BiggerPockets Podcast 047 with Joel Owens Transcript
Link to show: BP Podcast 047: Apartment Complexes, NNN Leases, and Commercial Real Estate with Joel Owens
Josh: This is the BiggerPockets Podcast, Show 47.
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Josh: Hey, what’s going on everybody? This is Josh Dorkin, host of the BiggerPockets podcast here with my fabulous cohost, Mr. Brandon Turner. Yo yo yo what up Brandon?
Brandon: Yo what up? Hey you want to hear me rap?
Josh: I do.
Brandon: Alright. I got to get a beat. You go don, don, don, do, don, don.
Josh: Oh, is that what we’re doing? Okay.
Brandon: Oh, I can do it.
Josh: Dom, dom, dom, do, do, dom, dom.
Brandon: Alright, stop. Collaborate and listen.
Josh: You’re not even. You’re not even.
Brandon: Ice back.
Josh: You’re not even on the beat.
Brandon: Well, you know. We’ll have to listen another time.
Josh: That was awful. Stop.
Brandon: I was on a road trip once with my wife and I learned all of Ice Ice Baby. It was good.
Josh: Yes, you and about 200 million other people.
Josh: Have that song burned into their brain.
Brandon: Yes, you know, we’re cool people, you know. Not everyone can be quite as talented. Anyway.
Josh: Alright, yes, anyway. This is the BiggerPockets podcast and I am here with Brandon who apparently fancies himself Vanilla Ice and so. We got an interesting show today guys. We really wanted to start exploring a little more into some more advanced topics and move beyond just really covering kind of the basics so today we’re going to dig in to commercial and more specifically a topic that’s kind of fascinated me, which is triple net leases, which you’ll learn more about as we as we go along. Before we do that though, I would like to present today’s Quick Tip.
Brandon: Quick Tip. Quick Tip.
Josh: What is today’s Quick Tip Brandon? I’m not going to present it. I’m going to just leave it for you.
Brandon: Alright my Quick Tip today is go befriend a banker right now. The reason I chose that one is because this week I got a call from my banker and apparently he read one of my blog posts and was impressed and so his boss I guess read it and got told the banker to give a call and get me into the bank to have a meeting to talk. That’s my Quick Tip. Start talking about what you’re doing with people especially your banker.
Josh: Clearly, clearly they were as drunk as you are right now.
Brandon: Clearly. Clearly. Alright, that’s my Quick Tip.
Josh: That’s a great tip. That’s a very very good tip you know. That’s a very very good tip. Bankers are the lifeblood of a more sophisticated investors and the more of them you know, the better you’re going to do so that’s fabulous. Alright guys, really quick before we get into introducing our guest.
I just want to give a quick reminder if you like the show please jump on iTunes and leave us a review. Leave us a rating. Those reviews and ratings really help us out and they help other people get to know more about BiggerPockets. The BiggerPockets podcast so definitely take a minute to leave us an honest review there. We definitely appreciate it.
Otherwise, make sure to check out the show notes at BiggerPockets.com/show47 where you can ask questions of our guest and anything you want to ask him. Anything you want to talk about, you can do that there at BiggerPockets.com/show47. Alright so Joel Owens, our guest. Joel is an active member of the BiggerPockets forums and he’s definitely an expert in all things commercial.
He’s a commercial real estate broker and a commercial investor and he’s going to share a lot of really good stuff about getting started with the whole world of commercial investing. I think we’re going to cover everything from apartments to like I said to triple net leasing and a whole lot more. Today’s show is definitely packed with some high-end stuff so as always, bust out a notepad and take some notes unless of course you’re driving in which case that would be a bad idea, but you can always rewind this, this thing and listen again if need be. With that why don’t we bring Joel in and hopefully Brandon can bust a beat here and get it going. Come on Brandon.
Brandon: Don, don, don, don, don. Alright.
Josh: Hey Joel what’s up man. Joel welcome to the show. It’s good to have you here.
Joel: Thanks Josh.
Brandon: Oh, no thank you for me. Oh.
Josh: Oh, that sucks man, he’s—Joel is the man.
Joel: Oh well Brandon works behind the scenes so he doesn’t count.
Brandon: Joel knows how things work around here.
Josh: Joel just climbed up the ladder yet another rung. Nice one. Well what’s up?
Joel: Yes, yes, I didn’t want to—I didn’t want to say hi to Brandon because he just got off the hamster wheel trying to power Josh’s house so don’t even start.
Brandon: There you go. See he understands how this game is written.
Josh: Oh, I see, I see, alright man. Well, enough about me. Let’s talk about me. I mean wait, let’s talk about you. Alright, so for those folks who are unfamiliar with you, Joel, how did you get into real estate.
Joel: Well basically, you know I started out young owning a couple different businesses and I used to have a car out of shop. I used to have a pizza shop and basically.
Josh: Okay, you got to stop right there. Hold on. Hold up. I’m a New Yorker man, you got a pizzeria.
Joel: Yes, yes, I had a pizza shop for awhile. I worked for—I worked for Dominoes Pizza for awhile and I was a driver and I was a manager and the person I worked for, he owned about 84 locations.
Joel: He was one of the biggest franchisees in the country. He actually was Tom Monehan’s right hand man which is one of the brother’s that owned Dominoes Pizza and they basically, you know started—grew the company real big together. He used to own some commissaries too, but it came to a point where they told him he either had to own the stores only as franchisee or in a commissary so I learned a lot from him and after I left there, I opened up my own pizza shop which I had for a number of years, but the hours were really really long. If you took a vacation, the employees didn’t care about the sales like you did. They’re just making hourly so.
Joel: After awhile, I just said hey, I want to get out of this and then a friend of mine owned a landscaping company and it got to a point where either he was going to have more crews or sell it off so he sold his company off. He had been in real estate for a few years. I had always wondered about it and so I just gave him a call and asked how he liked it and he said he loved it. That’s when I went and went and took the test.
Brandon: What was he? Was he an agent or a broker then?
Joel: He was an agent in Georgia as soon as you get licensed you have to be licensed for at least three continuous years before you can set for your broker’s license.
Brandon: Okay. Was he doing—was your buddy doing commercial or residential?
Joel: No, he was just doing residential. He knew a bunch of people from his landscaping business that he sold off. He did their yards and everything else. When I first became licensed, I was kind of focusing on or you know, back then, the market was just starting to turn. It was still booming for maybe the first you know year or so after I got licensed and then the short sale started happening and I did those for awhile, but the emotional drama from all the residential homeowners about you know, we’re getting foreclosed on, or they’re coming after my car and all this kind of stuff. Those long night hours and weekends, I was really trying to get away from that.
I had that with the pizza place, working in that business and I was trying to get away from that so I was really looking for something different after I got licensed. How I kind of transitioned into the commercial aspect was, funny enough there was an older gentleman. We were friends. I used to be a delivery pizza driver and we got to talking and basically, he owned an old coin laundry.
He had inherited from his mother. Him and his brother did. This developer had approached him to buy their property. It was an older building built in the ‘50s and basically he asked me to review the contracts of the purchase of sale from this developer because this developer was hounding him to see if I could spot any potential problems.
Basically, I went through the whole contract, spotted a bunch of issues. We met with the developer directly and then after that meeting the developer actually called me and then wanted me to come on board because I caught every out on the contract. Usually, people don’t catch everything. I caught every single thing and then he wanted me to help him assemble all the 25 acres there for the commercial next this project so I worked on that for about the next two or three years.
Brandon: Oh wow.
Josh: You had up until that point, you had zero experience looking over these kinds of agreements or doing any kind of deals in the commercial side correct.
Joel: Yes, I mean I owned some businesses before so as far as that aspect, you know talking to the, you know, owners. A lot of these land parcels were older businesses in the ‘50s and stuff so I could kind of relate to them as a business owner that way. I knew a little bit of that side of it, but as far as you know assembling the land for x, we’re going to use tax credits. It’s going to cost this much to scrape the land. It’s going this many times and phases. We’re going to have to do all these different things. You know meeting with the mayor and you know the zoning and all these kind of stuff. I really didn’t have experience with that. The guy I worked with over the next two to three years, he actually—he used to work for some of the big REIT companies and they would do takeovers of other companies and basically strip them.
Joel: Strip them down and you know re-sell them and all these other kind of stuff and basically it was kind of a soul less job. He basically left that after, you know, many many years of doing that for one these large REITs and he basically went on to just do his own development projects as a consultant you know to—usually what happens with these development deals is you’ll have an owner that owns some land for a really long time that might be local and they don’t really know how to approach you know big time developers or you know, get an anchor, public’s Kroger, how to negotiate with their acquisition departments or present a project or any of that stuff. What they’ll do is they’ll line up with the developer that ‘s a consultant and basically puts the whole project together.
Josh: Got you.
Joel: Keeps them moving forward.
Josh: Got you. Got you so you were always pretty varied in there and it sounds like you know the next two plus years or so what’s pretty much on the job learning experience for you.
Joel: Yes, I mean I had to go out there to you know, some of these real bitty houses some of them were little bitty businesses and I mean it was a process. I mean to get the stuff under contract, you know we’d negotiate a few points, go back, sometimes it took me a total of about six months or so before we finally got them under contract and everything was taken care of.
Josh: Got you. Got you. No that’s cool. That’s great so how did that transition from—how did you transition from that to going off on your own and starting to make your own purchases?
Joel: Well I—about that time, there’s kind of a transitioning happening in the marketplace. You know, at the end of that project, the market was kind of getting soft. A lot of the new homebuilders weren’t building, you know the $5-$600,000 homes anymore. They were kind of pulling out. Selling the rest of their inventory because they saw the writing on the wall and so a lot of commercial projects that are you know, ground up development kind of stopped at that point.
You know and they were just finishing what was in the pipeline because you know, all the commercial money kind of dried for new construction and then what would happen is if you had a fifty thousand dollar house, mixed in with $500,000 houses then for instance publics the anchor would say, “If we build this here right now because the economy is going down. We won’t have the customer base that we want here even though we love the area. Love the traffic accounts, etcetera.” I took on bunch of different land listings for awhile, but those weren’t really moving and they cost a lot of time and money so basically.
Josh: Are you talking—sorry to cut you off. Are you talking about just raw land?
Joel: Yes, yes, mainly raw land. There was even land that had been scraped. It was just—you know, just dirt there. It could even be in a good area, but what happened at that point is basically you know the bottom dropped out. Foreclosure started coming into the market, people started defaulting on their loans, on the commercial side and people kind of switched instead of building unless it was an A-corner location.
What they would do is they would just buy something for less than replacement costs. You know, you could do a short sale, REO for the bank and just do a value at a tight deal. At that point I kind of switched. I did some letters—mailed out some letters. At that point I got my brokerage license, my own company at that point just to do what I wanted to do and basically, I got a call off of that and it was say a group that owned about 200 and something units up in Dalton, Georgia.
It is the carpet capital of the world for the manufacture a lot of construction material and basically, they had financed during the height of the market and I met with them and I ended up listing their 60 unit, one bed apartments as a short sale with the Wells Fargo being the lender.
Josh: Got you, okay.
Joel: I learned a lot from that.
Josh: Got you. Got you so now you’re working on the commercial side on your own. You’ve got your brokerage, you know, at what point do you say you know what I’m going to jump in and what does that look like? How did you on your own personal side start to acquire these commercial properties?
Joel: Well you know me and you did a—we talked awhile back about you know the first one was a 20 unit that I had in Roswell. It was five quadriplexes four units a piece for 20 units and basically you know I did that when at the time—I did that one with a wrap. We wrapped around the existing mortgage so you have a certain price of the—certain debt service for the first mortgage you create a second note where they owner finance you around the existing note. Just wrap around it.
Then you actually get the—a deed to the property. That particular property I don’t own that one today. That one’s a long story. I learned a lot when I had that property. Basically, without getting into too much—I won’t go into too much specifics on the people involved, but basically, after I bought it, what I found out later was is the seller there was supposed to be 18 out of 20 units occupied. What I found out later is the seller was taking a line of credit from their house and so if the rent was $18,000 a month. They were collecting $9,000 and then they were taking $9,000 from the line of credit and then putting that into their business account like they were collecting for rents.
Brandon: Oh, that’s not good.
Joel: Yes and so basically what happened is when I got in there, I ended up having to evict about ten people.
Joel: Ten units and because they had previous agreements with the—unspoken agreements with the landlord or they’re doing a handyman services and basically the seller was a way learn dealer. Basically what ended up happening was that because they owner financed it on the wrap the property insurance company when that came up to renew on the property for them, they found out that they had switched a title was no longer in their name. They wouldn’t insure anymore, you know renew their policy. Basically, at that point you know, me and the seller had gone round and round because basically I evicted all these people.
I was constantly doing repairs to the property to get them in rentable condition and basically the property was basically you know hemorrhaging cash. The seller told me that I could you know convert the deed to a land contract and then work on all these repairs so that they could renew the insurance policy and then at the end of the term with that, you know then they could you know give the deed back to me or something like that. At that point I felt that the seller had led me on a lot of different things. Basically that first, you know about the year and a half that I owned that. I was going over there probably about three times a week, fixing stuff. You know, an electrician they want a $120 to fix a 57cent outlet.
Joel: And I could do it in 10 minutes. I had property manager on site, but it wasn’t professional property managers just a friend of mine I knew and he was doing an okay job, but the type of tenants that are there was in an A area, but the type of tenants that are there, they basically, they’re holding down two jobs so if the second job is giving them 20 hours a week and it gives them ten hours a week. Then you know, then they only have six out of the 800 of the rent.
Joel: Then they’ve got to go to you know a charity or something else to try to get the other $200 bucks so what it does is increases your book keeping and increases your times to collect.
Joel: What ended up happening in the end is you know, I ended up consulting an attorney and I gave the property back to him. The attorney said basically, you know, I had you know, signed as a guarantor on a loan, but basically there’s a law in Georgia where you know it’s a statute of fraud so someone induces you to enter into a contract under false pretenses then basically it can rule that contract invalid.
Joel: Basically, by I mean what they had done is basically committed fraud. They basically took this line of credit from their house and made it seem like they were getting full deposits in their bank for their business point when they weren’t just to try to you know sell a property or get the problem off of them so the attorney basically told me you know I could sue them. Try to get a judgment you know that could take up to six months or a year. A lot of legal fees and I would spend a lot of time and money I would still might not be able to collect so they just advise to cut my losses and move on from.
Joel: Basically, that’s what I did. I—you know, I maybe lost maybe you know probably $6-$7,000 on that deal so it wasn’t too bad. You know.
Josh: Better than it could have been.
Joel: Yes, yes, it could have been monstrosity, but I learned a lot from that I mean the biggest thing I learned too is on that particular street, it’s in an A location, but there’s about you know 25 quads on that street, four units and even if you have an A location, the other investors had you know different levels of debt service. They bought at the head of the market for—they didn’t want to put repairs in to the other buildings and so they would just reduce the rent and not fix anything so you know, we would get a call from tenants that would want to live in our place because it was nice and fixed up. They wanted to pay the $750 rent instead of the $850 we were charging, but the place they were moving from on that same street was a dump. I mean when it rained, the lights would flicker on and off and had mold and had.
Josh: Nice, slumlords.
Joel: It had all these crazy stuff, rats and all these stuff and so you know what I learned form that experience is no matter how nice you make your unit, no matter how nice the area is. If you’ve got property building owners around you—you know, it’s still going to adversely affect your investment because I had people that said they loved the area, but when I drove down the street to get to my building, to live my building, the other buildings that were run down. They just didn’t want them to rent there.
Josh: Well that’s, I mean I guess that worked to your benefit. Let me ask you a couple things here. First, really quickly, what’s an A location?
Joel: You know, an A location is just you know, really strong population growth, has a really strong economic development department where they’ve got a lot of things planned in the future when you look at the future land use map and it goes out you know 15 or 20 years. They’ve got a lot of smart growth going on. The population levels are growing. The median income is really high. It’s got really good schools, really great school systems, a lot of parks, recreational activities, medical facilities.
Joel: Churches, that kind of thing.
Josh: Got you. Got you and then presumably there’s a B and a C and D and how does that work? What does it go down to?
Joel: Yes, you know I mean like D is basically, you know, some people don’t like the terms, but we just call them war zones.
Joel: You know it is basically a crap hole. Just to be honest with you. I wouldn’t land that couple of years ago looking at some of those single-family houses and then there was some streets there. There were just—I mean I was driving in the middle of the day with the doors locked and I wouldn’t even get out to walk on the sidewalk.
Joel: I mean it was just that bad. I mean.
Josh: It’s a crap hole.
Joel: Yes, some of the streets are just called, one of the streets was called Gun Alley Drive. I’m not joking. It was really called that.
Josh: That’s awesome.
Brandon: That’s funny.
Joel: It’s bad when even the police don’t go down those streets.
Josh: Yes, yes. Alright.
Joel: That would be the worst area. You know B or C, it just kind of transitions to you know more blue collar worker they’re working two jobs or kind of more industrial area. I mean it’s a sold and stable area. The D areas tend to have what I call violent crime versus non-violent crime levels so.
Joel: You know, murders, rape, shootings, you know shootings all this kind of stuff. If that’s real high frequency, that’s a lot different than the area that you know they might have a little bit of high crime. It’s like petty theft or it’s you know domestic disturbance or something like that.
Josh: Right, right, yes.
Joel: You know.
Brandon: Obviously you advise people to stay away from the D areas, but what do you think about B or C? Should I as a new investor, should I runaway from B and C and only stick with A or is it okay to kind of, you know, go slumming a little bit.
Josh: Oh geez.
Joel: No, I mean. No, B only.
Josh: That’s nice Brandon. Opinions of my cohost are only.
Joel: Yes, the B and C areas are actually really good areas. You know, if you go to an A area, a lot of those turns speculative. More people are buying on the appreciation factor and they’re hoping for strong rent gross.
Joel: When they go in, the cap rates aren’t going to be as strong and you’re really not going to hit a lot of your target cash numbers and so you know most investors, they like you know a B or a C type building in an A or B area.
Joel: It’s what they used to—they try to go for—I mean the lowest you’ll go is you know C building, C area type thing. You just got to make sure when you go in the area that you get it for a really good price so when you exit later on, that you won’t have any trouble moving the property because there is always a buyer even for a war zones there’s a buyer.
Joel: You got to make sure your cap is strong enough on your exit to get out of it.
Brandon: Yes and we’ll talk about that. I definitely want to cover caps and apartment evaluation in a little bit.
Josh: Yes, yes.
Brandon: Anyway, I think you had a question Josh.
Josh: You know, we’re talking about the show’s focused on commercial real estate and I guess the big question that I think a lot of people who are listening have is is commercial real estate only for those people with millions of dollars or can anyone jump in and start getting involved in that side of the business?
Joel: You do need more money to start in commercial. It depends on what you’re talking about. If you’re talking about small mom and pop type commercial, like a you know a gas station that will sell for $200,000 or trying to tie up some commercial land for development or something like that. You know, little small warehouse you can do those types of deals with less money. If you’re talking corporate rated type tenants and stuff like that. You know usually the purchase price is at least in the low millions and you do need, you know a couple hundred thousand at least for with a partner to get started with those.
Brandon: That’s good to know because I know a lot of people you know, look at you know things like triple net lease investing which we’re going to cover later and they think oh man, that sounds so nice. I wan to get started right now. Can I do it with the $12 in my bank account? You’re saying that’s probably not going to happen.
Joel: No, that’s, you know that’s a pipe dream. It’s not going to happen.
Josh: Come on. No I heard the seminar man. They said I can buy thousands of apartments for no money down right away.
Joel: Oh yes, yes, well you know the funny thing about that is in 2008-2009 when the markets froze. Sellers were desperate at that point so you can approach them with no money down or you know all these kind of really crazy type scenarios, but now that the market has kind of thawed out a little bit, you can still find sellers to hold the second mortgage or you know, even finance on the note or something like that. They really do want some money and security into deal, a large or a private complex even no money down. You know, you’re going to spend tens of thousands of dollars on the environmental phase one survey, site inspection, cost reserve stable, the appraisal, closing costs so you know you’re not really getting a no money down.
Josh: Got you.
Brandon: That’s one thing a lot of people when we—when you get the commercials, I was shocked like when I tried to get any work done on my apartment complex, everything is more expensive. I mean an appraisal is not the $500 that I pay for my house. It’s you know, $5,000 for an appraisal. Everything is just significantly more expensive. Even an appraisal between the difference between a fiveplex and a fourplex. It’s significantly more for me so I am—I was shocked by that when I kind of started getting into that stuff so. Well, let’s actually move to talk more about the apartment complex thing because that’s one of my favorite topics in all of real estate investing. I guess I want to know your opinion. Is it ridiculous for somebody to think about starting with apartments or should they start with a single-family house?
Joel: No I mean, you know, sometimes what you suggest, you know, getting a you know FHA loan and getting a quadriplex you know four unit. They can get in with a little money down that way. That can, you know, really do well starting out with that.
Brandon: That’s only for one through four units correct?
Joel: Right, yes and you know, the thing is with that you’ve got to have a certain type of mentality to want to live next to your tenants.
Joel: I’m not that person.
Joel: You know, I’ve—from my clients that I have that I’ve learned from and other sellers with larger apartment buildings. They structure everything in a way where they’re really hands off. They just building everything into the cost model and they’re hands off and they don’t have to deal with any of that drama at all.
Josh: Got you. Got you. Yes, alright so how should somebody start looking at apartments. I mean you know are they listed on the MLS or do they have to go directly to a commercial broker or do commercial sites like you know, Costar, Loopnet, so on and so forth?
Joel: Yes, Costar and Loopnet, they’re actually you know, they got bought out and they kind of merged into two companies.
Joel: Even thought they keep them separate.
Joel: Costar is a lot more office type property. Loopnet is more where most of the you know apartment type stuff is on. You’ll find the bigger units on Loopnet, 20 to 2-300 unit type buildings. The smaller buildings, the one to four units, you’ll see a few on there, but most of them, you’ll usually find on the residential MLSs where they have homes listed and stuff like that. You’ll find a lot more of the duplexes to quads on those type of sites.
Brandon: Okay, so yes, I notice on my MLS, my local MLS that sometimes I see apartment complexes on there seldomly. They’ll be anything up—I mean be anything up—I mean went and saw a hundred and something unit, but that’s very very rare. Usually like you said, they’re the smaller properties, anything under 20 I see semi often. I don’t know if that’s just because brokers put them on both places. Probably it can’t really hurt so, but how do you—so moving on to a kind of complicated topic that I know we can spend an hour talking about and it would really be helpful to have you know, pencil and paper but for an audio an audience. How do we value an apartment complex? How do you determine how much it’s actually worth? What’s that look like?
Joel: Well for two to four units, the appraisers typically used to compare both sales approach. When you get into five units or more, they use the income approach which is based on the cash flow, that the property is generating, the income that’s coming in. A very simple way to do it. The simplest way that I found is pretty safe is basically you just take the gross expected income so if you’ve got you know—say you’ve got four units and they’re doing four hundred a month. You take that and you multiply that times four you get 1,600 and then you multiply that times 12 months and that gives your gross expected income. Then what you do is you take away about 50% of that for property.
Josh: That’s $19,200 by the way. Okay and so they take your property management, you operating expenses, and your bank can see factor and that’s what makes up the 50%. What you’re left over with then before your debt service because it’s just like if your buying it with cash is your net operating income and what you with that is you divide that by purchase price to get your cap rate so on how much you’re paying and you know most people shoot for a ten cap or something. That’s kind of a standard guideline. Now my rule is if the landlord is paying any kind of water on the property or any kind of utilities like that I bump it up to about 60% of cost of the gross expected rents.
Brandon: I found that pretty true too. My apartment complex, that’s 24 units and that’s exactly what it is. It runs about 60% total because there’s water...
Josh: You guys are saying that on these apartment complexes. Instead of estimating 50% of your expenses like the 50% rule would say you’re going to actually increase that up to 60%.
Brandon: That’s correct.
Josh: Okay, got it.
Brandon: Alright, so real quickly, recap what you just said there. Everyone kind of gets it. You said four units, I’m doing this math as I go, four units times four hundred a piece. It’s $1,600 a month times that by 12 and you get $19,200 per year. Then multiply that times the let’s say 50% rule or 60% rule. Let’s go with 60% so we’re going to actually go by times 0.4 correct, Joel?
Joel: Yes, that’s what I do, I just do I just do 0.40.
Brandon: Because that’s 40% rule because that’s 40% remainder so there’s $7,680 left so then we want to divide that by the purchase price. Let’s say we paid $100,000 of that property. That gives us a cap rate of 7.68%.
Joel: Yes so at a ten cap, you’d basically be looking at about $76,800.
Joel: Which is just right.
Brandon: If this property was listed at $100,000 and the average cap rate in the area was ten, I would say no this property isn’t worth a 100. This is worth $76,800.
Joel: Yes, the only way I would look at that differently is if it’s a really old building, sometimes they build those more spread out instead on of on a smaller parcel land and so if it was something that was commercial frontage or if it had extra land that could be divided out or something where I could turn it into a higher—highest in best use. I could get more money out of it then it might make sense.
Josh: Joel really quick. Can you just explain that though, the highest in best use? Is it just what it sounds like? You know the property you want to see how much money you can essentially milk out of it.
Joel: Yes, it’s just determining what would give you the most money and also it’s in what kind of time frame is it going to give you that money so you know you might say, “Hey, commercial development is going to give me this amount of dollars, but it’s going to take me three years to see those returns when the developer closes on the property versus I’ve got these other two or three exit strategies that I can get the money back within in a year.” What’s more important to me is getting this higher return over three years or is it going this other strategy for the second and highest best use of getting that money back within six months or a year?
Joel: Getting rid of this property so you have to factor that. That comes into play when looking at a property.
Josh: Got you.
Brandon: Cool and on top of that then I got two thoughts that came to mind. First of all, one just because I have to plug it because I spent a month of my life working on this thing is the buy and hold calculator from BiggerPockets. I actually put in all this cap rate stuff in there so you can figure out how much a property is worth based on that. If you want to check that out. BiggerPockets.com/calc also I will put in the show notes here on BiggerPockets.com/Show47. A few different articles that I really like for like figuring out all this work so if you’re really confused right now and you want to learn more about cap rates and how to figure out value of multifamily properties, I will link to a few of my favorite articles so check it out at BiggerPockets.
Josh: We put a lot of good content on the topic.
Brandon: Yes, yes for sure and it kind of confusing, but once you kind of understand it, it’s—like I said it’s one of my favorite things in all of real estate investing is this whole topic. Especially the topic of adding value so I kind of want to move that way a little bit. I think you can call it a value add? Is that right Joel?
Joel: Yes, yes, so you have a multifamily basically have kind of three segments. You have the fully performing property, which is you know, 85% to a 100% occupied. You have the semi-performing, you know value at this kind of the sweet spot where stuff is maybe between 40% and 70% occupied and then you have most of the you know you consider it vacant properties even if they’re 10% or 20% occupied. They’re basically vacant. You’re going to have to get those tenants out of there when you start rehabbing everything.
Josh: What’s the value, you know, the value play comes in when you buy a property that’s not fully rented correct?
Joel: Or you know, it could be something like you know someone really old owns the property and they’ve had for 20 or 30 years and it’s fully performing, but the rents are low for the market and they just haven’t updated anything with the properties so there’s other type of value in place that aren’t necessarily related to occupancy only.
Joel: The reason they go towards most investors I know they have what’s called the sweet spot and basically it’s properties that are about 40% to 70% occupied. If it’s 75% or 80% occupied, the person who’s holding the note, the bank, they aren’t that desperate to take a hit on it yet. The sellers that own the property, they’re still believing that it’s going to be turned around and it can go up to you know, 85%-90% and it will be fully performing again so there’s not much motivation for them at that point.
When it’s 40% to 70% occupied, it’s kind of turned a corner, starting to get in disrepair, the seller is cutting you know pest control services, lawn care, all this kind of stuff to quit hemorrhaging money and they stop taking care of the property, but there’s not that really that much damage done to the interior unit shed. Your rehab costs are going to be less going in and you’ll have some cash flow while you’re rehabbing the units versus a property that’s maybe 20% to 30% occupied or totally vacant. Sometimes, those are gutted down to the studs, the cooper’s been torn out the windows, roof, parking lot, everything needs to be redone and you know you can put 10-12,000 a unit into those versus you know 2 or 3,000 a unit into the ones that haven’t been ripped apart yet.
Josh: Other than you know the—being concerned of the cost of repairs and things like that which obviously is certainly going to be a concern, why should somebody care and I’ve got a point in asking that. You know, the commercial properties are valued based upon income. Is that correct?
Joel: Yes, they’re based on the income and what stuff is trading at cap rate-wise in the area.
Josh: Okay so ultimately, if I were to take an apartment complex and increase the income then by doing so unlike a residential property I’m directly going to see an increase quote value of that property. Is that correct?
Joel: I would call it a forced appreciation or forced equity play.
Joel: Basically, yes you’re increasing the income. Now the key is when you go into one of those type of properties, typically the way that they do this is they’ll try to approach the bank first to finance them on the deals short term for you know 12 to 18 months or something like that while they’re you know rehabbing it, getting it fully performing again and then at the end of that 12 to 18 months the way they retire the debt with that bank and refinance or they’ll sell off the property to you know, realize their forced appreciation.
Josh: Got you.
Brandon: Yes. To illustrate an example because I like to illustrate examples so the 24-unit that I bought was 50% occupied when I bought it. The owners had taken it back in foreclosure, they hadn’t owned it in like eight or nine years so I bought it 50% and I bought it at the value of being 50% occupied. Then when I bought it, I went and fixed each unit up one at a time and slowly brought the value up. Now you know I’m slowly working towards a refinance at the new hire value so that’s like what you’re talking about here right Joel about the value play?
Joel: Yes and the key is really. You want your exit cap to be stronger than what the market offers so in other words, if you’re going in cap rate is an eight, you stabilize it and when you peer, reseparate actions and your equity minus your commissions and resell costs and all that. You know, a year and a year and a half down the road. If you project the going and selling cap rate of that market is going to be a ten then you really want yours priced at about an 11 cap or something like that because typically, what I’m seeing right now is most of the buyers want to have the seller hold back a second, you know, a 10% or 20% second mortgage and if the banks wanting a 70% lender value that way the buyer’s only have to put down 10% to 15% of their own money, their cash versus dropping 25% or 30% down. What that does is that increases your cash on cash returns. Now for someone in your situation, Brandon, where you’re trying to realized all that first appreciation, if a buyer comes you and says I want you to hold the 10%-15% second and then you’ve got your real estate agent commissions on top of that, your closing costs, and everything else. That’s about 20% to 25% of what you were going to take away for your profit to put in another property. That’s now eaten up by holding a second in your resell costs and so you’re not going to want to a lot of value at type players don’t want to hold a second for that reasoning because it eats up all their profit.
Joel: [Inaudible][43:24] first.
Josh: Is that, I mean is the quote value at play, I mean to me it’s sounds like just a you know, little more quote on quote elegant flip. I mean you’re flipping the property regardless right? You’re buying it. You’re fixing it. You’re getting that cap up and then you’re reselling it. Is that right?
Joel: Yes, you just have to be careful on your rents so if you think the rents are going to be $475 to $550 in the area, you don’t want to push top rents upon the rehab. Yes, you’ll have you know you’ll have a brand new product, but you want to kind of be in the middle of that because you want the most tenant applicants for the best quality product just like when you’re selling a house or flipping so that you can screen for the best possible tenants to go in your units for the rehab. What typically happens is on the larger rehabs that are you know a 100-150 units, they’ll do other projections with a lower rent in mind so you know if market rent is $525, they’ll rehab their units and put it out there for rent rate of $475. That accelerates how many units they’re filling per month to get it stabilized faster so that they have it fully occupied in the sooner number of months so they can sell it a lot faster or refi a lot faster out of the property.
Brandon: Okay, alright, cool. Well, I have two quick last questions for you on the apartment thing. First of all, real basic, you mentioned it’s a—your local cap rate—there’s an average cap rate. How do you figure that out? What’s my local cap rate? Is that the same as what it is where you are?
Joel: Usually, there’s a couple different ways. I mean you can sometimes, your taxes says their website will have sales records on it or your local residential MLS will have a tax assessor feature that your agent can use or a sold feature. Loopnet also has a sold feature on there as well where you can look at comparable recent sales. The larger buildings, you know, instead of finding a comp that’s one or two months old. You might find the comp that’s six months or seven or eight months old because the larger properties don’t sell as frequently as you know, the duplexes to the quads do.
Joel: You have to adjust a little bit. You know, if you think the cap rate is seven, but you think that the market is kind of shifted 40 or 50 bases points then you know you kind of make your adjustments for that and for everyone listening what a bases point is is that’s a percentage of the cap rate so basically if I’m saying 30 or 40 bases points. Instead of being a seven-cap rate, I’m talking about—if I say 30 bases points, it would be 7.3 cap rate.
Joel: It’s going up 30—so hundred bases points makes up one percent.
Josh: Got you.
Brandon: Alright cool. Alright so then last the question on apartment stuff is for anybody who wants to get started with apartments, what is the very first step? Like what should people do that are listening to this podcast? Where should they go from here?
Joel: Well, you know one thing they can do is they can meet up with local investors in the area that have invested and can show them the positives and negatives and you know, they really need to determine how much cash they want to allocate toward their first property and that will kind of determine what level of property that they’re going to buy. You know, basically if someone has $300,000 cash to put down and a $100,000 in reserves, if the seller held back a 15% second mortgage on a 75% loan with value then the buyer would be putting down $300,000 in that situation so that means that they could afford up to a $3 million dollar apartment building.
Josh: You know what I think might be helpful for folks, you know we’re running through quite a few numbers. I’m wondering if one of us can at least for the purpose of the show notes at BiggerPockets.com/show47, can kind of write up some of these examples that we’ve talked over. I think just having people have something written down in front of them might be handy.
Joel: Yes, that’s a great idea.
Brandon: I’ll do it.
Joel: You know, commercial, you have bigger numbers and bigger amounts and there’s a lot more due diligence involved and so I mean it does get a little bit more complex than residential.
Josh: Yes, so anyone listening, you know we’ll make sure to put something together for you in the show notes. Speaking of finding local investors, another place they can do it is one the BiggerPockets meet page, which is our networking where you can find members. It’s just BiggerPockets.com/Meet and you can find local investors in your area or any area that you’re investing in via that page so check that out. Joel, one big the big things that I know Brandon and I were really excited about in getting you on board here was the topic of triple net investing. I think you know, it’s go this sex appeal so to speak you know, you know.
Joel: Oh yes, she’s pretty with all the right curves.
Josh: There you go, there you go man so let’s talk about that. What is triple net investing and why is it sexy?
Joel: Well, it’s sexy for people because it is totally hands off. You don’t have to worry about you tenants, toilets, and termites, people’s dramas, and their life issues.
Brandon: I like toilets.
Joel: But I like toilets.
Josh: They should call it TTT investing then. You know.
Joel: Yes, a lot of it depends on you know the general cycle of people investing. When they start out with a small amount of money, they’re typically going toward rougher areas, single family houses to get the highest yield that they can and then they usually go to the duplexes or quads and then they go to the larger apartment buildings, commercial and usually where they end up is in triple net. Now if someone has a large amount of cash from stocks or you know the bank account or CDs or just anything else.
They don’t really know much about real estate, but you know there are doctor or lawyer or high income type professional. The triple net leasing is very attractive to them because what they don’t have a lot of is time. They need a lot of you know, they’re looking for the tax appreciation and they’re looking to keep up with inflation and build up equity over time. I’ll just you an example, you know say a doctor making $200,000 a year income, well with their surgeries and their practice and everything else, they don’t have time for you know doing a value out on an apartment building or you know doing these other types of things with houses to try to approve appreciation and all this kind of stuff. They really don’t care about that.
They’re making so much money to support their life. They’re looking for the tax write down and to just build safe returns over time and you know a bank account with a CD they might be getting one percent a year versus triple net. If you get a 7% cap rate or 7.5% going in and you add your tax appreciation on that which we’ll call a tax equivalent yield, you can get double-digit returns and be hands off.
Josh: Got you. Got you so you know to dumb it down for those of us who, you know may not get it. Triple net lease investing is investing commercial properties where you don’t have to do really anything. I mean you’re literally, it’s your buying the frame of the building and you know, somebody’s kind of taking care of management. The tenants are taking care of maintenance and everything else and essentially you’re not going to see exemplary returns, but you’ll see pretty above average you know 10% or so returns potentially when it’s all said and done from these kinds of deals.
Joel: Yes and one of the things you have to think about is you know, people with higher incomes or just want to put it in a safe place, they’re not really concerned about the higher returns, what they’re wanting to do is they’re wanting to preserve wealth at that point. You know if you have $50,000 and you make $60,000 a year at your job and you’re trying to quit your job. You need the highest yield possible to get out of the rat race.
Joel: If you’re making a couple of hundred thousand dollar a year and you’ve got $500,000 or $700,000 or a million, you want to put it in a safest thing possible, if you’re getting 9% or 10% with your tax rate down, you don’t really care about getting a 14% or 15% return because you don’t want to put all that money, that wealth at risk for that extra two percent-three percent-four percent. It’s not worth it to you to possibly put that in an investment and lose that in a month.
Josh: Got you, so what is a triple investment look like? Is that buying the candy store on the corner? Is that buying a building where Walmart is going up? Is that buying, I don’t know, I mean what does triple net investment look like.
Joel: Okay well, in triple net the first part is STNL, which is Single Tenant Net Lease. That’s for a free standing building. That is not connected to anything else so that would be stuff like a Dollar Store, a bank, a medical office, a restaurant, a pharmacy such as Walgreens, CVS, Rite Aid that kind of thing. You know, with a single tenant net lease, there’s so many variables to it with the kind of return that you want. They break it into a bunch of different categories so if you want a pharmacy, the way those are typically structured are those are more for retirement plans. You know, when someone is going to pass away, estate planning. Those are typically 25 a year leases in a primary term. They don’t have any rent bumps, any rent escalations each year.
Brandon: You didn’t misspeak there you really mean 25 year leases right?
Brandon: We’re not talking month to month or a one-year lease like a residential? 25 years?
Josh: Well that’s stability right there.
Joel: Well, see as far pharmacies go they’re the most stable because some of them have a hundred year history so lenders love them so you know you can get in with those with like 10% down or 5% down because the lenders love those properties. You know for instance, Walgreens, you know you’re talking a multibillion dollar corporation. You know that’s about as good as it gets. Now you know your returns are less there versus a you know restaurant or something like that. You know restaurants typically have a lower shelf life so even you know, say a Red Lobster or a Longhorn Steakhouse or something, those brands might typically have a 30 year or 40 year shelf life at the longest.
Josh: You know before because industries are constantly churning so you know with triple net you have what I call the corporate tenants and the mom and pop type tenants. The mom and pop type tenants, you can have a triple net lease on a you know $200,000 gas station, but that’s typically not what my clients invest in. They typically like the corporate tenants because they’re more stable, the mom and pop type stuff where you just kind of create a triple net lease for, it’s kind of the mixed used type product and when you try to get a loan on it, you don’t have as many lenders competing to loan out on that type of property because they can be hard to dispose of if something happens to it down the road.
Brandon: Well, here’s my question and I’ve never really fully understood why this is. Why does Walgreens rent? Doesn’t seem like silly that Walgreens, a billion dollar company, why don’t they just buy the building, why are they paying some investor money to rent? What’s the deal?
Joel: Okay, so what happens?
Josh: Good question by the way.
Brandon: Thank you.
Josh: What happens is, without—why these companies love triple net is because you know with the land they might purchase—you know Walgreens always wants corner locations so they might purchase the land for a million dollars for that acre or acre and half and then it cost them with their development crew you know another 2 million dollars to build the building or something so they might be at 3 million dollars. Well you know Walmart’s not in the—not Walmart, Walgreens isn’t in the real estate business and so the financial accounting standards for it has to be basically you have a write off where you can on your accounting books you can actually take it as a loss, paying rent every month and so versus them owning the actual property. For someone like Walgreens, they would rather be taking their money and re-imaging existing stores that are older in great locations or putting that money toward developing more new stores rather than owning the real estate themselves.
Brandon: Okay so.
Joel: With the tax right now.
Brandon: It’s a better return on their investment to be reinvesting in their own business rather than dropping three million dollars of their own money permanently in real estate?
Joel: Right, exactly. What they’re the best at is running their business and in their specific asset class. That’s you know, returning the profits to their shareholders that invest in their stock on their company. You know, they’re not focused on the real estate aspect of it.
Josh: Got you. Got you so you know that’s the single tenant net lease is kind of the obvious. Is kind of the obvious is there like a multi-tenant net lease, do they have like strip malls that are triple net lease?
Josh: Or things like that?
Joel: Yes, you have multi-tenant net lease and TNL and you know, one of the advantages to those is they haven’t compressed as much so the caps are higher on those so you might find a you know a ten unit strip center where it might have some corporate tenants and it might have some mom and pop in there on the triple net lease. You can even increase your debt on that so you know in a single tenant net lease space, the way those transact you’re generally putting you know if it’s a restaurant or something else you’re putting you know 25%-30% down. On the multi-tenant net lease, they want 25% put down, sometimes a lender will let you, allow you to have secondary debt a mezzanine debt a B piece loan on the property so you know your B piece loan might be 9% or 10% interest rate on that smaller piece that’s 10% or 15%, but then you as a buyer instead of putting 25% down, you’re only having to out down 10%.
Josh: Got you.
Joel: To buy that strip center.
Josh: Got you. Got you.
Brandon: Okay, yes.
Josh: Tell me. I mean this sounds really interesting you know it’s not dealing with tenants. I mean, I guess you got to find them, but once you find them, you’re pretty much done. What do we do? You know, hey I want to go and buy a Walgreens in Denver. I want to go and find a strip mall somewhere around. How do you find someone that’s selling something triple net? Is it labeled that way or do you have to kind of weed you know through things? How does that work?
Joel: Well, you won’t really find you know signs out in the front on commercial properties because it will spook the tenant’s customers. Sometimes even if you own a piece of property, you don’t want people knowing you’re putting it out on the market so sometimes they have off market properties so for instance you can find some triple net properties on Loopnet. You can, if you have connections with sellers you can look up their addresses and do mailers to them. You can have relationships with developers that might have held a property for five to ten years since they are selling it off right away.
They’re a seller of a triple net property. When you go on Loopnet, what a lot of people don’t know is when you go on Loopnet, you only see, you know, a certain small percentage of the properties unless you’re a premium paying member. You know paying $90 or a $100 a month. You don’t get to see all the properties. That’s how Loopnet creates their money is by either making you a premium searcher or a premium lister on the broker side. You know, if you don’t want to pay that money or you know, you’re looking for someone that’s knowledgeable about triple net. You know, you can use someone like me that’s a broker that specializes in it.
That already has premium memberships that is already spending that money, already has the connections to the developers and the properties. Like for instance, I had my secretary look up you know all the Dollar Stores, the addresses, all the Walgreens, all the Rite Aids, all the CVSs, and we have the numbers and owners of all those different properties that we mail out to so that when they’re ready to sell, you know they’ll call me. Also, I have relationships with other brokers. It’s more of a specialized field. It’s not like residential where you have you know a million agents trying to sell a house or something. It’s a highly specialized field you have small groups of different brokerages that specialize in it. We each talk to each other and you know they present off market properties to me or stuff or they put it on the listing service because they know that I qualify my buyers and educate them ahead of time.
Josh: That’s great. That’s great.
Brandon: You’re saying find a broker.
Brandon: Bottom line.
Joel: Well, an experienced broker now because you know, it’s one thing when someone has $20,000 and they’re putting it down on a house and yes, that’s substantial amount of money, but say you have $500,000 or a million dollars of stocks or you had some money sitting in a bank, you really don’t want—that could be your life savings, it could be your family’s life savings, you don’t want to go through someone who’s not experienced in that specific asset class where they miss a couple mistakes. They could end up costing you dearly.
Josh: Yes, yes. Really quick and then we’re going to have to move on. What are the down sides to triple net investing?
Joel: Well, a lot of it comes down to the type of tenant. You know when you underwrite a tenant and you do your due diligence on them, a mom and pop type tenant is—has a lot more risk. You know they might have only own one location or a few locations or something like that so the downside is that the property at some point could go dark which means the business shuts down. Now you got to figure out what are going to do with that building or location? How are you going to repurpose it so you know Walgreen going dark, it’s not really going to happen, they might move to a new location and not renew their option period after you know 20-25 years from their five or ten year option kicks in. They might move to a different area, but really the location of the property if you buy the right location you’re going to be insulated because you know if that tenant moves out, there’s five or six other tenants that are clamoring to get that corner location and it’s going to be easily re-rentable if it does go dark.
Josh: That makes sense.
Joel: Yes, if it’s a Dollar Store, sometimes they put those in off the wall places, off of a commercial corridor and it could be down the road and it’s sheet metal constructions on the front and the back. You know, cheaply done and you’re—you’re going to have more problems with those types of properties if they go dark because they’re kind of off the beaten path and your second or third generational tenant that comes in isn’t going to pay the same kind of money that the dollar store is paying.
Josh: The key with everything else then is really location and location, location.
Joel: Yes and the credit to their tenant how strong they are. There’s basically four levels of strength of a tenant basically. You know the smallest level is the franchisee. You know say a Hardy’s and they’re just a franchisee and only that one location and they’re doing a guarantee.
You might find their cap rates a little higher. You get it in an eight and the annual rent bumps are 2.5% or something like that. Going up the next level form that, you could have a franchisee of the Hardy’s that owns you know fifty locations and has been in business for ten and 20 years. They can offer a lot more stability.
They can warranty up their other properties to secure the lease and give you a lot more security. You know, they might be a two and a quarter rent bump a year or something like that. Then the next highest level is say Hardy’s itself that has a couple thousand locations, but they for the state Georgia for instance, they might have three hundred locations where the lease is only guaranteed by the three hundred locations they have in the state of Georgia. The parent company is not guaranteeing the lease in that situation. The subsidiary is that they’ve created which is you know the 300 restaurants at that point and then the most security is actually a fully corporate guaranteed lease backed by the parent company.
Josh: Got you.
Joel: Those are—that’s the highest strength you can get, now when it comes to the annual rent bumps, you might find the cap rate might be 50 or a hundred bases points lower. You might find the rent bumps are only you know, one percent to 1.5% a year escalations, but the quick tip on that is is that the great thing about triple net is it’s totally hands off, but the other great thing is if you’re going getting 1.5% to two percent a year, you’re actually getting that increase because the tenant is paying for everything versus an apartment complex your rents might go up three percent a year, but if you’re paying water and all this other type of stuff. Those expenses will go up too offsetting your gains.
Joel: Yes so, you don’t have that in triple net.
Brandon: That’s nice.
Joel: When you get two percent, is you’re getting a true two percent.
Brandon: That’s—I never thought about it that way. That makes a lot of sense so cool. Alright, so I think we should move on.
Josh: Yes, no listen. Lots of fascinating stuff and I think if people have questions on this stuff, they can definitely hit you up on the show notes at BiggerPockets.com/show47 and of course, Joel likes to spend his days when he’s not working trolling around the BiggerPockets forums so I’m sure if you put a post about triple net, he’s got an alert set up for it and he’ll jump in and help you out. It’s time to hit up.
Announcer: It’s time for the Fire Round.
Josh: Yes, you like that.
Brandon: Yes, that’s nice. Beautiful. Alright, Fire Round, these questions all come from the BiggerPockets forums. These are questions that Joel you’ve probably have seen because you’re on there a lot so. Here we go. First question, mixed-use properties, what’s your opinion? What is it first of all for those who don’t know?
Joel: Mixed-use property is where you have something that’s not a defined specific asset class so you know, you might have—you know commercial store front on the bottom and residential on the top or something like that. It’s a combination of different asset classes into one building location. They’re—I would save those for the experienced investors. I would really, you know, if you’re used to buying houses, apartments are probably going to be the easiest transition you’re going to understand to move to first or if you want something passive, you can go triple net or something else. When you get into mixed use, there’s not as many lenders for that product. It’s more risky. When something goes bad, it’s harder to sell off and dispose of so there’s a lot more knowledge required and there’s a lot more risk with mixed-use properties.
Josh: Got you. Got you.
Josh: Alright so here’s the next question. When you buy a multifamily property, do you need to sign all new leases and should you?
Joel: Well, it depends on what was the—what are the existing leases that are in place. You know, are they just on a continuum month to month? The leases that you would be taking over you know were they poorly written? Is there a lot of problems in the leases that you would be taking on as the new owner?
If they’re really crappy leases that are detrimental to you as a new property owner then definitely you know, part of the condition of buying a property is you would want to go in and have the tenants agree to those new conditions of the property because if you know if you don’t, you’re inheriting those problems. You think you’re going to get a certain return going in and you buy wrong then your returns are going to be diminished so definitely looking at leases is a key component with multifamily or anything. That goes—just a quick note, that goes for triple net as well. You know, you have to review these leases to make sure there’s not any hidden time bombs in there.
Josh: Before you make the purchase.
Joel: Right, before, yes it’s part of your due diligence.
Joel: Just—real quick 30 second thing, that I didn’t mention on the triple net. Basically, you got three segments. You got the ground lease which is you know, you’re basically leasing out the land. You don’t have any tax appreciation there. You’ve got a double net lease, which the landlord is responsible for. Sometimes it can be utilities or the parking lot or the roof or the structure, and then you got to absolute triple net lease, which you’re not responsible for anything. You know, you own the building and the land. On the double triple net, you get tax depreciation on the ground lease you don’t, but you always have to review the leases to look for any hidden problems.
Josh: That’s great. Great advice.
Brandon: Okay, yes. Alright so last week on the show with Jon Klaus, podcast 46. He mentioned a phrase actually referring to Jerry Puckett, which was show 21, that market like a wholesaler and what he meant was when you market for properties like a wholesaler would maybe through direct mail, you can get really good deals. I’m wondering, I’m kind of adapting this from the question on the forums, but can you do direct mail the same way a wholesaler might for lets say apartment buildings or commercial properties like this.
Joel: I mean you can the difference being the sellers that you’re talking to are usually very sophisticated so you know if you’re sending a letter to someone on a single family house, you know it might be a $40-$50,000 that they inherited or it might be you know someone that owns a house and they don’t really know anything about real estate. You know, when you’re conversing with someone on a commercial property that calls you wanting to sell their 3 million dollar apartment building, you know, they’re usually a pretty sophisticated investor that built up their capital to a point to where they would be able to buy that building in the first place.
Josh: Makes sense. Yes, next question, if a property is master metered meaning all the properties, the properties run on the same power, all the units, paid by the landlord, how tough or expensive is it to go and rewire it.
Joel: Well, the first question you want to ask is do you even want to do that because what you know for that area is what’s customary for the tenants in that area so you know, if there’s 25 large apartment buildings within a three mile radius and it’s customary for the whole area for the landlords to include all the tenants utilities, you go out and pay all this money to separate everything out and guess what all your tenants just go right down the street where all the utilities are included.
Brandon: Yes. Yes.
Joel: That’s the key. Now if you own—if you’re looking to buy an older building in the area where most of the buildings, the tenants has separated out and the tenants pay your utilities and you just got an old building that was never converted then in that sense, it would make sense to spend the money to do that because the tenants in that area are conditioned to paying their own utilities.
Brandon: Is there like a set—is there a per unit price that sometimes it might be or is that just too varied?
Joel: I mean it’s just too varied. I mean with a bigger apartment complex, you could have a length of the run that can make stuff go into you know $40 or $50,000, just a quick example is some of the older apartment buildings use galvanized pipes as a water main coming from the streets to the buildings and you know, they rust from the inside out, the lower—the water pressure keeps getting lower and lower so even if you put all the plumbing in the buildings, the main itself won’t carry the water pressure to the building because it’s backed up so in that case, if you’ve got to cut open the water line and half of the water line is running through your paved parking lot. You now how to use a cut saw, cut open that whole parking lot take that line out, put a new line in and then repave the parking lot and then put all the dirt back down depending on the length of the run. You know, you could be talking $40,000 for something like that so you know.
Brandon: There is just too much—too many variables in there to really.
Joel: Yes, it depends on the size of the building, you know what’s existing there, depends on the local city or the county if they’ll let you do separate meters. If they say no, we won’t allow you to use separate meters and you got to get a private water company that puts meters on your property, but you’re still responsible for the bill, but you bill the tenants.
Joel: Directly. Try to recover, you know not all of them will pay you back when they’re supposed to and you’ll have to send collections on them and stuff like that so it’s just varies. That’s why it’s so important. I mean you know if you’re going to put your money at risk, really get with another investor or you know someone that’s a broker and an investor. That really knows the business. Like for instance, I don’t know much about industrial so I have a friend of mine that’s been in industrial for 28 years and that’s all he does and when someone calls me about industrial, I’ll send him to him because I know the basics of that, but really multifamily triple net leasings are what I do day in and day out so you know that’s where I’m going to help people. The other stuff I’m just not experienced enough in it.
Brandon: Yes and that’s a good tip right there too, yes, find somebody who’s experience in it so.
Josh: Yes. Absolutely.
Brandon: Alright, next question of the Fire Round is you know, people real estate agents typically make on a residential house like 6% commission is kind of the general number. I’m wondering what is that general number for commercial real estate is it 6%? You mentioned earlier you made $34,000 or whatever, is that still the same?
Joel: In commercial, it’s different. It varies on a host of different factors. If it’s like an FDIC property or foreclosure type thing, those listing brokers sign an agreement typically at a reduced commission a little bit so they might be at 4.5% or five percent total instead of 6% or sometimes if you get a—say there’s a Real Estate Investment Trust, a REIT on triple net leasing that owns 30 O’Charlies Restaurants in their portfolio and they say, “Hey Joel, I want to list you know. We want to dispose ten of these properties and they’re going to be you know two and a half million dollars a piece for a total of 25 million for disposing all of these properties for us, we want a reduced amount for that. In those situations, the amounts you know, typically go down. You know, maybe if the millions sells priced at 2 million and it’s a private seller, you can still get like a six or a five and a half or something like that if you double ended it. When you start getting into five, ten million dollar properties, stuff like that, you know the total commission amounts might go down to like to four, four and half percent or something like that.
Josh: Got you.
Josh: That makes sense. Alright last question, where’s the best place to get a commercial loan? How do you do that and should you pay—I’m going to add to that and should you be paying any fees upfront for said loans?
Joel: Do not pay any fees upfront.
Josh: Thank you.
Joel: The residential—you know the residential before it was highly regulated from all the foreclosures. There’s really a lot of fraudsters out there.
Joel: When residential got highly regulated guess where they moved to?
Josh: Commercial. Yes, there are so many commercial scumbags out there. I mean there’s really no other way of saying it.
Josh: We see it. I’ll see it on the site. We’ll try and get rid of them as quickly as we can. You know there’s all these guys that are these you know, pay us the money upfront and we’ll hook you up with this great loan. No, there’s alternatives right?
Joel: Yes, yes, that’s due diligence. They’ll call it all kind of crap, due diligence fees, insurance deposit, they’re called a host of different and sometimes what they’ll do is they’ll say, “Oh, there’s no upfront fees.” They’ll get you an application process.”
Josh: Application process.
Joel: Halfway through they’ll say, “Oh, oh, by the way there is this one little fee now that we didn’t know about that you need to pay before court—anytime someone wants you to put money somewhere, a good tip on that have your attorney hold those specific funds. They can send a verification letter to the, whoever this lender is or funder or whatever and says here this money is put aside in tis account for this specific purpose and here it is. My attorney is holding it. My attorney will not release it until we close at the closing table, you know.
Brandon: That’s a good tip.
Joel: All the scammers, go away really fast. If you say you’re not going to pay any upfront fees. Now when it comes to bank financing, it really depends on what you want to do with the property so in commercial it’s different from residential. Most of the banks do what’s maybe like a five-year loan or a ten year loan at the best for a fixed rate term. You won’t really find—sometimes, you can find 25 or 30-year loans in the commercial side, but the cap rate’s higher so.
Not the cap rate, the interest rate so you know, if you go to local banks says I’ll give you a five year loan at 4.6% fixed over a 25 year amortization, you might find a 25 year product out there, but they might want a hundred bases points higher and they might say, “If you prepay this loan, any earlier than five or ten years, there’s a $300,000 prepayment company that fees it’s penalty with this loan and so you know, knowing that you’re getting longer turn debt spread out over a longer period of time, but your interest rate is much higher, about a hundred bases points higher so when you go by your cap rate, your spread between your debt service and your cap rate.
That’s going to make your cash flow lower because you’re paying higher on your mortgage. You’ve got to balance everything out. Typically what I do is I tell people kind of the sweet spot is to get a regional bank because they’ll go like a ten-year term and that’s a pretty good amount of time to pay down the debt. The bases points are not that much higher maybe 40 bases points higher where you can still cash flow well.
Josh: Okay, okay, so that all makes on sense and you know the big—big piece of information that really rings out to me is you know definitely, definitely be careful and avoid these guys because there’s a ton of this shady practitioners in this space these days.
Joel: Oh yes, yes, a lot of people aren’t even a mortgage broker. They’ll get a course or become an affiliate of a company and you know they want to take a point then this person takes a point then you’ve got four people who are trying to take a point, a chain, and none of them knows what they’re doing and a quick way to get rid of these people is say what have you funded lately, give me the addresses of it. Show me all of your typical cost breakdown. If they go away and they don’t respond, you have your answer or if they get defensive. If they get defensive, that’s another way, trying to control and manipulate somebody to you know try t extract a fee out of them. You know to try to.
Joel: Change you off the topic so.
Joel: I’ve been running through that stuff over for years for years and so I see those people a mile away.
Joel: You know, just go directly to banks, you know banks like for instance, my secretary. I had her call around to all the—I believe there’s a couple hundred banks in Georgia. Call around to every single bank and ask them versus them selling off the paper versus keeping portfolio loans that are in house that they underwrite themselves. I’m building a database of you know all the different banks, what areas they lend in. If they have any in house products that you know, they’re just not selling off the paper on Wallstreet with a buy back provisions because the ones that are selling off the paper, you have to fit in this tiny little box to get it approved for a loan because if it goes south later on, on Wallstreet with a buy back provision, they can force the bank to buy back that loan.
Josh: Got you. Alright so hey Brandon, do you have anything you want to add to this or should we move forward?
Brandon: Let’s move on, but I want to announce that we actually have a kind of a cool thing here. There’s a guy who reached out to me. His name is JT Spangler. I hope I’m saying his last name right. He actually recorded us a new Famous Four jingle so check this out.
Announcer: It’s time for our, Famous Four.
Josh: Nice, nice, no that’s awesome man. Very, very cool thank you JT. We definitely dig the jingle.
Josh: We appreciate it.
Brandon: Yes, follow him on Twitter at Twitter.com/JTSpangler. S-P-A-N-G-L-E-R alright and with that our Famous Four so.
Brandon: Yes, you want to start it Josh?
Josh: Famous Four.
Brandon: No, we’re not doing that anymore, geez, this guy never learns. He never learns.
Joel: Famous Four.
Josh: There you go, there you go. Alright Joel, what is your favorite real estate book?
Joel: Well, the—well I’ve read so many of them I think you know my favorite resource is actually kind of crazy. It’s going through the federal and state statute codes and reading all the different real estate sections. There are just so much information in there. It’s just.
Brandon: That’s a new one.
Josh: That is a new one. You’re kind of like a CPA type of guy, Joel.
Joel: Yes, I like that. The next one I want to get and read that I’ve heard is Real High Remarks, Brian was talking about it the other day was Ray Alcorn’s Commercial Book on Real Estate Investing. I want to get that one and try to work through that. I’ve heard that’s really good.
Josh: Got you. Got you, but for light weekend reading, you recommend folks go and hit up the local commercial statutes on real estate.
Joel: Yes, I mean it’s actually not that hard to understand, I mean once you get in there and look at all the titles and it’s broken down by title then you can get down to the specific chapters on different things and it’s not that bad once you get the hang of it.
Josh: Got you. Got you.
Brandon: Oh, wow. Well, I won’t really be linking to—I’ll find some good ones in my weekend light reading. Alright so.
Josh: You know, all joking aside, I bet you there’s a ton of value in that stuff.
Brandon: I’m sure yes.
Josh: Yes, cool so cool something we haven’t hear before.
Brandon: Cool, next question of the Famous Four. What is your favorite non-real estate like business book?
Joel: I saw him in person years ago when I had my pizza restaurant. It’s Jeffrey Gitomer, People Don’t Want to Be Sold, but They Love to Buy.
Brandon: Okay. I haven’t heard of that one.
Josh: Interesting. Interesting. In ten seconds what’s the gist?
Joel: Yes, it’s basically a mindset shift on how to create relationships and business with people in a way that you’re not trying to hard sell them. You’re just connecting with them on—naturally in a way that wants them to keep doing business with you and developing the relationship. What they’re drawing to you instead of repelled by what you’re trying to do.
Josh: Got you.
Joel: It gets more complicated than that but you just kind of have to read the book to get the full examples and everything.
Josh: Perfect, no that’s great that’s great, well and we will link to that in these books and show notes at BiggerPockets.com/show47. Really quick, so what do you do for fun Joel? What are your hobbies?
Joel: Let’s see. I like to travel. I like—I enjoy martial arts. I should already be a fourth degree black belt. I’m a third degree black belt now on the Tae Kwon Do side, I took Kung Fu for a number of years, but what I’ve been recently doing the last few years is Krov Maga it’s an Israeli secret service self defense. What they teach you overseas and it’s basically a realistic self-defense base program where you encounter multiple attackers, knives, guns.
Joel: Going outside with attacks and everything else. It’s all reality based.
Josh: Nice, nice. Well I know when Brandon and I went to this conference in St. Louis, he was trying to pick a fight with a buddy of ours. Brandon who’s rather, you know rather big dude. I wonder if he’ll do that with Joel now.
Brandon: I might pick a fight with Joel at the—whenever we have our next BiggerPockets Summit, which we’ll have to talk about some time Josh.
Josh: How about the pressure? How about the pressure? Nice.
Brandon: I got to keep it up.
Josh: There you go.
Brandon: Alright, final question of the Fire Round is what do you believe sets apart the successful investors from those who just give up, specifically referring to commercial investors that you see.
Joel: Perseverance, you know real estate is like a roller coaster. You know, it’s going to have fast lows and fast highs and you know where you’re kind of coasting in the middle and you really have to do those things day to day, the tasks to make yourself successful without other people watching. You just have to you know do things for yourself. Set those goals everyday and run it like a business not like a hobby. You know, like I’m going to do it an hour here, an hour there. You really have to lay everything out, follow an actionable plan, small steps, the small steps will turn into big results over time.
Josh: That’s good. That’s good.
Brandon: Cool, cool. Awesome. Well, why don’t we wrap this thing up. Joel where can people find more about you? Where can we connect with you at?
Joel: Okay so you know, I can be found on BiggerPockets as a moderator of course, and also my website is just www.AWCommercial.com so the name of my company is All World Realty, that’s my brokerage so I just made the website, AWCommercial.com and they can just email me or call me or whatever they like to do. Kind of the information we talked about today is very basic. I may have gone over one the triple net side maybe 10% of this stuff.
Joel: Typically, a client contacts me we’ll converse through emails over a few months and it might take you know three or four or five six months to find the right property just for them where they fully understand and how the process works, how to invest their money, and how to find the right property.
Josh: Right on, right on. Well Joel listen, we definitely appreciate having you on the show. Thank you so much for the time and we’ll look forward to seeing you on BiggerPockets.
Joel: Alright, alright. Thanks guys. Brandon needs to get back to work now. He’s been slacking for the past hour and half it seems.
Brandon: Yes. Hamster wheel need to be run. Thanks Joel.
Josh: Nice. Nice. Nice. Alright Joel, take it easy.
Joel: Alright, see you guys later. Bye.
Josh: Alright guys, that was our show with Joel Owens. I know as always my brain is busting. It’s overflowing with lots new stuff. I don’t think we do a podcast without learning new things even as host on the show. Brandon’s looking like he wants to say some smart ass comment.
Brandon: Well, I was going to say well that’s not too hard to overflow your brain, but you took the wind out of my sails. Thank you.
Josh: Wonk wa.
Brandon: Wonk wa.
Josh: There you go Brandon. That was awesome so.
Josh: Getting back to it. As I mentioned in the beginning guys, jump on the show notes at BiggerPockets.com/show47. That’s BiggerPockets.com/show47 and ask Joel any questions you’d like. Thanks again for being with us on yet another episode. As I mentioned in the beginning of the show, please head to iTunes and leave us an honest review. Beyond that of course, connect with us over on Twitter, Facebook, G+, LinkedIn, Pinterest. We’ve been trying to play in Pinterest a little bit so come join us and share our pins and most importantly come hang out with us on BiggerPockets if you’re not doing that already if you’re just a listener of the show and haven’t gotten active on BiggerPockets. My action item for you is to sign up create a profile and introduce yourself. Do it. Do it now.
Brandon: Do it.
Josh: Do it. Yes, alright so Brandon, let’s get out of here man.
Brandon: Let’s get out of here.
Josh: I’m Josh Dorkin.
Brandon: I’m Batman.
Josh: Signing off.
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Josh: Stop. Collaborate and listen
I suspect were a brand new invention
Something grabs a hold of me tightly
Brandon: I flow that a harpoon daily and nightly
Josh: Will it ever stop?
Yo, I don't know.
Brandon: Turn off the lights and I'll glow
To the extreme we rock a mic like a vandal
Light up a stage and wax a chump like a candle
Brandon: There you go.