The Cauble Group

View Original

298. Don't Invest with Strangers! | Office Hours

Tyler Cauble
See this content in the original post

Don't Invest with Strangers! | Office Hours

In this episode of the Commercial Real Estate Investor Podcast, we discuss the risks of investing with real estate syndicators you don’t know personally. Using a recent Reddit thread as a case study, we break down key lessons for investors, including:

  • -The importance of vetting syndicators before committing capital

  • Common mistakes investors make when evaluating deals

  • The impact of overleveraged deals and expiring rate caps

  • Best practices for due diligence in commercial real estate investing

  • How general partners and limited partners should align their interests

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

Key Takeaways:

  • Don't invest with syndicators you don't know personally. It's important to thoroughly vet and understand how a syndicator operates before investing with them.

  • Align incentives with your investment partners. The general partner should have significant skin in the game and be taking on meaningful risk alongside the limited partners.

  • Be very conservative in your underwriting and stress test deals for various scenarios. Don't rely on overly optimistic assumptions.

  • Focus on getting 20%+ annualized cash-on-cash returns. Anything less may not be worth the risk and effort compared to other investment options.

  • Avoid 50/50 partnerships, as they can lead to stalemates and disputes. One partner should have majority control.

Your browser doesn't support HTML5 audio

Don't Invest with Strangers! | Office Hours The Commercial Real Estate Investor Podcast

See this gallery in the original post

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.

See this social icon list in the original post

Episode Transcript:

Unknown Speaker 0:00

This

Unknown Speaker 0:05

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 live from the cobble group Studios here in Nashville, Tennessee. Back for another round of office hours. This is where we dive into your questions around commercial real estate. Whatever questions you have, brokerage, investment, development, doesn't matter. Let's talk about it. And I mean, look, you guys have probably heard me say this on on, on the podcast, on the channel before. Commercial Real Estate isn't easy, but it is very simple. It's very formulaic. It doesn't have to be super complicated. I swear. If I can do this, anybody can do this, it's it's not that complicated. I know getting over the hump of doing your first deal is, hands down, the hardest thing for you to overcome.

Unknown Speaker 1:11

It took me five years before I finally got mine and the minute that I did, or really the year that I did, I bought three more buildings because I realized how easy it actually was. So that's just your bit of encouragement for the day. Go out, find a deal, make it happen. Today, we're going to be talking about a pretty interesting thread I found on Reddit about not investing with syndicators that you don't know personally. You shouldn't invest with anybody that you don't know personally, if you've never had a conversation with them, if you don't understand how they operate, how they like to invest, you have no idea how they're actually running things behind the scenes. So we're going to dive into that thread today. We're going to talk about best practices when you're partnering with people, when you're investing with other people, and of course, we're going to get to your questions as well. But before we do any of that, let's get back to what I've been up to this past week.

Unknown Speaker 2:03

So we are finalizing our Birmingham mastermind for the Siri accelerator that is coming up in the middle of March. Really excited to get that going. So we've, since we launched the inner circle, which is the 10 people that I will be personally working with on their commercial real estate portfolios. We've added an extra day, so it'll be a Thursday, Friday, Saturday that we're doing the event, and everything's pretty much lined up, which feels good. You know, when you're a little over a month out and most of the stuff is kind of already pulled together, you start to feel pretty good, especially when you're me, and you don't like to have to organize things like this. So I'm really excited for this event. It's it's going to be a lot of fun and excited for all of the mastermind members that are going to be there. It's going to be great if you were on the email list and you have considered joining the mastermind before, you probably saw an email this week, we are ending lifetime access for all new members of the mastermind, so through the end of February 2025 you can still join and get lifetime access, but starting March 1, every member thereafter will be on an annual basis. Instead, it'll be the same price, just renewing annually instead of getting the lifetime access. So if you have considered or are interested in joining the mastermind, go, click the link in the description below, book a call with me. I do have financing available for those that can't afford the full fee up front. Obviously it's a little more expensive. It's financing, but it allows you to pay for it on a monthly basis instead. So completely up to you. What lifetime access, I would say is probably worth it. Over 100 people in the group right now would certainly agree with that. I'm sure

Unknown Speaker 3:45

this, this next month, I'm going to be giving a talk at the Entrepreneurs Organization for Nashville. This is not necessarily real estate related, but I guess it kind of is. You know, the Entrepreneurs Organization, I've been a member for five years now. I joined in like, March of 2020, April of 2020, couldn't have needed it more. You can imagine owning a business during that time, pretty wild,

Unknown Speaker 4:09

especially having real estate investments and all that kind of stuff. I mean, it was just a it was a very interesting time. And so they asked me to participate in the EO talks, which is where they have, you know, entrepreneurs in the organization come out and talk about, you know, it's kind of like a TED talk, I guess, but for the Entrepreneurs Organization, which is really cool. So I want to be giving a talk on YouTube and how that has completely changed my real estate business. So that's fine. It's, you know, I talk real estate all the time. Like, every, every slide deck I put together is real estate. Every,

Unknown Speaker 4:46

every live stream we do is real estate. Everything is, everything is always real estate. So it's kind of nice to take a break and talk about business for once as well,

Unknown Speaker 4:55

because that is the other side of this, right. Like, yes, I'm a real estate investor.

Unknown Speaker 5:00

Yes, we broker deals and all that kind of stuff. But I own three businesses in the world of real estate, and I am running those businesses.

Unknown Speaker 5:08

So it's, it's kind of fun to talk more on that side of things, too. So hey, if you guys are ever interested in the business side of things, I love to talk about it. I love entrepreneurship. I have been a champion of entrepreneurship since I was in like middle school, doing all sorts of things, trying to hustle and make some money. All right, let's dive into this right of third because I think this is really interesting, and it could, it could possibly save you, at least it could save, could have saved this investor a couple $100,000 that he lost. So, you know, the title of this threat is, do not invest in syndicators you don't know personally. A warning,

Unknown Speaker 5:45

if you don't know people incredibly well, there's no point in partnering with them. There is no point in investing with them. I mean, you got to think like, this is basically a marriage, right? You are, you are giving a lot of money to somebody, and you're going to be partnered with them on something for you. Something for 357, 10 years, right? That's a long time. Most relationships don't last that long. So this is a big deal, and I think that a lot of investors don't take this as seriously as they should. And also, it comes down to syndicators as well. And I'm not saying that anybody that they're talking about in this threat is necessarily at fault, I don't know, but from, like, anecdotally, what I've seen, like some syndicators just don't care. They just add you to a list, like, for example, all of my LPs, like my limited partners, anybody that wants to invest in a deal with me, I have to have a phone call, at least a phone call, with them before I will even put them on the list to be eligible to invest in our deals. Yes, that is a requirement of a 506, B syndication. You'd be amazed at how many syndicators don't do that, though, thinking they can just skirt the rules.

Unknown Speaker 6:54

I don't want people jumping into my deals that I don't know for multiple reasons, right? Like, obviously, I don't want to have a bad investor. I've got one bad investor right now who totally deceived me about her experience in real estate. To be fair, it's one out of over i don't know 200 investors that I have active in my deals right now.

Unknown Speaker 7:15

And,

Unknown Speaker 7:16

you know, I'm constantly having to, like, she's constantly asking me questions and, and, you know, being negative about it. And I'm like, this is, like, this is how this works. This is, you know, you you read the documents, right? You signed everything. I mean, it's, it's interesting how the most sophisticated people will never reach out to you, the people that have no idea what they're doing, or it's the last bit of money that they have, or the only money that they have, they will question everything. They always try to cause problems.

Unknown Speaker 7:47

And so now I really, really ask the questions to vet these people and make sure that I don't get anybody else like that into my deals, because it's just not worth it, right? Like I've got enough stress and headache to deal with on turning these deals around,

Unknown Speaker 8:02

but it's the same on the investor side, like you should really be interviewing these sponsors, these syndicators. You should be talking to some of their other investors. You should be talking

Unknown Speaker 8:13

to whatever references that you can get right so you can verify that this is somebody that you should be investing with, and I'm always happy to share those references, right? Because

Unknown Speaker 8:26

you're gonna have people that are, you know, maybe not happy. I mean, who knows? Right? Like I've had investors have made, like, 20% annualized cash on cash returns and be upset about it, because they thought we could do better. I mean, hey, man, if you think we could do better, I would love for you to come in and help me run the next one. Run the next one right. Like, that's great,

Unknown Speaker 8:46

but you know for the most part, like, we're gonna have a bunch of happy investors, and I'm happy for them to share every single aspect of what we have going on behind the scenes. And that's what LPS should be doing. If you're going to be investing in other people's deals, you really got to do your research. So here's, here's what this guy's saying. So warned a buddy of mine a couple years ago and got a call this morning. His equity is completely gone.

Unknown Speaker 9:08

Couple 100,000 he invested with a big syndicate in San Antonio, Texas. Guy overpaid for everything over improved the property and put 80% bridge debt and all caps are expiring. That's the cap on the interest rates. Those are expired. And

Unknown Speaker 9:26

apparently this guy has an Income Fund he raised that he's using to bail out all of his deals. But where folks, lots of these syndicators, are about to get nuked, survived till 25 they said, lol, the bond market is telling the Fed, we don't believe you. It's about to get ugly.

Unknown Speaker 9:44

I mean that there's red flags all over that, right? I mean, first of all,

Unknown Speaker 9:50

whenever I'm investing into a deal,

Unknown Speaker 9:54

I like to make sure that I understand what the price per square foot basis, what.

Unknown Speaker 10:00

The cost basis is on everything, right? Because that's how you just understand, like, are you overpaying or not? You don't have to be a genius to figure that out. I just go with the cops, right? So if he's overpaying for everything, you probably could have caught that on the offering memorandum on the front end over improve the property again, that's, you know, these are all questions you should be asking as an LP,

Unknown Speaker 10:21

you know, what comps do you have to support that the property needs this level of renovation, right? And these are, this is a good conversation for syndicators to hear too, right? Because this is all stuff that you should be able to justify an answer.

Unknown Speaker 10:36

80% bridge debt with caps is crazy to me. I would never do that. I mean, basically that's hard money, right? Like, that's a private money loan, high octane debt. That stuff is expensive as hell, and it sounds like they probably spent additional money to buy rate caps, right? So the interest rates would stay stuck where they are for a little bit. But essentially, all that is is an is a very expensive adjustable rate mortgage, right? And so as soon as those caps go away, those interest rates are going to spike right up, and you're going to see negative cash flow faster than you can say negative cash flow, right? That is not a good move, and that's going to cause some problems, right? So, I mean, typically, in a situation like this as an LP, there's not really a whole lot you can do if you've already signed on and joined this person, right?

Unknown Speaker 11:28

I would recommend going back and looking through your operating agreement and seeing if you can have them removed as the manager, or whatever possible recourse you may have, you may have nothing right, which is why it's so important to vet these deals on the front end. It's very, very, very, very important

Unknown Speaker 11:46

to make sure that you are just doing all of your proper due diligence, right?

Unknown Speaker 11:53

I mean, they're they're going through here and talking about the different groups that it could be. I mean, I actually know this group, and I have personal anecdotes on lifestyles unlimited on them, not

Unknown Speaker 12:06

on those personal anecdotes saying not a great group. One of their biggest mentors has deals blowing up all over Texas. A friend of mine took a full equity loss in San Antonio with them earlier this year and invited me to listen to their investor webinar. LPS pressed them on why they weren't taking more personal risk. And the guy from lifestyles basically said, I can't take the risk my investors take, because this is my full time job.

Unknown Speaker 12:32

Oh, my God, if, okay, if that's true. And there's a recording of that, that's nuts, because

Unknown Speaker 12:39

GPS almost always, in every single case, take more risk than the limited partners do. That's why limited partners are limited partners, right?

Unknown Speaker 12:51

Limited Partners are basically putting up just the equity, and general partners are taking on all the risk, right? I mean, the lifestyles I know is mostly multifamily,

Unknown Speaker 13:02

so they're probably signing non recourse debt, but I do all commercial, right? So every single deal that I do, not only am I taking on investor capital, we're actually signing on for personally guaranteed debt, which means that I am personally on the hook for that debt, which

Unknown Speaker 13:18

that's not always fun, right? But

Unknown Speaker 13:21

I mean, if you're doing a multi family deal with non recourse debt, and you aren't putting any money into it, and you aren't taking any risk on the deal,

Unknown Speaker 13:30

that's a pretty bad look. Also, why would you invest with somebody that isn't putting their money where their mouth is? Every single deal that I do, I put in at least the minimum requirement of my investors. So if I'm asking my investors to put in a minimum of $100,000

Unknown Speaker 13:50

I'm putting $100,000 into the deal as well. At least $100,000

Unknown Speaker 13:55

right? Some sponsors will do at least 10% of the equity raise, like as a partnership group. That's what they'll do. So if they're raising a million dollars, they put in 100,000 of that and raise 900,000 from other investors.

Unknown Speaker 14:08

If an if a general partner is not willing to put any of their own cash into a deal, run away. There's no point in even having a conversation with them, because they aren't actually bought into that deal performing well, right? Like, if they thought it was going to do really well, why wouldn't they be wouldn't they be putting as much money into it as they possibly could, right? And to be fair, as a general partner, you can't go and invest as much money as you possibly can in every single deal that you can do, right? You just, you won't the amount of deals that you're doing. It doesn't make sense. But if you can't put $100,000 in 50 or $50,000 into every deal you're doing.

Unknown Speaker 14:45

What's the point? This is, you know, sketchy as hell.

Unknown Speaker 14:52

Oh, let's see how people are just diving into what's the group? What's the group? What's the group? Let's see. Syndicators are going to do fine. They took their.

Unknown Speaker 15:00

Fees at acquisition and will take more from the income funds their equity was 1% of the deal. That's another thing that you want to keep in mind as you're going through this and investing with these other guys, is how heavy are the fees stacked on the front end? And what are their incentives on the back end? If somebody's coming in and taking a 456, percent acquisition fee on the front end. They have no motivation to do anything else, right? Because that's the majority of the fee that they're going to make on that deal, right? So if they're getting a big acquisition fee, they're signing non recourse debt, meaning they can just give the keys back, and they have a small amount of equity in the deal, their only motivation is to

Unknown Speaker 15:46

not piss off investors, I guess. I mean, it's, it's, you know, that's kind of a bad spot to have somebody in, right if their only motivation for doing well in a deal is to not piss off investors. So you have to make sure that your incentives are very equally aligned. I charge a one to 2% acquisition fee on all of our deals, honestly, like it's generally 1% and that barely covers our cost to pursue the deal. That's how it should be. In my opinion, no general partner should be out there making a living off of their acquisition and asset management fees. That's crazy, but there's a lot of people that do it, and there's a lot of LP investors that are kind of fine with that.

Unknown Speaker 16:26

Let's see the Income Fund will basically recapitalize him out at a $0 basis. The good news is that the income funds investors will likely get similarly screwed in the next Recap cycle, and your friend has learned a valuable lesson about syndicators. So basically, what this fund is that they keep talking about is like an Income Fund is where they go and raise, kind of like mesda, right? You go and raise additional funds from other investors, and you're saying, Hey, we're gonna give you a 12% cash on cash return, fixed, or whatever that is, right? There's so many different ways to structure it, and then they'll go out and they'll basically put more money into the deals that they're already doing

Unknown Speaker 17:07

to help keep it afloat, but basically, all you're doing is putting more high octane debt into these deals. And so, like, it doesn't,

Unknown Speaker 17:18

I don't know, man, I mean, that just doesn't add up at all. It's impossible to keep that afloat. You know, it's going to catch up to you eventually.

Unknown Speaker 17:29

Let's see this guy is saying fed saying they won't be cutting rates much through 2025 and the market has finally accepted that to be the truth, after pricing in higher number cuts than the Fed said. Fed said multiple times what their plan has been and market has been aggressive every single time, pricing in more cuts and underwriting lower rates.

Unknown Speaker 17:49

I am so conservative when it comes to my deals. We were running through a stress test on a deal that one of our members, Kate was looking at last night in Dallas, Fort Worth, and I was kind of showing her how I would go through my underwriting. And when we stress test deals, it's like, okay, what purchase price can it bear? How much in capitalized rehab can it bear? If I get $8 a foot net in rent instead of $9 a foot, what does that look like? If it takes me three months longer to fill this vacancy, then I estimate. What does that look like if I get a 7% cap rate instead of a 6.75%

Unknown Speaker 18:29

cap rate on the exit price, what does that look like? Right? You go through all of these different scenarios to try and make sure that things are going to work, I'm incredibly conservative when it comes to my underwriting, which is why we have had zero capital calls from our investors up to this point, right? It's pretty good. Most, most groups are having capital calls. And

Unknown Speaker 18:54

I don't know why other people don't approach deals that way. I guess because they're incentivized to just acquire deals, and so they're trying to make them look really good for investors. But why would you ever underwrite multiple rate cuts when the Fed continues to say we're probably not cutting anything this year?

Unknown Speaker 19:13

I mean, it's just, it's, it's really interesting to me how some, some people approach this market.

Unknown Speaker 19:18

And this is like, also,

Unknown Speaker 19:22

honestly, like institutionally level people, right? This isn't necessarily, you know, your mom and pop investor that's doing this kind of stuff. These are the people that know better, and they're really taking way too much risk in trying to make it work

Unknown Speaker 19:35

regardless. Survive till 25 was always a cope used by deal markers, brokers, etc, who are either delusional or complete idiots,

Unknown Speaker 19:44

not wrong, the fundamentals of their deals sucked and only made sense at sub 3% rates, and they were hoping and coping that we would go back to Infinite printing to bail them out. Seems like the market is now of the belief that the Fed has no interest in doing that which more or less a.

Unknown Speaker 20:00

With what the Fed has been saying for years now, and people are finally going to have to come to terms of the fact that they can't keep kicking the can down the road forever.

Unknown Speaker 20:10

Look, the the world of commercial real estate entirely changed after 2020 because so much money started coming into the commercial real estate market that people stopped paying attention to the fundamentals.

Unknown Speaker 20:26

It's really interesting to see how much dumb money is in this market now that has a lot of dumb money. When I first got started in commercial real estate, back in 2013 I remember looking at Self Storage investments, and you could buy a an outdoor self storage facility, right? So, nothing fancy, but an outdoor, non climate controlled self storage facility at a 15 to 18% cap rate. Like, I'll never forget looking at that and being like, Who the hell would buy this? Which is kind of funny.

Unknown Speaker 21:02

This is wild, how much the market changes, but 15 to 18% cap rates those same product, that same product today is sub 7% cap rate sub 6% maybe in some cases, which is crazy,

Unknown Speaker 21:16

but that's because there's so much dumb money that doesn't understand the fundamentals of how commercial real estate works, that is willing to just throw money out there and make it happen. You know, for me, like, I don't get out of bed for a deal that's not going to make me more than a 20% cash on cash return annualized. We were having this conversation last night in the mastermind, like, there's no point. What's the point in getting out of like, do it, taking the risk, finding the deal, doing all of the work, spending five years, if you're not going to get a 20% annualized cash on cash return or better, what's the point?

Unknown Speaker 21:50

You can go invest and read ETFs and get 12 to 15% returns. So like, Why do anything else?

Unknown Speaker 22:00

Now, I know those are, those are rare and few and far between, but, I mean, I would say pretty comfortable. You can make nine to 11% on REIT stocks and stuff like that like

Unknown Speaker 22:10

so if, if that's your baseline as a return metric, you got to go find something that's worth doing, right? I wouldn't take an 8% cash on cash. I wouldn't take a 12% internal rate of return. There's, it's that's way too much risk, way too much work, and it's not going to make any sense at all. There's just no point in doing that. Man, I'm really getting on a soapbox this morning about returns and deal metrics and all that kind of stuff. But to be fair, I get asked all the time like, what is a good return on commercial real estate, and it's a really tough question to answer because it's so subjective to you personally, but go compare everywhere else that you could make $1

Unknown Speaker 22:52

and judge it by the risk reward, right? If you can go and put your dollars into the stock market, into a real estate investment trust, spend no time take hardly any risk, right? There's still always risk associated, but take hardly any risk to do that deal and get a nine to 11% return. Why in the world would you go out and do a commercial real estate investment where you're getting a nine to 11% return, right? Okay, yes, you get the tax benefits. Yes, you get the appreciation, but at that point, it's a lot more risk for marginally more reward, right? So that's kind of how I like to look at that. Go, compare it to whatever else you can make all right? I'll jump off my soapbox, though, to be fair, this is office hours, and it's a one way. Mike, so you guys will still have to continue listening to me. Let's get to those questions. Rich is saying, can you talk about managing your time and resources on the multiple value add deals you're doing at a time I just put under contract a value add 25,000 square foot shopping center and 20,000 square foot retail center, and that alone seems overwhelming rich. That's a good question, man. I mean, it all comes down to your team. It all comes down to your systems. It all comes down to honestly, just the experience, like, once you have been through one, you realize, like, okay, it's just a 1234,

Unknown Speaker 24:14

ABC process, right? It's

Unknown Speaker 24:16

kind of the rinse, wash and repeat every single time. And I'm not gonna sit here and claim that I'm the best at systems and processes, because I am by far from that. But having gone through

Unknown Speaker 24:28

the process so many times as I have at this point, it's far easier the more that you do, I promise,

Unknown Speaker 24:37

especially as you build a really good team, right like on those those two shopping centers like get yourself a great property manager, get yourself some really good commercial real estate brokers that'll handle all the leasing for you. Find yourself a good contractor, and you're kind of golden, to be honest with you. It really doesn't take all that much work, but always happy to dive into whatever specific questions you have that are going on with those two. Congrats on the.

Unknown Speaker 25:00

By the way,

Unknown Speaker 25:02

Colin is saying, What is one thing you thought about real estate a year ago that you recently have changed your mind on? Dude, that's a great question.

Unknown Speaker 25:11

Oh man,

Unknown Speaker 25:13

what is one thing that I thought about real estate a year ago

Unknown Speaker 25:17

that I have recently changed my mind on? I

Unknown Speaker 25:27

uh, man, that's tough.

Unknown Speaker 25:29

I don't know that there's anything that I've necessarily changed my mind on. Maybe I've just gotten more

Unknown Speaker 25:37

enforced or stronger in my convictions, right of like, you know, you guys have heard me say all the time, there's no point in ever doing an adjustable rate mortgage. And even going through what we looked at this morning, those idiots did an adjustable rate mortgage and are getting completely screwed. Don't ever do an adjustable rate mortgage. If you want to do an adjustable rate mortgage on commercial real estate, come to my office. It's here in Nashville, Tennessee. I will slap you in the face so that you wake up. That's crazy. Don't do it. I

Unknown Speaker 26:10

mean, I think the other thing is that, like

Unknown Speaker 26:13

I

Unknown Speaker 26:16

I'm a big believer that anybody can learn this industry,

Unknown Speaker 26:20

anybody can learn how to do commercial real estate. I can teach you all of the ins and outs of commercial real estate. The stuff that I can't teach you is the drive to go out and make one more phone call, make one more cold call. The brokers that I've had on my team that are kicking ass now, which make this business so much fun. They are all hungry, right?

Unknown Speaker 26:45

They want to go knock on the doors. There is only one person that I have on my team now that came from another commercial real estate brokerage. Everybody else I started in commercial real estate out of five people. So four of the people on my team, I started them in commercial real estate, gave them all of the education, gave them all of the knowledge, and they're all kicking ass, right? But that's the secret ingredient. Is you, I can't train you to make one more cold call like you're either going to do that or you're not, and you're a contractor, so you're either going to bust your ass to make yourself a living, or you're not.

Unknown Speaker 27:21

And I think for so long, I tried to take people that, you know, maybe they had commercial real estate knowledge. So I was like, oh, okay, well, I don't have to train them as much. I don't have to do this as much. Dude. They were lazy as hell. They wanted somebody to just give them the deals, right? They literally wanted somebody to put the football, you know, on the half yard line for them to just walk across the finish line. It's like, dude, what? Why do you you want to take all the credit when somebody else did all of the work? You do nothing. So I think I've just gotten more convicted in that over the past, over the past year, really, over the past few years.

Unknown Speaker 27:59

Great question, by the way, man, I had to really think about that. One inner warrior is saying I've been a residential realtor for only one year, and I have started to pursue commercial real estate. And said, Good job, you woke up. Should a newer agent join a commercial team? That's hilarious. That's basically exactly what I was just talking about. I mean, look, I am not a fan of doing residential real estate. I have some friends that are incredible commercial real estate agents. And you either have the personality for that or you don't, right?

Unknown Speaker 28:30

And I don't,

Unknown Speaker 28:32

but I've got some friends that, you know, they crush it. They make more than some commercial agents do selling residential real estate. I mean, yeah, I don't. I don't see why you wouldn't. I mean, here's the thing, if you are a residential agent that wants to get into commercial real estate, you cannot stay at a residential real estate firm and expect to go anywhere in the commercial real estate world. It just doesn't work that way, right? I mean, that's that's like, you know, being a line cook at McDonald's, thinking that you're going to go to a Michelin star restaurant next, you're just not going to, you need to go, you know, go to Texas Roadhouse and then go to the local, you know, green hills grill, type of restaurant, the J Alexanders, and then work your way up, right? That's just how that works. So

Unknown Speaker 29:16

you can't just jump from A to Z. You got to kind of take the journey along the way. So I would say, first step, absolutely, go join a commercial real estate firm, immerse yourself in that world, learn everything about commercial real estate and grow from there. Dylan

Unknown Speaker 29:32

is saying, Good morning, thanks for the live Absolutely. Dylan, thanks for joining us. Man,

Unknown Speaker 29:38

inner warriors, saying my brokerage allows me to sell both residential and commercial properties. Yeah, I would leave them. I mean, I just would, I am so anti

Unknown Speaker 29:49

residential, like it just doesn't make sense. Can you make money doing that? Sure. Will you get commercial real estate deals doing that? Sure? But.

Unknown Speaker 30:00

You want to be a professional commercial real estate broker. No professional commercial real estate investor will work with a residential agent. They just won't. If a residential agent called me and tried to list any of my buildings, I would laugh them off the phone, because they don't understand anything about commercial real estate, right? You have to be a professional commercial real estate agent that does this day in and day out, to remotely understand that market. It is heavily competitive, heavily competitive.

Unknown Speaker 30:27

So highly recommend joining a commercial firm, vicin saying, Hey guys, good morning. Vic thanks for joining us. Captain Kurt, what's going on, man, he's saying, I've found a lot of people investors do not have integrity. There are quite a few people walking away from deals, losing all the investors money. They chase the money and lied about the track record. There is a lot of that in in the world of commercial real estate syndication, right? There is so much fraud for what I think that this is a in general, when you are dealing with people that are investing capital, there's going to be a lot of frauds. So there's a lot of that. Estate. There's a lot of that commercial real estate. There's a lot of that in crypto and stocks and bonds and whatever. There's a ton of it. But it's, you know, look, commercial real estate not immune. There are plenty of frauds in commercial real estate, so make sure that if you're going to be investing with these people, that they have

Unknown Speaker 31:19

incentives that are aligned with you, right?

Unknown Speaker 31:24

Let's see, Rich is saying, if you're going to partner with just one other person on a deal, who's the money guy, how would you set that up, just a JV agreement, or full blown syndication?

Unknown Speaker 31:34

So Rich really what that comes down what that question comes down to, like, is it a JV or is it a syndication? Comes down to, if he's just the money guy, is he

Unknown Speaker 31:44

giving you 100% of the cash, and then he has no say in the day to day thereafter,

Unknown Speaker 31:50

because if he is going to have a voting share, you know, let's just assume you're 5050 partners. You do all the work, you find the deal, you do all the work. He puts all the money in your 5050, partners.

Unknown Speaker 32:04

Does he get a 50% vote as to whether you put more debt on the property? Does he get a 50% vote as to whether you sell or not all of that stuff? Would say, like, if he has a vote, then it's a joint venture. You don't need to go through a syndication. You don't need to go through any of that. However, if he has no say in anything moving forward, after he gives you his money, that is a syndication, even if it is only two people, you and the investor. If that investor is quote, unquote, a silent partner, that is a syndication. Technically, now is the SEC going to find out about that? I don't know, but I would never, ever, ever, ever take that risk, because if the SEC gets wind of it, they will remove your I mean, first of all, you're going to court, right? It's going to be a big deal, but they could possibly take away your right to raise capital for anything ever again. So it's just now, it's not worth messing with.

Unknown Speaker 33:02

So get a good attorney. That's for sure. Good attorney. Colin is saying, as a business employee, what separates a good employee from a great employee?

Unknown Speaker 33:12

Oh, as a business owner, what separates a good employee from a great employee? Good. Good question, Colin.

Unknown Speaker 33:19

I mean, I would say what separates it is the inner drive. I mean, this kind of goes to what I said earlier, and maybe this is just something that I see personally with my own team, but it's the inner drive. Like, I'm not a micromanager. I don't want to be sitting there thinking about what I have to make sure that you're accomplishing on a day to day basis. You should independently. Want to do all of that right, and so that's why it's always tough with, like, higher salaried employees, because they get complacent, right? Like they're like, Okay, well, whether I do that this week or next week, I'm still making the same amount of money. So why does it matter? That's why I love contractors, right? The brokers, they're hungry, man, they're like a pack of wolves. If they don't go make another call this week, they won't make enough money in three months, right? Like that is how that just shakes out to them, right? So to me, it's all about the inner drive.

Unknown Speaker 34:10

I like having people that work with me that understand fully what we are doing and what needs to be done to get us there, right?

Unknown Speaker 34:21

Some employees, I feel like they're just on the ship, right?

Unknown Speaker 34:26

You know, they're doing their, you know, they're pulling their or or whatever, right?

Unknown Speaker 34:31

But, you know, to me, the employees that really stand out are the ones that go, Hey, by the way, there's a storm up that way. If we, you know, start paddling a little bit more on the right side, I think that we can avoid that cool, let's have that conversation. You know what I mean? Like, just because I'm the captain doesn't mean that I think I'm always right or that I'm gonna force my way no matter what. Like, I'm totally open to changing direction, if somebody can show me why. And so I like it when people are independent

Unknown Speaker 34:56

thinkers. Let's see Vic and is saying, is playing Monopoly a hobby?

Unknown Speaker 35:00

Great question.

Unknown Speaker 35:02

Yes, absolutely. I mean, look, monopoly, it's just training for the real world. So go do it as much as you can.

Unknown Speaker 35:12

Do it a sec. If you believe it's a good deal, you put in as much cash as possible. Yeah, that's exactly right. I mean, if it's a good deal, you're putting your money where your mouth is, right? You're going to go through, and you're going to make sure you're going to make as much money on that deal as you possibly can.

Unknown Speaker 35:25

So why wouldn't you do that?

Unknown Speaker 35:29

Captain Kurt is saying I sign on every deal with a personal guarantee, because I personally checked the underwriting and even told my team to make it more conservative. I require all general partners to invest 50k minimum into each deal, that's the exact same setup that I have, right? I mean, where I require all GPS to invest the same amount no matter what, and we invest as LPs, right? So it goes into the LPS LP stacks, so we get treated as general partners and limited partners, right? Again, just more incentivizing

Unknown Speaker 36:00

our alignments, right? I mean, we want to make sure that we are completely aligned when it comes to all of this.

Unknown Speaker 36:06

I think the more that you do that, the better that a deal is. Because

Unknown Speaker 36:11

I don't know. I mean, if your investors win, you win. And you know what I like to say is, I mean, I'm 32 I'm going to be doing commercial real estate for a long time. I'm going to be raising capital for a long time. I am way too young to start screwing people over and treating people poorly, right? You want to make sure that you're going through and treating people right. And do I give my investors an outsized return for the deals that we do today? Probably, I mean, I would argue yes, because, I mean, my deals are not as aggressive as some other general partners in terms of the splits that they achieve. But also, like, I want to make you a lot of money so that you turn around and just say, keep making me money for the rest of your life, right? Like, if I have one person that gives me $100,000 today, and I make sure that they make more money proportionally today, over the next 50 years, we're going to make a lot of money together, and it's going to make my life a lot easier over that time. So that's kind of how I look at it. It's a long game.

Unknown Speaker 37:12

Colin is saying with syndications, what is the best way to cover yourself? This sounds more technical than most people could probably take on and fully understand. Would attorneys be the best bet? Hell yeah, absolutely do not touch a syndication without great legal representation. There's no like, I mean, it's not even a question. You can't do it without attorneys. In my opinion,

Unknown Speaker 37:33

the best way to cover yourself, one is to have all the knowledge in the world. Two, to have all the drive to make sure that if anything goes wrong, you're going to do everything that you can to fix it right, because at the end of the day, the investors don't really care about the deal they're investing in you, right?

Unknown Speaker 37:51

But yeah, I mean, make sure that you've got good partners, make sure that you've gone through this before. I wouldn't just jump into a syndication without having done one with somebody else before. That has right? You never know. You don't know what you don't know. That's the thing about this business. Like that's why the mastermind is so great. That's why y'all jumping into office hours and asking all these questions is so great. You don't know what you don't know. And every opportunity that you can to ask another question, to hopefully lead you to whatever that piece of information is is all the better.

Unknown Speaker 38:24

Frank is saying, if the roofs need to be changed, should the seller or buyer pay for the roof? Well, Frank, unfortunately, there's not a lot of information in

Unknown Speaker 38:34

that. Oh, he's saying, I'm in the process of buying a commercial real estate deal. However, the roofs need to be replaced. Should the seller pay for the roof? I mean, it's kind of up to you. It depends. On the price. There's so many factors in the deal that I don't know. So it's hard for me to give you a definitive yes or no. I've seen sellers pay for roofs. I've seen buyers pay for roofs. I've seen sellers give credit to the buyer for paying the roof. I've seen sellers give credit for half of the roof. It all comes down to the negotiation. It comes down to the value of the property. They may already be discounting the fact that the roof needs to be replaced in the purchase price. They may be assuming that the roof is perfect in their purchase price. I don't know, but that's a great question for your commercial real estate broker. And I would also have a roof inspector come out and or a roofing company and just get an estimate on what it's going to cost to replace that roof, so you can use that as a point of negotiation with the seller.

Unknown Speaker 39:29

James is saying, what's a good cap rate to go in on a deal in today's climate impossible question to answer.

Unknown Speaker 39:37

It's absolutely impossible. It's like saying, you know, what kind of car is best? Well, are we off roading? Are we going across, you know, the country on the highways? Are we just going to work day to day? There's a different car for every job. There's a different cap rate for every deal. A 12% cap rate could be great. It could be horrific. A six.

Unknown Speaker 40:00

Cap rate could be great, it could be horrific. It completely depends on so many factors. What is the credit of the tenant? What is the shape of the property? How long are the leases? You know, where are your debt terms at?

Unknown Speaker 40:14

It's a really tough question to answer, and I hate to say that and give you a complete non answer, but I want you to understand, like, how tough that is to say, like, 5% could be good, it could be bad. 10% could be good, it could be bad, right? It just completely depends on all of the other terms that are going into that deal. For example, one of the deals that we looked at last night was a 6% cap rate deal,

Unknown Speaker 40:40

and on the surface it looked bad, right? Because you're like, Well, it's a 6% cap rate for, you know, bunch of industrial like flex tenants.

Unknown Speaker 40:49

These are looking at the rent roll, it's like, okay, well, these are turning over pretty much over the next five years, and it's all under market rates. We could probably add two to $300,000 a year to the NOI and, you know, significantly increase the value of this property, right? So it's like, okay, well, maybe this is a pretty good deal. And then it was like, you know, looking at the tenants, they're all local credit.

Unknown Speaker 41:10

Why in the world would you pay a 6% cap rate for local credit tenants in an industrial deal?

Unknown Speaker 41:16

Absolutely not. Absolutely not. So it it all depends. Frank

Unknown Speaker 41:23

is saying, I'm in the process of buying a commercial real estate deal. However, the roofs need to be replaced. Oh, I think

Unknown Speaker 41:30

we already covered that one. Frank, let's see. Let me know if you

Unknown Speaker 41:34

have any more questions on the roof, though.

Unknown Speaker 41:37

Samantha, what is your white box? Build out cost per square foot in your market? Oh, gosh, that's a good question. I haven't built out a white box in a long time. I'd have to go back and check I would think from like a pure like Shell, you're somewhere in the 35 to $50 a foot range. Now, it depends on your

Unknown Speaker 42:01

definition of white box, because everybody kind of has a different definition of what white box actually ends up looking like, right? So it's like, you know, it does it include HVAC or not? Is it a restaurant space? Does that include, you know, grease trap or not? Like, there's a lot of like, little nuances involved in that, but I would say comfortably, 25 to $50 a flood, maybe 35 to $50 a flood, everything has gotten so damn expensive. I mean, it's crazy. Is it is crazy? I

Unknown Speaker 42:32

yeah, I don't know. We're looking at buying another house. And,

Unknown Speaker 42:37

you know, a few years ago, I bought a house for a lot less than what I qualified for. I bought it for 380 and

Unknown Speaker 42:45

I think that house today, now, to be fair, we put probably 50, $60,000 into it. I think that house today is worth 750, and that's crazy to me, right? Like it's only been two and a half years. How is that house worth twice what I paid for it?

Unknown Speaker 43:01

Just, I mean, I know it's inflation, and I know how the market works. I'm just still, I'm still just saying that's crazy.

Unknown Speaker 43:08

Colin, if 5050 partners disagree, how does that get resolved? Or does the project get stuck in a stalemate? Colin, it gets resolved by everybody hiring attorneys and spending a whole bunch of money and getting really pissed off. Don't ever, ever, ever do a 5050 partnership with anybody, and that includes your grandmother. Somebody needs to have 51 somebody needs to have 49 every single time. Because at least that way going into it, everybody knows this is how it happens. One deal in my entire life, it was a 5050 partner. I should never have done that. I knew going into it that it's not an ideal situation, but I figured, oh, this guy's a close friend of mine. He's been a client for a few years. Not going to be a problem. We'll definitely equally contribute to it. No dude goes off, disappears on a meth bench, I kid you not, a meth binge for two months and comes back and hires attorneys and tries to sue me for doing for this deal and all sorts of stuff. I mean, it was the craziest situation I've ever been in.

Unknown Speaker 44:10

It would have been made a lot easier had I had 51% of the deal so that I could tell him to screw off. I'm controlling everything, but I had to get him to agree to everything, which meant that we both had to get attorneys involved. And we both, you know, he threatened me with a lawsuit, and we just laughed at him. You know, he was just like but I still had to spend 10 or $20,000 on attorneys for that. It's ridiculous. So more more of the story don't become a 5050, partner with anybody, including somebody who might disappear in do math, which is

Unknown Speaker 44:42

what in the world is that

Unknown Speaker 44:46

sports charisma, hey, Tower, is it realistic to get into commercial real estate two years post college? I mean, yeah, absolutely. I dropped out of college and got into it. I want to invest in my first property, but I don't know if I have enough capital for commercial real estate, or if I should first do multifamily and learn the rope.

Unknown Speaker 45:00

Dollars. I'm going to tell you this right now. You're not going to learn any ropes to a multi family. If you're wanting to get into commercial real estate, they're very, very, very different. I mean, look, if you want to get into commercial real estate, go become a broker, become a commercial property manager, whatever it is, spend, you know, 2345,

Unknown Speaker 45:16

years, networking, meeting everybody that you can in the industry, find the partners that do have the capital, while simultaneously learning everything that you can about finding and operating these deals. And then you won't have to have any cash, because they will invest in you to go and do these deals. That's exactly what I did. I didn't have any cash when I first got started. I just knew how to go out and find and find a deal, right? That was a big deal. That's what that's what investors care about, yeah, Samantha. Samantha saying the same thing. Don't do multi to one of the ropes in commercial real estate. Do retail, office and flex Exactly. Yep. Let's

Unknown Speaker 45:49

see inner warrior. What type of commercial real estate specialty is generally the highest paying? What should a newer agent focus on? I mean, look, inner warrior, you can make money doing any type of commercial real estate. They all pay a lot. It just depends on what you want to do, right? They can also all pay a little, right? Somebody might say, well, multi family makes the most money. Well, yeah. But also, there's duplexes in multi family. How many people are actually selling 300 unit apartment complexes on a regular basis? Somebody might say, industrial makes the most money. Well, yeah, there's, there's 3000 square foot warehouses, and there's 1 million plus square foot distribution centers anchored by Amazon. Like, you know who's, who's

Unknown Speaker 46:29

going to be the buyer for some of those, right? Like, those are really, really big deals.

Unknown Speaker 46:33

So they're not going to happen very often. So, I mean, I think that you could, you could make a lot of money doing anything. It all just comes down to, what are you going to become the expert in? What are you going to spend all of the time to learn, to network? Because it's all about who you know, right? Yeah, of course, you got to know things. Anybody can learn this. Though it's all about getting out there, making relationships, getting to know people.

Unknown Speaker 46:57

Nick is saying, what are some return metrics upon acquiring a newly built flex space. Say, hold period is five to 10 years. What are some return metrics upon acquiring a newly built flex space?

Unknown Speaker 47:10

Nick? I'm not quite understanding the question like, are you asking? What are return metrics that you should be tracking? I mean, I would be tracking your debt service, coverage, ratio, your cash on cash return, the internal rate of return probably your equity multiple. One thing that a lot of people don't think about when they're getting into commercial real estate or doing real estate in general, is your return on equity, right? So

Unknown Speaker 47:35

too many investors get focused on cash on cash, right, which is a snapshot in time, like you put $100,000 in on day one, and you're getting a 10% cash on cash return. That might seem good until you've paid down your mortgage for three years, and now you're actually getting a 7% return on equity, right? So you've actually got all this equity that's built up, that's trapped in the deal. So that's kind of stuff that I pay attention to whenever we're looking at this. So hope that helps begin to sing. Tyler, when you purchase a property as a new investor, you make a mistake. How do you rebound? It depends on how big the mistake is. Man, I mean, if it's a really big mistake, you start over, and hopefully you just learn more on the next one. If it's not a big mistake, you just kind of say, you know, what we learn from it, and we'll make more money on the next one. That's that's kind of how I approach it.

Unknown Speaker 48:27

Jared, what are the important things to do? Or what are the important things in due diligence for a triple net deal with a national tenant? I mean, Jared, honestly, the biggest thing, I mean, there's all the other due diligence, right, that you would typically do on any type of real estate deal. You don't want to look at the building, you want to look at the survey, you want to look at the title work, you know, all that kind of stuff. The biggest thing in a triple net deal with a national tenant, like a single tenant, net lease deal is the lease and the credit of the tenant that backs it, right? Because you're basically buying that stream of income. Yeah, you get a building with it, but really what you're like the building doesn't matter at all if it's not paying you every month. So the tenant does that.

Unknown Speaker 49:09

So I would make sure that you comb through that lease, you make sure that you understand the financial backing of the tenant, because that's the most important part about that. Amen

Unknown Speaker 49:18

is saying, Can you put less than 20% down on commercial property? What's the most practical way of doing? So, could you purchase a $1 million property with $100,000

Unknown Speaker 49:27

Good question. Yes, you can, like,

Unknown Speaker 49:30

especially if you're gonna go negotiate seller financing, right? Like not dealing with traditional banks. I mean, there's a couple different ways to put down less than than 20%

Unknown Speaker 49:41

on these deals. So one is seller financing, right? You can negotiate for 5% 0% 10% down, like whatever, whatever the seller is willing to take.

Unknown Speaker 49:52

And so you know that could kind of help you there. You could, like, if your owner occupying as a small business, and you do an S.

Unknown Speaker 50:00

A loan. You can typically put down around 10% maybe 15. Just depends 10% is likely.

Unknown Speaker 50:09

You know, you could go and borrow the money, right? Like, I mean, maybe you do have to put down 20% but you could go raise $100,000 from another investor. You put in $100,000 now you've gotten a $1 million property with, you know, only $100,000 out of your pocket. Couple different ways to do it. I am not a big fan of over leveraging on these deals,

Unknown Speaker 50:29

like if I was you, I would rather find a way to buy a badass 500 $600,000 property with my 100 grand that I could then go and quickly flip and build up, because the more debt you take on, the more risk you have. And I don't think that people think about that enough. The more debt that you have in a deal, the riskier it is, like there's just more,

Unknown Speaker 50:55

higher mortgage payment. You've got more more leverage, which you know, more leverage can be a good thing for cash on cash returns, but it's a horrific thing for your stability in a deal.

Unknown Speaker 51:05

Nick is saying your answer helps. Wondering what are typically IRRs

Unknown Speaker 51:10

just depends. Nick, I mean, you know, IRRs, if you're investing in multifamily today, you're happy to get 12%

Unknown Speaker 51:17

again. I wouldn't get out of bed for that. I'd be, you know, on Reddit all day doing nothing. If that was all I could find, our IRRs are typically in the 18 to 22% range. We

Unknown Speaker 51:30

just had a deal that we sold last year that was a 41% IRR,

Unknown Speaker 51:36

you know, I would say the deal that we exited before that was a 29.33%

Unknown Speaker 51:41

IRR, so you know, we're aiming for 18 to 22 we typically outperform that, but I like to always keep it in the 18 to 22 range. Because one, that's a good return. Two, it means that I'm not getting overly optimistic with any deal.

Unknown Speaker 51:59

So plus, I like to over promise under promise and over deliver, not over promise under promise and over deliver.

Unknown Speaker 52:07

Let's see rich. Hilarious saying, velocity mortgage has a 5040, 10 loan program where the seller carries 40% Yeah. I mean, you could, you could also negotiate for seller carries.

Unknown Speaker 52:18

You know, most commercial real estate lenders do not want seller carry involved, but you can always find somebody that may be willing to consider that.

Unknown Speaker 52:29

Nick is saying, or equity multiples, or cash on cash from a quantitative perspective, as I like flex space, but I want to go through the development phase rather than buy them stabilized. Yeah, Nick, I mean, if you're, if you're looking for return metrics on a development deal.

Unknown Speaker 52:43

If you're not doubling your cash or more, there's no point in taking the risk. That's a lot of risk on a deal, right? So I mean, if you're gonna put in a million dollars on this development and you're not gonna walk away with at least two to $3 million there's no point in doing it, in my opinion. But it all comes down to the individual metrics, right? It depends on your market. Like every every different deal has a different risk profile, just based on where it is, who's involved, what the debt looks like, what the you know, size of the building looks like, all that kind of stuff.

Unknown Speaker 53:15

Christian is saying, is investment sales and niche like retail, multi industrial, or is that too general? Also, would investment sales be strictly triple net No. Christian investment sales are pretty much anything that is considered to be an investment in the world of real estate, right? So that could be an office building, it could be an apartment complex, it could be a shopping center. Doesn't really matter.

Unknown Speaker 53:38

So it's, it's way too general, in my opinion, for the majority of brokers, you know, you got to find a niche somewhere, right, even if it's just a location, right? Like, I will sell anything as an investment in East Nashville, you know, like, that's kind of what my team does.

Unknown Speaker 53:53

We don't niche down into any specific asset class. We pick neighborhoods. So that's, that's kind of what I would do. I would look at just finding your niche, figuring out what that is. Appreciate you guys joining me. If you are enjoying these office hours, please like subscribe. Let us know in the comments what you're thinking or anything that you would like covered in the future. Thank you for joining me for office hours. We'll be back live again next Tuesday at 8:30am Central Standard Time as always, and I'll see you guys, then this

Unknown Speaker 54:26

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.