BiggerPockets Podcast 156 with Mark Spidell Transcript

Link to show: BP Podcast 156: Lifestyle Engineering Through Commercial, Residential, and Vacation Rentals with Mark Spidell

Josh: This is the BiggerPockets Podcast, Show 156.

Mark: That was how it happened and I learned a lot from that. So now we have a much more smaller-scale property management group involved and a much higher level of service, monthly report and yeah, we’re feeling good.

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Josh: What’s going on, everybody? This is Josh Dorkin, host of the BiggerPockets podcast, here with my co-host, Mr. Brandon Turner. Happy New Year, Brandon.

Brandon: Happy New Year, Josh Dorkin. How are you doing?

Josh: Yeah. I’m good, man. I’m good, as you can probably hear, I’m a little sick here. A little recovery—

Brandon: You’re always sick. You’re a sick person. What can I say?

Josh: Really? Why are you so mean? Everybody talks about what a nice guy you are, but they don’t realize you’re kind of mean.

Brandon: Here’s what I realized this week. Somebody said something in the forums and they said, I just watched the YouTube video of the BiggerPockets podcast, because we put this on YouTube as well. I said, I totally had Brandon and Josh’ faces mixed up with their voices. And somebody else was like, I did, too. And somebody else was like, I did, too. And I realize that people have no idea that I’m you and you’re—people think that I’m you and you’re me and I think that’s weird. So maybe, really, they are actually thinking I pick on you more and they’re saying the wrong thing to your face. I don’t know. So who picks on who most? You guys should let us know in the comments of the show.

Josh: Oh, yeah. BiggerPockets.com/Show156. Let us know what you think. Let us know. All right, guys. We’ve got a really cool show today. But before we go into the show, let’s bust out today’s Quick Tip. Today’s Quick Tip. Brandon, did you want it?

Brandon: I’ll take it.

Josh: It’s the New Year. I’ll be generous. More generous.

Brandon: Today’s Quick Tip is the brand new feature on BiggerPockets called the Rental Property Portfolio Tracker and basically what this does is it allows you to enter in the current properties that you have and you can track the process—basically, the idea of your address, the purchase date, purchase price, current value, loan balance, equity, and your monthly cash flow. So you can have like just one nice page where all your properties are at. You can see what your cash flow looks like, how much your net worth is currently, and you can download a PDF or share just like a PDF document with anybody you want. So if you’re just trying to get a bank loan, you can print out this nice document so check it out at BiggerPockets.com/Portfolio and start using it. It’s free for everyone so it’s still in beta mode. We’re trying to work on it and trying to make it better but we could use your advice on how to make it better so get in there, use it, and tell us what you think.

Josh: Awesome. Great tool. Cool. We have a sponsor today. Let’s bring him out.

Brandon: We do. Today’s show is sponsored by: If you’ve been listening to the BiggerPockets podcast this month, you’ve probably heard me raving about our awesome podcast sponsor, RealtyShares.com. Realty Shares is making it super simple to diversify your portfolio by investing in real estate from your computer in just minutes. What I really like about realty shares is that all real estate deals are sourced and vetted by experienced investment professionals. They’ve crowdfunded over 1500 properties across the U.S. Of course, keep in mind that all investments are risky and may lose value and past performances is not indicative of future results. So visit RealtyShares.com/BiggerPockets to start investing in deals in your neighborhood today. Once again, that’s RealtyShares.com/BiggerPockets.

Josh: Awesome. Our sponsor. All right, guys. Let’s cut to this thing. Today’s guest is Mark Spidell. Mark’s a real estate investor with a really interesting background. He’s built a really cool portfolio with both long-term and short-term rentals. He’s got a great story and a really cool philosophy on life which includes something that he calls “lifestyle engineering”. I’m doing finger quotes here. I know you guys listening are going to love it. We also talk a bit about commercial real estate investing as well as a bunch of other topics. There’s tons of actionable stuff in here, lots of advice for everybody regardless of where they are in the real estate world. I know I get excited about these shows that help everybody out so here we are again with me excited to get another show.

Brandon: I am excited. So excited. Yes. Let’s get to the exciting show, shall we?

Josh: Mark Spidell. Let’s do it.

Mark, welcome to the show, man. It’s good to have you here.

Mark: Thanks, guys. It’s an honor.

Brandon: This should be fun. We’re talking about investing in a couple of things today. You do vacation rentals. You do commercial. You do residential. You kind of cover the whole gamut, right?

Mark: Correct, yeah.

Brandon: Awesome. Great. So why don’t we start with how you got into that game?

Mark: I was pretty timid to start off with, I would say I eased into it. I had an ADU—it’s more like a mother-in-law apartment at my house and some neighbors had been doing vacation rentals had some success with that. Also, I had a background in banking and [inaudible][5:20] of finance, even kind of at a higher Wall Street level. From that, I always understood real estate but to me a more accurate investor, it took me a while to kind of take a plunge.

Josh: Hey Mark, what’s the ADU stand for?

Mark: Additional Dwelling Unit.

Josh: Got it.

Brandon: So basically, you were house-hacking at the beginning.

Mark: Yeah. It was a modified hacker, sure.

Brandon: That’s awesome. So you just had it converted into a vacation rental?

Mark: Before, we had a guy working for Comcast living in there that did nothing but kind of act creepy all day in my opinion.

Josh: That was Brandon.

Mark: So I thought, how can we best utilize this space? Because the nice thing about it was, we could have friends and family stay there as well as get the income. So it was sort of a nice compromise at that time in life.

Josh: So what inspired you to do it, though? At the end of the day, why start renting it out? Did you have plans? What was your goal up front? Did you want to just build some side income? Did you want to be a full-time investor?

Mark: At that time, I wasn’t sure. I always have been a bit of a hustler but I think one of the challenges in my area is that the credit quality of the tenants is not all bad. And I’m not trying to pick on anybody because it’s a tough place to live. It’s an expensive market. So what I thought was, a better route at that time, and I still believe this is why my business has evolved this way was if you go the vacation rental route, you obviously just get a different clientele.

Brandon: I would assume that clientele is a lot higher because they’re renting vocation rentals, right?

Mark: Yeah, the vacation rental mindset is a lot different, I would say. Maybe 90% of the people, they tidy up when they leave. They do exactly what you say in the instructions, pleasant to deal with. On the rental side of things, you go through the background check, you look at their income, and everybody’s a stretch around here just because there’s a huge discrepancy between what people can make income-wise here and really, what rents are.

Josh: You’re in Glenwood Springs, right? That’s Colorado. What’s around you?

Mark: We are 45 minutes north of Aspen, so the Aspen market has a huge impact on our local market and we’re about an hour due west of Vale. So again, a major resort market there.

Josh: And Glenwood Springs is beautiful. You guys have hot springs and it’s an amazing place for anyone listening, you want a cool spot to check out. It’s boundaried by these ultra, ultra, ultra high-end resorts so that’s kind of fascinating. We talk about these different market niches and market types, big cities and things like that. It’s kind of neat to have somebody who gets caught in between the two ultra high-end neighborhoods. So you get into this, you’ve got this property and you’ve got this Wall Street background and where does your mind take you? All right, I’ve got this guy now renting out this mother-in-law ADU apartment. How do you transition from that to kind of the next phase in investing?

Mark: Really, it was lifestyle-focused. My wife’s a professional and she works a fair amount. At the same time, she’s been fortunate to find a situation where she can work three-quarter time. We now have a four-year-old and we have a four-month baby so—thank you. Yeah. Big deal. So we’re very focused on wanting to do the parent thing correctly. It’s so hard in an expensive market and just how life is for modern people. So we’re trying to figure out a way to have balance, have a little bit of control and have some freedom. So that’s why we went more into real estate.

Brandon: Let’s talk about your first then non-owner occupied deal. What did that look like?

Mark: Well, I had been in the mortgage-back security industry studying what was going to happen. I went from doing work related to [inaudible][9:34] mortgages and the different companies that were involved in those mortgages and I saw that there’s going to be an opportunity, in extreme levels of default. I told my brother and my dad, hey, I think there’s an opportunity here. Do you guys want to try to pull some money together and invest, so we bought two single-family homes in the Dallas area and then a house near DIA in Denver and so that was sort of our first way of saying, hey, there may be an opportunity here. Let’s give it a shot and as a partnership, it was just okay, but it was our first way of kind of getting into real estate. So yeah. It was interesting.

Brandon: Okay. And you said those are single-family units in Denver, right?

Mark: One in Denver and two in Dallas.

Brandon: Okay. Do you still own those today?

Mark: Yeah. So I bought my brother and dad out of the partnership at the beginning of last year and that was just sort of a piece to my overall puzzle that I have now.

Brandon: Can I ask you about the relationship thing? Obviously, maybe your family is going to listen to this so don’t talk bad about them, but do you have tips for people working with family? Because that is oftentimes people’s first inclination is to go out and partner with mom and dad, brother, sister, kids. What are your thoughts on that and what are some of the dangers and ways you can avoid that, the bad things?

Mark: We’re a very transparent family in that we have formal loan documents if there’s loans involved. In fact, I would say it’s almost a detriment because sometimes we’re talking about it at Thanksgiving and my mom hates that, my wife hates that. But at the same time, everybody knows the role and is transparent about it. It’s not a awkward sort of thing. At the same time, though, we have different roles and responsibilities and skills. But after a while, my brother—he needed some money to invest in some of his other business ventures and my dad was kind of getting just tired to even wanting to think about it, so he wanted out and it made sense for me to get bigger into real estate.

Josh: Right on. So what year was this?

Mark: We bought those houses in 2009. It was right at the right time, for sure.

Josh: Would you be willing to tell us—you talked about how you got into bed together with your brother and dad as your partners. What do these deals look like? What attracted you to them?

Mark: Basically, you could get over a 10% return on your money. That was pretty much, we were back into the math and look at it that way. Purely quantitative. We were not looking at enough qualitative because we actually had some hiccups and that’s why we didn’t grow more at that time because everybody was on the same page, more on the qualitative aspect was involved.

Josh: Can you go more into detail into what that means? I get the quantitative. Okay, it’s the math. What’s the qualitative part of the picture?

Mark: Quantitative, we felt good about. Qualitative wise—for example, at the house near DIA, we had the very first tenant and it was my responsibility to find the property management company. I just googled, what’s the property management company in Denver? Found a really big one and I got really big company service and it wasn’t good. Long story short, we had a woman apply to rent, she didn’t ever really live there. A group of gang members had paid her off to get access to the house so yeah—two or three months in, they stopped paying and then it takes a while for the eviction and they were definitely sketch, tough guys. I got a relationship going with a neighbor and so he would shoot me pictures every now and again. One day, I get a text of an Escalade on blocks in front of the place. Bad things were going on, for sure. So that was part of the qualitative part. Not everybody was feeling good about this, and hey, my bad. That was a learning opportunity, for sure.

Josh: I want to learn more about this Escalade on blocks. Were they putting like drugs on the tires or what?

Mark: What was happening was somebody was not happy with whatever they did and took their tires. Took their wheels. But that very house though, that was a $90,000 house and it is currently up for renewal now. Since we bought it, I would say we’re on the third or fourth tenant and I might be able to sell it for $240,000 now if I want, or we’re going to rent it right now for $1700.

Josh: Back to the gang member, it’s interesting because I had some drug doings in property that I had. It was scary and it was a pain in the backside to get rid of these folks—how did that go down for you? How did evicting—and I’m assuming your managers just dealt with it and you had nothing to do with it? Maybe not.

Mark: They dealt with it really poorly, to be honest with you. They wanted to take the path of least resistance and I had to just follow up and bang on the phone a lot and that was how it happened. I learned a lot from that and now we have a much smaller-scale property management group involved and a much higher level of service, monthly report. Yeah, we’re feeling good.

Brandon: So if you could go back and tell your younger self or maybe somebody else comes up to you and they’re in your exact shoes that you were in back then, what can you tell them? What lessons did you learn from those first couple of deals, maybe with your family, that you would warn listeners of the podcast right now about?

Mark: I think at that time, I was almost viewing it like I would view investment as a stock or a bond and just say, it’s pure math. This is how we do it. Are you sure you know instead of calling an investment person, I’m going to have to call a property manager. I’d make thee very minimum decision involved in this and you know what? In hindsight, you need to be educated and you need to make more than one phone call. It’s just not that easy.

Josh: Interviewing property managers is a monster, monster task. It’s of the utmost importance and we’ve got tons of resources on the site that go into that. We’ve got a lot of articles that include questions to ask and things like that when interviewing so for anybody listening, if you’re dealing with that, I definitely encourage you to just jump on BiggerPockets, type in the search like “interview property managers” and you’ll come up with some cool stuff. I think everybody will find it really helpful.

Okay, so Brandon made a note here about the crash coming. I want to jump back before we jump over again. You saw the crash coming. You were in MBS space. Where are we today? Do you think we’re in a position—Yellin just made some changes at the fed. Where are we going?

Mark: Looking backward, I was in that industry from 2001 until about 2005 and part of the reason why I got out in 2005 was because all we were talking about was rising delinquencies at that point in time. And it was in a lot of the tougher bruss-felt markets, and so I have always been a bit of a belt and suspenders type of guy so I thought, you know what, maybe I need to diversify my skills a little bit. I’m young. I’m going to try some different things out so I actually went to commercial appraising for a year. I didn’t like that but learned a lot. Went back to the MBS space for another few years but from there, it was crazy because it was hot at that time. They were just popping out the loans all the way through until about 2008, really, towards the end. All I was doing was work for the FDIC, closing down small banks that still had mortgages on their portfolios. I mean, it was an interesting rollercoaster, for sure. But where we are now, I definitely agree with Brian who is on the broadcast a few episodes back. He talked about the fact that at this time around, it’s not just crazy lending that has escalated prices. I think there are fundamentals. I think that jobs have come back a bit. I think that incomes are supporting the mortgages that people are getting now. At the same time, though, I think there has been financial innovation where people have been able to get access to credit in different ways. Subprime financing is coming back, both auto and home, so that is something that I think people have to consider. Where we are now, though, I’m not sure that we’re going to have a big real estate crash so much as we may just not have a sexy appreciation for the next few years, is my feel for it.

Josh: Cool, thanks for sharing.

Brandon: So what happened next? You’ve got these first deals under your belt and you were working on them. Maybe before you answer that, how did you finance those deals? Was it all cash?

Mark: Yeah, we just used family money at that point. They were cheap enough where it wasn’t too—we should have backed up the truck at that point in time and bought more, but we were just kind of trying things out. Yeah, it was pretty easy.

Brandon: So what happened next? How did you buy more?

Mark: You know, I really took a break for a long time. But when we bought those, I was actually transitioning—we were living in Glenwood at that time. I used to live in Denver. Now, we’re in Glenwood trying to start a family and I was working as a commercial banker at that time, doing commercial real estate loans. I was doing a lot of research on just the local markets, both residential and commercial, and so I actually came across a commercial building loan that I liked. It was a new loan that we had taken from another bank on a commercial building that I felt had good tenants. And I had left that banking job and went into something else but I had always remembered that building and sure enough, one day, I drive by and I see this commercial building for sale. The guy who was actually listing it was the same guy who had helped me buy a couple of condos that I also have in my portfolio also. So I went into this commercial building.

Josh: Can you explain what you mean by, you liked the loan? What’s the distinction between that and liking the fundamentals of the property?

Mark: So I guess it’s kind of the same thing. I mean, I understood the loan and there’s just very few commercial loans in a market like this that actually look good, especially as a peer investment. You might have a situation where a business owner may be a restaurant owner and wants to buy their real estate, yeah, that makes sense. But as a peer investment in terms of commercial—you’re buying this tenant income. There’s not a whole lot in these markets that I think float. So this is one that did and I had always remembered that.

Josh: Got it.

Brandon: Tell us about the property.

Mark: So it has three major tenants, I would say. High-quality tenants, and what I mean by high-quality tenant in a small market—they’re one of the top three real estate companies is in one of the bigger spots. I have a title company. I have a State Farm agent. Then, I have a dentist specialty type of guy in one spot. And then I have a couple of non-profits. I’m full except for maybe one basement space that I actually use for my office right now. Cash flows, it was a brother-sister team that inherited the property and they were really just not into real estate investing so much. They basically wanted to collect checks and not really think too hard on it. So there was a lot of deferred maintenance problems. The utilities weren’t handled well. The tenant relationships weren’t all that great. Just a lot of easy pickings to work on to really add value.

Josh: How would somebody know that? How am I, as some novice real estate investor, who is interested in commercial, see this property and be able to identify that there was all this deferred stuff sitting around that I can potentially snap it up cheaply, make some fixes and drastically improve the value?

Mark: And Brandon talks about, you’re in for an advantage, and really, I had the advantage of seeing the loan and seeing the types of leases involved so that was something a little bit unique in this situation. But it takes a long time on a commercial deal. By just in terms of size, this was a $1.14 million dollar deal, so not a huge deal, but at the same time, it’s big for me but yet too small for bigger boys. You’re not going to get a large real estate investment group looking at that size of building. And the value ad is really in the management. So it took, gosh, two or three months to really scrutinize the deal. I interviewed all the different tenants. I got a good handle on all the different deferred maintenance aspects and it was definitely intensive work and it was still scary. I mean, at the end of it, because they weren’t going to give me a lot of information. They were only going to give me the lease to get the deal done and so it was hard. It was painful.

Josh: Hey Mark, so you touched upon something. There is this kind of pull on the market. This is a $1.14 million dollar commercial deal, too small for the big boys but kind of scary perfect for you. At what point is something not too small for the big boys? As somebody who’s been in the commercial space, when do the institutions start to take notice of properties? Is it $5 million? Is it $10 million? Is it $20 million?

Mark: I’m not sure I’m the best to answer that, but you would be surprised. One of the things I learned from being a commercial estate appraiser—interesting story where a guy who had hotel experience bought a Hampton Inn in roughly 2005 and he knew that he could go in and manage that hotel better. It was underperforming. The people that he bought it from were the original developers of the hotel and they were going to get their value ad from just billing the hotel and selling it for the profit. So he went in, he worked hard. He lived in this hotel. He got the income up and just got a better culture in there and then he sold it a year later for roughly a million dollar profit. I would call that at that time, it was a $6 million dollar hotel, so that was one guy doing that and I think he maybe had one or two investors. So that was, I would say, not yet at that scale of the bigger time guys. So really, I think the bigger investors are going to look for something that’s at least $10 million.

Brandon: How did you finance that property? How were you able to do it? Did you do cash or did you do financing?

Mark: No, I actually went to the very bank I used to work for and I said, hey guys, wouldn’t it be nice for you to keep this loan and I helped him do some of the underwriting work. I showed them what I was going to do. I gave them countless spreadsheets of this is how I’m going to add value. I’m going to make this work. And it worked. And that was with a very conservative bank so I felt good that we were able to get it done.

Josh: That’s cool.

Brandon: Pretty much every webinar I do here on BiggerPockets I do here on BiggerPockets. I do a weekly webinar usually here on Wednesdays or Thursdays—people can sign up at BiggerPockets.com/webinar. Anyways, in almost every webinar, I stressed this idea of help your banker out. When you’re trying to apply for a loan or when you’re trying to get a deal, the more work you can do for your banker, if they’ve got ten loans they’re trying to process and one of them is handed to them on a silver platter and one of them, they have to dig and spend hours and hours of time digging, who are they going to help? You’re at the front of the line when you help them. So I love that you said that. You helped them with spreadsheets and with documents and you showed them, this is why it is a good deal.

Mark: Oh, absolutely. That’s a great tip because being a commercial banker, I can tell you that it is hard. Most of your day is just vetting through trying to have to give them bad news that sorry, you’re just not in a good position. And they’re not even close to being ready to help themselves. That’s the hard part about it is, they don’t even have the information. They’re not even in the ballpark of knowing that they could even apply for a commercial loan. At the same time, though, I still have friends that work for this bank. It’s a large regional bank and there’s cost-cutting. There’s a lot of pressure in that market so the easier you can make it on your banker—but they really want your loan. There are very few good commercial real estate loans out there so the easier you can make it, they want to give you the loan for sure. They just have time and resource problems, for sure.

Josh: Right on.

Brandon: I did it when I was trying to get a loan on my 24-unit complex. I had a 5-unit and a 24-unit and trying to get loans on them. And I went through a couple of different banks. I had a lot of trouble getting it. And it wasn’t until I flipped a switch in my mind and said, you know what? I’m going to help this banker do their job for them. I went and printed out this really nice report. I gave them every bit of information they could have possibly wanted, gave them more information to verify. I put it inside of a plastic binder and I even used the BiggerPockets rental property calculator report on the front of it that showed them all the numbers. I gave it to them. Within a day, I was approved for both those loans. It was like, well, that was way easier. I realized because before that, I was handing them a box of paperwork and they hate that. So of course they turned me down, because they were busy doing other stuff.

Josh: Mark, tell me about that two to three month vetting period. I think a lot of the folks here want to know, what exactly are you doing? What is it that—is it not just evaluating what they give you? You have to actually go out and source some information yourself, right? You have to do some detective work. What exactly are you doing?

Mark: I would say, the big parts of that were having specialists come out. So I had a roofing guy. I had an HVAC guy come out. First, with the residential deal, you might just hire a home inspector, right? There’s some value to that, arguably. But with this, especially with the roof and the HVAC, I do those, those were big deals. I also talked to the city utility company and worked with them a little bit trying to get an idea of how I could add value there as well as there’s an energy savings non-profit around. So through them, I got some ideas on how I could add value through energy savings. So LED lights was a big project that we did. For example, this building—one of the buildings, the assessor shows it as 1950 era, so it had the old school T-12 halogen lights. Awful in terms of energy efficiency. So through replacing those lights with LED, not only did the energy non-profit help me by covering over half the cost of that improvement, but then I got the tenant to go halfsies with me on the other half so that I’m only out a quarter of the costs. And so now, it’s a win-win for everybody, right?

Josh: That’s awesome. That’s great. Cool. Do you need to be locked in a contract in order to have these specialists come out or can you actually do that just with the, hey, we’re in diligence period and we’re going to have people come and look?

Mark: Yeah, that wasn’t hard. The owners were helpful there. And again, my broker was the one who was listing the property. So although he had to walk that fine line of serving both parties, he was also helpful in doing what he could to facilitate that.

Josh: So the answer is yes, you can actually do it without being in contract, yes?

Mark: Correct.

Brandon: Let’s talk about financing a little bit more, you being a commercial financing guy. How do they differ? For people who don’t know, how does commercial financing differ from residential financing?

Mark: We talked a lot about portfolio balances and so I had both. I had residential portfolio loans that I used a small commercial bank in Texas and then I have a bank in Colorado commercial building that is also a commercial loan. Some of the bigger differences are with a 30-year loan, you’re talking about a 30-year fixed rate, 30-year amortizing loans. With a commercial, both of them are 20-year amortizing, both my residential portfolio loan and my commercial building loan—those are both 20-year AMs, but five-year terms.

Brandon: What’s that mean? What’s a five-year term mean?

Mark: So a five-year term, we’re talking about at the end of five years after Re-fi or you have to pay off, actually, with my Texas residential portfolio loan, that one’s a little bit different. It just adjusts. It straight adjusts after that. Not a lot of exposure.

Brandon: A lot of people might be wondering. You’ve got five years. That’s not very much time, right? You’ve got this multi-million dollar potential loan with a commercial property and the bank says we’ll give you five years to do something with this. That seems like a lot of pressure, right? How do you get around that or what are your thoughts behind it?

Mark: It’s true, your loans amortizing in 20 years. So you are going to have that loan paid down so it should be easier to refinance at that point in time. At the same time, I thought Ben had some good points. I know some of the folks on the—

Brandon: Are you talking about Ben Leybovich?

Mark: Yes.

Brandon: No, I think you’ve got the wrong one.

Mark: He drives a Tesla.

Josh: He does drive a Tesla.

Brandon: That says it all.

Mark: That’s all I took away from that podcast, was Ben has a Tesla.

Josh: You’re talking about show 151 or 152, I forget.

Mark: I can just totally imagine Ben pimping around Lima, Ohio in this Tesla just sporting it.

Brandon: I’m sure he’s very happy with that. So by the way, 152, BiggerPockets.com/Show152, probably one of the best shows we’ve done.

Josh: It’s a great show.

Brandon: Fantastic show and you can learn all about Ben’s Tesla. So check it out. All right, so definitely the adjustable thing makes me nervous. I had two—I can’t remember for sure, I should know this, but I think mine is a 10-year balloon payment on it. 20 or 25 AM. I think it’s 20-year. Anyways, my thinking is the same thing. After 10 years or after 5 years, I’ll have it paid down significantly. Hopefully, prices will go up. If not, the bank could call it and say, you know what, you said you had to pay this back. At the same time, my hope is, if the market did tank, they’re not going to want to necessarily go and foreclose on me anyways. So they’re going to want to work with me, hopefully, if worst case scenario happened.

Josh: But that’s on the variable rate, right? That’s on the one where you go variable. What about the five-year term where—

Brandon: That’s what I’m talking about.

Mark: You do have a risk. I worked for a very conservative bank that actually had inherited a ton of loans from another bank that they bought and they kicked a ton of loans out because they weren’t well underwritten and they just didn’t fit the guideline anymore so a lot of folks had to go hustle after that five-year mark and go to the other bank in town and sometimes it worked, sometimes it didn’t. There’s a lot of hard stories in 2008 to 2010 in a commercial market for sure.

Brandon: This is why I don’t like it—if I’m going to have a short-term loan, like I said, the ones that have ten years or whatever, I want to make sure I have enough equity in there, even now, and that I’ll have even significantly more, like I don’t want to over-leverage my risky loans, so to speak. I want to have that option to later on be able to get out. And that’s why commercial loans typically don’t lend 90% loan to value. They’re 60-70%, usually.

Mark: From the bank’s perspective, they do not want to be long. Even talking about a seven-year loan, a lot of them just pucker up because they have interest rate risk. They don’t want to deal with that. At the same time, as an investor, it keeps you disciplined to have that five-year mark because if you have a house that you’ve had for five years and sort of the buy-and-mold theory that some people talk about that you really shouldn’t just keep some of these things forever—maybe it is time to parse something out of your portfolio after five years and then you start again.

Josh: Hey Mark, so what is the standard payment down for a commercial loan?

Mark: Usually, I see it as 30%.

Josh: 30%. Okay. And then what tips do you have for somebody that’s looking to go and purchase commercial property to minimize the risk? How do they go about doing that?

Mark: I would say homework is your key but the best thing about being in that market, you just have a lot fewer competition. For example, I’m by far the youngest commercial real estate investor in my town. Everybody else, if I go around talking to different people that are tenants in buildings, I’ll ask them, hey, who’s your landlord? They’ll say, some LLC out of California I’ve never met them. And how long have you rented here? Oh, 15 years. You’ve never met your landlord in 15 years? It’s just a faceless thing. Or you have an old-school investor who’s had the building for 25 years and they’re getting older and they don’t want to put any money into it so it’s pretty easy, actually, if you hustle to be the best landlord in a small market and have a lot of success.

Josh: Mark, really quick—how old are you?

Mark: I turn 40 in June.

Josh: Oh, I got you beat. February. You are an old guy, by the way.

Mark: Look at my hair. You have gray hair compared to me. I’ve got the silverback grilling going on for sure.

Brandon: Looking good, man. That’s all good. Okay, you say it’s not that hard for those who want to hustle. It isn’t as hard as people might envision getting into commercial real estate, but I want to go more basic than that. Why get into commercial real estate? What’s the point? What are the benefits of going into that niche?

Mark: Well, it comes down to commercial real estate is valued based on the income of the property and there is more value ad because you can cut expenses and there’s plenty of deals out there where you can better manage expense. At the same time, though, you should be able to hustle and be more creative. For example, you might have—and you’ve had a lot of guests talk about this—let’s say you buy a commercial building. You need an office yourself. There could be a lot of benefits just right there. You may have some friends that need office space but then downstairs you have a basement that’s completely unutilized. All of a sudden, just due to social media, different apps, whatever it might be, why not make your basement of this building a mini-storage, for example? I mean, you could totally do that now where I think ten years ago, that was not even in the ballgame.

Brandon: I like commercial for that very reason, the ability to add value by being creative and by using your head, you can just add cash to your pocket at the end of the day as well as equity later on down the road. That’s awesome. Do you manage the properties yourself, the commercial ones?

Mark: I manage everything in Colorado myself with the exception of the Denver property. The stuff I have in Texas, I have a manager down there. But yeah, everything in Glenwood, I do manage myself.

Josh: We’ve talked to the nth degree about managing houses and stuff like that but we haven’t really talked about managing the commercial. So what is that like? What’s different about it?

Mark: Hmm. That’s a good question. I would say that you actually have some different things going on. You have stone removal, which is a bigger issue. You have just landscaping. You have outdoor trash. Things that you just don’t have to deal with as much with residential. The leases are much more complicated so you can’t go cheap there. You really should use attorneys when possible. I think also culture is a big deal at a building. If you could have a good culture where everybody gets along and you have good synergies between tenant businesses. That really goes a long way to adding value.

Josh: We just signed our—we’ve been working out of a co-work space for a little while and we just signed a commercial lease. We’ve got a 2700 square foot office space now. And oh man, this was not signing your five or six-page residential—I think our current lease is 69 pages. Something like that.

Mark: You had triple net and [inaudible][38:43] and all that?

Josh: It’s exceptionally complicated. There’s all sorts of gotchas and things like that and I’ve looked at other leases in the past that have had very old school tenants and I would need to literally get permission to put Wifi in the office space. But a typewriter was okay. Written in the lease. Like, really? So yeah, I think your advice about using a real estate attorney is spot on. Listen, I think it’s spot on for anybody but particularly for commercial because to go through that kind of paperwork and assume that you’re going to know what the hell you’re doing as a tenant and as a landlord is remarkable. It’s interesting, and the culture part, I think is something that I bet a lot of the big corporate landlords don’t think about, again, as somebody who was shopping.

We looked at a lot of buildings. You’ve got this surgeon’s office and next to it, you’ve got just these random combinations and you’re like, they’re never going to interact. There never is going to be this positivity, this vibe within the building itself and I think by trying at least to establish some kind of culture, I think you can, like anything else, get longer-term leases. Get people who could stick around and want to be there because that’s just that little extra that is going to keep them from moving somewhere else.

Mark: A couple of my tenants have been in the building since the mid-90s. So there’s a lot of value to that and if you’re a good landlord and if you hustle, everybody gets along, sure. Why are they going to leave? It’s a hassle to leave.

Josh: So how do you make your buildings—how do you landlord differently than the big corporate, faceless, nameless entities that are out there doing it? What gives a commercial tenant—what do you do to attract those tenants that much more than those big guys?

Mark: Well, first off, if somebody calls, I reply within at least no more than two hours. Second, I usually meet with the primary decision-maker once a year and I go through just different maintenance things I’m doing, different improvements I’m doing, let them know who the neighbors are. I’ll go out of my way to say to a tenant, hey, have you met everybody? And we’ll go around and we’ll shake hands and just get everybody comfortable. In fact, this year I gave everybody a Jimmy John’s lunch just for being good tenants and for the holidays. Little stuff like that.

Josh: Very cool. Awesome.

Brandon: Before we get out of here, I want to touch base on a little bit more. Besides just the commercial, we’ve got vacation rentals and commercial—what else do you do besides that? You have more than that, right?

Mark: Yeah, I have my portfolio in Texas that I don’t really do a whole lot with. It’s just a lot of single-family homes. Then, the commercial building, we’ve talked about. And then I have four short-term vacation rentals that I do VRBO and Airbnb, that kind of strategy, but then I have four other furnished condos that I do month or longer, and it’s a nice synergy with the vacation rentals because I might have somebody that’s longer-term that I can move into a vacation rental in the shoulder slow season, or I am getting a lot of travelling nurses, temporary workers, so sometimes those folks need to stay for three months. Sometimes, six months. Or I may have a retired couple that wants to ski for the season. They want to spend a couple thousand bucks a month on a vacation rental, furnished condo, and yeah, it works out great.

Brandon: That’s cool. And you manage all those yourself, you said, right?

Mark: Yeah, I have a lot of help. I have a couple of cleaning people, a couple of maintenance people, but I do all of these sort of Facetime with the guests/tenants.

Brandon: That’s cool. And do you anticipate in the future—are you going to do more vacation rentals, more commercial—where are you headed?

Mark: I would like to—I may go into the direction of just be a peer technology play of doing marketing for other vacation rentals and help them provide some structure to their business. I personally don’t want to use my time to really grow that aspect of it. Next step, though—I find a lot of value ad in understanding and executing on bigger deals. But for these medium to larger deals for me, a million to five million bucks. I’m going to look for other investors and we’re going to execute on some of those opportunities.

Brandon: Okay, cool.

Josh: Mark, you’ve got, so far, you’ve got the commercial, the vacation, the short-terms, you’ve got the vacation long-term. I mean, that’s a pretty unique mix and it seems like one that you’ve probably crafted intentionally. Is that the case? Did you do that intentionally?

Mark: Part of it was, it was the best opportunity at the time. A lot of the vacation rentals, in a resort market at the time I bought a few of these—they were the best things in terms of value to buy, in terms of just price point. What you could do, if worst case scenario to do is to do a 12-month lease. I mean, you could go that route. It’s not going to give you the best yield but it’s a good worst-case scenario. So that’s why I did that. At the same time, though, it is a little big labor intensive, especially on the vacation rental side, to actually execute that well. It’s not a passive business but it can be lucrative.

Josh: Yeah. Really quickly, because you’ve brought it up, you’ve talked about the furnished versus vacation versus your standard, longer-term lease. What goes into that? How different it seems like a quasi in-between the two. What’s different about running a furnished property short-term and a super short-term apartment vacation rental and again, a longer-term typical lease?

Mark: Obviously, cleaning is a bigger part of that and just having a standard. So we’ve kind of come up with a little bit of a program between my two cleaning folks and my maintenance people that when it’s time to have a turnover, we execute. We know what we’re going to do that day and I’m planning that a couple of weeks in advance, always. At the same time, just keeping them booked, because I’ve actually had a lot of success, I would say, with my sort of intermediate term rentals. I’ve only had a couple of months in the past four years where I haven’t had those things filled. So what that means, though, is I might have a travelling nurse who’s working in the area for six months. Well, she called and I told her, because of just a tight market, I can accommodate you here for the first two months and then I’m going to move you over there for the next. And you know what? They don’t really have a lot of choice and I have the best products. So that’s how the synergies sort of work with all these different units.

Brandon: I love the diversification within that asset class. And I also love how—I wrote a blog post on it a couple of weeks ago, but this topic of, when finding out which strategy you should do, you’ve got to look at, what are you good at? What are your abilities? What’s your location like? It’s kind of like this intersection of a lot of different things and for you, I love that you just figured out that this works for you in your area and that’s why I advise people all the time, listen to as many podcasts as you can because you start to hear these things and today, there’s probably dozens of people going, man, Mark’s strategy is exactly what I want to do. That works for me. I’m in a gray area for that. And other people are like, maybe someday, I’ll keep it in a file cabinet and I’ll come back to it. So I just love that. Very cool.

Josh: And the reminder that there is no one set path for anybody, particularly I just think it’s important to reiterate this for the newbies, despite what the “educators” out there might tell you, there isn’t a single path. There isn’t a single strategy that’s going to work.

Brandon: Well, there is but I’m not going to tell you what it is unless you pay me $997.

Josh: Hold on, let me bust out my wallet right now. Let me call my credit card company and extend my limit. So every niche, he’s working within his market. What works there? He’s looking at the niches and the strategies and kind of polishing and formulating a plan that works for him and that’s the key—create that plan. Create that strategy upfront so that you can start to take steps forward and actually start making things happen.

Brandon: Well, it was purposeful in that it was a little bit of a lifestyle engineering. I said, how much time and effort and energy do I want to spend on certain things and how much cash do I really want to have? If you use the mindset of every month, put yourself in a position to take more and more risk, then all of a sudden, you can get to a place to do really cool things. So I’ve kind of hit phase one, where between what my wife’s doing, what I’m doing, we have enough to really do some cool things and both in terms of we have more control and flexibility with our time. But at the same time, now I’m to the place where I can say, you know what, maybe I can get a couple of people together and we can go look at that $2 million dollar deal. I know I can get the bank loans set up. I know that we can add value to this deal. But all of a sudden, it can start to get more fun.

Brandon: That’s cool. I love that. I like that term, lifestyle engineering. That’s kind of what it is. You’re saying, this is what I want out of my life. I’m going to build it out of my real estate investing. I’m going to engineer this to make it happen and it’s one of the things that we all love about real estate, is it has the ability to do that. So very cool.

Last question I have before we get out of here or before we move to the Fire Round, anyways. What are some of the potential pitfalls or things that can happen when you invest in those resort areas or mountain towns, things that you are doing right now?

Mark: I think a lot of folks do not give enough credit to just the fact of liquidity. These markets are more like rubber band types of reactions, so when things are going great, all of a sudden, there’s just a lot of activity going on and you’ll have a hard time finding a place to rent or buy. At the same time, boy, when it got soft, it got soft hard. You have a funny way of saying that but that’s really what happened, kind of. I mean, the thing about it is, in a resort market, there’s not cookie-cutter houses so much. A lot of the stuff that really got into trouble was like the $800,000 custom home that was just an oddball. And it sat there vacant and there’s a problem with it or you know, the same thing with the commercial side of things, too. There’s just not a lot of liquidity in these markets whenever things don’t go well. So from the investors’ perspective, you have to have money in reserves to get you through these tough times.

Josh: That is a great bit of advice and I think we can apply that to absolutely anybody in real estate, whether they be a flipper or rental property, single-family rental property. I mean, reserves are absolutely key.

Mark: I think it’s coming again to the point where if we do have another soft spill, there’s just a lot of people stretching right now, whether you might get caught on a couple of bad flips or you might get caught doing a couple of speck houses, that’s when the heartache starts for sure.

Brandon: Yep. Very true. All right, well hey, let’s shift gears and move over to the World Famous Fire Round, which today is sponsored by “PatLive, the leading provider of call center services for real estate investors with over 15 years of experience. PatLive’s professional agents have helped thousands of people just like you spend less time on the phone and more time making money. Setup is fast, easy and flexible. PatLive can recommend the perfect call flow for your needs and create a custom solution just for you, whether you’re feeling calls from yellow-letter campaigns, prescreening buyers and sellers or managing rental properties, PatLive can handle it all. To start a risk-free 14-day trial and get half off your first month of service, call 1-800-862-0002 or visit PatLive.com/BiggerPockets”.

It’s time for the Fire Round.

All right, thank you very much to your response here in the Fire Round. Let’s move on and ask you those Fire Round questions. So these questions come direct from the BiggerPockets forums and we’re going to Fire Match you. #1: How can I know what a commercial property is going to rent for?

Mark: That is difficult because in a small market, you may not have good comparables. But you can go on the MLS. You can see what things are renting for. The important thing, especially in a small market, is to look at what the gross rent rates are and the net rates are and do your adjusting to really get a good handle on what the market rates are for your product type.

Brandon: It’s kind of like how you value the purchase price of a house. You’ve just got to find out what similar ones are going for and adjust up and down based on what your property has or doesn’t have.

Mark: Also, if it’s a gross lease, let’s say it’s a gross at $20 a square foot. Okay, well then you might be going on triple net. Well, the triple net’s $15 but it’s really hard building to building to know what those expenses are going to be so Apples to Apples is more difficult. It does take a little homework and a little bit of math.

Brandon: Okay, cool, awesome. My question—do I need a commercial real estate broker to find a good commercial deal?

Mark: No, absolutely not. You know, I like the fact that Ben was talking about sitting in his Tesla and the guy sat down and wanted to talk about selling his commercial portfolio. That is how a lot of business happens. In fact, there are some folks in my town that I know are getting to a point in their life where maybe they don’t want to be property owners. Maybe they want to be property lenders and so yeah, I’m talking to those folks for sure.

Josh: So do you think just the relationships are the best ways to get out there and source deals? I mean, obviously brokers are a great resource.

Mark: Well, in small markets, especially—there’s not a lot of people that “specialize” in commercial real estate brokerage because to lease a commercial space in a small town, it’s not all that fun. There’s not a whole lot of sexy action in terms of commission and all that kind of stuff, as well as just selling those buildings. It’s not as fun and easy to sell a luxury home, for example. So why does somebody want to get in that business? So there is a lot of opportunities in the small markets to just go out and hustle, make calls and get to know people, for sure.

Brandon: What’s your best advice for people looking to invest in another city outside of their own? Maybe they found a city that’s growing really fast and they think there’s potential. What’s your best advice for somebody doing that?

Mark: I would say to find somebody to partner with in that community. You have to go in with the mindset of a win-win for everybody involved. In fact, I have two deals closing before the end of the year and one of them is in Tulsa and I got to know a guy in Tulsa on a recent trip and I know what his goals are in life and kind of what his capacities are. He and I are going to work together. I’m going to be the money guy and hopefully, we have a good result on that. So he’s going to be my boots on the ground.

Josh: Last question—do you think out-of-country investing is a smart move for new investors?

Mark: The only thing I’ve ever looked at was things in Puerto Rico and Mexico and you just have a lot of things that are outside your control there. It’s a long flight, oftentimes to go and take care of those things. I’m not to that point, so I don’t have a good response for you.

Josh: Let’s move onto the last segment of the show. Famous Four.

Brandon: #1—what is your favorite real estate book?

Mark: It’s sort of a real estate/business book. I do like the Rich Dad, Poor Dad four-quadrant. Cash flow quadrant. I was just checking it out the other day. Good mindset book, for sure.

Brandon: What about a business book?

Mark: I actually have it here with me. This is a non-traditional choice. This is not your light, bedtime reading. I recommend folks pick up a used, old copy of the Captain Schweser CFA Level One, Financial Reporting Analysis book. Yes, very boring. Within a phonebook-sized book, you can really get a good brush up on accounting. Or if you’re completely new to that stuff, it will really help you get to the point where you can prepare that stuff for the banks, etc.

Josh: You know what’s interesting about that is as you escalate, and the levels of real estate investing, from novice to become more advanced, you really do need to become more sophisticated in your knowledge base. And while I give grief to this book, it’s like exceptionally boring, you have to start to understand some of that stuff.

Mark: The pages are so thin, they’re comparable to like Bible book pages. So I get that.

Josh: All right, Mark. You’ve got two kids. You’re living in a pretty cool part of the world. What do you do for fun?

Mark: Besides the normal hiking and skiing, I do a lot of back-country skiing. You know, that’s where you put skins on the skis to go uphill, so that’s great exercise, a lot of fun.

Josh: Could you go back? What are you talking about? I’ve never heard that terminology.

Mark: You’ve never heard of that?

Josh: No. You put skins on? What?

Mark: You put skins on your skis. It’s called Alpine Touring or AT Skiing. You put skins on your skis. You can go up a hill. You can go check out stuff that the resorts can’t offer and yeah—you have to be careful with the avalanche danger, so I’ve got to give that disclaimer but it’s awesome. Great workout, great views. And then you get power turns.

Josh: Back country’s really cool.

Mark: Yeah, and then a lot of roadbiking, too. This is a good area for roadbiking. I do want to encourage any BiggerPockets listeners to come visit me in Glenwood Springs. I will give a 10% off BP discount to anybody that wants to stay at one of my vacation rentals. But we may end up drinking beer and talking about real estate. That may be part of the deal.

Brandon: I’m coming. I’ll see you tonight.

Josh: Nice. That’s awesome. All right.

Brandon: Last question from me and the last question of the Famous Four. What do you believe sets apart successful real estate investors from those who give up, fail, or never get started?

Mark: I liked what Brian said in that same episode we mentioned before about just the ‘why’ and I think that if your ‘why’ is you just don’t like your boss and you think that real estate is going to solve your problems, you’re going to have a tough time. I think that the ‘why’ has to be multi-faceted. If you really want the freedom, if you want the lifestyle engineering that we talked about, real estate can help you but make sure you’re doing it for the right reasons.

Josh: I love it. Mark, thank you so much for coming on board. You already plugged your vacation rentals and your 10% discount. Where can people find out more about you?

Mark: I think BP is the best way for the community and I look forward to hearing from folks, for sure.

Brandon: Awesome. We will, of course, link to that in the show notes so people can check you out there.

Josh: At BiggerPockets.com/Show156.

Brandon: There you go.

Josh: All right, Mark. It’s been a pleasure. Thank you for coming on board. Thanks for being a part of the BP family and enjoy the snow.

Mark: Thanks, guys. Yeah, over a foot this week.

Josh: Yeah, we’ve had almost a foot this week in Denver. So I feel you.

Mark: Thank you, appreciate it.

Josh: Thanks. All right, guys. There was a lot of wisdom in there. I hope you guys were able to get it all. If you weren’t, get back in there, listen up again. This show is difficult. It’s funny, because you want to pick like, hey, we’ve done 156 shows. Which were my favorite? Which were my top 10, my top 15? And I don’t know about you but I am finding it a lot harder and harder to do that just because the quality of the shows is so good and just—I don’t think I leave an interview without walking away with something.

Brandon: Same here. Every guest we have now, I learn from continually and the shows we’ve recorded that are coming up soon, they’re incredible as well. It’s been a really good run on this podcast with amazing guests, so thank you guys to our amazing guests, those people who are listening who have been on the show. And if you are listening to the show and you think you could be an amazing guest, we would love to talk to you more about that. So go to BiggerPockets.com/guest and fill out the simple form there and let us know what you do and what you can bring to the BiggerPockets table.

Josh: Awesome, awesome. Before we roll out, I want to read a review. This is from DesertSkier. He left it on January 2nd. “We’ve got a real estate investment group here in Dubai and many of the members recommended BiggerPockets so I thought I’d give it a try. This is indeed a brilliant project for all those who value their freedom, time, and financial. I love listening to the other real estate investors and pick up on as many little details I have not thought about”—I can’t talk. I can’t read—“I’m convinced that the information provided allowed me to bring more astute decisions to my own business which probably avoided many mistakes called ‘experience’. Great podcast. Thank you for bringing it to us”. Well, that is pretty awesome.

Brandon: I love it.

Josh: The listeners are everywhere, Dubai, you name it—we’ve got listeners everywhere so a big thanks to you. And if you want to leave us a review, please do so. Just jump on iTunes and you can leave us a rating and review and we would very much appreciate it. Otherwise, jump on the show notes— BiggerPockets.com/Show156. It’s BiggerPockets.com/Show156 and I don’t know, that’s all I got. What do you got?

Brandon: That’s all I got. It’s a great show. Go listen to last week’s if you haven’t listened to it, or next week’s if we’re done.

Josh: Take us out of here.

Brandon: We’re done. Hey guys, thanks again for being a part of the BiggerPockets community. Happy New Year. Use this time to crush your goals. We’ll see you on the other side for BiggerPockets. This is Brandon and Josh signing off.

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