How to Invest in Commercial Real Estate

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Episode 113 - WHEN Are You Ready to Invest?

by Criterion, Braden Cheek, Brian Duck
July 31st 2023

Today hosts Braden Cheek, Brian Duck and Joel Thompson discuss how to know when you're ready to invest in a commercial real estate deal.

Time Stamps: 00:00 - Introduction 01:15 - Details abo... More

All right guys. Welcome back to another edition of How To Invest in commercial real estate. We are excited to start our show today but we have some updates. Uh Braden, what do we got going on that? We need to tell him about. Yeah, so last week we talked about Grand Perry and unfortunately, I didn't have my notes and we didn't have the pitch deck finalized. So I felt like I kind of fumbled through it. So I wanted to go through that a little better. We are building a 10,000 square foot pre leased early childhood education uh center. The, the brand is the learning experience. Um We're building one of those in Grand Prairie. I just got back from a site visit. It is, I would like to think a great location between Dallas and Fort Worth um Marine Creek. So kind of in between Arlington and Dallas. So Arlington a little west uh then Dallas and it's kind of, you know, just in between them. I don't know if it's a mid city or not. But anyway, um really awesome opportunity. We launched it on the investor list. When did we launch it? Two days ago, two days ago and it, and it was immediately uh sold out.

Yeah, 48 hours, it was sold out very fast. So if you got involved in that project, um we are excited about it. Um We see a lot more of these coming in the pipeline. I know for sure. We have 33 more possibly four more learning experiences. So if you missed out on this one, there's gonna be another one right around the corner in a very similar market. 18 to 24 months, 18 to 24 months, we're projecting a 24.67 irr to the investor to the investor um which is a 1.39 equity multiple. And guys just remember uh uh most of you are invested in the market, we, you know, average returns in the market are 6 to 8%. That's what they tell you in school when you're underwriting. This crap is, you know, 6 to 8, find a good mutual fund. Yeah. And you know, we, we've done the comparison on previous podcasts. What is the difference between eight and 12 and 16 and 20? Ok. And here we are, we're offering 24. Uh it could be higher, it could be a little bit lower. But in any event, if you can get 20% compounding on your money, uh year over year, you will be wealthy over time.

Uh It builds fast, uh 20% return, you're doubling your money in less than four years. Uh, so not to mention the, the tax advantages on top of that. Right. Right. And, uh, you know, if you use the rule of 72 which we've talked about before, uh, if you're getting 6% returns, it takes you 12 years to double your money. And so after 24 years you've got, what, four times your money and if you're getting something like a 20% return and let's just use 4%. 0 my gosh. Uh you, you're double in four, you're four times in eight, right? You're eight times in 12 years. It just blows the returns out of the water, do the math for yourself. Set up an Excel spreadsheet, put in the returns and just see how big of a difference 20 to 24% makes compounding versus 6 to 8%. But anyway, uh what else do we have today that we want to talk about? Yeah, there was a uh real quick. There was a lot of people involved in that because I, I think there's 15 different investors. Um There's investors who invested their first time in that deal.

There's investors who've given us their, you know, 7th $25,000 check. There's investors that have given us hundreds of thousands on that deal. So I really want to encourage somebody that hasn't done it to get involved and, and maybe feel like you're asking a dumb question but try to get involved because everyone in the spectrum here on the investor list is getting involved in these deals at, at whatever amount is right for them now. Yeah. Yeah, I had another exciting event today. Uh We working with the city of Owasso in the Chamber of Commerce. We had a ribbon cutting for the uh Owasso co-working space. We also leased the last available office. Uh So we're excited and it's the only uh co-working space available outside of uh Tulsa downtown Tulsa. Um As far as Owasso goes. So we hope that that really the nicest co-working space in that nice, nice one in. We actually got a lot of really good feedback from the, the ribbon cutting day. I know for sure. We got one sign up just off of the group of people being there today that, that are on the chamber and just kind of came to hang out. It's like everyone knew it was a co-working space they were going to and then they get there and they're like, oh, this is nice.

I like, do you guys think, I mean, come on, we had a bunch of people say they, that they knew people that needed space. So if you are working out of your house, if you are an entrepreneur that's starting up a business and you don't want to go lease a bunch of expensive office space, the the coworking space can be a great opportunity. It's affordable. It offers free wifi. It offers coffee. It has a uh what am I thinking of? Um meeting space, say it, conference room, conference room. Yeah. And uh so come check it out if you're in the Tulsa area and hopefully we can continue to fill that up. That'd be great. So um another big thing happened yesterday, I mean, it wasn't big, it was kind of predicted. Everyone kind of thought they knew what was gonna happen, but the fed raised the interest rate, another quarter point point is now prime is now 8.5. And it in what, like 12, uh it hasn't been that high uh since 2001 coming out of the dot com bubble of the late nineties. That don't you remember that dot com bubble was three? I think I remember you lost a bunch of money.

Uh All right. So 11 more thing before we get into today's topic, we're, we're in Owasso. Um There's been uh we've done two different, three different developments in Oso, but most recently we did two multi tenant retail deals in Owasso. So I just wanted to talk about the pipeline. We get a lot of questions about what's coming next. I just missed this deal or I love that deal. I need to get involved in another one or relationships ranking everyone wants to know when the next deal is. The short answer is we don't really know sometimes when the next deal is because the the timelines are fluid, but I can speak to what we have in contract. And recently, we just had so much success with the help of the shop company, uh brokerage group out of Oklahoma City and several other partners involved on the deal. But we have tenants lined up like crazy. So we're going to continue to develop those retail spots in was so you can anticipate um one of those, the first one coming in September and the other two before the end of the year. So lots of opportunity there. Fantastic real estate. Um On 96 and Garnett, I'm a little partial because I'm from Owasso. But if you guys are in the market, go drive 96 and Garnett uh Owasso developments, we have our Owasso one development going, we have Owasso two up there and now we're buying subsequent loss uh kind of coming off that hard corner.

Uh We've got some great loys from some national retailers. It's, it's gonna be a really good opportunity. Anyway, all the updates I'm done. Ok. So today's topic. Um you know, uh I had a wonderful family reunion this weekend and I was talking to some of my relatives about uh maybe potentially investing. And then Brian and I often get questions from uh people that sign up on the investor list that are maybe new to investing and they say, hey, what is a good time to get involved in in commercial real estate investing and how much money do I need to invest in commercial real estate? And so we just kind of were brainstorming, maybe it would be a good idea to just give our thoughts on kind of when are you ready to begin to invest in one of our deals? And we think we have some parameters now, you don't have to listen to these parameters. You know, these are not set in stone parameters. If someone asks me, this is just the advice that we're gonna give you as far as what you need to do to take care of business before you're willing to risk your hard earned cash into one of our deals.

Fair enough. Yep. Yep. Sounds good. Super loose guideline. Everyone does it different but don't get offended and if you do make sure to leave it in the comments so I can leave a funny reply because I, I'm go, I'm going to obviously commercial real estate has uh plenty of risk. Although we've never lost investor money, it's always a potential and we never want to lose sight of that. And we want people to go into our deals with their eyes wide open that hey, these guys have a great track record, but on any given deal, on any one deal, something could go wrong that could cause them to lose some or even all of their investment. So, Brian, what's number one on the list uh to get done before you can consider investing in commercial real estate. So I'd say number one is to have some emergency cash, uh, available for things that come up. Whether it's, uh, you know, car repairs or, or whatever, you know, financial experts would say what, maybe 20% of your annual income or, or maybe they just set. Uh, I've heard, I've heard six months salary, six months of take home pay. It's an, it's an oh shit bucket, right?

Like, oh shit. My ac went out oh like you just had a transmission go out in a, in a car or something. Oh shit. Like cars. Uh you know my pool pump went out. I needed, I needed a roof. I need to like get this like a million. I don't know if it's just me but I have to buy new tires on my car. You know, that's, that's way too much freaking money. So, and the, the important part about this is we, you know, commercial real estate is an illiquid investment super. I it, it takes time for these investments to mature or to get developed. And so you can't just say, oh man, I had something go on, I need my money back. And so what we want is to make sure that you have excess cash on hand for these types of issues. And typically what happens is when people don't discipline themselves to have an emergency cash position is when those things happen they do desperate things to take care of it. Uh They, they may be forced to sell uh a good car that they shouldn't have sold for a loss. They may go to uh you know, a payday loan, they may take a loan from their 401k and we don't want any of our investors to consider any of that uh because those are negatively impacted uh financial decisions that that'll hurt you down the line.

So what, what hearing generally, let's simplify this. A touch is a general sense of financial stability at, in, in the home life. And so number one, I picked an arbitrary amount given your situation. Could it be a little more or a little less? Yes. But we think $10,000 in your uh bank account of emergency cash that you don't need today. That's step number one, a lot of people that's gonna be a lot bigger number. I just, I think a lot of people will be bigger than that just out of worry and fear of uh you know, I don't want something like that to happen. I, I'm, I'm scared of, of bad things happening. I, we keep excess cash in all of our properties accounts because bad things happen. So for a lot of people that's a lot bigger number, but $10,000 I would say is, is definitely the minimum step one emergency fund of at least $10,000 in the account. Uh What's number two, Brian, what after they get that, what is the next thing they need to make sure they've taken care of before they come to us and say I've got money to invest. Well, I'd say credit card debt is number two, right? Because, um, you're gonna be paying mid twenties interest on, on credit cards and that's, you know, that you, you can't write that off.

So, um, if you, if you go try to find an investment for 25% you're gonna have, you know, the only thing you can do is maybe real estate, you're just, you're, you're not gaining anything, right? And you're paying taxes on that. So great point. So if you have credit card debt and you pay that off, it's an instant, you know, guaranteed 25% return or 22% or whatever the interest rate you have on your card is. We're talking about carrying a balance, right? Like everyone uses credit cards for the insurance, whatever, if you're not paying it off at the end of the month and you're carrying a balance where it's charging you interest, you're not, you're not ready. Yeah, you, you, first of all, you don't understand, credit cards were made for free points, not, not carrying balance. So step two is eliminate uh all credit card debt. You're not ready to invest in commercial real estate if you're carrying balance on credit card. Uh, so go ahead and pay those off get that guaranteed return by saving that interest, we can't offer guaranteed returns most likely. And so, uh, you know, I think it's a great, uh, second step and a lot of these deals like the Grand Prairie Deal we just talked about, that's, I ideally exiting in 18 to 24 months, maybe a little sooner, maybe a little later, but generally 18 to 24 months.

And it's not paying you anything while it's invested. Whereas a credit card is charging you every single month. Right? So there's carry costs associated with that. It's not like that. You can just defer that for 18 to 24 months. I'll pay it later. That gets expensive real quick. All right. What's number three, number three, I'd say is if you have any large loans out on cars, boats, any kind of expensive toys, a va v whatever. And this is gonna be a little controversial. I, I agree. Uh, some people will say, well, my car debt is, you know, back when interest rates are low, I got it and it's, it's 2% fixed. I have a loan on my car. And so there, there's gonna be exceptions. But what I would say is if you're carrying, if you're carrying a balance on a depreciating asset, then you might not be ready to start throwing 25 50 $100,000 at uh commercial real estate investments. Because I mean, if you have, if you have debt on your car and let's say, like you had, what happened to me and the engine blows out and you, you owe $15,000.

Uh, and you're still, you still owe 30,000 on the car. Uh You may be upside down and you may be forced to make a bad decision with respect to that car. And, and so if you in, in boats, you know, once again you're paying on the use of that boat, the boat is going down in value. And so what we see is if, if you really are in a position to be throwing money at speculative commercial real estate investments with us, we'd like to see all of those liabilities kind of buttoned down. And if you can pay all those off first, you're in a safer financial position to be able to take the risk to invest in commercial real estate. If you're buying a, a new boat with financing, you're used to taking a lot of risk because I've never seen anything depreciate faster in my freaking life boats go down a mortgage on your home. I'd say that's probably ok. Um, a, a long term fixed uh, mortgage on your home with interest that is depreciable against your tax bill is ok. Another one that might be ok is student loans that are maybe at a low interest rate that maybe you can, the, the payments are really low and, and the, the rate isn't gonna change on you Uh, I'm ok.

Maybe keeping that, but anything else that's going down in value, I, I would say you need to consider why you're not in a position to pay that off. You know, before you invest with us in commercial real estate. I, if you say, well, I don't have the money to, to pay it off. I only have the money to invest in the speculative real estate investment. I, I don't, I don't think you're quite in a position to do it, to do it as freely as you should be able to. Yeah, you're, you're living on a bit of margin, let's say. Um, so, uh, that was that three, that was three, number 44, I would say is, um, before you invest with us, I would say that you want to max out on, uh, any kind of tax deferred retirement plan that you might have available through your job. Right? Because at least to the matching part, right? Because that's a, that's a, a guaranteed high return for sure. Uh, higher than we can give. Plus you get to invest in pretax. It grows without taxes and then you can take it what tax free at 63 or you pay taxes on it, you pay taxes on or you can do a Roth and it's an after tax.

And so the taxes are prepaid, you know. So think about this, uh, everyone, if your, if your employer is offering a match, let's say it's 50% up to like up to 345 or 6% of your salary. We, we can't give you a day 1 50% return, but that's essentially what you're getting with that money is you're putting it in and you're getting an instant 50% return that gets to grow tax free. Which is a lot. I mean, if you take a $60,000 a year job, that's maybe 1500 to $2000 that your employer is investing into your retirement account for you, that some of them match 100%. So, I mean, that's right. It's just, just about the best deal out there. Another, another great advantage to maximizing those accounts is they are creditor free, right? Creditors cannot get to those accounts. Um And so they're gonna be there as a safety net for you. Uh Long term for retirement, you got to put it in tax free. It's free from creditor uh assault and you potentially get 50 or 100% day one return. Let, let's talk about what we're doing with that money too because a lot of people ask us if we can take their retirement account money.

There's lots of different types of retirement accounts. So I, I used air quotes on that but yes, we can take self directed retirement account money. So if you have an employer that is investing in, in or co matching in your 401k and that's growing once you build up, you know, 50 100,000, maybe a little bit more in that account, you can start self directing that over into private real estate deals like ours, ours or, or something with somebody else that's similar. Um, a lot of people just don't realize they can do that, but I don't know that you can do that when you're still at the employer. Well, it has to be self directed. You could, you can switch over to a self directed. You could just, I don't know that all employers uh offer that. Uh So we, we, it's a disclaimer if your employer offers you a self directed option maybe. But a lot of times what happens, they don't offer that. But when you leave that job, you can then uh put all of that retirement savings into a self directed Ira from that 401k plan and then you're ready to go to invest with us.

So you're, you, you're still gonna have the option to use that money down the line. But we still think it's a good idea that you're maximizing your 401k at least up uh to the matching that your employer provides you before you're thinking to come invest with us. Which is what like I, I haven't read the greatest one, latest one, but 22.5 1000 something along those lines. The max you can put in is, is roughly 22.5 1000. Typically employers will match um up to 3 to 6% of your, your, your salary. So again, to be clear, we're doing 100% of what your employer is willing to match, not necessarily maxing out the 401k. That's right. Ok. Ok. Um All right. So that's, that's 44 things that we think you should be considering before you're saying Joel, I want to get into a commercial real estate deal. Um What, what's the next? So, so, ok, you've got these four things under control. Now, you think you're ready to invest? We need to talk about how much money you should have available at your disposal to, to invest over on top of this $10,000 or whatever emergency fund, you've got all these things in order.

So our minimum is $25,000 right? So if you have $25,000 let's say someone has $25,000 to invest. Would, what would we tell them? Would we tell them? Ok, give me the 25,000. Well, uh first of all, I feel like we should, you know, put a disclaimer out that nobody's asking these questions to investors. Let's, let's get that right. I frankly don't have the time or, or effort or, or feel obligated to dig in to, I mean, it's kind of nosy, right? So it's not like we're going through this asking qualifying questions like how much money do you have a good point? I'm never gonna ask somebody that has 25,000 to invest and say, hey, well, what's your credit card balance? What kind of toys you got loans on? No, we're not gonna do that. But once again, the question gets asked to us a lot and so we just wanted to make sure we give you guys the best possible advice to set you up for success. That's the whole point. So anyway, good point. Ok, so back to my question. Um, if somebody that's listening has covered all these four points and now they have $25,000 to invest as a minimum to one of our deals is, should they send us the $25,000?

Probably not the best idea, you know. Yeah, they're, they're not gonna be diversified and you know, maybe having a 401k that, that helps them get diversified. But, but putting what's left in one deal to me isn't diversified enough. I'd, I'd like to see someone get, I, I don't know, maybe save up 50,000 and get in two deals. I'm ok with two deals, but putting everything in one deal. So let, let's, let's use an example to maybe answer the question if, if you went to an investment advisor with all all of your saved money that you're looking to invest and he simply suggested, yeah, give it to me. I'm gonna put it in the market all of it today and we're buying Apple, you know, what we're doing or, or Tesla or maybe something a bit more emerging, you know what I mean? You wouldn't do that. Nobody would suggest that they'd say, ok, let's, let's allocate this in the market over a period of time over a bunch of different stuff. Here's how we're gonna wait. Here's what you can expect. Blended risk profile, blended return profile, different states of companies, you know, some are, are slow and steady and stable, some are emerging and growing and have potential upside but maybe more associated risk.

It's the exact same thought process guys, we're trying to allocate money in the market over a period of time. So you don't have just like w why let's break that down? Why would you not want to take all available funds you have for investing and, and, and get it into something today instead of over maybe a short period of time over because, well, for one reason the market goes up and down, right? So you may be buying like if it was stocks, you may be buying it at the height of the market, same in same in real estate. If you drop the next day, you wanna kind of dollar cost average over a period of time to make sure you're taking some of that risk out. Yeah, and it's the same, you know, with commercial real estate, we have deals that have varying risk profiles and there's never any investment that's 100% guaranteed things can go wrong. Uh You know, we've had uh issues with tenants vacating after we purchase, we've had tenants with loans not going through the way we want them to. And so all we're saying is if you've worked so hard to meet all these steps and you've saved and saved and saved and you have just 25,000, you know, can you put it in one deal? Yes.

But we don't recommend it because once again, it's your, all your eggs are in that one basket. And we, we would love to see people in a position to invest in 234 deals to diversify that your chances of hitting that 20% irr in three out of the four really good. And then you have an opportunity where if one doesn't go well, uh you're not out of luck. And, uh, and so that's gonna be a little bit discouraging to some people. They may say, well, man, it took me, you know, so long to invest up this 25,000. And that's kind of the point is if it takes you years to, uh to come up with that 25,000 and then we're gonna put it in an investment. What if it goes wrong? What if by chance you lose half of that investment, right? How emotionally are you gonna be able to handle that? Are you in a position to write that off? And no worries. And, and so what I'd rather see if someone does only have 25,000 over and above all the other steps we've gone over is if they said, hey, I've, I've got this 25,000 today, but I'm because I paid everything else off, I've got 5000 coming in a month in another five months.

I'm gonna have another 25,000. And so I'll be ready to do my second deal. That's a better position than to say, hey, I'm saving 500 a month. It's gonna take me, you know, another four years to save up for a 25,000. That's a different story. So it depends on your situation. You may say, hey, I, you know, I got this 25 but I'm about to sell some stock and I'll get another 25 or another 50 I can do the next three deals. Uh That's the position we would rather you be in because once again, we want to set you up for success. We don't want you to be stressed over your only 25,000 where if this deal doesn't work, you're gonna be devastated. That's not the position that we want to put people in. Uh So that's why we suggest uh maybe, maybe it's 50,000 where you have at least enough for two deals uh with us. Yeah, I mean, it's, it's your own, it's your own judgment. I mean, these are, it's, it's financial stability. It's making sure you can weather a storm, it's making sure that you understand that there's risks associated with everything. And at the end of the day when you're wiring somebody $25,000 to buy shares of their company that's gonna go buy this piece of real estate.

Like you have to at least ask the question. What if I don't get this money back? Everyone's asking that question before they're wiring it in. What if I don't get this money back? If you're not asking the question, that's what we're trying to avoid, right? Is not, not asking the question. What if I don't get this back? And if there's, there's a host of problems that happen. If you don't get that money back, then maybe we should rethink what we're doing here. Let's take that 25,000. Have it make some babies and maybe grow it to 50,000 and then, you know, come and say, hey, you know, I've, uh, or, or like you said, there's so many different examples. Obviously, we don't, we don't get the chance to ask all these pre qualifying questions. There's plenty of questionnaires and, and stuff we do ask, but this stuff isn't on there. All right. And then we had the last note, uh I think as a number five or 66. Yeah. Well, just to make sure. Ok, so now if you're ready to invest, just make sure you understand the investment, you do your research, do your homework, understand the risks. Um Don't just blindly throw the money in. Uh We give a lot of information out every time we have a deal and, and uh everybody just need to study that and yeah, it needs to make sense.

I love it when we get investors to actually look over the budget that we sent and look over the deal and say, hey, this doesn't make sense. I think this number might be a little while we like that. We want to be checked. Ok? But that means that they're actually understanding what it is that we're trying to do. But if you, if you don't understand what we're doing, then you shouldn't give up all your money, right? You really need to understand and get comfortable with the plan. Ok, guys, you're paying this for the land. Does that make sense? Does that comp out? All right, this is the building cost. What is the least amount you're gonna get? Does the cap rate you say you're gonna sell for? Does that make sense? Because you know, I've invested with other third parties and I'm not a very detailed guy and they're, they're just saying, putting these assumptions out. Well, we're gonna sell it to for cap, that's unrealistic. And if I don't understand the investment, then I'm not gonna see where the bullshit is in the numbers. So here's a great easy way to double check us go on the internet like for the, for this deal uh type in learning experiences for sale and just see, see what they're on the market for, see how many you are on the market, see what, what you think they're going for and then double check that against our exit cap rate assumptions that we have that directly correlate to the returns.

And again, we're offering this information, we're breaking it down, step by step. Here's the sales price, here's the commission, here's the loan payoff, here's this partner's proceeds, here's that partner's proceeds modeled up on different sales case scenarios. So you can follow it, right? That directly correlates to the operating agreement, which correlates with everything else, you know, so getting comfortable with that and just making sure you understand it, it, it's going to be a better ride because you're, you're educated, you know, when you're ignorant about it, you're probably just gonna worry because you don't know, you don't know what's, what could change or what could be better or what we're waiting on or what we're doing. And if, if a problem comes up and you've studied it, you're probably better able to stomach, you know, what, what came up and understand it and think, ok, yeah, that makes sense. But once this problem gets resolved then then it'll, you know, take care of itself. So, yeah, so that's, that's basically it, guys, those are the things that we think you need to consider before you're ready to invest in commercial. Real estate and hopefully this was a help helpful guide.

This is once again, it's not uh set in stone. Um You're free to do whatever you want. What we can tell you is that we are 100% committed uh to providing outsized returns to our investors with as little risk as possible. We take a lot of effort to make sure that we meet our objectives and we have a great track record for doing that, but that still doesn't mean that they're all gonna work out. And so we want you guys to have the security on the back end to where if you invest with us and the deal doesn't work out that you're still set up for success. Brian's financial stability is so important that he still buys great value, purified drinking water to make sure he has enough money to invest. And so, and why did you take one of my bottles? I have glasses with free water. See, I'm just wasting. I wanna also give a shout out to Braden's uh shirt today. That's nice. Thank you. Thank you really impressive. Anyway, guys, I hope you enjoyed the show. Hopefully, it gave you a few things to think about uh when you're considering investing in commercial real estate. Anything else? I think that's it. All right, until next time. Uh Thanks for watching.

Thanks guys.

Episode 113 - WHEN Are You Ready to Invest?
Episode 113 - WHEN Are You Ready to Invest?
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