? Because it's still kind of your own cash, you're just paying that extra down towards extra debt. So it's theoretically kind of the same, but dollars today are always better than dollars tomorrow. Yeah, and and it's it's cash on cash percentage to the investors goes up with the longer amortization rates have go ahead. And do the bank terms, are they ever different between retail and maybe multi family or or do they, do the banks consider, okay, we're gonna either loan it or not and they don't really, they don't really care what the asset is for their terms as far as banks go, they're probably a little similar. Um We we don't typically do uh fix debt for multi family with banks because Fannie Mae Freddie Mac um are and even cmbs have have much better terms. Uh But banks would would vary some with the apartments versus retail.

But for retail, it's typically 2025 year. Am they're usually fixing it for 3 to 5 years, Although lately we've been getting banks to hit 10 year fixed. Uh Yeah, and rates are really, really low right now, you know, I've had rates on deals, believe it or not, uh back in the early 2000s that were up to 89%. But uh and that's of course terrible. But today I mean it's it's 3754% on on retail. It sounds absolutely insane. But we literally just closed on a retail deal less than a month ago for less than 4% interest. I pay more in my house than we pay on that retail deal in the current state of of retail too. Okay so uh L. T. V. I would say is 70 to 85%. Yeah on on retail um on you know maybe bigger deals that are anchored by a grocer and they're getting life insurance company debt. They may go down to 60 65. But I would say industry standard is definitely 70 70-80 is the sweet spot.

But I've seen 65-85. Okay. So red bud, You guys uh set up your debt, You did your due diligence, You closed on the property. Um Tell us what happens after you close, who's managing it. How's it going? Yes. So we closed on the property in, You know, 60 75 days. Wait about a month of inspections that went pretty seamless. Um we hired those out to third parties. You know, people are getting the survey, people inspecting it. We're just reviewing that, sending its title company, sending it to our attorneys, Yada Yada Yada, you're kind of just coordinating them at that point. You moving in the closing phase, your lenders, you know, gearing up a lot um you know they're getting ready for everything and then um you know at the end of inspections you really need to start thinking about who's managing that property like you said. Um We typically don't like to manage our retail. We like to go and and find you know an institutional type management company, a big management company who manages a lot of properties like ours in that market. Um and then just interview them, you know, see how they manage those other properties drive by and see how clean they are.

Um But yeah we hire management company. They on on retail. They're typically charging you know anywhere from 2.5, 3 to 4% of revenue a month which on a deal like red bud is You know, I think less than $2,000 a month. And that they manage everything, they collect the rent, their pay the bills, they're paying the bills, they're sending late notices, they're finding evictions. If you have them doing all the bookkeeping all the bookkeeping, they're preparing the complete set of books for our accountant. So they export the complete sets into our accountant. But other than that the month over month bookkeeping and reporting that we send to our investors is done by that management company. So you guys just get what a monthly statement. Yeah, we literally get a monthly report their due by the 15th of the following month. Um, and you know, who paid, I mean, you have access to the information, but yeah, we, we get a report and it says, Hey, here's how much money you made. Here's all the tenants that paid. Here's the tenants who didn't, here's the leases that are expiring soon. You may want to get in touch with them for a lease renewal.

Here's any maintenance problems. You know, the parking lot needs to reseal or we, we budgeted this, um, in september and it's a little over. So you're dealing with that. But, you know, the most time consuming part of this is when you're setting your annual budget, um, year over year maybe. And even that's fairly easy because you've, you've done that in the beginning. So, You know, you set the budget and, and nine times out of 10 it stays inside the budget. You know, all the preemptive maintenance or deferred maintenance that's all going in the budget and it's all on a calendar. It's not a specific date. It's scheduled, it's through a management company. So people might think listening to this, well, it just can't be that easy. Uh, you can't just buy and then sit back and get a statement and, and money to pay your investors, but it really is, you know, I've got a little example, I'll throw in. Um, there's a deal that we've bought that. I put investors in four years ago and I have to say good or bad. I haven't ever been to the property.

I've never even been there. I found it. I modeled it. I got the debt, I put the syndication together and I've been paying, I've been paying distributions 12-13% to my investors every quarter for four years. And I've never been to the property. So I invested in one of your deals. And you've never been to the property. Well, I, I think your partner went to the property. I mean, Joel personally, I don't know if it has been to the property. Uh, yeah, I think they, uh, my business partner victor went to the property. But what? And he went one time for one afternoon. The point is that it just doesn't, we have a management company managing that. We just get a statement every month and I just send checks to my investors every quarter and for four years that's been going on without a hiccup. So not every deal is going to be that easy, but it absolutely can be that easy. Yeah. And they're, they're out there. There's a lot of those deals, There's a ton of those deals out there. We're getting 100 of those emails, email or 100 of those deals emailed to us a week. So that's a point that we can kind of try to wrap up on is red buds been successful.

You're paying distributions to your investors. And uh, you know, we'll have pictures of it online and a video on the Youtube channel. But look at it, you'll recognize this deal. This deal is, is in your market, anywhere in the United States on a, on a great corner in front of walmart and anybody can buy that at an eight cap, 8.5 cap. They can get good debt and they can start either making money for themselves or making money for investors. Those deals exist everywhere. Yeah. They're, they're, they're all over the place and they're in all different asset classes to, I know we talked about retail today, but you know, that, that was the focus, um, the same opportunities are in every asset class out there. But yeah, I mean the deal, um, I don't know. That's saying you guys say the deal, the decade comes along once a week. Yeah. Yeah. I think old time guy dolphin cruises where I got that. But um, yeah, it just encourages you to know that, that it's out there and it's available and it's, it's not hiding that's, that's a, that's a center you drive by every day. But now next time you drive by it, you're gonna say, I wonder if that deal could make me 17% return on my money.

So hopefully this show is going to encourage you just, that it's possible. Yeah. And, and how to do it. It's not that bad. You know, in about 29, 30 minutes you can go from how we found the deal to how we closed on it, what we're doing now. Um You know, that's not bad. It's pretty easy brian anything else? I think we've covered it pretty well. Well, thanks for coming today guys. I really appreciate your time. Um You know, I think we're gonna help a lot of people with this. I think it can kind of be overwhelming of where you're finding deals. What do you do? Oh my gosh, there's all these things going on. But I mean really it's not that bad. Um A few episodes of these. You're gonna be able to run these deals. No problem. Or at least have the confidence to invest in partner with other people because you know the steps, you know, the process. It's not that bad. Well, if you're watching us on Youtube, make sure to like and subscribe. If you're on Spotify or Google podcasts on Itunes podcast, make sure to check out on Youtube if you want to see the video version. Um but I think that wraps it up for episode 002. We'll be back in a couple of Days for Episode three.

Thanks Guys. All right. Thanks. Yeah