First Commercial Deal—What Went Wrong? | Investors Round Table

In this episode of the Investors Round Table, we’re diving into the hard lessons learned from our first commercial real estate deals—the mistakes, the surprises, and the critical takeaways every new investor needs to know. Logan, Matt, and I will share real stories from our first commercial transactions, breaking down what went wrong, how we overcame challenges, and what we would do differently today.

Logan Freeman, with over 6 years of dynamic real estate experience, has executed over $300M in acquisitions for his firm, FTW Investments and as the head of acquisitions for a prior investment fund. Logan is also the managing broker at XchangeCRE, a boutique commercial real estate brokerage firm specializing in 1031 transactions. Leveraging his unique blend of people skills and transactional expertise, Logan is a driving force in acquisitions, capital raising, and investor relations, and serves as a voting member of the firm's investment committee. ➡ Contact info: 573-694-9669 www.ftwinvestmentsllc.com

Matt is real estate investor and attorney residing in the Nashville, Tennessee area. He lives with his wife, Taylor, and two boys, Ashton (4) and Julian (6 months). Matt has more than $25M of assets under management consisting of 280 multifamily units and 25,000 square feet of office in Tennessee. Matt is the owner of Anderson Legal, a law firm focusing on real estate and construction in Tennessee. He also is an owner of Foundation Title and Cloud Realty. Matt’s representation of hundreds of real estate investors, developers, professionals and contractors in real estate litigation and closings has provided him with a unique perspective and background.

Get commercial real estate coaching, courses, and community to jumpstart your investment journey over at CRE Central: www.crecentral.com

Key Takeaways:

• Underestimating renovation costs and working with inexperienced contractors can lead to major challenges on your first commercial deal. It's important to work with seasoned professionals who can provide accurate cost estimates.

• Creative financing options like investor partnerships and seller financing can help new investors get started in commercial real estate without having to put up all the capital themselves. However, you need to carefully structure these deals to ensure they are beneficial for your role.

• Thoroughly reviewing leases, tenant information, and potential capital expenditures is crucial when evaluating commercial properties, as the income and expenses are the key drivers of value.

• Don't be afraid to take the plunge into commercial real estate, even if you're a beginner. With thorough due diligence and learning from others' mistakes, you can find success, even if your first deal isn't perfect.

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.

Episode Transcript:

Tyler Cauble 0:00

This episode of the commercial real estate investor podcast is brought to you by my cre accelerator mastermind, where you'll get access to my step by step investment blueprint, essentially a library of resources on how to invest in commercial real estate. You'll get connected to a supportive community of other commercial real estate investors that are doing projects just like you. You'll get personalized coaching and feedback from me every step of the way. Go to www dot cre central.com to learn more. Welcome back to the commercial real estate investor Podcast. Today, we are back live for the first time of the year for the investors roundtable. Excited to be back with you gentlemen, diving into this. If you are tuning in for the first time, we've got Logan Freeman out of Kansas City and Matt Anderson out of Nashville here with me, and in this episode or series, we dive into what it's like being a commercial real estate investor, raising capital, all of the fun things around becoming a professional commercial real estate investor. Today, we're gonna be diving into our first deals. What were all the mistakes that we made? What did we wish we knew before we got into it? Because if you're anything like me, and probably like all three of us, you learn more from the mistakes that other people have made, and hopefully you don't go and make those yourself. So with that being said, Logan, we're gonna kick it off with you first man, diving into your first deal. I mean, first, tell us what was your very first deal, and what were some of the challenges that you faced going in?

Speaker 1 1:35

Yeah, well, I think the one that I really want to start with was was actually not my first deal, because my first deal went really freaking well. And it was, of course, it did. It was, it was actually the second deal after, you know, I had the Midas touch right, and everything I was doing was working. And so, you know, I shifted from going and buying somewhat stabilized and renovated assets to let me go renovate a building that was built in the 1800s completely changed the use it hadn't been operational for a few years. And, yeah, I'm not going to run into any issues with building out residential units on top on a commercial building and having retail facilities down on the bottom. And so it's a 12,000 square foot building down on Southwest Boulevard, a hop and spot in the crossroads of Kansas City, really cool area, a little ahead of our time in regards to what we wanted to do, but it's in a building that has it's a contiguous city block, right? And so we bought the two in cap spaces on a much larger building. So I learned all about firewalls and all these different components. But that was our first project, and our goal was to take this old manufacturing kind of skate. It was called skates belting and supply company, and it was awesome because we've got 20 foot ceilings. You've got exposed original brick, the original wood on the floors. I mean, just a beautiful building, right? And build two Airbnb so short term rentals on the top floors, and then renovate the bottom floors and have them be for for retail. So that's what, that's what. The second deal was that I learned a lot of different lessons on

Tyler Cauble 3:29

that's, I mean, that sounds like a pretty cool project. Sounds like something I would do. It's

Speaker 1 3:34

looking back at it, and I was actually thinking about this before I was like, this is exactly what Tyler would do. I mean, it's it's got so much character. It's a really cool project. But here's the thing, I had no knowledge of construction at that component. I had no idea that I was going to need to shut down one of the busiest boulevards in Kansas City for six hours to be able to get new water lines into the building. I also didn't know that our tuck pointing was going to be $250,000 and I thought it was going to be $60,000 I didn't know that we were going to have roof leaks in the middle of a winter storm, and I was going to be down there literally taking buckets of water and throwing them out the back so it didn't ruin our brand new wood floors that we had. And I can go on and on for the whole next 30 minutes, but I didn't know a lot of what I should have known going into that project. And I what I what I know now is I learned a really good lesson. Yeah,

Tyler Cauble 4:35

no kidding. I mean, that's the best way to learn too. And for those of you that don't know what tuck pointing is that's when you buy an older brick commercial building. The grout, the mortar in between the bricks, doesn't last nearly as long as the bricks do. It actually starts to rot away. And that means that you've got to go back and basically scrape that out and fill it back in. And like Logan said, that can be a complete pain in the ass. So. Logan, before we jump over to Matt, I want to know, like, how did that change your underwriting on the next deal? How did you account for that for your next project? Because there's an intangibility there, right? Like, you didn't know any of that stuff was going to happen, yeah,

Speaker 1 5:14

well, looking back at it, I knew that there was only one general contractor that gave us a bid to fit into our construction scope, and that's the contractor that we went with, and the the contractor that had the experience, the knowledge, and had done five or 10 of those projects already said, Hey, your budgets about 40 to 50% off here. And you know, I was like, Well, I think we can do it for cheaper, and here's why. And then I went and created a self fulfilling prophecy, and found the general contractor that had specialized in residential but said, yeah, absolutely, we can renovate this, this old building. So then we had construction permit delays. We had all of these different delays, and now I'm battling with the bank on getting construction financing, and the contractor doesn't have the, you know, the draw schedule that they have to have, and all of the receipts and everything, and it was just on and on and on. So how do I how did I change my underwriting? Well, I actually just said I'm going to go with the experienced contractor who's done this and been there before, and trust their numbers and not try to go solve a problem and value engineer on something that I haven't done previously. So big lesson learned going back was actually working with the experts that have been there and done that before, and just because I found a contractor who said, I can do it for that price, because we needed it to be that way for the deal. And then ignoring that was the big lesson that I was taught during this deal.

Tyler Cauble 6:51

I bet all three of us have learned that lesson. I mean, you know, it's so tempting when you're first starting out to go with a guy that's $200,000 cheaper, because you're like, well, better investor returns more cash. For me, it almost always ends up being $200,000 more expensive than the more experienced guy, because it just, I mean, you've messed up so much stuff, and they have no idea what they're doing. Andrew's jumping in the chat. He's saying 100 years and you'll have dust talking about the tuck pointing, very true. Andrew's actually in the accelerator mastermind. He knows a thing or two about renovating historic buildings. He turned this really cool historic building in downtown Louisville into a mini boutique hotel on Airbnb. Go check it out, swaps and guest house. Yeah, it's really cool. Matt, what about you, man, what was your What was your first commercial deal, and what were some of the challenges you faced?

Speaker 2 7:42

Yeah, I got, I got pretty lucky because, you know, with my background in law, I've, I've seen a lot of these contractor issues. I've helped, I helped other people buy deals much before I bought my first commercial deal. So between that and having done a lot of residential stuff, I got to learn some of these lessons through other people's heartaches. So that was a pretty nice advantage. My first foray into commercial was like 2018 we bought a it was not a sexy deal that you would do Tyler this. This was a in Madison, Tennessee. It was just like a rectangle building, just like block building from the 70s. The front was like 1000 square foot cash advance place on a one year lease. The middle unit was like 5000 square feet. It was, it looked like a person's basement, like abandoned basement. And then the back unit was a was a laundromat. So that was my first commercial deal. And really, at the end of the day, I I was, I was a little bit nervous to jump into commercial from residential. And what, what happened for us is we just, we knew we had a smoking deal on paper. And so the deal was so good that my logic was, like, I can't screw it up that bad, right? Like I've got enough room. There's no way I can screw it up bad enough to make up for the deal I got. And if I remember the numbers correctly, we bought it for right at $500,000 and the seller carried 1/3 of the purchase price. The crazy thing about it, though, it was that property, as is was worth probably about 625 give or take, 606 25 and the seller carried a note at 0% interest, agreed to be in second position to the bank and agreed to remain in second if we needed to go back to the bank for construction money. So

Tyler Cauble 9:46

what did you do to this guy? Did you take his family?

Speaker 2 9:53

The funny part is, I didn't even negotiate this deal. It was a my partner's the one that negotiated. So the part I did was I. Jumped in and I said, we need to, we need to add a provision in here, because I knew the roof was in pretty rough shape and I didn't have much cash, um, so I was like, we need to add a provision in here where he agrees to let us go back and get construction money and remain in second place. So that was, I was about the only part I had in the negotiation. Um, the rest was just set in front of me. So it was a crazy deal. The big mistake, I would say, I probably made two mistakes on that, which was, number one, I was pretty broke at the time, and we probably should have brought a capital partner in just to be able to have flexibility reserves peace of mind. So that's one mistake I made. The other mistake I made was that, I mean, that seller carry loan was so beautiful, um, that we, you know, we sold it because we had a six figure profit, which was a big deal at the time for us, in a fairly short amount of time. But we really should have just held that thing like as long as possible to take advantage of that principal pay down. And so that was another big mistake we made. But we did a lot of things right, because I'd seen a lot of mistakes and learned some tricks that I was able to use, and, you know, like the one I described. Well,

Tyler Cauble 11:10

hindsight is always 2020, right? I mean, we always look back on the deals that we sold, and there's, there's this, like, tinge of regret. But what I've found is, is, if you actually trace it back. You know, you put that money to work doing something probably better anyway. And so, I mean, hey, it compounds, right? Like, when I first got into commercial real estate, all of the old guys would always say, Oh, I wish I never sold that building. And so I thought, Okay, I'm gonna buy everything. I'm gonna hold it until the sun sets. But then you realize, like you can't really, actually do that. You can't scale, right? They were selling those buildings in 1031 exchanging into bigger buildings. It takes a long time to hold everything. Probably not the best use of your cash anyway. Was that the deal that you did with Brandon, or did you sell it to

Speaker 2 11:57

Brandon? Yeah, that's the one. So the fun part is, I showed up to the closing table, and they paid us, like, $11,000 to buy the property. And I'm like, This is my first commercial deal. And, you know, I'm used to residential and I show up, they pay me $11,000 to buy the property, and the paperwork so thin, you know, I'm used to the residential stuff. I'm like, what commercial is the best thing ever? So I was pretty pumped. I was like, man, commercial from now on. And then, yeah, I ended up selling that building to Brandon, actually, and he ended up figuring out what to do with that middle unit that I never could sort out. Man, if

Tyler Cauble 12:30

you go find another deal like that, I think Logan, I will give you all of our money. It's ridiculous. Well,

Speaker 2 12:36

hey, my second one's not that much different, to be honest. Yeah, is this the office building up in Madison? Yeah, that was seller. Carry too well. We did two, two projects with her, and we bought $2.4 million worth of real estate with only putting 125 grand down. So well, let's,

Tyler Cauble 12:54

let's dig into that here in a second. Because I think, yeah, creative financing is a phenomenal way to get started. I did a lot of that. I still do a lot of that, because why put your money to work if you don't have to? Vic, it is saying, Good afternoon, guys, good afternoon Vic, and thanks for joining us. Hey, if y'all are tuning in question of the day, what's your biggest fear about buying your first commercial property? We want to hear it, and let's talk about it, because we may be able to either dispel that fear or at least commiserate, because we've probably felt the same way before too. Okay, let's, let's, let's take a bit of a left turn for my the questions I was going to ask, I want to talk about creative financing. I mean, Logan, before we come back to Matt, Logan, talk to us about some some deals where you've done creative financing, because if you're getting getting into your first deal, I didn't have any money on my first one. Made plenty of mistakes, but the thing that I did right is that I brought $0 to the table. I think that creative financing can unlock a door for a lot of new investors that maybe they never thought was possible. So talk to us about some of the more creative deals you've

Speaker 1 13:55

done. Yeah, yeah, absolutely. And I've got the deal actually pulled up if you want me to share my screen, so I can show it to you guys here in a second too. But go for it. The way that I approached creative financing was not necessarily with the seller, per se. I created some creative financing through reading a book by Joe Fairless. And I think it was, you know, the book on apartment investing or something like that. It was this huge book that he finally wrote after all of his years of running his his podcast, and, you know, it said, Hey, if you don't have the capital needed, and this is, you know, eight, nine years ago, you know, here's how you can approach this, go find a project and find an investor and structure it this way. So I still remember being on the phone with this investor that I've done multiple projects with, and even the horror story of the one that I'm going to show you all, and we still have a great working relationship. But I said, Hey, you know, you've got some capital to place, and I'm going to go out and find a project, right? And so I did that. And then I said, Look, I'm not going to be able to sign on the loan. I just, I just didn't want to do that at the time, and nor would I think it would have really been that much help for this individual. I say, hey, it's gonna be a little bit easier if you just have, you know, the debt on your side. He said, That's fine, and we'll structure it this way. You know, I'll do the asset management, construction management, I'll take 20% of the upside, you get 80% and you get 100% of the tax benefits. And we went back and forth a little bit, you know, in regards to that structure, but that's generally how we ended up structuring this. And I did that multiple times with this investor, and it worked out fantastic, because I went out and, you know, found him a project that he owns 80% of, gets 100% of the tax benefit of and I'm just sitting there not really making any money until the thing is either cash flowing or he's been paid back the down payment, and we go to sell. And so it is a really good way to structure something so creative financing with an investor that I trusted, and he trusted me instead of actually dealing with the seller in regards to having them do some creative financing. Now, a couple deals down the road, I was able to negotiate 100% seller financing on a boutique hotel, Tyler that you have stayed in here in Kansas. Beautiful hotel, by the way, really cool, really cool place, and they became the bank for us, and we still put money down. We raised capital from investors. We put money down, but we were able to get a really good interest rate. And even, you know, after four years, we're able to actually go in and just, you know, extend that loan. Because the guy was like, Look, I'm getting payments every single month, and this is working out fantastic. And so we recently sold that project. But, you know, we just approached the guy and knew that he had the ability to do the seller financing, because he had the thing beta paid off. He didn't have a loan, and it, it worked out really well. And there's not that many banks that really want to take a risk on a boutique hotel that is not operational currently, and we had to turn it into to being operational. So those are a couple ways that I've I've structured that. And now as a broker, we have definitely structured and working on two seller finance deals right now, because, you know, if we're trying to bridge what the seller is wanting for the buyer, then one, they need to bring less money to the table. Or two, they need to get a more advantageous, you know, interest rate, and so, you know, this has been really interesting, because a lot of these property owners don't really want to have a taxable event right now. They want some time to plan for that. And so we're structuring seller finance deals and getting those across the finish line, working on one on the plaza right now.

Tyler Cauble 17:39

And that question came up on our mastermind call last night, which was, you know, are sellers today more likely to do seller financing than they have been considered where the market is? And I said, Absolutely. I mean, my brokerage team is educating every single seller about seller financing before we even list properties. That's not something that used to be normal in our industry, right? We would just go and list it and say, hey, you know, you're probably going to get the the, you know, these terms on a contract, and we'll get it closed. Now it's Hey, you should probably consider seller financing, and here's how that can make you more money. And so more sellers are probably out there considering it with, with where the market is, Matt, tell

Speaker 1 18:18

me. Tell us, on that front, though, you know, if a seller is wanting to complete a 1031 exchange, after that seller finance deal, there is some complications with that. So it's it's a challenge. If they're like, hey, I'll sell our finances while I go find, you know, a 1031 exchange, call your Qualified Intermediary and talk through that with your sellers, because they that that is a situation where, you know, some of that might not be able to be moved forward. If it is a tool where they're like, Hey, I just want to sell our finances, and at the end of it, I'm going to sell it. And that's fine. That works really great. But if they get down the road and say, Holy cow, I'm not able to 1031 exchanges now they don't want to get out of the deal, you may be in a tough spot. So just keep that in mind.

Tyler Cauble 19:03

That's right. Yeah, it is. Yeah, there's a pretty good chance you're paying taxes at the end. Mac, what about you, man, tell us about the second deal.

Speaker 2 19:13

Oh, the well, the other one I was referring to, we bought a couple office buildings from a lady. And I've usually used, you know, I've done sub two, I've done seller financing. I've done, well, you name the I haven't really done a contract for D. That's probably the only one I haven't personally done myself. But she, typically, I'm looking for using the tool on the person that it's going to benefit the most, which for me, has been someone who's typically older, you know, near retirement age. Typically, they don't have debt on the property, and they don't really have a great plan for the money. That's usually the the person that this fits well for. And that was exactly it for her. She had a she had a building where she really wanted a certain price. It was 1.4 million for that one. She really wanted that price. And. No one was willing to give it to her, and I spent time with her, got to know her, and at the end of the day, she had no real plan for that money at all, right? She really didn't know what. She just knew she wanted to get that price, and she was very attached emotionally to the building, and she felt like it was worth that price. So that's what we did. We made her an offer. I said, I think I can get you your price, and I usually use a line something to the effect of, would you be open to me being able to pay your price, but maybe not being able to pay all of it to you on day one, you know, something general like that, kind of get the conversation going. And so that's what we ended up doing. We ended up doing like, 100 grand down, $1.4 million purchase price, and she carried the rest. And then we bought another building for her for, I think it was 975 and she carried 950 so it's, yeah, it's, it's a, you got to be careful with it. You know, for a beginner, though, you got to be careful with seller financing. Because just because you can do it, doesn't mean you should do it, and it's a it's a form of leverage, right? So your your returns can be astronomical, but your losses can be pretty devastating too. Because if you know a seller financing, doesn't necessarily make a bad or mediocre deal a good deal just because you got seller financing. So I'd caution you, it can be incredible, but you need to be careful and make sure the deal fundamentals are sound. That's right.

Tyler Cauble 21:26

I mean, at the end of the day, it's frustrating as hell to work with traditional banks, but there's a reason that they say you're only going to bring 80% or 75% it's because one, it de risks their position, right, which, of course, they're going to do. But two, it also protects you. Banks actually want to protect you. That's why they have a debt service coverage ratio in there, right? 1.25 times debt service coverage is typically what you'll see. That means that for every dollar and debt service that you're paying, they want you to be making $1.25 that way there is still profit for you in the deal and stuff. Makes sense. I mean, you know, yes. Is it tempting to get 95% leverage, you know, through through seller financing, of course, but look at the monthly payment. Are you going to be able to afford that? Because you can very quickly get upside down on in a situation like that, vacant is saying, Tyler, God forbid, the economy gets worse in the long run, can strip malls survive? Good question. I think so absolutely. I mean, a lot of these strip malls are incredibly resilient today, considering we've gone through the the Amazon apocalypse, most everything that is still around in these strip malls is something that is either a daily or weekly need for local residents in the area that you can't easily order online. So think about your dry cleaning, the local pub, nail salons, services, right? Things that you can't just I mean, hey, if Amazon starts doing, you know, nails online, you know, good for them, be an interesting business model, but that's probably gonna be a while before they break into it. Rebo is saying biggest fear is probably losing a big portion of the money that I have and wasting my time on a deal, also potentially losing the money of the people that put their trust in me. Rebo, I think that that is probably the number one fear when it comes to doing your first commercial real estate investment. Logan, how do you how did you handle that? Because I know we all felt that,

Speaker 1 23:20

yeah, you know, I think that you know two ways that I've handled that. Number one is, you know, be quick, but don't hurry. You know, you need to speed wins, but at the same time, you have to be written. Matt's talked about this before, but you have to be really, really regimen on your due diligence checklist, and learn from my mistake. When, when that contractor who's been doing this for 25 years said, hey, the budget is this, and I can show you five projects in this corridor that's been that, here's, here's what it is. And I said, No, I've got somebody else that can do it. And then change orders happen. That's on me. So learn from that. So put yourself around really, really experienced people that are in the trades that are going to need for that you're going to need for your project. Number two, you have to be willing to walk away, you know, like if I look back at this project and I can let me just show it to you guys real quick. And I know we're running up on time, but I just want to show you the awesome, you know.

Tyler Cauble 24:22

Yep, there we go. Okay.

Unknown Speaker 24:26

Logan, hold on

Tyler Cauble 24:31

one second. Matt, have you lost Logan's audio, or is it just on my end?

Unknown Speaker 24:37

Yeah, he sounds like, uh, you sound

Tyler Cauble 24:39

like Autobot. Logan, yeah, it's, it's, it's not coming through every time you talk, for whatever reason, it sounds robotic.

Unknown Speaker 24:49

Okay, why?

Tyler Cauble 24:53

No, it's still doing the same thing. I don't know why it's doing that.

Unknown Speaker 24:57

I just think. Should think, wow,

Tyler Cauble 25:02

oh my gosh. This is sorry for Logan's audio guys. It's kind of wild. Yeah, okay, yeah, it'd be starts like, whoa. Audio, Logan, if nothing else, you've got a career with Daft Punk. It sounds really, really cool. Matt, close us out. Man, what are, what are some things that somebody should keep in mind, or triple check before they close their first commercial deal?

Speaker 2 25:30

You know, I'd say leasing is a big one, you know, because it's something that's kind of a different animal when you're jumping in a commercial. But you really need to study the leases, because a lot of times the value, you know, typically the value of the property is based on the income. And so you really need to dive deep into the leases, into the lease documents, tenant estoppels, make sure you understand the security of the tenant and the documents involved and and that those are solid. That's huge. And it's kind of a different thing that residential people aren't very used to. That's one thing. And then another thing that can, you know, Logan referred to this earlier, the capex stuff can destroy you, right? The capex stuff can really mess you up, if you know, and it's different. The construction is different than residential. A little bit. You're dealing with commercial sprinkler systems and commercial roofs and and commercial HVAC systems, and you need to really get somebody for me. I had to get somebody really trusted to get in there and help me understand that the first few go arounds couldn't rely on my own knowledge for that. Those are two big things, I would say. And then the deal structure can be huge. You know, the way you structure the deal can make or break you. It can it can take a deal that's good or mediocre and make it great. And then the other thing is, it can make a deal that was good for you as your role in the deal fantastic or terrible. You know, you can do a good deal but structure a partnership or a syndication that's not good for you. So those are a few things that come to mind off the top of my head.

Tyler Cauble 27:02

No, that's, I mean, that's all great advice. I mean, look, it's, it's 2025, there's always opportunity in the commercial real estate market. It's just a matter of getting out there and finding the right deal. So if you're sitting there thinking to yourself, all right, can I do this? Yes, you absolutely can. I mean, look, I dropped out of college. I'm not that bright. Logan played football. Come on, he's not that. I mean, that's an attorney. So, like, that's, you know, like, come on, if we could do it, you could do it. So just get out there, analyze the deals, study everything. Go meet everybody. It's a fun industry to be in, and I promise you, you're not going to sleep the night before your first closing. You're going to sleep like a baby afterwards, because you'll realize, oh, it's actually not that big of a deal. Gents, appreciate you joining me. We'll see you all in a couple weeks. This

episode of the commercial real estate investor podcast is brought to you by my cre accelerator mastermind, where you'll get access to my step by step investment blueprint, essentially a library of resources on how to invest in commercial real estate. You'll get connected to a supportive community of other commercial real estate investors that are doing projects just like you. You'll get personalized coaching and feedback from me every step of the way. Go to www dot cre central.com to learn more you.