Getting Started, Is Multifamily Worth It, and Deal Structures (Office Hours)
Let's dive into whatever questions you have around commercial real estate brokerage, investments, etc.
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Key Takeaways:
Industrial and retail properties are recommended asset classes to invest in currently, while multifamily, office and hospitality face challenges.
Flex industrial properties can still make sense to develop since demand is high and projects are pre-leasing.
Deal structures can be creative, like carrying back financing from sellers, to make deals work in the current environment.
Networking to find investors is important, and skills like deal sourcing and underwriting are valuable to bring to partnerships.
Highest and best use analysis through a yield study can help identify future redevelopment potential on a property.
Environmental reports are a cost of doing business when purchasing land, and negotiations may be needed over who pays.
Building on leased land long-term is generally not recommended due to not owning the underlying asset.
About Your Host:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors as a board member for the Real Estate Investors of Nashville.
Episode Transcript:
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This episode of the commercial real estate investor podcast is brought to you by cre launch Pro. This online commercial real estate program is designed to take you from beginner to pro commercial real estate investor with access to all of my courses, our online community, and monthly group coaching calls. Learn how to confidently buy your first commercial property today at www dot c r e launch pro.com. Welcome to the inaugural episode of our office hours series where I will be going live and answering any of your questions that you have about commercial real estate investing. So whether that is about a specific deal that you have going on, or you're just wondering how you can break into the industry in your specific area. And you want to get a little bit of free coaching from me while we are alive here on the podcast, we can dive into a little bit of everything. Now if I don't have anybody jumping in with questions, I'm just going to be kind of rambling on talking about what I've got going on here. My general thoughts about the market, which I am sure that I will have plenty of so feel free to join me here live on Tuesdays from 830 to nine o'clock Central Standard Time to again, ask whatever questions you have. I will caveat this next week, I'm going to be out of town so we will not be doing it on let's see what day is that? That is? Tuesday, October 3. But we will be back the following week. And for the foreseeable future thereafter. Diving into your questions, so until somebody has something ready for me I'm gonna go ahead. Hey, Kenny. Good morning. Good to good to hear from you. Thanks for jumping in. Let me know what questions you guys have on commercial real estate looking, looking forward to diving into some things with you all. Until then I'm just going to ramble on and talk about some things that we've got going on here. So we we recently started a series here on the YouTube channel that I'm really excited about. Good morning, Victoria, thanks for jumping in, called The Story of the deal. And I am fired up about this series, because it's really the content that I wish I would have had when I was first getting started in commercial real estate. You know, everybody talks about how how great a deal is once it's done or how profitable it is. But, you know, when I was first getting started, I wanted to know the story behind it. Like how did they find it? How did they pull that deal together? What did the numbers actually look like? We recently released our first one this past Sunday, go check it out. It's a historic church converted into creative office space, such a beautiful building. That property is available here for lease in Nashville if you are looking for some creative office space, but dive into it. It's really cool. I mean, we get into the numbers with the owner to see you know how much they bought it for what the construction costs were. And I even break it apart and say, hey, look, here's how much you would have to rent this out for if you were going to buy this building in order for it to make sense. Let's see Dukes are prepper county is saying I am in the Pacific Northwest. Would you recommend to buy true commercial or stick with multifamily man that is a loaded question right now. So we had an episode yesterday with the the investors roundtable diving into what asset classes we would and wouldn't buy right now. On the no list was office, multifamily and hospitality on the Yes list was industrial, retail and single family. And I know single family is a bit of a surprise for some of you because we typically strictly stick to commercial. But right now with where the market is, I don't think single family is a bad investment. If you're looking at doing flips and stuff like that, I don't know that it makes sense to really fix it and hold. You know, multifamily multifamily is tough right now, you know a lot of people have been flooding into that market over the past 10 years. And I just don't know how it is really an investable asset at the moment, because cap rates are so low interest rates are so high, that there's just not a lot of meat on the bone. Right? There's not the, in my opinion for the effort and risk that you're taking the juice is not worth the squeeze. But, you know, if you're looking at commercial when you're looping in industrial and retail into that, I think you can make way more money, have far less of a headache doing it and probably build wealth faster if we're being honest. I mean, let's let's dive into that a little bit further. I think that on the industrial side, it still makes sense to build. Right? There's not a lot of assets right now where it makes sense to build because like I said earlier, interest rates and construction costs are so high. But if you watched our video the other day About flex space, I think it was titled like the easiest commercial real estate for beginners to buy. We break down the numbers of how how much you can pay for the land, how much you can pay for the construction, and what you've got to rent it for in order for you to make two times your money. Most multifamily deals right now, you can't justify building them. And even if you're doing a value, add play, most of the deals I'm seeing might might get an 8% cash on cash, annualized rise, you're probably not going to be getting that day one. That's after you take into account a sale of the property and a 12% IRR. And I've talked to some multifamily guys. And they're like, Yeah, we would love to be getting that right now. So it seems to me like it's a really tough asset to actually make any money on right now. And I don't know that I'd be getting out of bed for something that's just going to squeeze by now look, if you're paying cash, and you're willing to just sit on it for a while, then yeah, I mean, I think pretty much anything you want to buy could be a good investment.
Let's see, Victoria is saying I want to get into commercial real estate, I have no money or experience. And I'm in Jackson, Florida, I wanted to focus on renewing dilapidated buildings around the downtown area, which the city and others are renewing. I think that that's a great idea. Let's say she's added another part to it. So like putting in your local ice cream, coffee store, work offices, sort of what you're doing, what are your suggestions on achieving this, I'm concerned that I have no money to actually do. So, Victoria, you're still in a great spot, right? I didn't have any money when I first got started. And I think that having no money forces you to get creative, right? So the best thing that you can do, if you have no money, but you want to get started in commercial real estate, is to go out and build some sort of skill set that is going to be invaluable to partners. That could be finding deals that can be leasing deals, that could be managing deals, I would probably lean more towards finding the deals right as the most valuable skill set that you could bring to the table. If you know how to find really good deals. And you can go build a list, or a group of investors that are looking for deals, they will be willing to partner with you. Especially if you find the right people because people with money, want to enjoy their lifestyle, right? I've got investors that all they want to do is travel. And they travel full time. They technically live in Nashville, but they're almost never here. Right? They need the boots on the ground, they want somebody that's actually putting the work in, and they're more than willing to put up 100% of the capital and still give you equity if you're going to find the deals and run them for them. Right. So you know, my first deal, I didn't have any capital, it was a 42 unit townhome development, about 15 minutes southwest of Nashville. And I went and found the deal, put it together, I underwrote the whole thing knew that it was going to make sense. And went to the development firm that I worked for and said, Hey, I found this deal. I want to partner with you guys on it. And they said okay, well, if you want to do that, go ahead and put together a term sheet of what it would look like. And so, of course in my naivete, I put it together and said, You're gonna put up 100% of the capital, I'm gonna get 25% of the deal. You're gonna teach me how to do this. And I'm gonna go do it. And they were like, Yeah, we're not going to do that. Absolutely not, we will give you 10% of the of the deal. And I said, Okay, perfect. I mean, I think that a lot of people when they're first getting started, they try to get way too much of a deal. And the money is great, right, of course, you want to get as much money as you can out of the project. But when you're first getting started, having the skills that you will earn, by basically going through that project, as well as the track record are actually far more important. I would rather have 1% In my first deal, but have it be a homerun deal that I can add to my track record and tell every investor in the future, look at this deal that we pulled off. Because you're not going to make a lot of money on your first deal. But having a track record where you can then go to your next investor and say, Yeah, I'm gonna take 50% You're gonna put up 100% of the capital for the other 50% and I'm gonna go knock this out of the park for you will make your life so much easier. So I think that that said, it's really like focus on how to find really good deals. And a big component of that is going to be underwriting. So we've got a whole bunch of videos on underwriting. You can take a class at CCM CCM 104 is the best class I ever took on underwriting. That is how you will learn how to look at deals and then just underwrite one a day. Find a good group of investors that you can work with and take it from They're doing some prepper counties saying thank you industrial and retail highly recommend industrial retail right now, I think that those are just really good asset classes, especially if you're looking at like smaller neighborhood retail, and flex industrial, nobody is building flex industrial. And there is such high demand that the majority of projects that I see will be leased by the time they deliver. So even if you're building ground up, you're you're relatively direct when you do that power training, saying, Hi, thanks for making this live. I would like to ask for someone who's new, what would be the numbers that you have to focus to make a good deal on multifamily real estate? Whew. So multifamily in my opinion hasn't had good numbers. Since like 2018 2019, we actually started telling clients to stay away from those deals back that because cap rates were too compressed, it didn't make any sense. I mean, I wouldn't get out of bed. So let me just tell you my numbers that we look for on all of our deals, and then you can kind of translate that to multifamily however you well, we look for a minimum of a an 18 to 20% annualized cash on cash return, which gives you a two times equity multiple over five years. So basically, if my investors give me $100,000, in three to five years, I'm giving them back $200,000, it ends up being somewhere between an 18% to 22% IRR. Now in multifamily, you're looking at more of like an 8% annualized cash on cash return with a 12% IRR. Now that's not on deals that I've done. That's what everybody is telling me that isn't that my buddies that are in the multifamily world, that is what they're getting. And they're, they're squeezing for that. Right? They're really hoping to get to that. So, you know, a good deal to me is, you know, 18% cash on cash return a good deal to multifamily investors right now is an 8% cash on cash return. So really depends on on what you're going for. Victoria is saying thank you so much to our absolutely happy to help. That's that's why we're here, I think these these, this series is gonna be a lot of fun. We're victorious and where do I find investors for these kinds of properties that would require heavy capital. So you should be networking to find investors, long before you ever find a deal. You know, there's this misnomer that people say all the time, which is, you know, if I if you find a good deal, the money will come. Yeah, but if if you don't know anybody that has money, it doesn't matter how good the deal is, right? It's there's a, I grew up playing guitar, right, I'll never forget, when I was in high school or middle school, somebody told me, the greatest guitar player will never be discovered. Because they sit in their room, and they play by themselves. And that's, that's just always been so profound. To me. It's the same thing here, it doesn't matter how great of a deal you find if nobody knows that you found it. So go and network at your local real estate investors events, start an Instagram or social media page and just start networking with people and sharing your story and doing what you're doing. I mean, I started my Instagram back in like 2016 2017. And it's been the best thing that I've ever done. You know, I don't I don't market to people out there. I'm not shoving like, hey, come by with me, come invest with me down people's throats. It's really like, Hey, here's what it's like behind the scenes being a commercial real estate investor. And here's what we've got going on. And people are attracted to that, because it's an interesting thing that, you know, they don't normally get to see. And so I found I found a majority of my investors through Instagram, the podcast and YouTube channel. Now, I'm also networking all the time, right? So anybody that I meet at a Chamber of Commerce event, or through an Urban Land Institute event, or at a bigger pockets conference, I make sure to follow up with them and have those conversations with them. I talked to my attorneys, you know, my real estate attorney, they're dealing with other people in real estate, who do you know that I should meet? Same with my CPA? Who do you know, that I should meet? You know, who are you working with that has money that would that might want to be investing that into commercial real estate. And just make sure that you use those soap boxes, you know, right, like Facebook is the modern day soap box, you can just go out there and post and let people know what you're doing. And just tell every single person you can that you are looking to raise capital and do real estate deals. There was a guy that was here in Nashville, the real estate investors in Nashville. His name is Philip. He was incredible at this. He ran his own event, right and he usually had like 40 or 50 people show up. And every single person and I saw him do this, every single person that he met one of the First questions he asked was, How much money do you want to invest in real estate? And no matter what they said, he was like, Cool. Well, I'll get you on my list. And I'll make sure that the next opportunity that I have, I'll give you a call. And he was one of the more successful guys that ever saw in real estate. Because he was asking every single person that he came across how much they wanted to put into real estate, and he'd write that down. He knew okay, you know, Mr. And Mrs. Jones want to put $100,000 into real estate. Cool. Well, next time he needs $100,000 He calls Mr. And Mrs. Jones.
Let's see, Dukes of prepper. County, do you teach how to structure deals? Absolutely. I mean, creative deal structures is like my forte, you know, we I love getting creative on those aspects, especially right now, like when you are in an environment like we are today, using traditional bank loans is probably not a really good option. So getting creative on the deal structures is how you go. Like, for example, one thing that I just did, I made an offer on a property on Friday, I offered them $800,000. And we'll close in 90 days, or close in 120 days. But I would just raise the equity for that. And but I made a second offer. And I love making two or three offers at the same time, because it gives the seller more of a choice to make instead of a counter. Right? Typically, they'll just pick one that they like, instead of saying no, actually, we're going to do this. The second one was $900,000. So I'm giving them $100,000 More for this property. But they have to sell or carry $500,000 at 5% for five years. So you know if I'm the seller, and I'm like, Well, I can make $100,000 more plus interest. If I just sell her carry this for a little bit, I might pick that one. Well, that one works for me, right, because I'm fine paying $100,000 more, because I'm getting debt at 5%. And I only have to bring $400,000 to the table instead of $800,000. And I'll probably just refinance them out with a construction loan when I'm ready to start the first phase of development. So getting creative with your deal structures and learning how to do that is incredibly important. We we will probably have an episode on that probably in the investors roundtable sometime soon, because I think that it's a very important skill set to have when you're investing in commercial real estate. Okay, saying thanks for this. I'm a graduate student in Boston, looking to get into development in the DC area after school I love Boston, by the way went up there for the first time last year, it was really cool. Any strategies to enter the industry directly after school and your resume tips. Okay, what I would recommend is do anything you can to get a an internship, or you know, some sort of work experience on the resume that is directly related to commercial real estate. A lot of these groups want to see, it doesn't matter if you're if you're just getting you know, doing something for free and bring somebody coffee, find any any foot in the door that you can to assist somebody, you know, I get people asking me this all the time, I've got one guy that's been hounding me for an internship since the beginning of the summer. So we're looking at bringing him on next summer. But it makes a huge difference when you have that actual experience. So bring somebody coffee, you know, tell them you're gonna go find them deals, tell them you'll work for free, you just want to be around whatever they've got going on. But keep in mind, too, that just being around can often be a burden on the person that you want to go work with. Because now they have to worry about, you know, when you're showing up and what deals you want to go look at, and all that kind of stuff. So just try and make it as easy as possible on the person that you want to shadow because their time is very valuable. The other thing that you could do is start taking CCI M classes, or start taking online courses with the Urban Land Institute, anything that will give you some sort of skill set kind of like what I was talking about earlier, you could take an online underwriting course through CCIE, you could take an intro to development course through the Urban Land Institute. And I would, you know, see if there's anything that has a certificate, and you know, those are very well respected groups in the commercial real estate world. So if you can, you know, complete some of those classes, it'll show that you've got a skill set in commercial real estate, or you're at least working towards something and they will be able to I mean, that would help tremendously, right. I mean, if you've got the ability to find deals, to do some underwriting something like that, you can at least get a foot in the door. All right, Kenny is saying cap rate versus interest rate. What considers a buy cap greater than interest. Thanks, Tyler. Absolutely, Kenny. Yeah, I mean You know, it really all comes down to what your, your strategy is, like, if you're paying cash, you don't care about interest rates, right. And so we've got a couple of buyers on the brokerage side that we're representing right now they're paying all cash, they do not care what interest rates are, which gives them a significant amount of leverage. And really upside compared to some of these other buyers that they're competing against. We can waive all financing contingencies, we don't care. But it means that we'll say, Hey, we're gonna close in 30 days, I want, you know, you're asking for a 6% cap rate, we're gonna pay a six and a half percent cap rate, we're gonna pay you cash, and we're gonna close in 30 days. If you are looking at buying any sort of investment that does not have a value add component, you have to have a higher cap rate than interest rate. Otherwise, it just won't work. I mean, unless you bring like 80% down, which, let's be honest, what's the point of doing that if you're not, you might as well just pay all cash. So if it's stabilized like a single tenant net lease, like a Walgreens or a Starbucks, you have to get a higher cap rate than your interest rate. And that's why a lot of those deals are just closing in cash. Now, it's tough to get any debt and make it make sense. But if you're doing some sort of value, add component to it, and you see a very clear line to increasing your noi, then it really doesn't matter what cap rate you're buying it at versus the interest rate. I mean, of course it does within reason, right. But if you're going to go in and add $50,000 to the bottom line, you can afford to pay a lower cap rate than your interest rate, because you're going to be pushing that effective cap rate of what you're buying. So you just want to underwrite it, and make sure that you fully understand what that looks like, if you never get to the level that you're expecting to get to. Because you're probably gonna be losing money every month. Now you will be paying down your mortgage, building some equity in the property. But let's be honest, we're doing this for the cash flow, right? You don't want to just sit there and lose money every month. So get dive into the underwriting, make sure that you understand what it's going to look like once you've done that value add portion of it. And hopefully you're signing some more leases and increasing the NOI. Let's see Victoria saying talk to agents, I was going to start a page that highlights the deals and their potential that subscribe to people who have common interests, thoughts. Yeah, 100%. I mean, I think, you know, there's Facebook groups out there. There's discord groups out there, you know, BiggerPockets has a pretty good forum. I mean, jump in on those and get really active and tell people what you're looking for and connect with anybody that you can, I think that there's a lot of agents out there that are willing to work with you, and possibly even connect you with some of their other clients. If you have a good story to tell, and they believe that, you know, doing so will create more business for them in the future. So I think I think that's a good strategy. Josh was saying, Do you think it's a good idea to get your real estate license in college? I'm a sophomore, to be a headstart and getting into commercial real estate early 100%. Josh, Joshua, I think that getting your commercial real estate license, which is the same as your residential, right, so just getting a real estate license is a brilliant first step into getting started in commercial real estate. I think that it is an invaluable tool, it will help. I mean, getting started now. I mean, you think about it, if you're a sophomore, and two, three years, when you're graduating, you will have all of this experience, you know, you could do it part time while you're in school, you could, you know, be a junior agent to a commercial broker and just help them out even if it's for free, right? Like just take, you know, a couple hours a week to go help them out somehow. You will build all of that experience, build that resume up and you'll be that much more attractive to commercial real estate firms when you graduate. And you'll get to build skills. So yeah, I think it's a great idea. I mean, look, I've used my commercial real estate license to put down payments on my properties, right that one of the first office buildings ever bought, I collected a 3% commission on it, and I rolled that in the deal. It's a great way to start investing when you don't have any money. And plus, you're going to learn so much. So I think it's a great idea. Jack Cole is saying what's the best boat name, lessor or triple net? You know what I like? I like the triple net for a boat. You know, you can have a trident on it right? It's got three points triple net. I think it's a pretty clever thing there. So yeah, name your bow triple that I like it. The empowerment channel. I'm a commercial agent and sourcing deals for a billion dollar fund. Congrats. That's gonna be a lot of fun. It's always nice having somebody that has a lot of money.
Let's see cookies. Sorry. Who do I go to with the best knowledge to find highest and best use for a piece of commercial land I own for aren't enough, we actually did a group coaching call and our Discord channel about that this past week, I think that learning how to determine highest and best use is a phenomenal skill to have. Because you'll be able to see things that a lot of people don't. Right. I mean, we, for example, we're under contract on a property right now. It's got an old motel on it, we're gonna, you know, convert it into a boutique hotel. But it is currently zoned for like 38 storeys something crazy, right? So we were digging into it. I was like, Man, I think that we could build something really big here. I mean, yeah, we're paying for the hotel today. But I think in 10 years, it's gonna have a lot more potential. So we ended up hiring an architecture firm, to do what's called a yield study. So write that down, go check that out, have an architecture firm, do it, I think it costs like 3000 to $5,000. If you're serious about it, it's worth spending the money on and it came back. We've got a whole like 10 Page packet now on how we can build 38 stories on this site. So that became a huge part of our marketing to our investors, like, Hey, you're going to invest in this cash flowing boutique hotel, but in 10 years, because it's an opportunity zone deal. So we're going to have the capital in there for at least 10 years. In 10 years, we'll be able to flip this to a much bigger developer who is going to build probably not 38 storeys, let's be honest, it's not an area where it's going to make sense to build 38 storeys, but you could build a 20 storey apartment complex, you know, two to 300 units. Why not? So that's a great way for us to have a good exit strategy there. cofee saying, bingo. Yield steady. Yes. Serious. Thank you. Absolutely Happy, happy to help. Jack triple that it is Thanks, pal. Love it, man. Let's, we're gonna have to see some pictures of the boat at some point. I'd love to, I'd love to see that. It'd be really funny. So let's see. Man, it's, you know, one thing that I want to say is state of the market. It's a very interesting world out there right now. I think any deal that you can get done that makes sense is a good deal to do right now. You know, here at my firm, we're just focused on hitting singles at the moment, because it's this is now a time where you just got to keep moving. It's weird out there. Interest rates are high construction rates are high land cost is high. Everything is so high. Will it come down? Maybe we'll see. It might just do what real estate always does and continue to go up in price. But you know, we had a really good conversation yesterday on the investors roundtable and, and Bryan Adams said, you know, a mentor of his told him, you're always, you know, grow your assets under management, and don't blow up. And he said, right now we're in that time where it's don't blow up. So be safe on your deals, don't get over leveraged, and just keep building the skill set. Because when the market comes back, it is going to come back strong. Let's see Kenny is saying what are things to watch out for in a ground lease deal in California, we got to deal with environmental report, which is constantly no guarantee that it got approved? How do we structure this? So are you buying the land with a ground lease on it? I've got to have a clarifying question there? Or are you? Do you own the land and you're leasing it to somebody else? Because if you're buying it, and there's environmental concerns there, you're going to have to pay for it? Right? I mean, that's you can negotiate for the seller to pay for it. In reality, they should they should be the ones paying for everything. But oftentimes they'll just say no, if you don't, if you don't want it move on. So like, you know, on a deal that we did, we had to pay for the phase one, the phase two and what I like to call phase two and a half, which is basically an even more intense phase two. But it's a cost of doing business. You know, if you get in there and you do the environmental report, and it comes back bad, you've got two choices, you can either drop the contract, or you can just pay for the mitigation and move on. You know, you'll have some leverage over the seller to say, hey, look, if you want this environmental report, you got to pay me for it and give us our earnest money back. Otherwise, the next guy is going to have to do it anyway. And you know, at least they'll know oftentimes, a seller might do that. And they might reimburse you for the cost of the Phase One environmental. Let's see, planning to build a commercial retail building. Man, I would never build a commercial building on a piece of property that I don't own. I know a lot of people do it. A lot of people do it. But to me, there's just no value in that because in 1020 3040 50 years, whatever it is, it's going to run out and you're not going to own the dirt and it's just It's not worth it, in my opinion. And Juan sang phase twos are a pain in the ass. Yes, they absolutely are. Awesome, guys. Well, I'm sorry that I didn't get to everybody's questions. It's nine o'clock right now, please join me in two weeks, I think I said it was October 3 is the next one that I will be doing. I'm probably going to be out of town. So I might be doing this from my laptop. But we're still gonna go live. We're still gonna make it happen. And we'll, we'll have our next office hours. Then. Again, I will be doing these weekly, Tuesdays at 830. Unfortunately, I'm going to be out of town this next week. So we're just going to have to Well, no, I'm going to be out of town. But I'll try and do it while I'm in Milwaukee. We'll make it happen. So yeah, join me next week. We'll be here next week. To go further into your questions. Appreciate you all joining me and I will see y'all then. This episode of the commercial real estate investor podcast is brought to you by CRP launch Pro. This online commercial real estate program is designed to take you from beginner to pro commercial real estate investor with access to all of my courses, our online community and monthly group coaching calls. Learn how to confidently buy your first commercial property today at www dot c r e launch pro.com
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