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BP Podcast 047: Apartment Complexes, NNN Leases, and Commercial Real Estate with Joel Owens

by Brandon Turner on December 5, 2013 · 35 comments

  
Joel Owens

How do you like the idea of making double digit returns while not needing to lift a finger with your investments? If so – this is the show for you. On this 47th episode of the BiggerPockets Podcast we sit down with commercial real estate investor and broker Joel Owens to learn strategies for getting started with commercial real estate investing. From apartment complexes to NNN lease investing and a lot more, this show is packed full of tips for investors in all walks of life.

Listen to The Show on iTunes

Click here to listen on iTunes.

Listen to the Podcast Here

In This Show, We Cover:BiggerPockets Podcast _ Real Estate Investing and Wealth Building 9.42.11 AM

  • How Joel got his start… from Pizza Owner to Apartment Broker/Buyer
  • Joel’s first investment… that turned bad quickly
  • What makes an A, B, C, and D neighborhood
  • How much does it really cost to buy commercial real estate?
  • Should someone start with apartments or single family properties?
  • Where to find apartment complexes and other commercial properties
  • How to determine the value of an apartment
  • How to carry out the “Value Add” strategy
  • No money down commercial investing?
  • Carrying a second mortgage when selling real estate
  • NNN Lease Investing – How to get started with this passive investments
  • And a LOT more

Links from the Show

Books Mentioned in the Show

Dealmaker’s Guide to Commercial Real Estate: Strategy and Practice for the Intelligent Investor by Ray Alcorn

Tweetable Topics

“You have to have a certain mentality to live next to your tenants… I don’t have that personality.” (Tweet This!)
“If you are used to buying houses, apartment investing is the easiest to get into.” (Tweet This!)
“Real estate is like a roller coaster – fast lows and fast highs…with a lot of coasting in the middle.” (Tweet This!)
“Run your real estate like a business, not a hobby.” (Tweet This!)
“Small steps lead to big results.” (Tweet This!)

Connect with Joel

Example of Income Approach Math

  • Property Type: 4 Plex
  • Income Per Unit: $400
  • Gross Monthly Income: $1600
  • Gross Expected Income: $19200
  • Subtract out all operating expenses (60%) $19,200 x .4 = $7,680
  • Net Operating Income: $7,680
  • Divide by Purchase Price to get Cap Rate: $7,680/100,000 = 7.68%
  • Cap Rate: 7.68%

Example of How to Determine How Much You Can Afford

  • Cash Down Payment, 10%: $300,000
  • Seller held back a 15% second mortgage: $450,000
  • Total Purchase Price: $3,000,000
  • First Mortgage:  $2,250,000
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{ 35 comments… read them below or add one }

Brad Boone December 5, 2013 at 8:08 am

Very good info, thanks for your time.

Reply

Michael Sadler December 5, 2013 at 8:12 am

Ice. Ice. Baby.

Thanks!

I am looking forward to listening to the rest.

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Joshua Dorkin December 5, 2013 at 8:29 am

Hahahaha . . . listen all the way to the end ;)

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Michael Sadler December 5, 2013 at 4:52 pm

Haha . . . I have time to listen to it … ALL … now! :D

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Douglas Dowell December 5, 2013 at 10:05 am

Stop, collaborate, and listen….Brandon back with a new invention! Epic podcast as always.

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Brandon Turner December 5, 2013 at 10:38 am

Haha thanks Douglas! Did you listen “after” the outro music? Check it out :)

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Douglas Dowell December 5, 2013 at 11:26 am

Ohhh wow….some things cannot be unheard hahaha….I stopped the download to soon earlier.

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Jimmy Moncrief December 5, 2013 at 10:18 am

Brandon – I like the quick tip of talking to your banker!!!!

Favorite quote Josh – “The more bankers you know, the better you will do”

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Brandon Turner December 5, 2013 at 10:38 am

Thanks Jimmy!

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Joshua Dorkin December 5, 2013 at 10:45 am

Yes! Someone likes what I have to say. Thanks Jimmy ;)

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Michael Sadler December 5, 2013 at 6:13 pm

…banker &/or ‘experienced’ independent mortgage broker.

Some mortgage brokers specialize in having private sources of funds.

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Joel December 5, 2013 at 11:06 am

Hi everyone,

Yes it was a fun podcast. It went so fast. We covered a small fraction of the info due to time constraints. I like ribbing Josh and Brandon too much so couldn’t get all the info in……… : )

You can post questions here or reach me at my e-mail handle or on the Bigger Pockets forums.

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Steve January 22, 2014 at 5:04 pm

Does anyone put a NNN lease in a residential contract?

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Kizzy December 5, 2013 at 11:46 am

This was good information and insight into commercial real estate. One of my take a-ways is to find lenders now before I begin to invest and build a relationship with them.

Thanks for taking the time out to do it.

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Brandon Turner December 5, 2013 at 12:12 pm

Thanks Kizzy! Appreciate you listening!

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Kizzy December 5, 2013 at 12:38 pm

No problem. I had an idea of the A,B,C,D idea but wasn’t sure so this cleared it up for me along with some other things to think about.

Brandon, I’ve been trying to find the buy & hold calculator. Can you provide the direct link here. I haven’t had much luck with locating it on the BP site. Maybe I’m typing the wrong phrase/word.

Thanks again.

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Brandon Turner December 6, 2013 at 11:05 am

Hey Kizzy, no problem! It’s up in the links above – biggerpockets.com/calc

Enjoy it!

Michael Sadler December 5, 2013 at 6:17 pm

It was great listening to you guys for the first time!

Lots of fun!

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Cuong Le December 5, 2013 at 11:02 pm

HAHAH you guys never stop entertaining us…”and I’m Batman” (sounds more like Val Kilmer’s version of Batman; definitely not George Clooney).

The Vanilla Ice gig at the very end was awesome! Brandon and Josh should battle it out at the next convention! Joel, thanks for all the awesome tips. Didn’t know anything about commercial properties and this was a great intro to it.

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Joshua Dorkin December 5, 2013 at 11:22 pm

Thanks for listening, Cuong. I’m glad you were amused!

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Travis McCamish December 6, 2013 at 3:05 pm

Great podcast. I am an Acquisition Specialist by trade and it was great to hear another professionals take on acquisition strategy. One should also focus on the commencement and expiration dates on current tenants leases when acquiring retail commercial property.

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Amit December 7, 2013 at 5:01 am

Hey Joel,

This was a much-needed introduction to commercial real estate investing. Thanks so much to you and Josh and Brandon for educating us. I’ve got several questions which I’ll post separately.

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Joshua Dorkin December 7, 2013 at 8:31 am

No problem, Amit. Thanks for listening.

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Amit December 7, 2013 at 5:50 am

Hi Joel,

You mentioned the potential tax/depreciation benefits of double or triple net properties. Can you elaborate?

Thanks!

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Steven C Hamilton II EA December 8, 2013 at 1:30 pm

Amit,

Some of the tax benefits are the ability to cost segregate. This means you will beak apart all of the costs of the property. This would include: Flooring, land improvements, roof, non essential electrical, walls, even signs. You will then depreciate the building over 39 years; however, these other items are all depreciated faster.

-Steven

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Amit December 7, 2013 at 6:00 am

Second question:

Do you think that it’s important to have experience with SFR or apartments before pursuing triple net properties? While I’m sure it’s beneficial, it seems like triple net investments are a different beast.

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Joel December 7, 2013 at 9:08 am

Hi Amit,

1. In NN or NNN you own the building and the land so you have depreciation with the building. Typically 80/20. You also have various special loan categories such as a 467 section loan which allows special tax benefits.

These types of examples get complex so when my clients are under contract they consult their CPA or tax attorney on strategies. You can also cost segregate taking more tax write downs in some years versus others. I am not a CPA or tax professional of anything and that’s why I leave it up to them to advise their clients on that issue.

With a ground lease you do not own the building so no tax depreciation. If at the end of the primary lease term the tenant does not renew the option most times you get the building by default at that point.

2. You do not have to have experience at all to buy triple net right off the bat. You do need the cash AND have an experienced team in your corner including a broker who specializes in these types of transactions. Some do not start out in triple net because they do not have the cash to invest yet. For example you have 20k you can most likely get some kind of house but have to have in the six figures in cash to really get going with triple net.

Someone wanting passive investing, planning retirement, or just a really busy professional that wants something more than the bank is paying but cannot devote time to anything is a perfect match among other examples.

Reply

Amit December 7, 2013 at 11:26 am

Thanks so much, Joel. This is super-interesting and helpful.

Perhaps you can elaborate on the following:

a. I understand you’re not a CPA (and perhaps others could comment), but if you are able to clarify…. Here’s my understanding of one of the tax benefits of REI. With a residential property, the value of the structure can be depreciated and that annualized amount can be deducted from the yearly profits. However, if the adjusted gross income of the owner is greater than the IRS cutoff limit, the tax benefits are deferred. Is this roughly the same with commercial property depreciation?

b. Can you help me understand what happens after the 5-year or 10-year loan from the bank runs out? Do people typically refinance every 5-10 years? Do they try to pay off the property in that time?

c. How commonly do people stick to their own local area? For example, what percentage of your clients are long-distance?

d. Is it common for groups of 2-4 people to invest together as an entity? I would imagine so.

e. Do commercial real estate property values generally track with residential values? Do rents typically appreciate at the same rates historically? If so, it seems like the investor could count on building equity in the property, benefitting from the rising rents compared with loan servicing amounts, and an increase in property values.

Thanks so much for all you give to this amazing community!

-Amit

Reply

Joel December 7, 2013 at 10:11 pm

Hi Amit,

A. I hope Steven Hamilton ( tax guy ) can chime in on this. Taxes are so complex and every individuals situation is different. There are different methods for taking depreciation and different tax advantages.

B. The 5 and 10 year loan are common on multifamily. For NNN they are also common if you contact a local or regional bank. You can land loans for the full term of the primary term lease from alternate lenders. The basis points go up a little and you can get squeezed on the margins with the spread. An owner if 5 or 10 year has a plan to refi or sell before it comes due on NNN. When looking at buying we calculate out the balance left at the time of maturity to see what the debt obligation will be. You can also take some annual cash flow in addition to the down payment top knock it down further.

C. I would say about 50/50 currently. The outside clients tend to be out of the country investors or Cali and New York etc. where they cannot get yield there. I do transactions all over not just in my home state.

D. Sometimes people will invest together as a group and form an LLC or a trust etc. Some of my clients might partner if family, friends, or colleagues. Some will not at all and others will partner with a stranger if they can vet them properly and feel comfortable. It all varies.

E. Commercial is different from residential. The value of the property is it’s location and strength of the tenant whether they are credit grade and then investment grade BBB- or better on top of that. The rent escalations are spelled out in the primary term lease. True NNN you aren’t doing anything so you get the full rental increase but of course nobody can control annual inflation or what that will be year over year. The rent amounts are tied into the volume of sales in that area. The lease is set at usually no more than 8 to 10% of expected gross annual sales. This is why in New York you will see a Walgreens for sale for 6 million and then in Georgia in a suburbia one for 3 million.

Hope it helps.

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Amit M. December 11, 2013 at 8:45 am

Hi Joel,

Different Amit here…I’ve seen your comments on BP forums in the past btw.

Been meaning to ask you, are there any strong appreciation/equity building plays that you have seen with NNN?

I own several residential props in San Francisco that have been very successful. A few years back Marcus and millichap had a seminar here on NNN….a stand alone Wendy’s in Georgia here, a strip mall in Alabama there, that type of thing. Most of the attendees were older than me. What I got out of the thing is that basically NNN is a great way for an RE investor to get out of the day to day, but still be able to do a valid 1031 and defer taxes. My understanding is that done correctly you can pretty much assure yourself a headache free income stream. They were throwing out 6% I believe.

But because the rent increases are baked in long term, I understood that appreciation is also largely built in/regulated. So it seems unlikely you’ll get a significant equity pop. The only thing I can compare it to is office space in downtown SF. I know that during the down turn some owners had to lower rents for new contracts. Now things are hot again. So I imagine that if you’re about to secure a new tenant, and the new rate is significantly higher, you will get that equity pop. But of course I’m also taking about prime downtown space in SF.

Can you speak to that in terms of the smaller NNN properties and potential equity gains/appreciation? Thanks.

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Joel December 11, 2013 at 10:30 am

Hi Amit M.,

For NNN of course house buying and spec market plays will give you the most upside but you can also lose your shirt as well.

NNN is a more stable investment but of course the returns are not into the stratosphere. If someone has 200,000 and they need to make it 300,000 to 400,000 quickly because their job pays 50k a year then the growth chart is different than someone making 200k a year or more.

Some of my clients that are business professionals and doctors can sock away 10k to 15k monthly in cash or more. For them time is the issue versus the return. They want better than banks but little to no risk and hands off. That is why they find NNN so appealing.

In STNL ( free standing single buildings) for new leases the market is about a 4 to 7 cap depending on what it is and who is guaranteeing the lease. There are some value plays where you might get a property at a 10 cap or so. One for instance is a Rite Aid pharmacy with 4 years left on the primary term lease. Lenders will require a ton down and a short amort. schedule to curb their risk that the tenant will not renew or move locations for option periods. As a cash buyer you can get great yield knowing there is a 95% or better chance they renew the option when it comes up. If they do not and the location is great you have repurpose potential and other tenants will want that space.

As far as buying a new lease with 15 or 20 years left someone isn’t going to hit a 9 cap on a corp. tenant. I have seen larger stores such as Best Buy and Barnes and Noble but a big loan on a such a big building carries a lot of risk for getting that 9 or 10 cap there so I am not bullish on it for my clients. If it’s a REIT buyer that can stomach it going dark and can keep it afloat with the whole portfolio of other properties then it might make sense for them.

MTNL ( strip centers, etc.) right now there is much more value in those to be had. 10 caps or better and really good loan terms. Lenders are bullish on them because they haven’t compressed like STNL although I see STNL opening back up and caps rising soon. With debt in the 4′s unless paying cash getting a 5 cap just doesn’t make sense for cash flow.

Everyone is trying to chase SAFE YIELD. They can stomach a little risk but not much.

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Joel December 16, 2013 at 10:05 am

Hi Everyone,

I’s Joel from podcast 47 commercial and NNN.

I just wanted to let everyone know my Comcast e-mail for contacting me was down from Wednesday the 11th until the 15th but is working fine now. It was a coding issue that Comcast screwed up not moving my e-mail accounts to my new house.

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gerald harris December 26, 2013 at 12:06 am

in 2014 i am definately going to try my hand at more commercial deals. I had an opportunity to purchase a 10 room boarding house, but the deal fell through. Good thing it did, the area was a lower end area with high crime. Location is important and i will focus on this.

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Aaron Yates January 13, 2014 at 10:20 am

I worked at SEVERAL pizza places as a driver and managed a dollys at one point for a year. Never opened my own though due to no capital. Interesting to see we have something in common from our past…

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Michael January 31, 2014 at 9:31 am

‘come on, I heard this seminar man, they said I could buy thousands of apartments for no money down, right away’

You were joking, right… are you saying this isn’t true?

Maybe you’re just not trying hard enough. Just saying…

Reply

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