How to Invest in Commercial Real Estate

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Episode #040 - Quick and Dirty Underwriting to FIND the one you might actually BUY - LIVE REACTION!

by Criterion, Braden Cheek, Brian Duck
September 9th 2021

Ugly? - PASS; Cap Rate too low? - NEXT; Purchase Price too high? - ONTO THE NEXT; Horrible Location? - KEEP LOOKING; Not Enough Traffic Counts? - NOT A CHANCE; 2nd Story Retail - FORGET ABOUT IT! More

how much time are left on the lease is, how do their rents compared to what I feel are the market rents in that area and a quick glance at a rent roll that has, you know, their start date, their end date and those lease rates that'll tell me, okay, I'm downloading this. Uh, and I'm gonna, I'm gonna underwrite it. What's up? Everybody welcome back to how to invest in commercial real estate. We are a podcast and Youtube show, just breaking down how to invest in commercial real estate and today we're just gonna jump right in. So one of the biggest questions um, we get from people wanting to get started investing in commercial real estate and start taking down deals on their own and raising money and kind of sponsoring a deal is how do you guys underwrite, how do you put it together? What do you look for? What's, you know, what do I need to keep my eye out for? Um, so we thought we'd put a few deals together and you know, Joel hasn't seen any of these deals, brian hasn't seen any of these deals? I picked them out. Um so kind of true first raw impression. What are you looking for? What do you hate? What do you not hate etcetera?

Yeah. And I think it's important to remember, you know what we're looking at today. I think our retail deals, but you know what, what will govern, what deals you're looking at is your investment objectives. And so that will be, do I want class a, you know, brand new stuff at a low cap rates, high price in the middle of Dallas, Okay, that's gonna be a different deal for us. We do a lot of, uh, you know, I don't know, maybe be class retail, uh, in pretty good locations that can get 8, 8.5, 9 cap and a pretty good cash on cash return. So I don't know if this will be like that, but yeah, well you might even eliminate something quicker than that if it says it's for sale for $50 million. Right? I mean, as opposed to, so I have a target of like 2 to 10 million is a real good range. I'll by up to 20 or even down to a million, but 2 to 10 is a good range for, for retail for us. Yeah. And you really need to reverse engineer how many deals you need to look at based on how many deals you want to buy. So, you know, right now, we're trying to do 3-5 deals a year that's comfortable for us if it's our pipeline and it satisfies everyone's needs.

So we know that we need to be looking at, you know, 50 to 100 deals a month. Pretty easy to meet that goal of finding one a quarter that we're okay. We're convinced this is it, this is the deal, we're gonna push this one. I like it. So you need to look at a lot of deals in order to look at a lot of deals. You can't spend an hour on each one. Just, Hey, look, I, there could be 10 a day that I, I look at that pretty easy. But what people have to remember is a lot of them are eliminate just by the look of them. You know, or let's say retail comes through and it's got two story. I'm not, I'm not probably interested in a two story retail. The, the second story always struggles so that's out. Or if it's, if it doesn't have the right exterior and I think it can't really be ever improved upon a repurposed. I may just, you know, skip that. So there's a lot of ways to get through a lot of deals and then you still are left with. Okay, Maybe I still, you have to look at which ones I want to underwrite. That's gonna take a lot more time than which ones Am I gonna put an L. O. IAN? So you have to look at a ton. Yeah. So generally speaking, you get a rough list of parameters and then you, I mean you can bend the rules a little bit, but generally, you know, if it's got like a 25,000 square foot, you know, like Big box 10ants.

Yeah, you may not, I don't want it to be a little Weary that may just throw it out right there. 25,000 ft done. All right. So let's get into it. Just 1st 1st 1. Okay, I'm gonna look at this first one here. I haven't seen it before. Multi tenant retail looks like it's in midwest city. Okay. And, and if you're looking, if you're watching on youtube, you should be able to look at what I'm looking at. It's got a grocery store. Is that a shadow Angkor? I don't know yet. Um, I think the crest is Not included. Okay. 35,000 ft. Good. That's a good size for me. The first thing I like is that Midwest City. It's not a great market. There are some decent parts is just south of Oklahoma city for those who don't know. Uh, so that would be somewhere that I would buy. Uh, the asking cap rate is 8.75. That to me is good. Um, you know, with, with me getting dead around four 875 starting ask is something I'm going to definitely try to dig into so that it's very positive. One negative I see here is that 76% occupied. Uh, it could be a positive depending on how you look at. It.

Could be. Um, and could that be the reason they're asking an 8.75 cap or uh, yeah, that's, that's an interesting. Some people, they will go lower on cap because the, the occupancy they think provides you some upset, but for me, you always ask and retail, why is it not least multi family can be mismanaged mismanaged, but retail kind of, you don't really mismanaged retail that much. So there may be a reason why you're you're holding onto some vacancy. Alright, let's, let's go for the first thing I see here. I want to see rooftops and we see a decent amount of rooftops here. Uh Nothing if I see a lot of just land, you know, maybe it's not in a highly populated area. I would pass this traffic counts too. It's got 18,000 on 22,000 on that Main Street. That's that's pretty good. Um 10,000 is still acceptable to me. If it's two or 3000, I'm probably passing. Yeah, that's the middle of nowhere. Yeah. So let's keep going here. Just traffic count might make you pass on a deal.

That's right. Yeah. Alright, Okay. Population. Um Let's see that. five miles. 100,000. I mean, I I can't see anything I like. It's small, but uh, that's a that's a little five mile radius. 100,000. That's not bad. It's not really great. But um, you know, sometimes you'll get three and five mile radius of 10 20,000 people to me that that's probably a red flag. Not that it deals wouldn't work. But I just with retail, you really need population density and so that I'm gonna I'm gonna demand at least 50,000 people within a 3-5 mile radius of what we buy. And generally you're looking at rooftops and you're looking at traffic counts because for a business in a retail center that we want to buy to thrive and succeed and then make money themselves. They need to have people passing their business and live close by that they can sell food to, they can sell close to, they can get gym memberships for that's really important on retail. It has been for us for sure. Alright, let's see. Not too much info on that page.

So this gives me a little bit of a look of where the vacancy is. So that crest is next door, which isn't bad. You have pretty good frontage visibility. Sometimes retail deals are are set back, especially these grocery anchored one. Yeah this is right up next to a 20,000, you know, traffic count road. So I like it. The let me see that the vacants are all uh small, so that is actually good for me as well. Uh Well, you know, we find when you get over 2500 to 3000 square feet of retail space, your your number of users that can take that much space kind of goes down for sure and and they're they're harder to leave. But 1000 1500. Um Most businesses that one of the presents can fit, you think about H. V. A. C. Units, you think about renovating this space and tenant improvement dollars. You think about the lease term and your brokerage commission, I mean bigger spaces just at scale, it's just more expensive. Alright, let's let's keep going. They kind of do an overview of the tenants.

Um All these tenants are are okay. You have a comment. Yeah. One question I have right off the bat is how how is the crest foods doing? Like if it's, you know, predicated on being next to a grocery store, I would want to make sure that grocery store is doing all right. And how do you find that out? Probably talk to the management company that's managing it or the or try to call the owner. Um You could go there on a day and you know, and see the traffic that's sitting in the parking lot. That would probably give you a good feel. A solid broker of this deal would have already had that in his back pocket. He knows that's coming, you know what I mean? Yeah, I mean you could talk to other businesses in the area or other brokers that that are in midwest city and they'll be able to, oh yeah, I know that deal that deal does really well. Or that deal is struggling. So there's there's people you can call. So dollar dollar tree is the anchor. I want to see how many square feet the anchor takes up. Uh 8000 which um which is okay because dollar tree can take, I've seen them in 10,000 ft before, so that's not too big a space for dollar tree and then it's just a bunch of other small tenants. Um 11 thing I have is you have these vacancies, when's the last time they were rented?

Are they built out or are they, you know, they've been vacant for years? Um Kind of just trying to get a feel for the demand. Uh let's see, lease highlights $10. So the next thing I'm gonna do is look at the rent roll and I'm gonna get through right here, so it doesn't have rent on it, it doesn't have rent on it, interesting. So that's what we do when we're doing it live. That's what we get. Um Let me see if they have another one. Uh We're live we're live um You know, typically I'm not too worried about the expenses because um you know, it'll tell me the least will tell me if they're passed through and I can figure all that out and further due diligence. So in this initial look, I'm really wanting to know uh how much time are left on the lease is. How do their rents compared to what I feel are the market rents in that area? And a quick glance at a rent roll that has, you know, their start date, their end date and those lease rates. Uh That'll tell me, okay, I'm downloading this uh and I'm gonna I'm gonna underwrite it.

So if you're interested in this deal, that's one of the first things you'd go back to them and ask is for the rent roll. Yeah. Here it is. It's it's small guys. But uh it looks like 16 17 18. Those those are all okay. Dollar tree's at 10 bucks. That's that's okay. Um Nothing's over $2020 except this U. S. Corps of engineers. 10 bucks. Okay. None of these besides dollar tree that goes out to 2026. There is a lot of lease role. Um you know, you've got 22, 23, 23, 22 23. So in a year, in the first two years you're gonna lose, you're gonna have renewals of the majority of your tenants. This is about a year old. Huh? This om is about a year old, okay. It's about a year old. So um now that could provide you opportunity to raise rents. If the rents are under market, these look like they're they're very close to market already. Not not over market but not really significantly under market. And really you're just trying to gauge that probability of is my income going up?

Is it going down? And why do I feel that way? Is it because leases are expiring in their way under or is it vacant space releasing up or or so on. Yeah all of these look like they're about at market rate. So then I need to understand um Can I lease the vacant space? And do I think the majority of these tenants are gonna renew with me at similar terms but uh with what I've seen um this this is something that I would, I would dig into at 8.75 asking cap if that's, I think that was on the actual Ny and so if it is that that's a pretty good opportunity for me to dig into. So I mean cash on Cash roughly, you should be able to hit 16 Percent 16 ISH depending on your loan. And that's just, that's just cash flow. I mean that's not even your Ir depending on what you could project a sale at, which is a bit more complicated but overall pretty good. Yeah. So I that's a deal. I would, I kind of went through what I would do, I would give this a five minute overview like we just did and I would decide either to call the broker and get information or put it in the trash pile.

Alright, Let's let's hit the next one. Plano texas. So I do, I do like I do like plano. Um Let's see here. Okay. 9.3 million. A little bit large. The asking price is 2 20 ft. Most of the retail we purchase is lower than that. Not that it can't be worth it. Playing out is a pretty hot area of north north Dallas. But we've purchased deals at 75 ft all the way up to, You know, 180 a foot. So this is already higher than what I'm normally used to seeing. And the ask cap rate is 6.78%. That is on the lower side of what I want to buy retail for. So I, unless everything else about this is perfect. I won't even get through the whole om because it's a big retail deal at under a seven cap asking at 2 20 ft. Well maybe it's, maybe it's anchored by a chick flick only search portal in the back somewhere, digging. Yeah. Alright. So let's, let's take a quick look here dominoes. Okay, that's no chick fil a no.

Um, it's 100% occupied. So they call upside, they say, oh, it's an asset with upside opportunity, but it's already 100% occupied and I'm gonna pay a 6.5 7 cap for that. Alright, let's look at current. Uh Well this is just kind of an income and expense and it looks like average income is about $15. That, that's not bad. Alright, here we go. This is the rent rent roll. So, um, we've got no big, well, we have, we have the banquet hall. Hmm. So I don't, I don't love banquet halls. I mean, what's, what's wrong with the banquet hall in 2020 1000 square foot banquet hall, you know. Yeah, with what we went through with Covid and, and and things, those, those businesses struggled and uh and they their their businesses intermittent. You know it's not a steady everyday kind of a business. It's not like an event center in high demand for weddings. So I I don't love that being uh 9000 square feet which is almost 20% 22% of your center. So would you even keep flipping right here or is this trash pile already?

This is really close to trash pile. I'll just look at the rents. Uh 15 16. Those are okay. The triple nets look high. It's almost $7. Um It's hard to because some of these like texas king. I have no idea what they do. Yeah. You definitely don't have uh you definitely don't have any any credit at all hindu Temple and a canine university. These are all tough business is for me to get my head around. Um So I don't think I would keep going on this. Um You know just more. Let me see if there's what else there is. Look at that chick fil a. Okay, okay so you got a chick fil a likes it. Yeah. I mean they maybe get a ground lease out front. Uh I I probably at this cap rate just given that retail I can get at 8.5 cap. Not it's not gonna make someone money. It's I'm probably gonna pass at nine million bucks. So let's do the next one. Yeah. When I look at retail that's priced that way per foot. Or at that cap rate I'm looking for better quality 10ants.

Maybe better quality um least guarantees um longer leases. You know a really Top notch to consider under seven. I can go to Vegas and I can get a decently located pretty new retail property. Um with 10ants that you recognize from a rent roll. Yeah. And and so that that's that's why that one's gonna be tough for me. Okay. Alright. This last one that will take a look at um It doesn't say where it is on the front page but I like the visibility from the street. It looks relatively new Indianapolis right outside the Indianapolis airport. Okay. Outside the Indianapolis airport. I really like this deal for five million bucks. Um So that's a good price point. Um Easy equity raise for us. The cap rate looks a little low but um. Seven to now I can if I make an offer in the seven and three quarter eight range, I can still get some cash on cash numbers that I want. So it may be worth looking into. Uh let's see 26,000 ft. So you're less than $200 a foot. That's that's better Degree.

I tell you from personal experience pitching something Joel over $200 foot. Just threw out trash. All right let's let's see. It looks like it has a restaurant on the end. I like the way it looks. Yeah, it's a nice looking, it's it's good on the wow. Alright. So it's hard to find this property, but it's kind of, I forget where you got to describe it a little bit. There's people listening. So it's in the middle or kind of on the edge of what looks like millions of square feet of industrial, of industrial, primary looking jobs. And you've got you've got walmart and uh some target and kohl's you have retail area pretty close. This looks like it's right off the highway Or what they're calling, Baker, Quaker Boulevard with 20,000 cars a day. So the traffic counts are good. Um And it is, it's located southwest Indianapolis near the airport. Okay. I don't have any problems there. Chicago's pizza is the main tenant. Um So that's probably just the local pizza joint. Yeah, I'll put a pin in this right here.

What I like site visits. I'm a firm believer if you gotta get boots on the ground before you make an offer or at least before you get into contract after you have the L. O I you know, pending. You know, somebody and you can kind of get it out, but you gotta get boots on the ground. And Chicago's pizza is why you go you fly down to Chicago's pizza on a Tuesday and it's packed out. You can feel way better about that. Knowing worse is if you walk in and it's like a vacant buffet that that smells like dead rats like that, that tenants out immediately. It's out. Yeah and and I mean it costs money to go look at these things so you definitely want to do a little diligence before. But yeah, you can't you have to go look at it eventually right before you get serious and start spending money. Yeah, I'd make sure you're in the realm of possibility, you know, with the broker and everything like that. So all these rents are at 15 bucks a foot uh 16 15. I don't know Indianapolis that well, but those don't seem high at all to me, they seem pretty reasonable. They do have a couple of vacants. It looks like they're tied up in options as well.

Yeah, everybody's got some options. I need to understand that because the options aren't good for uh the owner, they're good for the tenant because the tenant can take it or leave it and it locks you in on your upside. So I need to look at what those options are they at the same rent. Well then I just gave them five more years at the same rent. I can't grow my income. And we already talked about in another podcast how how much income uh you know, rent increases drive profitability. So I need to look at that. I was talking to a broker the other day and um I was complaining about lease term and he was like, yeah but they have a five year option. Like that's that's a moot point unless it's had a huge increase. The lease is uh there there's some term left 29 is one that's good. 25, Chicago's Pizza. Alright. So the rest of the local UPS stores typically are a good bet because once people have their addresses um at a UPS store they just keep them. Um Most of these other guys. Yeah. Okay. Uh But imagine it's hard to change that.

So uh for this one, I don't want to understand the vacants um if they've if they've ever been leased or uh you know when the tenants exited, if they have been, if they had built this let's say 10 years ago and those vacant spaces have never been leased? That would be a red flag for me that the area isn't quite supporting as many of the tenants. Uh And it may be that they signed up a bunch of tenants 5 10 years ago and they're all come and do and they can't wait to get out of there because it hasn't been as good as they they wanted it to? That's a great great question. So how do you how do you ask those questions? And who do you ask them to, is it like let's say you got to the site visit because it's interesting enough, I wouldn't get to the site visit on this one. there's some positives but the cap rate is a little bit lower than I like. So I would start this off with a detailed phone call with the broker. Uh, and I would dive into all these questions and based on that call and those notes that would determine whether I pull the trigger to fly up to Indianapolis. So there's, there's a lot on that call. There's a, yeah, you need to be ready for that call.

I'm asking a lot of different questions about the area about the development, about the owner. Um, Why are they selling? What's the motivation asking about these specific tenants if they have other stores? Is this the only location? Just lots of stuff just trying to get comfortable with the vacancies, vacancies, how long they've been vacant, Why they're vacant. Um, you know, have you had any lease lisa's role? Did the tenants renew? Were you able to get increases on that renewal, meaning that they like the location they want to stay. So all that you're going to dig into on a call and I might do that with this one. I like Indianapolis. Um, it's a good deal size. It's nice and clean looking from the outside. Um, but I would want to, the first thing I'm gonna ask the broker is, hey, you listen at 72, I think this is an eight cap deal and he says, oh well, you know, we haven't had a lot of interest, go ahead and make that offer. that's, that's positive. Or you could tell me Joel, don't waste your time. I've got seven offers already on this thing and they're all close to asking. Well then that makes my decision for me because I want to buy an eight and he says he's already got buyers at seven too. So I, it's been a while, but I, I bid on this deal.

I really liked it. I was ready to fly up there, but I think it ended at, hey, let's put a pin in that offer. I think we're gonna get one better. Okay, we didn't get a call back. So I'm assuming they got a better one would be interesting to know if they sold it. And that's kind of the risk you take with, with trying to get a deal like you're always trying to get the best deal you can to make the most money you can. But at the end of the day, there's real competition for these assets. You know, sometimes now more than ever. Yeah. And, and sometimes if there's a lot of competition, you just have to be patient and wait for one that for whatever reason didn't get as much competition. Yeah. And, and right now on multi family, that means I don't buy any of them maybe because there's just so much competition on multi family right now that I either have to be okay making an 8% cash on cash instead of 16 or I just don't buy multi family until the market starts to correct so I don't know what the right solution is. I know people are killing it. Multi family but the prices are going to levels that I've never I never thought they would go. So okay, so we we looked at three we'll we'll kind of wrap it up here, look at three, which one are we diving into?

Like if you only have the three, if you had if you decided to make an offer day and this is all all you had your diving into one which one out of those three? I'm gonna go back to the first one because midwest city yeah, it has the vacancies are really small And the asking cap is 875 and so there's just a lot of room for potential upside, what would your answer have been? Was Indianapolis the whole time, this one right here. Yeah, yeah. We offered on plano too. Just like the record that we did, we went and we wouldn't look right. Yeah. And then we we did go down and look at plano. Um That was you know, I thought I was gonna get a deal on covid playing this great market, tons of houses, tons of income, tons of jobs, tons of traffic counts. Um It's obviously enough traffic counts to sustain a chick fil a but anyway um I think that was a great episode. I mean a lot of people just by setting like, okay, I just need to look at more deals. I mean it's not, it's probably not your investment criteria is it? I mean I would, I would think it's just Look at more deals. You'll find one.

Ask ask maybe a little bit better questions like Joel said he looks at 8 to 10 a day. Yours my my inbox is is full of deal after deal after deal. So it's very easy to get on those lists. Um Just start getting on brokers list, signing up for newsletters and all these things that people will send you everything you want to look at that. You'll get too many. Uh and then I can just hit this button and click these and then maybe the eighth one grabs me. I pull it up, I open it up, I look at it and then I'm back, I'm back to deleting, you know. Uh but that's why that's how we find good deals. That's why Brian can attest because he's invested on all of our deals that we've had a bunch of winners in a row. I don't know 15, maybe 20 now. Um you know statistically we should have had something that didn't didn't go very well but you know, we were trying to be really careful and we go through a lot of deals to find something we feel good about. Well um I think that's it for today. If you're listening on the podcast, make sure to go check out the Youtube channel how to invest in commercial real estate so you can see the offering memorandum says, and all the stuff on the screen. But, um, I think that's it.

We'll see you next week.

Episode #040 - Quick and Dirty Underwriting to FIND the one you might actually BUY - LIVE REACTION!
Episode #040 - Quick and Dirty Underwriting to FIND the one you might actually BUY - LIVE REACTION!
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