Podcast Summary
Exploring Commercial Real Estate and Triple Net Leases with Joel Owens: Build relationships with bankers, consider commercial real estate for advanced investing, and use Rent to Retirement for low or no money down investments.
This episode of the Bigger Pockets podcast delves into advanced real estate investing topics, specifically commercial real estate and triple net leases. A quick tip was shared, which is the importance of building relationships with bankers. The episode also features an interview with Joel Owens, a commercial real estate broker and investor, who provides valuable insights on getting started with commercial investing. Additionally, Rent to Retirement was mentioned as a resource for investing with no or low money down. Overall, this episode is packed with high-level information for those looking to expand their real estate investing knowledge beyond the basics.
Discover tools and services for easier real estate investing: Services like PropStream for data and Vacasa for vacation home management can streamline real estate investing and increase profitability
If you're looking to invest in real estate or even own a vacation home, there are tools and services that can make the process easier and more profitable. PropStream is a leading real estate data provider that helps investors find motivated sellers with over 155 million property listings and accurate comps. Meanwhile, Vacasa is a full-service vacation home management company that simplifies the experience of owning a vacation home by handling maintenance, bookings, and earning homeowners an average of 20% more revenue. Joel, a real estate investor, shares his journey from owning businesses like a pizza shop and car audio to getting into real estate. He started with residential sales and transitioned to short sales during the market downturn but eventually moved away from the emotional drama and long hours. Whether you're a seasoned investor or just starting out, utilizing services like PropStream and Vacasa can streamline the process and increase your chances of success.
From Pizza to Commercial Real Estate: An Unconventional Journey: Starting a career in commercial real estate can involve unconventional paths, from pizza to contracts, and learning on the job with experienced professionals.
Starting a career in commercial real estate can be an unconventional journey. The speaker began in the pizza business but transitioned into reviewing contracts for a coin laundry owner facing a property sale. Through this experience, they identified issues and were subsequently offered a role in assembling land for a commercial mixed-use project. Despite having limited experience in this area, they learned on the job, working alongside a consultant who had experience with large real estate investment trusts (REITs). This experience provided valuable insights into the commercial real estate market, but when the market began to soften, the speaker took on land listings, which proved to be time-consuming and costly. Eventually, foreclosures began to enter the market, and the speaker's career took another turn. This story illustrates that starting a career in commercial real estate can involve unexpected opportunities, learning experiences, and challenges.
Buying Commercial Properties During Economic Downturns: Thorough research, clear communication, and a solid understanding of market and property conditions are crucial before making commercial real estate investments.
During economic downturns, opportunities can arise for those who are willing to adapt and take calculated risks. The speaker shared his experience of transitioning from residential to commercial real estate during a market crash. He bought distressed commercial properties through short sales and value-add deals. However, his first commercial investment turned out to be a lesson in due diligence. The seller had misrepresented the property's occupancy and financials, leading to unexpected expenses and challenges. Despite these challenges, the speaker learned valuable lessons and continued to acquire commercial properties, eventually starting his own brokerage. This experience underscores the importance of thorough research, clear communication, and a solid understanding of the market and property conditions before making an investment.
Learning from Real Estate Fraud: Investing in real estate involves risks, including fraud. While legal action can be taken, it's often lengthy and costly. Instead, consider cutting losses and learning from the experience. Research and understand the specific characteristics of different areas before investing.
Investing in real estate comes with risks, including dealing with unscrupulous individuals who may commit fraud. In the discussed situation, the investor lost money due to a fraudulent business deal. Although it was advised to sue, the legal process could be lengthy and costly with uncertain outcomes. Instead, the investor chose to cut their losses and learn from the experience. Another key lesson was the importance of considering the surrounding area and the impact of other property owners on the investment. An "A" location refers to strong population growth, economic development, and good schools, among other factors. "B" and "C" areas may have industrial or blue-collar worker populations, and while they may not be as desirable as "A" locations, they can still be good investments. It's essential for new investors to research and understand the specific characteristics of different areas before making a decision.
Investing in commercial real estate requires more capital than residential properties: To invest in larger commercial properties, a solid financial foundation is necessary due to higher costs and larger investment requirements.
While commercial real estate can be an attractive investment opportunity, it typically requires more capital than residential real estate. For smaller commercial properties like mom-and-pop businesses or small warehouses, it's possible to get started with less money. However, for larger commercial properties with corporate tenants, significant investment is required. The costs associated with larger commercial properties, such as appraisals and inspections, are much higher than those for residential properties. While there were opportunities to invest with little to no money down during the market downturn in 2008, those opportunities are rare in today's market. To get started in commercial real estate, particularly with larger apartment complexes, it's essential to have a solid financial foundation. CoStar and LoopNet are popular platforms for finding commercial properties, including apartments, for sale or lease.
Valuing Apartment Complexes: Smaller vs. Larger: For smaller complexes, calculate gross income, subtract expenses, apply cap rate. For larger complexes, use income approach based on cash flow and income generation.
The size and valuation methods for apartment complexes vary. Smaller complexes with 1 to 4 units are more commonly listed on residential Multiple Listing Services (MLS), while larger complexes with 20 to 300 units are typically found on commercial real estate platforms like LoopNet. Valuing an apartment complex involves different methods based on its size. For smaller complexes with 2 to 4 units, appraisers use the comparable sales approach. For larger complexes with 5 units or more, the income approach is used, which is based on the property's cash flow and income generation. A simplified way to estimate the value of a smaller complex is to calculate the gross expected income and then apply a cap rate to it. The gross expected income is calculated by multiplying the monthly rent per unit by the number of units and then by 12 months. Fifty percent of this gross expected income is then subtracted to find the net operating income. The net operating income is then divided by the purchase price to find the cap rate. The cap rate is a standard guideline for investors and is typically around 10%. However, if the landlord pays for water or other utilities, the percentage used to calculate the net operating income should be increased to around 60%. This method, known as the highest and best use, determines the most profitable use of the property, considering both the potential return and the time frame for that return.
Value-Add Strategy for Multifamily Properties: Buying underperforming multifamily properties and increasing their income potential can lead to significant returns through forced appreciation.
Investing in multifamily properties with a value-add strategy can lead to significant returns through forced appreciation. This approach involves buying properties that are underperforming or in need of renovation, increasing their income potential, and then refinancing or selling the property at the new, higher value. The sweet spot for value-add investments is typically properties that are 40-70% occupied, as sellers are often motivated to sell and rehab costs are lower compared to vacant or fully gutted properties. Commercial properties are valued based on income, so increasing the income directly leads to an increase in property value. To get started, investors can use resources like the buy and hold calculator from BiggerPockets to help determine property value and potential returns.
Setting a higher exit cap rate for apartments: Maximize profits by setting exit cap rate above market average, increase negotiating power, and boost cash-on-cash returns. Determine local cap rate via tax assessor websites, MLS sold records, or LoopNet's sold feature. Network with local investors and set a budget to start investing in apartments.
When it comes to investing in apartments, it's important to set your exit cap rate higher than the market average to increase your negotiating power and maximize your profits. This strategy allows buyers to hold a smaller percentage of the purchase price upfront, increasing their cash-on-cash returns. However, value-add players often prefer not to hold seconds due to the significant profit erosion. To determine your local cap rate, you can refer to tax assessor websites, MLS sold records, or LoopNet's sold feature. For those interested in starting with apartments, networking with local investors and determining your budget are crucial first steps. Your budget will determine the size of the property you can afford, and meeting experienced investors can provide valuable insights and guidance.
Exploring Different Forms of Real Estate Investing: Commercial vs. Passive: Consider commercial real estate for larger investments and more complex deals, or opt for passive options like online platforms and mortgage funds for hassle-free investment experiences. Networking and technology tools can aid in the process.
Real estate investing comes in various forms, each with its unique advantages and complexities. Commercial real estate involves larger numbers and more due diligence, making it more complex than residential investing. For those looking for a hassle-free real estate investment experience, consider passive options like investing in online platforms or mortgage funds that offer fixed returns and hands-off management. Networking on platforms like BiggerPockets can help connect you with local investors and potential deals. Additionally, technology tools like DealMachine can simplify lead generation and contact management. Remember, the goal for many is not just real estate but the passive income it can provide.
Investing in Triple Net Leases: Stable Returns with Minimal Involvement: High-income individuals can buy commercial properties with tenants responsible for maintenance and management for stable, consistent returns and tax benefits.
Triple net lease investing is an attractive option for individuals with large amounts of cash and a desire for stable, consistent returns. This type of investment involves buying commercial properties where the tenants are responsible for maintenance and management, allowing the investor to reap tax benefits and above-average returns with minimal involvement. Triple net investments can include single-tenant net lease properties, such as dollar stores, banks, and pharmacies, which offer long-term stability due to their tenants' strong financial backgrounds and long lease terms. While returns may be lower than other investment types, the appeal lies in the preservation of wealth and the reduction of risk for high-income individuals.
Corporate tenants prefer triple net leases for tax benefits and business focus: Corporate tenants opt for triple net leases to expense rent, concentrate on core business, and potentially find higher caps in multi-tenant strip malls. Finding these properties can be tough, use resources like LoopNet or network with sellers/developers.
Corporate tenants, such as Walgreens, prefer triple net leases because they can write off rent payments on their accounting books as a business expense, rather than owning the real estate themselves. This allows them to focus on their core business and reinvest in their company. Triple net leases can also be found in multi-tenant strip malls, where caps are higher and debt can be increased. Finding triple net properties can be challenging, as they may not be labeled as such and are often sold off-market. Sources like LoopNet or building relationships with sellers and developers can help in the search.
Working with an experienced broker is crucial for triple net property investments: Experienced brokers offer access to off-market opportunities and help assess tenant creditworthiness, but careful evaluation of tenant and property location is essential for successful triple net investing.
If you're considering investing in triple net properties, it's crucial to work with an experienced broker. These specialists have established connections to developers and property owners, allowing them to access off-market opportunities before they hit the listing services. Moreover, they can help ensure that you're dealing with tenants of sufficient credit strength to minimize the risk of vacancies. However, investing in triple net properties also comes with risks, particularly regarding tenant quality and property location. Mom-and-pop tenants and those with weaker credit profiles pose a higher risk of vacancies, making it essential to carefully assess tenant creditworthiness. Additionally, properties located in off-the-beaten-path areas may be more challenging to re-rent if a tenant vacates. Ultimately, the key to successful triple net investing lies in carefully evaluating both tenant creditworthiness and property location.
Investing in triple net properties vs. multifamily and mixed-use properties: Investing in triple net properties provides a consistent return on investment due to tenants covering all expenses. However, multifamily and mixed-use properties come with added risks and require more expertise. Thorough research and due diligence are essential for successful commercial real estate investments.
When investing in triple net properties, you're getting a true return on investment because the tenant is responsible for paying all expenses, unlike apartment complexes where rent increases may be offset by rising expenses. However, mixed-use properties, which combine different asset classes, come with additional risks and require more experience and knowledge for investors. When buying a multifamily property, it's essential to review the existing leases carefully to ensure there are no hidden problems that could negatively impact your returns. Additionally, triple net leases have different segments, including ground, double net, and absolute triple net, each with varying tax depreciation implications. Direct mail marketing can be effective for commercial properties, but sellers are often more sophisticated and require tailored approaches. Overall, thorough research and due diligence are crucial for successful commercial real estate investments.
Cost and feasibility of separating utility meters in commercial properties: Investing in individual utility metering for commercial properties may be worthwhile in areas with separate tenant utility payments, but can be a deterrent in areas with included utilities. Commercial real estate commission rates vary widely based on property type and seller.
The cost and feasibility of rewiring a master-metered commercial property for individual utility metering depends on the specific market and local regulations. In areas where tenants typically pay their own utilities, it may be worth the investment to separate the meters. However, in areas where tenants expect utilities to be included in their rent, attempting to separate meters could result in tenants leaving for competitors. Commission rates for commercial real estate also vary greatly depending on the property type and seller. While residential agents typically earn a 6% commission, commercial rates can range from as low as 4.5% for distressed properties to as low as 4% for larger properties. It's essential to consult with experienced professionals in the commercial real estate industry to navigate these complexities.
Beware of Commercial Loan Scams: Stay cautious of lenders asking for upfront fees, consider having attorney hold funds, transparency is key when asking for recent funding examples and cost breakdowns, build relationships with local banks for successful loan experience.
When it comes to obtaining a commercial loan, it's crucial to be cautious and avoid potential scams. With the increased regulation of residential loans, some unscrupulous individuals have moved to the commercial sector. Be wary of lenders asking for upfront fees, and consider having your attorney hold the funds instead. For bank financing, a regional bank may offer a good balance between loan term and interest rate. Remember, transparency is key - ask potential lenders for recent funding examples and cost breakdowns. If they're hesitant or defensive, consider it a red flag. Building relationships with local banks and understanding their lending practices can help ensure a successful loan experience.
Emphasizing Perseverance and Consistency in Commercial Real Estate Investing: Successful commercial investors treat real estate as a business, follow an actionable plan, set daily goals, and stay focused during market highs and lows. They also recommend reading state and federal statute codes for valuable information.
Successful commercial investors have a mindset of perseverance and treat real estate as a business, not a hobby. Joel Thrash, a commercial real estate investor, shared his insights during a podcast episode. He emphasized the importance of following an actionable plan, setting daily goals, and staying focused even during the lows and highs of the real estate market. Additionally, Joel recommended reading through state and federal statute codes for valuable real estate information. On a personal note, Joel enjoys martial arts, traveling, and recently started Krav Maga. For more information about Joel and his investing journey, listeners can connect with him on Twitter @joelthrashRE. Overall, Joel's advice emphasizes the importance of consistency, dedication, and a long-term perspective in commercial real estate investing.
Months-long conversation to find right property and understand investment process: Patience and due diligence are crucial when investing in commercial real estate, involving a thorough understanding of the process and market.
Investing in commercial real estate involves a thorough understanding of the process and the market. Joel Owens, a commercial real estate expert, shared his experience on BiggerPockets Radio, explaining how potential clients typically engage in a months-long conversation to find the right property and fully grasp the investment process. He emphasized the importance of patience and due diligence. If you're interested in learning more from Joel, visit his website at awcommercial.com or connect with him on BiggerPockets. Remember, investing in real estate, whether commercial or residential, requires careful planning and a solid understanding of the market. Don't hesitate to reach out to experts like Joel for guidance.
