How to Invest in Commercial Real Estate

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Episode #070- If You Could START OVER in CRE, What Would You Do DIFFERENTLY?

by Criterion, Braden Cheek, Brian Duck
July 25th 2022

Today our hosts Braden Cheek, Brian Duck and Joel Thompson from The Criterion Fund discuss what they would have done differently on their individual journey to CRE Investing! From starting sooner t... More

as I started to dig in. I saw it as a, as a way to quit my regular job. My engineering job that I had for 35 years. And so it took me that long to, you know, I hate that it took me that long, 35 years to to figure all this out. So that's what I'm saying. I hope that people that are listening to this decide, well maybe they want to do it a little quicker in life. Yeah. Yeah. Welcome back to how to invest in commercial real estate. And this is my favorite time of the year comes around four times a year. And it is distribution time, distribution time. Yeah. So uh this is the time of the year where all of our investors are really relying on us. You know, um You can send out a nice update, you can send out whatever you want, but I don't care about that. They only care about cold hard cash checks in the mail. In the mail. Yeah. So this quarter it's it's I don't know if it's a milestone. I haven't necessarily been keeping track but precision and criterion both paid out over a million dollars in distributions. What was precision that tell us about? We were close to 700,000. I think it's 6 96 95. I could double check the math.

It was probably 100 and 50 checks. Uh We've been pretty consistent. About six hundreds were up now about 700. And we still have a few properties that aren't fully, you know, paying. So that'll that'll still increase over time. But I tell you what it's my favorite time of the year I get four times a year where I get to sit down and and sign checks to people that have entrusted us with their money. Not only am I happy that we're giving them their returns, but I'm happy that it proves that we're successful what we do and we're doing what we told them we were gonna do and we're delivering all that money to them, their friends, their family, their coworkers. And so it's just the best time of the year for us. A million dollars. I had no idea of course were not a part of the precision but but you personally are involved in a million dollars every quarter. Yeah. And I think about how blessed how blessed we are and I use the term loosely but how fortunate we are to to deliver a million dollars to people that we know, I don't know people that that write checks to people they know every quarter for that amount of money.

I mean we'll be over probably $4 million this year between the two companies all going to people that have invested with us. And I think it's powerful. I think it's really cool. Yeah, it takes a lot of faith faith, not only in in the like us right because they're having to write us massive checks to get you know little pieces of that spread out over, you know 5, 10 years maybe there's there's a lot of trust both ways in that. I mean that's a ton of money anyway, it's a good time. And and you know, I participate, I love it because I get checks. I I've invested in some online, most of them haven't gone well, but some of them have and and those they send me checks. I get checks from criterion and I get a bunch of checks from precision equity, not only from the sponsor side but also from, I put in my personal money on a lot of our deals. And so it's just awesome every month for those things to come in and they don't depend on the amount of work we do, they don't depend on the amount of time we spend. Uh they just are there every quarter and it's awesome. I was excited this morning when I got all the emails this morning from precision and I was excited to open it up because I knew it was the, it was going to tell me how much I was getting back in distributions.

And so I got a different email on each property. And I couldn't wait to to check each and every property and a unique point about a couple of those emails is that we've actually paid back over 100% of the capital on at least three or four of your deals. And yet we still say, oh this is an 8% this is a 24% this is a 15% return on your original investment amount. But on some of these deals you don't have any money invested. You've already received all of your capital back, you have zero risk and you're still getting the check every quarter. I got I got one email from you that said I was getting 24% cash on cash. I got another one that said I don't have any money in the deal but I was still getting an eight as if I had the original investment in an 8% um Pro rated. So man that I was really excited to see all that. I mean 24% cash on cash. That's disgusting. What properties that that's village after we after we take our cut we're still paying 24%. Well on the criterion front. We had a crazy second quarter. We we have doubled our portfolio in the second quarter since the beginning of the busy.

Um And a lot of those properties we bought in in May and in the second quarter are already paying out distributions. And and another cool thing we started doing this quarter is um electronic distributions. So we've been getting hit several times and it's just one of those things we looked into for a long time. But um those first distributions went out electronically and that was super exciting. A lot of them, we just closed less or maybe just over a month ago and already sending out checks. That's fantastic. Yeah, exactly. So it's it's prorated for the quarter but still um we get that question, a decent amount is when do I, when do I get paid first? You know what what happens now? I gave you all this money, you know what to expect and like I said, not every single property we bought on in the second quarter is paying out now, but most of them are and it was so fast and when you think about it from the day you close, you're making money that first day you close you're making money the next day you're making money if it's a sunday you're making money. So if we own that for 40 50% of the quarter, why not pay off the distribution? That's kind of our thinking. So the topic today outside of distributions is kind of an interesting one.

So if you could go back and do it over, what would you do different. And this is interesting because I think a lot of people listening to the podcast are in those beginning stages of of so many different buckets, right? You've got, you know, a bucket similar to goals who you know, maybe they're flipping houses, maybe they've got a little small rental portfolio, maybe they've got a full time job and they're they're looking for a way to get into commercial real estate, maybe they started like brian did and you're starting to invest in the deals and you're, you know, still have another job, you're just looking to passively invest your money and pay attention looking to get into the game or or something similar to me where you're actively involved in commercial real estate through some sort of employment or working for another company or your broker and there's a culmination of all of these experiences. But what would you do different knowing what you know now then, Yeah, I'll start, I have the longest journey. Um I would say that the number one piece of advice that I would give people is depending on your goals, I wanted to make a lot of money and I wanted to quit my job and the fastest way to do that is going to be commercial real estate.

So, you know, I'm not saying you can't go ahead and buy single family rental homes uh and learn through that process, but from day one I would be focused on getting in the commercial real estate side of things as opposed to single family homes or condos or or whatever other avenue you can get into uh you know, cash flowing, multi tenant, retail, multi family even uh some warehouse office industrial that are cash flowing, I would recommend that and I would, I would push myself if I was going to do it over again to learn about that first and not think because I, when I started I was thinking I was gonna buy, you know, my first journal that was gonna make me 200 bucks a month in cash flow. And in my second that'll be $400 a month. And my third, Well, I mean just think, how many of those do you need to do in order to replace $50,000 of income a lot? You know, if you're, if you're making 200 bucks a month, that's 2500 year, we need 20 houses, all cash flowing at that level and maybe you're making $400 a month.

Okay. It still takes, you know, 12, 15 houses, uh, to get there. And for me, I didn't want to make 50,000, I wanted to retire early and make a million dollars a year passively. And so that would be my number one piece of advice is to focus on how to get into commercial. Yeah. So I've got an opinion on that. I, I think the difference between commercial and residential is what people are exposed to and what they think is possible, right? So people don't do things that they don't realize is possible before they started to do it because they didn't know it's possible. So especially in the part of the country where we're from a lot of people's retirement is, hey, I've got five to a dozen to 20 rental houses that are paid off for almost paid off for cash flow $500 a month apiece or whatever It's just, it's easy to wrap your head around it so to speak. And I think that's a lot of value we can bring the podcast is is just shedding the light on how simple some of these commercial transactions can be and how similar they really are to one of those residential real estate transactions. Because if you can get your head around the concept of a fix and flip value had multi families same thing.

It's the exact same thing. You're based on a residential, you're basically buying a single tenant. You know well single tenant net lease deal, you have one tenant. It's a person, they may move out, you may lose a month of rent when they move out. That's a big hole in your operating income. But the commercial is exactly the same as a P. And L. On a single family home. It's just bigger. And what we're here to tell you is that you can trust commercial real estate to follow the numbers just like you can a single family home, there's there's no difference to them. It's just multiply it by 1000 you know or whatever. So I love that. But let's let's get more specific knowing what you know now how would you how would you do that because you were at the point in your life where you started to buy this first residential home. So let's go back there. And how would you get to that 1st 100 unit apartment complex, skipping over the residential fix and flips, what, what is your advice on how you would take a different approach or how you, I was thinking the same thing or how he's give an example of how would you get the first apartment complex, how would you just get into commercial real estate differently if, if any different way than than you did?

Yeah, these are good questions. Um, you know, once again, if you don't have enough money to buy a commercial residential is an okay pathway to start because you may be able to flip a house and and make 20 30,000, 40,000. And so those can be the seeds of buying a bigger maybe a 10 unit or, or a 48 unit or 100 unit first apartment complex. Uh, but what I'm suggesting is even if you're gonna do that, start reading books on how to buy commercial real estate, consider getting a job at a commercial real estate firm, uh, maybe an investment shop like uh, you know, some of these, these capital firms that, that that go out and buy uh, you know, assets by multi family, get a job at one of those, you get your broker's license, you know, just just try to force your way into the game and start learning that looking for mentors, find someone that that does what we do and, and offer to work for free, offered a bird dog properties. You know, just try to force your way in because it's so lucrative once you learn the game. And I know it seems uh complicated when you're not in the business, but what I'm telling you is it really isn't that difficult.

The P and Ls are pretty simple on a multi tenant retail deal. Pretty simple. Multi family is a little more intricate, but still, uh, if you talk to a good broker in your area, they're gonna, they're gonna have how to underwrite multi family deals and they can walk you through that in minutes, not hours. And, and so, you know, there's, you know, average expenses per unit, uh, per year, three, let's say $4000 or $5000. And insurance is about $400 a unit per year. And taxes are based on this formula and you can just start breaking it down before you can evaluate those. Yeah, no, I think that's great. And um, you know, obviously I get taylor, you know, I'm constantly getting ads on, on linkedin and indeed all of these job searching sites for analysts, right? And I see everyone hiring an analyst right now and a lot of people don't necessarily know what that means. But this is the job for you. Um, if you want that job, an analyst is kind of like the assistant to the broker, You might say somebody who's underwriting the deals, building the performers, putting together the package. They're going to say, hey, use all of this, all of this information, shove it in that model.

Send me that outputs and, and let me see where we're at a great experience. It would be fantastic experience. And, and, and it sounds like what we're coming down to is the experience and the knowledge just know how to do commercial, figure out as fast as you can. Hey, I would do commercial and I would try to learn more faster in that, in that realm. So let's ask brian, because you have a little bit different, you worked in industry a lot longer than I did And you came into the space from an investor point of view, would you do anything different, uh, than you did coming in as an investor? Yeah. Well definitely I would do two things different. Number one, I would do it faster earlier in life for sure. I didn't invest in my first deal until I was 50. So I, you know, I'd recommend, man just think if I had a, if I had started in my twenties, you were investing in the stock market, investing in the stock market? But let me, let me, let me say this to people that are listening, you invest in the stock market for 35 years, what did you like? Did each year? You just learned a lot more about how to be invested in the stock market. You know, you learned nothing because you're letting other people didn't know how to do it well and you're you may be learned what I learned is that you know all of these mutual funds are about the same and you're gonna make about 8 to 10% on your money a year and you're gonna have some years, you make 20 and some years you lose 20.

But that's it's interesting point that you're not learning anything just investing in the market. I'm not saying don't do that, put money in the market but you should all also be looking for alternative investments and some that that produce more of a passive income because it's really hard to quit your job when your money is tied up in the market, especially if you take it out, you're gonna get taxed or penalized and so real estate is tax leverage passive income and just think if you are getting enough passive income then you could quit your job earlier. But but at 401k. Or a mutual fund isn't gonna do that for you. There's not a lot of passive income in stocks and bonds. I mean yeah stocks are gonna pay some dividends and and bonds are gonna pay you a small percent. You'd have to have a lot of money invested to you know to make enough for a living to to quit your job. So like you said, I didn't learn anything about stocks, maybe I wasn't as interested in stocks and I could dig in. Um, I can tell you that commercial real estate and investing in commercial estate, I'm really interested in it and I'm learning all the time and I'm learning useful things. So did you, would you say that your choice to start investing in commercial real estate helped you be ready to, to, to be an owner years down the road?

Yeah. Yeah, definitely. Because by, by getting in the game and just be an investment, an investor, I made me interested because I had a lot of money, right? If you buy a stock, you can put $100 in stock, but you're putting thousands, tens or hundreds of thousands, uh, as an investor in commercial, his state typically. And so, you know, maybe you're just a little bit more interested in what's going to happen with that money. And so it made me dig in. Um, I would look at, you know, you guys, I start with precision or, um, and, and so you guys would send out some of the financial packages and so it, it made me want to read those and, and learn from those for sure. So, and then, okay, and then the second thing I would do is, again, it kind of has, uh, to do with being involved is I would get more involved maybe than just being an investor, if that's all people want to do, that's fine. But I wanted to do a little bit more than that and you and I didn't, we really didn't start criteria until I was 60. So, um, again, I wish I would have started earlier and um, both as an investor and, and then getting deeper into the game quicker earlier in life.

Yeah. So there's no doubt that some investors and some people by nature ask more questions and, and inherently better questions based on where they're at in the process. Right? But there's investors who try really hard to understand. And, and you can tell in the beginning, the questions are just, okay, let's, let's walk through this. I'm not sure you understand the full grasp of this. And then just as we go, it's super interesting to me seeing on deal 345, how the questions evolve. You know, they start to use the lingo a little better and, and it's just, yeah, you can tell they're learning and paying attention because at the end of the day, it is a lot of money. It is a lot of trust. It's a long commitment. It's an illiquid commitment by illiquid. I mean, there's not some marketplace or some, some market where you can go sell your shares to somebody who you don't know, you can't, you have to wait until I tell you, I'm selling it and I send you your money. So it's, those are the reasons, I think I dug in quite a bit more than I did for stocks and trying to learn about stocks and bonds, but again, just to kind of circle the theme back here, it seems like you got to a certain point in your experience and education to where you finally started to say, hey, this is an extremely powerful investment, the more I learn about it, the more powerful it seems I need to do what I can to get more involved.

That's exactly what I thought. And also I saw it as, as I started to dig in, I saw it as a, as a way to quit my regular job, my engineering job that I had for 35 years and so it took me that long to, you know, I hate that, it took me that long, 35 years to, to figure all this out. So that's what I'm saying. I hope that people that are listening to this decide well maybe they want to do it a little quicker in life for sure. Now let's go to Brandon, you have a different experience. You started as an employee with a real estate company. You may not, you say, you may say, I don't want to do anything different, that this was a perfect avenue, get on with the commercial real estate company, learn everything I can wait for. The time is right to strike out on my own. Yeah, you know, there's a couple of things that that I would like to do that, you know, maybe could have liked to do differently. I, I personally love experience and and seeing how other people do it, you know, it's kind of fascinating to me just talking to other commercial real estate sponsors and figuring out how are you structuring your deals, how are you structuring your deals, how do you pay a preferred return, What sort of split do you do after this, where are you getting your money from?

So for me, it would have been fascinating to go to some massive, you know, multibillion dollar outfit and just see, you know, commercial real estate at scale, like a black stone or something new york, that would have been amazing and I would have been invaluable experience to just get those connections with these two big guys from Oklahoma and now that was a great experience and that, that was at a scale that I didn't even think was possible in my head and, and you know, the more you, the more you get immersed, the more you realize you're, you're like, you know, we're all just ants on the world, you know, we're we're insignificant and we don't matter, we're nobody, but it would have been cool to go work for, you know, one of the biggest best would be cool jobs out there, it would be cool, but uh, you know, I've worked for big companies and you only see a small portion they tell you what they want you to do and you don't really know anything else that's going on or very little about what's going on now if you bounce jobs around within the company smaller will give you access to the higher ups at the company and you will get a better sense of how the machine works.

So there's you know, there's my ignorance of play right there. I haven't worked for big companies so I, I just don't know what, I don't know. And then the next thing that was, that really blew my mind when I heard it is I was listening to Grant Cardone and he was talking about making a million dollars and for me, you know I'm I was I'm from a small town in Oklahoma called Owasso, you know it makes tiny town, daytime population of 20,000 people, tiny little town. So for me the idea of making a million dollars was this, you know like how how do you make a million dollars? Do you, have you ever heard of somebody making a million dollars? What is, what kind of house they live in? What kind of car do they drive? What you know, what do they look like? Who is this guy or girl making a million dollars? And then I heard Grant Cardone talking about it and he said everyone is gonna make a million dollars, you could work in Mcdonalds for your life and you'll you'll end up making a million dollars, it'll take you so much time and then I started to really think about time, you know and it was like I don't I don't want to make a million dollars. You know everyone's gonna make a million dollars.

That's it wasn't I didn't think about it that way. I want to make a million dollars as fast as I can. I want to make a million dollars in 10 years and then I want to figure out how to do it in five and then I want to figure out how to do it every year and then I want to figure out how to do it every month. Until it's the point where I hate thinking about money and it sounds counterintuitive, I don't want to think about money. You know, I I just I I want to be in a position in my life where you don't have to worry about money, I don't want to worry about money. I just want to be able to live my life hey where do you want to go to eat? I don't know. Salmon sounds good. Let's go eat salmon. Where do you want to go on a trip? I don't know, Telluride sounds nice. Let's go to tell you. That's the biggest gift about this gig is uh just like if you had infinite amount of years on this planet, time would become less valuable, right? The only thing that gives time, its value is its finite nous we only have a certain amount of it. Well, same with money. Money is only a big deal when you have a limited amount of it. But the more money you make, the less money means and the less you have to think about it because you can do whatever you want with money and you know, let's say your car breaks down or you have to redo your roof or whatever and you just have enough money to cover it.

So it just means less and you think about it less and pretty soon you eliminate the money problem from your life. I don't know where I was going with that, but no and inflation and I wouldn't say it's just, hey, I need to do this differently because I'm already, you know, I feel like I'm grabbing life by the horns here. But you know, you have to do things fast. I, you know, I have, I have three Children and I'm 26 you know, that's that was that was very fast and I'm not saying you need to go have a bunch of kids when you're young. It's not my advice at all. But me and my wife are starting to really embrace it to the point where it's, you know, we're getting all the, you know, hard, difficult stuff out of the way early and by the time me and my wife are 40 I mean we're gonna have so much time, kids will be out of the house for you. I think what you should have done instead of starting in commercial real estate at 17, you should have started at like eight or nine or something because you think I missed you think about my oldest son is 15 and he's almost to the age where you started full time in commercial real estate. I was picking up your trash man, yeah, not mine tenants so another so real quick.

Another one that I would say and what I would do differently when I started in commercial real estate. Yes, I believed it but I didn't have all the knowledge and then a few years in recession, the great recession hit and it really, you know, jolted my sense of what was possible in commercial real estate because the market took a dive, properties weren't performing quite like they should be and we were just surviving and it really kind of skewed my thinking about commercial, I always believed in it but I I undersold the future value of commercial real estate, the appreciation and value the growth in rents and all that. And if I could go back to my future or my previous self, I would, I would want to convince them that this is actually the best vehicle that you can be in. It's it's so powerful and an example of that is when I, you know after coming through the recession when I first started taking investor money, I literally thought like, okay, maybe this is risky, maybe one in four of these aren't gonna work.

I want to tread with with great caution your losses there. Yeah, if you're lost out there and then we did one and it worked just like we thought just like the performer and then we did another one and it worked just like we thought and then another one, then I'm four in, we haven't had one fail, then I was 10 in, we didn't have one fail and then I was 20 in, we didn't have one fail. And so you know maybe it's that I'm getting a little better but I think it's really that as long as you stick to solid fundamentals, uh, these properties and commercial real estate should do what you think it's gonna do, you've evaluated the market, you know the market has this much rent growth, you know, the occupancy in the sub market is this and, and so trust the process and trust commercial real estate to do what it's supposed to do and, and I would say to buy early and often. Yeah. So I mean I remember back in 2014 to 2018 we've done several of of the multi family value add um fix and flips, you know if you wanna call that over the country all over the country at this point and and they were doing great and we used to tour apartments that were for sale and and just talking about 40 1000 door it'll sell for 42 if this doesn't work or you know this, this rent can't go any higher.

We're not gonna get this rent growth, We've gotten that rent growth and forever and it was just our modest assumptions like this deal is not gonna work without some sort of massive rent growth and it came right, it's here and all of those apartment complexes are selling for double. It's sickening without having done anything. They didn't, they didn't power washing them, they didn't put a new appliance package and they didn't, they didn't fix the wood rot. They literally did nothing. They was like, man rents more expensive every month and it was for two years and now all of a sudden our property doubled. Now understanding the real estate cycle, which there are graphs that you can look up online and articles that you can read it is cyclical. So we're talking coming out of the recession in oh 9, 10, 11 kind of bottoming out. Then it starts to heat back up. Now people are getting in. Now people are making money then that money gets 10 31 and that money gets 10 31 and it heats itself up until you get a frenzy, which is what we had the last year to make less on your money every time you 10 31 it because you're playing with funny money and you haven't even seen it, you can't see it when you have 10, 15 years of stock market run and everybody's feeling rich that's gonna drive the prices straight through the roof.

Now they're raising interest rates and we're gonna get a little bit of a recession coming in that's going to depress the market some you don't wanna be too early and buying into the recession. But as the recession sets in, uh prices will either stabilize or come down that then it's a great time to buy again. But it's not a bad time to buy two years from now, either after it's bottomed or four years until you hit the next frenzy where everyone talks about surging prices, everything's going crazy. That's when you need to start backing off. Uh And so understanding those cycles will be a good a good avenue for people when they're getting into the game. It's just be familiar with the cycles and it's not unseen to the stock market cycles. Good point. So I have another question less to do with commercial real estate. But when, when you guys bought Callus, right, and sold it to Honeywell, is there any, you know, nuggets in there that you would have done a little different because that was a major acquisition and disposition of a big company. Oh, I don't know that there's anything different. Uh All I can, you know, all I can say is when you're buying and selling a company, it's, it's not too much different than than commercial real estate, right?

I mean you're trying to find a good value and you're trying to do a value add and then you exit at the at the right time. So it's really, it's really similar. Do you feel like you guys timed the exit right? Or do you feel like you could have got a little more held on? Well we got lucky, we timed it exactly perfect. Uh as a matter of fact it almost was a month too late because and and and the recession was starting is when we closed and so um but that's just luck and and like Joel is talking about the cycles of either stock or commercial would say there are cycles, but don't try to time them. Exactly right, get in when, when it feels right and get out when it feels right because you're not gonna buy at the bottom and you're not gonna sell at the top. Um Now we unfortunately we did sell at the top, but that's not gonna happen very often. Not everyone's I mean I'm not as smart as I am, so that's that's a good point. So buying and selling commercial real estate right? Um selling a lot of the times from what I've seen an observation is a lot of times when I go to sell an asset, I really don't want to sell it, I sign some value in my head, I'm like man, if I were to get that, I'd probably be happy, I'd probably sell then I'll typically add, you know, 5% 3 to 5% on it.

And I'm just like, let's just start there, let's start a stupid number. They really want to buy this, we'll sell it and we've sold a ton of deals that way. I mean a lot of deals by just saying, you know, it's not really for sale, I'd like to keep it some value, let's go higher, Send it out and let's just see what happens. Yeah, some piece of advice I would I would give is that I would say sell less unless you're, you know, maybe four months ago from right now and before interest rates started going up and the market was just so crazy. Yeah, maybe that's a decent time to sell. The thing is though, you're not, it's gonna be hard to replace that. That because if you're getting a huge huge number on your property, that means that other people are charging huge numbers for their property. And so I would say, my piece of advice that I would say is go into real commercial real estate thinking that you're gonna sell less and when you have value increases, just take advantage of them through refinancing, it's tax free money, There's no there's no tax that has to be paid.

You keep the assets, so now you're paying down the new mortgage that you got and you get a majority of the money that you would have received from a sale only now you're not forced to go buy within six months. It's tax free money that you can just sit on and wait for the right opportunity. So I'm not I'm not saying that selling there's never a good time to sell. I'm just saying you can usually take advantage of a situation by a good refinance. All right, well I think that was a good show. It was Yeah. Alright well make sure to check us out on how to invest in serie dot tv. It is super important that you get on the investor list. That is the only way you will get in one of the real estate deals. You want these checks every quarter get invested in the deal will send you checks a million dollars this quarter million and and easily to to I mean we had 50 we have more than 50 checks. So I mean hundreds of checks going out every quarter for a million dollars. And they were literally people that we knew colleagues. We worked with, people that listen to the podcast and signed up our investor list which they're starting to be a decent amount of Actually anyway, go to the website, the criterion fund dot com precision equity dot com.

How to invest in serie dot tv click the link. It's super easy name, phone number, email address and then you're on the list anyway, we'll see you guys next week on how to invest. In theory

Episode #070- If You Could START OVER in CRE, What Would You Do DIFFERENTLY?
Episode #070- If You Could START OVER in CRE, What Would You Do DIFFERENTLY?
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