47: Apartment Complexes, NNN Leases, and Commercial Real Estate with Joel Owens

This is the bigger pockets podcast show 47.

You're listening to Bigger Pockets Radio, simplifying real estate for investors large and small. If you're here looking to learn about real estate investing without all the hype, you're in the right place. Stay tuned and be sure to join the millions of others who have benefited from BiggerPockets.com, your home for real estate investing online.

Hey, what's going on, everybody? This is Josh Dworkin, host of the Bigger Pockets podcast, here with my fabulous co host, Mr. Brandon Turner. Yo, yo, yo, what up, Brandon?

Yo, what up?

Hey, you want to hear me rap?

I do.

All right, I gotta get a beat. You go, dun, dun, dun, dun, dun, dun.

Oh, oh, is that what we're doing? Okay.

Oh, I can do it.

All right, stop. Collaborate and listen. You're not even.

You're not even on the beat, dude.

Well, you know, they'll have to listen another time.

That was awful.

I was on a road trip once. My wife and I learned all of Ice Ice Baby.

It was good.

You and about 200 million other people have that song burned into your brain?

Yeah, you know, we're cool people. You know.

Not everyone can be quite as talented.

Anyway.

All right. Yes. Anyway, this. This is the Bigger Pockets podcast, and I am here with Brandon, who apparently fancies himself Vanilla Ice. And so.

We got an interesting show today, guys. We really wanted to start exploring a little bit more into some more advanced topics and move beyond just really covering kind of the basics. So today we're going to dig into commercial and more specifically, a topic that's kind of fascinated me, which is triple net leases, which you'll learn more about as we go along.

Before we do that, though, I would like to present today's quick, quick tip. Today's quick tip. Yeah. What is today's quick tip, Brandon? I'm not going to present it. I'm going to just leave it for you.

All right, my quick tip today is go befriend a banker right now. And the reason I chose that one is because this week I. I got a call from my banker, and apparently he read one of my blog posts and was impressed. And so his boss, I guess, read it and told the banker to give me a call and get me into the bank to have a meeting to talk. That's my quick tip. Start talking about what you're doing with people, especially your banker.

Clearly. Clearly they were as drunk as you are right now.

Clearly, clearly.

That's a great tip. It's a very, very good tip. You know, It's a very, very good tip. Bankers are the lifeblood of more sophisticated investors and the more of them you know, the better you're going to do. So that's fabulous. All right, guys, really quick. Before we get into introducing our guest, I just wanted to give a quick reminder. If you like the show, please jump on itunes and leave us a review. Leave us a rating. Those reviews and ratings really help us out and they help other people get to know more about Bigger Pockets, the BiggerPockets podcast. So definitely take a minute to leave us an honest review there.

And we definitely appreciate it. Otherwise, make sure to check out the show notes@biggerpockets.com show47 where you can ask questions of our guest and anything you want to ask him, anything you want to talk to them about, you can do that there@biggerpockets.com show or.

All right, so Joel Owens, our guest. Joel's an active member of the BiggerPockets forums and he's definitely an expert in all things commercial. He's a commercial real estate broker.

And a commercial investor and he's going to share a lot of really good stuff about getting started with the whole world of commercial investing. I think we're going to cover everything from apartments to, like I said, to triple net leasing and a whole lot more. Today's show is definitely packed with some high end stuff, so as always, bust out a notepad and take some notes. Unless of course you're driving, in which case that would be a bad idea. But you could always rewind this thing and listen again if need be.

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That's hostfinancial.com so with that, why don't we bring Joel in and hopefully Brandon could bust a beat here and get it going. Come on, Brandon.

All right.

Hi, Joel.

What's up, man? Joel, welcome to the show. It's good to have you here.

Thanks, Josh.

Oh, no, thank you for me.

Oh, he knows what's up, man.

He's.

Joel's the man.

Well, Brandon works behind the scenes, so he doesn't count.

Yeah, Joel knows how things work around here.

Joel. Joel just climbed up the ladder yet another rung. Nice one.

I didn't want to say hi to Brandon because he just got off the hamster wheel trying to power Josh's house. So I knew.

There you go. See, he understands how this game is.

I see, I see. All right, man. Well, enough about me. Let's talk about me. I mean, wait, let's talk about you. All right, so for those folks who are unfamiliar with you, Joel, how'd you get into real estate?

Well, basically, I started out young, owning a couple of different businesses, and I used to have a car audio shop. I used to have a pizza shop.

And you gotta stop right there. Hold on, hold on. I'm a New Yorker, man. You had a pizzeria?

Yeah, yeah, I had a pizza. I had a pizza shop for a while.

I worked for Domino's Pizza for a while, and I was a driver, and then I was a manager. And the person I worked for he owned about 84 locations. He was one of the biggest franchisees in the country. He actually.

Was Tom Monahan's right hand man, which is one of the brothers that owned Domino's Pizza. And they basically, you know, started, grew the company real big together. He used to own some commissaries too, but it came to a point where they told him he either had to own the stores only as a franchisee or the commissary. So I learned a lot from him and after I left there, opened up my own pizza shop, which I had for a number of years. But the, the hours were really, really long. If you took a vacation, the employees didn't care about the sales like you did. They were just making hourly. So, yeah, after a while I just said, hey, I want to, I want to get out of this. And then a friend of mine owned a landscaping company and it got to a point where he was either going to have to add more crews or sell it off. So he sold his company off. And he had been in real estate for a few years now. I always wondered about it, and so I just gave him a call and asked how he liked it, and he said he loved it. And that's when I went and went and took the test.

What was he? Was he an agent or a broker then?

He was an agent. In Georgia, you have to, as soon as you get licensed, you have to be licensed for at least three continuous years before you can sit for your broker's license.

Okay, and was he doing, was your buddy doing commercial or residential?

No, he was just doing residential. He knew a bunch of people from his landscaping business that he sold off, where he did their yards and everything else. When I first became licensed, I was kind of focusing on, you know, back then the market was just starting to turn. It was still booming for maybe the first, you know, year. So after I got licensed and then the short sales started happening, and I did those for a while, but just the emotional drama from all the other residential homeowners about, you know, I'm getting foreclosed on or they're coming after my car and all this kind of stuff.

Those long night hours and weekends, I was really trying to get away from that. I had that with the pizza place, working in that business, and I was trying to get away from that. So I was really looking for something different after I got licensed.

How that kind of transitioned into the commercial aspect was funny enough. There was this older gentleman and we were friends, and I used to be a delivery pizza driver. And we got to Talking and basically he owned an old coin laundry he had inherited from his mother, him and his brother did. And this developer had approached him to buy their property, was an older building built in the 50s. And basically he asked me to review the contract, the purchase and sale from this developer because the developer was hounding him to see if I could spot any potential problems. And so basically I went through the whole contract, spotted a bunch of issues. We met with the developer directly and then after that, after that meeting, the developer actually called me and then wanted me to come on board because I caught every out in the contract. Usually people don't catch everything. I caught every single thing. And then he wanted me to help him assemble all the 25 acres there for the commercial mixed use project. So I worked on that for about the next two to three years.

So you had up and up until that point you had zero experience looking over these kinds of agreements or doing any kind of deals in the commercial side, correct?

Yeah, I mean I'd own some businesses before. So as far as that aspect, you know, talking to the, you know, owners, a lot of these land parcels were older businesses in the 50s and stuff. So I could kind of relate to them as a business owner that way. So I knew a little bit of that side of it. But as far as, you know, assembling the land for X, we're going to use tax credits. It's going to cost this much to scrape the land. It's going to take this many times and faces. We're going to have to do, you know, all these different things. You know, meeting with the mayor and you know, the zoning and all this other kind of stuff. I really didn't have experience with that. The, the guy that I worked with over the, over the next two to three years, he actually.

Used to work for some of the big REIT companies and they would do takeovers of other companies and basically strip them, strip them down and then, you know, resell them and all this kind of stuff. And basically it was kind of a soulless job. And he basically left that after, you know, many, many years of doing that for one of these large REITs. And he basically went on to just do his own development projects as a consultant, you know to. Usually what happens with these development deals is you'll have an owner that's owned some land for a really long time that might be local and they don't really know.

How to approach big time developers or get an anchor Publix Kroger, how to negotiate with their acquisition departments or present A project or any of that stuff. So what they'll do is they'll line up with a developer that's a consultant that basically puts the whole project together, keeps it moving forward.

Gotcha. Gotcha. Your role is pretty varied in there. And it sounds like the next two plus years or so was. Was pretty much an on the job learning experience for you.

Yeah, I mean, I had to go out there to, you know, some of these were little bitty houses, Some of them were little bitty businesses. And, I mean, it was a process. I mean, to get this stuff under contract. You know, we'd negotiate a few points, go back sometimes. It took me a total of about six months or so before we finally got them under contract and everything was taken care of.

Gotcha. Gotcha. That's cool. That's great. So how did that transition from. How did you transition from that to going off on your own and starting to make your own purchases?

Well, about that time, there's kind of a transitioning happening in the marketplace.

At the end of that project.

The market was kind of getting soft. A lot of the new home builders weren't building the five, $600,000 homes anymore. They were kind of pulling out, selling out the rest of their inventory because they saw the writing on the wall. And so a lot of commercial projects that are ground up, development kind of stopped at that point.

And they were just finishing what was in the pipeline because, you know, all the commercial money kind of dried up for new construction. And then what would happen is, if you had a $50,000 house mixed in with $500,000 houses, then, for instance, Publix, the anchor would say, if we build this here right now, because the economy is going down, we won't have our customer base that we want here, even though we love the area, love the traffic counts, etc. So I took on a bunch of different land listings for a while, but those weren't really moving, and they cost a lot of time and money.

So basically, are you talking. Sorry to cut you off. Are you talking about just raw land?

Yeah, yeah. You. Mainly raw land, or there was even land that had been scraped that was just, you know, just dirt there. It could even be in a good area. But what, I mean, what happened at that point is basically, you know, the bottom dropped out, Foreclosures started coming into the market. People started defaulting on their loans on the commercial side, and people kind of switched. Instead of building unless it was a corner location, what they would do is they would just buy something for less than Replacement costs, you know, do a short sale, REO from the bank and just do a value add type deal. So at that point I kind of switched.

I did some letters, mailed out some letters at that point I got my brokerage license, my own company at that point just to do what I wanted to do. And basically.

I got a call off of that. And it was a group that owned about 200 and something units up in Dalton, Georgia was the carpet capital of the world, where they manufacture a lot of construction material and basically they had financed during the height of the market. And I met with them and I ended up listing their 60 unit, all one bed apartments as a short sale with Wells Fargo being the lender.

Gotcha. Okay.

Learned a lot from that.

Gotcha, gotcha. So now you're working on the commercial side on your own, you've got your brokerage.

At what point do you say, you know what, I'm going to jump in and what did that look like? How did you, on your own.

Personal side start to acquire.

These commercial properties?

Well, me and you did a, we talked a while back about.

The first one was a 20 unit that I had in Roswell. It was.

Five quadruple four units apiece for 20 units. And basically, you know, I did that one at the time. I did that one with a wrap where we wrapped around the existing mortgage. So if you have a certain price of the certain debt service for the first mortgage, you create a second note where they owner finance you around the existing note just wrapped around it and then you actually get the deed to the property. That particular property, I don't own that one today. That one's a long story. I learned a lot when I had that property.

Basically without getting into too much, I won't go into too much specifics on the people involved, but basically.

After I.

Bought it, what I found out later was is that the seller, there was supposed to be 18 out of 20 units occupied. And what I found out later is the seller was taking a line of credit from their house. And so if the rents were 18,000amonth, they were collecting 9,000 and then they were taking 9,000 from their line of credit, then putting that into their business account like they were collecting full rents.

Oh, that's not good.

Yeah. And so basically what happened is when I got in there.

I ended up having to evict about 10 people, 10 units. And because they had previous agreements with the, you know, unspoken agreements with the landlord or they're doing handyman services and basically the seller was a Wheeler and Dealer, basically, what ended up happening that because the owner financed it on the wrap, the property insurance company, when that came up to renew on the property for them, they found out that they had switched title, it was no longer in their name and they wouldn't insure anymore, you know, renew their policy. So basically at that point, you know, me and the seller had gone round around because basically I evicted all these people. I was constantly doing repairs to the property to get them in rentable condition.

And basically the property was basically, you know, hemorrhaging cash. The seller told me that I could.

You know, convert the deed to a land contract and then work on all these repairs so that they could renew their insurance policy. And then at the end of the term of that.

You know, then they could, you know, give the deed back to me or something like that. At that point, I felt that the seller had misled me on a lot of different things. And basically that first, you know, about the year and a half that I own, that I was going over there probably about three times a week fixing stuff, you know, an electrician, they want $120 to fix a 57 cent outlet.

And I could do it in 10 minutes. And so I had a property manager on site, but it wasn't a professional property manager. It's just a, you know, a friend of mine I knew and he was doing an okay job. But the type of tenants that are there, it was in an A area. But the type of tenants that are there, they basically.

You know, they're holding down two jobs. So if the second job is giving them 20 hours a week and it gives them 10 hours a week, then, you know, then they only have 6 out of 800 of the rent. Then they've got to go to, you know, a charity or something else to try to get the other 200 bucks. So what it does is it increases your bookkeeping cost and increases your times to collect. Yeah, and so what ended up happening in the end is, you know, I ended up consulting an attorney and I gave the property back to him. The attorney said, basically, you know, I had, you know, signed as a guarantor on the loan. But basically there's a law in Georgia where, you know, it's a statute of fraud. So someone induces you to enter into a contract under false pretenses, then basically it can rule that contract invalid. And so basically, I mean, what they had done is basically committed fraud. They basically took this line of credit from their house and made it seem like they were getting full deposits in their bank for their business when they weren't just to try to, you know, sell a property or get them get the problem off of themselves. The attorney basically told me, you know, I could sue them, try to get a judgment, you know, that could take up to six months or a year, a lot of legal fees, and I would have spent a lot of time and money, and I still might not be able to collect. So they just advised to cut my losses and move on from.

And so basically that's what I did. I, you know, I maybe lost maybe, you know, probably six or seven thousand on that deal. So it wasn't too bad, you know.

Better than it could have been.

Yeah, I could have been. Could have been a monstrosity. But I learned a lot from that. I mean, the biggest thing I learned too is on that particular street, it's in an A location, but there's about 25 quads on that street, four units. And even if you have an A location, the other investors had different levels of debt service. They bought at the height of the market, or they didn't want to put any repairs into the other buildings. And so they would just reduce the rent and not fix anything. So, you know, we'd get call from tenants that would want to live in our place because it's nice and fixed up, but they wanted to pay the, you know, $750 rent instead of the 850 we were charging. But the place they were moving from on that same street was a dump. I mean, when it rained, the lights would flicker on and off and had all this crazy. All this crazy stuff, rats and all this stuff. And so, you know, what I learned from that experience is no matter how nice you make your unit, no matter how nice the area is, if you've got other property building owners around you, you know, it's still going to adversely affect your investment. Because I had people that said they love the area, but when they drove down the street to get to my building, I love my building. The other buildings that were run down, they just didn't want to rent there.

Well, that's. I mean, I guess that worked to your benefit. Let me ask you a couple things here first, really quickly. What's an A location?

You know, an A location is just really strong population growth, has a really strong economic development department where they've got a lot of things planned in the future. When you look at the future land use map, and it goes out, you know, 15 or 20 years, they've got a lot of smart growth going on.

The population Levels are growing. The median income is really high. The it's got really good schools, really great school systems, a lot of parks, recreational activities, medical facilities, churches, that kind of thing.

Gotcha. Gotcha. And then presumably there's a B and a C and a D. And how does that work? What does it go down to?

Yeah, you know, I mean, you know, D is basically. You know.

Some people don't like the terms, but we just call them war zones. Yeah, you know, it's basically a crap hole, just to be honest.

I went in Atlanta a couple of years ago looking at some of those single family houses and there were some streets there that were just mean. I was driving in the middle of the day where the doors locked and I wouldn't even get out to walk on a sidewalk. Yeah, I mean, it was just that bad. I mean, it's a crap. Yeah, some of the streets are just called. One of the streets was called Gun Alley Drive.

I'm not joking. It was really called that. You know, it's bad when even the police don't go down those streets.

Yeah, yeah.

All right. That would be the worst area. You know, B or C, it just kind of transitions to, you know, more blue collar worker, they're working two jobs or, you know, kind of a more industrial area. I mean, it's a solid and stable area.

The D areas tend to have what I call violent crime versus non violent crime levels. So, you know, murders, rapes, shooting, you know, shootings, all this kind of stuff. If that's real high frequency, that's a lot different than an area that, you know, they might have a little bit of high crime, but it's like, you know, petty theft or it's.

You know, domestic disturbance or something like that, you.

Know, and obviously you advise people to stay away from the D areas, but what do you think about B or C? Should I, as a new investor, should I run away from B and C and only stick with A, or is it okay to kind of, you know, go slumming a little bit?

Oh, geez.

No, I mean, that's nice, Brandon.

The opinions of my co hosts are.

Lonely.

The B and C areas are actually really good areas. You know, if you go to an A area, a lot of those turn speculative. More people are buying on the appreciation factor and they're hoping for strong rent growth. So when they go in, the cap rates aren't going to be as strong.

And you're really not going to hit a lot of your target cash numbers. And so, you know, most investors, they like a B Or a C.

Type building in an A or B area is what they usually try to go. I mean, about the lowest you'll go is, you know, a C building, C area type thing. You just got to make sure when you go in that area that you get it for a really good price. So when you exit later on that you won't have any trouble moving the property because there's always a buyer. Even for war zones, there's a buyer, but you got to make sure your cap's strong enough on your exit to get out of it.

Yeah, and we'll talk about that. I definitely want to cover caps and apartment valuation. But anyway, I think you had a question, Josh.

We're talking about. This show's focused on commercial real estate. I guess the big question that I think a lot of people who are listening have is, is commercial real estate only for those people with millions of dollars or can anyone jump in and start getting involved in that side of the business?

You do need more money to start in commercial. It depends on what you're talking about. If you're talking about small mom and pop type commercial, like a gas station will sell for $200,000 or trying to tie up some commercial land for development or something like that, you know, little small warehouse, you can do those types of deals with less money. If you're talking corporate rated type tenants and stuff like that, you know, usually the purchase price is at least in the low millions and you do need, you know, a couple hundred thousand at least without a partner to get started with those.

Okay, that's good to know. Yeah. Because I know a lot of people, you know, look at, you know, things like triple net lease investing, which we're going to cover later, and they think, oh man, that sounds so nice. I want to get started right now. Can I do it with, you know, the $12 in my bank account? And so you're saying, you're saying that's probably not going to happen.

No, that's, you know, that's a pipe dream. It's not going to happen.

Come on. No, I heard the seminar, man. They said I can buy thousands of apartments for no money down right away.

Oh, yeah, yeah. Well, you know, the funny thing about that is in 2008, 2009, when the markets froze, sellers were desperate at that point, so you could approach them with no money down or, you know, all these kind of really crazy type scenarios. But now that the market's kind of thawed out a little bit, you can still find sellers to hold a second mortgage or you know, even finance all the note or something like that. But they really do want some money and security into the deal. A larger apartment complex even, no money down. You know, you're going to spend tens of thousands of dollars on the environmental phase one, survey site inspection, cost reserve stable, the appraisal, closing costs. So, you know, you're really not getting in. No money down.

Yeah. That's one thing that a lot of people, when we, when you get to commercials, I was shocked. Like, when I try to get any work done on my apartment complex, everything's more expensive. I mean, an appraisal is not the $500 that I pay for my house. It's, you know, $5,000 for an appraisal and everything is just significantly more expensive. Even an appraisal between the difference between a 5 Plex and a 4 Plex is significantly more for me. So I'm, I was, I was shocked by that when I kind of started getting into that stuff, so. Well, let's, let's actually move to talk more about the apartment complex thing, because that's one of my favorite topics in all of real estate investing. So I guess I want to know your opinion. Is it ridiculous for somebody to think about starting with apartments or should they start with a single family house?

No. I mean, you know, sometimes what you suggest, you know, getting a, you know, FHA loan and getting a quadruple, you know, four unit, they can get in with a little money down that way. And that can, you know, really do well starting out with that.

And that's only for one through four units, Correct?

Right. Yeah. And, you know, the thing is with that, you've got to have a certain type of mentality to want to live next to your tenants.

Yep.

And I'm not that person. So, you know, from my clients that I have that I've learned from, and other sellers with larger apartment buildings, they structure everything in a way to where they're really hands off. They just build everything into the cost model and they're hands off and they don't have to deal with any of that drama at all.

Gotcha.

Gotcha.

Yeah. All right, well, so how should somebody start looking at apartments? I mean, you know, are they listed on the mls? Do they have to go directly to a commercial broker or through commercial sites like, you know, Costar, LoopNet, and so on and so forth?

Yeah, Costar and LoopNet, they're actually, you know, they got bought out and they kind of merged the two companies, even though they keep them separate. Right. CoStar is a lot More office type property. LoopNet is more where most of the, you know, apartment type stuff is on. You'll find the bigger units on LoopNet, you know, 20 to, you know, two 300 unit type buildings. The smaller buildings, the one to four units, you'll see a few on there, but most of them you usually find on the, on the residential MLs where they have homes listed and stuff like that. You'll find a lot more of the, you know, duplexes to quads on, on those type of sites.

Okay. So. And yeah, I notice on my mls, my local MLS that sometimes I see apartment complexes on there. You know, seldomly there'll be anything up. I mean I once saw 100 and something unit, but that's very, very rare usually. Yeah, like you said, they're the, the smaller properties. Anything under 20 I see semi often. I don't know if that's just because brokers put them on both places. I mean probably it can't really hurt.

So.

But how do you. So moving on to a kind of a complicated topic that I know we could spend an hour talking about and it would really be helpful to have, you know, pencil and paper but for an audio audience. How do we value an apartment complex? How do you determine how much it's actually worth? What's that look like?

Well, for two to four units, the appraisers typically use the comparable sales approach. When you get into five units or more, they use the income approach which is based on the cash flow that the property is generating. The income that's coming in a very simple way to do it is the simplest way that I found is pretty safe is basically you just take the gross expected income. So if you've got, you know, say you've got four units and they're doing 400amonth, you take that and you multiply that times four, you get 1600 and then you multiply that times 12 months and that gives you your gross expected income. Then what you do is you take away about 50% of that.

That's 19,200 by the way.

Okay. And so then you take your property management, your operating expenses and your vacancy factor and that's what makes up the 50%.

What you're left over within before your debt service. Because it's just like if you're buying it with cash is your net operating income. And what you do with that is you would divide that by purchase price to get your cap rate. So and how much you're paying and you know, most people shoot for a 10 cap or something that's kind of a standard guideline. Now, my rule is if the landlord is paying any kind of water on the property or any kind of utilities like that, I bump it up to about 60% of cost of the gross expected rents.

And I found that pretty true, too. My apartment complex is 24 units, and that's exactly what it is. It runs right about 60% total because I have water.

And so you guys are saying that on these apartment complexes, Instead of estimating 50% of your expenses, like the 50% rule would say you're going to actually increase that up to 60%?

That's correct. Okay, got it.

So, all right, so real quick, let me recap what you just said there. Just so everyone kind of gets it. You said four units. I'm doing this math as I do four units times 400 a piece is 1600amonth. Times that by 12, and you get 19,200 per year. And then multiply that times the let's say 50% rule. Or 60%. Let's go 60%. So we're gonna actually go by times points four, correct, Joel?

Yes, that's what I do. I just do 0.40.

Yeah. Because there's 40% remainder, so there's 7,680 left. So then we want to divide that by the purchase price. So let's say we paid $100,000 for that property. That gives us a cap rate of 7.68%.

Yeah. So at a 10 cap, you'd basically be looking at about 76,800. Okay.

So if this property was listed at 100,000 and the average cap rate in the area was 10, I would say, no, this property isn't worth a hundred. This is worth 76,800.

Yeah. The only way I would look at that differently is if it's a really old building. Sometimes I built those more spread out instead of on a smaller parcel of land. And so if it was something that was commercial frontage, or if it had extra land that could be divided out or something where I could turn it into a higher, highest and best use and I could get more money out of it, then it might make sense.

Hey, Joel, Joel, really quick. Can you just explain that, though, the highest and best use is it just what it sounds like? You know, the property, you want to see how much money you can essentially milk out of it?

Yeah, it's just determining.

What would give you the most money. And also it's. In what kind of time frame is it going to give you that money? So you know, you might say, hey, you know, commercial development is going to give me this amount of dollars, but it's going to take me three years to see those returns where developer closes on the property versus I've got these other two or three exit strategies that I could get the money back within a year. So what's more important to me is it getting this higher return over three years or is it going this other strategy for the second highest and best use and getting my money back within six months or a year getting rid of this property? So you have to factor that.

That comes into play when looking at a property.

Okay, gotcha.

Cool. And on top of that, then I got two thoughts that came to mind. First of all, one, just because I have to plug it, because I spent a month of my life working on this thing, is the buy and hold calculator from Biggerpockets. I actually put in all this cap rate stuff in there and so you can figure out how much a property is worth based on that. So if you want to check that out, biggerpockets.com calc also I will put in the show notes here on biggerpockets.com show 47 a few different articles that I really like for like figuring out all this work. So if you're really confused right now and you want to learn more about cap rates and how to figure out value of multifamily properties, I will link to a few of my favorite articles. So check it out.

Bigger pockets, a lot of good content on the topic, for sure.

Yeah, yeah. And it is kind of confusing, but once you kind of understand it, it's like I said, it's one of my favorite things in all of real estate investing is this whole topic, especially the topic of adding value. So I want to kind of move that way a little bit. I think you can call it a value add. Is that right, Joel?

Yes. Yeah. So you have, in multifamily, you basically have kind of three segments. You have the fully performing property, which is, you know, 85 to 100% occupied. You have the semi performing, you know, value add. That's kind of the sweet spot where stuff's maybe between 40 and 70% occupied. And then you have most of the, you know, you consider it vacant properties. Even if they're 10 or 20% occupied, they're basically vacant. You're going to have to get those tenants out of there when you start rehabbing everything.

So what's the value? You know, the value play comes in when you buy a property that's not fully rented, correct?

Yeah. Or, you know, it could be something like, you know, someone really old owns the property and they've had it for 20 or 30 years and it's fully performing but the rents are low for the market and they just haven't updated anything with the property. So there's other type of value added plays that aren't necessarily related to occupancy only. Sure. But the reason they go towards most investors I know, they have what's called a sweet spot and basically it's properties that are about 40 to 70% occupied. If it's 75 or 80% occupied, the person who's holding the note, the bank, they aren't that desperate to take a hit on it yet. The sellers that own the property, they're still believing that it's going to be turned around and can go up to, you know, 85, 90% and it'll be fully performing again. So there's not much motivation for them at that point. When it's 40 to 70% occupied, it's kind of turned a corner, starting to get in disrepair. The sellers is cutting, you know, pest control services, lawn care, all this kind of stuff to quit hemorrhaging money and they stop taking care of the property. But there's not that really that much damage done to the interior units yet. So your rehab costs are going to be less going in and you'll have some cash flow while you're rehabbing the units versus a property that's maybe 20 or 30% occupied or totally vacant. Sometimes those are gutted down to the studs, the copper has been torn out, the windows, roof, parking lot, everything needs to be redone. And you know, you can put 10, 12,000 a unit into those versus 2 or 3,000 a unit into the ones that haven't been ripped apart yet.

Other than being concerned about the cost of repairs and things like that, which obviously is certainly going to be a concern.

Why should somebody care? And I've got a point in asking that.

The commercial properties are valued based upon income, is that correct?

Yes, they're based on the income and what stops trading at cap rate wise in the area.

Okay, so ultimately if I were to take an apartment complex and increase the income, then by doing so, unlike a residential property.

I'm directly going to see an increase in the quote value of that property, Is that correct?

Yeah, we call it a forced appreciation or forced equity play. And basically you're increasing the income. Now the key is when you go into one of those type of properties, typically.

The Way that they do this is they'll try to approach the bank first to finance them on the deal short term for 12 to 18 months or something like that, while they're rehabbing it, getting it fully performing again, and then at the end of that 12 to 18 months, they'll either retire the debt with that bank and refinance, or they'll sell off the property to realize their forced appreciation.

Gotcha.

Illustrate example. I like to illustrate examples. So the 24 unit that I bought was 50% occupied when I bought it. The owners had taken it back in foreclosure. They hadn't owned it in like eight or nine years. So I bought it at 50% and I bought it at the value being 50% occupied. And so then when I bought it, I went and fixed each unit up one at a time and slowly brought the value up. Now I'm, you know, slowly working towards a refinance at the new higher value. So that. That's like what you're talking about here, right, Joel, about the value play.

Yeah. And the key is really.

You want your exit cap to be stronger than what the market offers. So in other words, if you're going in cap rate as an eight, you stabilize it. And when you do your resale projections and your equity minus your commissions and resale cost and all that, a year, year and a half down the road, if you project the going selling cap rate in that market is going to be a.

10, then you really want yours priced at about an 11 cap or something like that. Because typically what I'm seeing right now is most of the buyers want to have the seller hold back a second, you know, a 10 or 20% second mortgage. And if the bank's wanting a 70% loan to value that way, the buyer is only having to put down 10 to 15% of their own money, their cash versus dropping 25 or 30% down. What that does is that increases their cash on cash returns. Now, for someone in your situation, Brandon, where you're trying to realize all that forced appreciation, if a buyer comes to you and says, I want you to hold a 10 to 15% second, and then you've got your real estate agent commissions on top of that and your closing costs and everything else, that's about 20 to 25% of what you were going to take away for your profit to put in another property that's now eaten up by holding the second in your resale costs. And so you're not going to want to. A lot of value add type players don't want to hold a second for that reason because it eats up all the profit.

So is that, I mean, is the quote value add play? I mean, to me it sounds like just a little more elegant flip. I mean, you're flipping the property regardless, right? You're buying it, you're fixing it, you're getting that cap up and you're reselling it. Is that right?

Yeah, you just have to be careful on your rents. So if you think the rents are going to be.

475 to 550 in the area, you don't want to push top rents upon the rehab. Yeah, you'll have a bright, you know, brand new product, but you want to kind of be kind of in the middle of that because you want the most tenant applicants for the best quality product. Just like when you're selling a house, you're flipping so that you can screen for the best possible tenants to go in your units for the rehab. What typically happens is on the larger rehabs that are, you know, 100, 150 units, they'll do all their projections with a lower rent in mind. So, you know, if market rents 525, they'll rehab their units and they'll put it out there for rent rate of 475. That accelerates how many units they're filling per month to get it stabilized faster so that they have it fully occupied a sooner number of months so then they could sell it off faster or refi faster out of the property.

Okay, all right, cool. Well, I have two quick last questions for you on the apartment thing. First of all, real basic you mentioned it's a, it's a, your, your local cap rate. There's an average cap rate. How do you figure that out? What's, what's my local cap rate? Is that the same as what it is where you are?

You usually. There's a couple different ways. I mean, you can.

Sometimes your tax assessor website will have sales records on it or your local residential MLS will have a tax assessor feature that your agent can use or sold feature. LoopNet also has a sold feature on there as well where you can look at comparable recent sales. The larger buildings, you know, instead of finding a comp that's one or two months old, you might find the comp that's six months old or seven or eight months old because the larger properties don't sell as frequently as, you know, the duplexes to the quads do. So you have to adjust a little bit if you think the cap rates of 7. But you think that the market's kind of shifted 40 or 50 basis points, then you kind of make your adjustments for that. And for everyone listening, what a basis point is, is that's a percentage of the cap rate. So basically, If I'm saying 30 or 40 basis points instead of being a 7 cap rate, I'm talking about if I say 30 basis points, it would be 7.3 cap rate. So it's going up 30. So 100 basis points makes up 1%.

All right, cool. All right, so then, last question on apartment stuff is for anybody who wants to get started with apartments, what is the very first step? Like, what should people do that are listening to this podcast? Where should they go from here?

Well, you know, one thing they can do is they can meet up with other local investors in the area that have invested and can show them the positives and negatives. And.

You know, they really need to determine how much cash they want to allocate toward their first property, and that'll kind of determine what level of property that they're going to buy. So, you know, basically, if someone has 300,000 cash to put down and 100,000 in reserves, if the seller held back a 15% second mortgage on a 75% loan to value, then the buyer would be putting down $300,000 in that situation. So that means that they could afford up to a $3 million apartment building.

You know what I think might be helpful for folks? You know, we're running through quite a few numbers. I'm wondering if one of us can, at least for the purpose of the show notes@biggerpockets.com show 47 can kind of write up some of these examples that we've talked over. I think just having people have something written down in front of them might be handy.

Yeah, that's a great idea. Commercial, you have bigger numbers and bigger amounts, and there's a lot more due diligence involved. And so, I mean, it does get a little bit more complex than residential.

Yeah. So anyone listening, we'll make sure to put something together for you in the show notes. Speaking of finding local investors, another place they can do it is on the BiggerPockets meet page, which is our networking page where you can find members. It's just biggerpockets.com meet and you can find local investors in your area or any area that you're investing in.

Via that page. So check that out.

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Joel, one of the big things that I know Brandon and I were really excited about in getting you on board here was the topic of triple net investing. I think.

It'S got this sex appeal, so to speak.

Oh yeah, she's pretty with all the right curves.

There you go. There you go, man. So let's talk about that. What is triple net investing and why is it sexy?

Well, it's sexy for people because it's totally hands off. You don't have to worry about tenants toilets and termites, people's drama and their life issues and what they've done.

They should call it TTT investing then. No.

Yeah, a lot of it depends on the general cycle of people investing. When they start out with a small amount of money, they're typically going toward rougher areas, single family houses to get the highest yield that they can. And then they usually go to the duplexes or quads and then they go to the larger apartment buildings, commercial. And usually where they end up is in triple net. Now if someone has a large amount of cash from stocks or the bank account or CDs or just anything else, and they don't really know much about real estate, but they're a doctor or lawyer or a high income type professional, the triple net leasing is very attractive to them because what they don't have a lot of is time.

They need a lot of, you know, they're looking for the tax depreciation and they're looking to keep up with inflation and build up equity over time. So I'll just give you an example. You know, say a doctor making $200,000 a year income. Well, with their surgeries and their practice and everything else, they don't have time for, you know, doing a value add on an apartment building or you know, doing these other types of things with houses to try to approve appreciation and all this kind of stuff. They, they really don't care about that. They're making so much money to support their life. They're looking for the tax write down and to just build safe returns over time. And you know, in a bank account with a CD, they might be getting 1% a year versus triple net. If you get a 7% cap rate or 7 and a half going in and then you add your tax depreciation on that, which we call the tax equivalent yield, you can get double digit returns and be hands off.

Gotcha, Gotcha. So.

To dumb it down for those of us who.

May not fully get it, triple net lease investing is investing in commercial properties where you don't have to do really anything. I mean, you're literally, it's, it's, you're buying the frame of the building and you know, somebody's kind of taking care of management, the tenants are taking care of maintenance and everything else. And essentially you're not going to see exemplary returns, but you'll see pretty, pretty above average, you know, 10% or so returns potentially when it's all said and done from these kinds of deals.

Yeah, one of the things you have to Think about is people with higher incomes or just want to put it in a safe place.

They're not really concerned about the higher returns. What they're wanting to do is they're wanting to preserve wealth at that point. If you have $50,000 and you make $60,000 a year at your job and you're trying to quit your job, you need the highest yield possible to get out of the rat race. But if you're making a couple hundred thousand a year and you've got 500,000 or 700,000 or a million, you want to put it in the safest thing possible. If you're getting 9 or 10% with your tax write down, you don't really care about getting a 14 or 15% return because you don't want to put all that money, that wealth at risk for that extra 2 or 3 or 4%. It's not worth it to you to possibly put in a bad investment and lose that money.

Gotcha. So what does a triple net investment look like? I mean, is that, is that buying the candy store on the corner? Is that buying a building where Walmart's going up? Is that buying, I don't know, I mean, a mall? What, what is a triple net investment look like?

Okay, well in triple net, the first part is stnl, which is single tenant net lease. That's for a freestanding building that is not connected to anything else.

So that would be stuff like a dollar store, a bank, a medical office, a restaurant, a pharmacy such as Walgreens, cvs, Rite Aid, that kind of thing.

You know, with a single tenant net lease.

There'S so many variables to it. With the kind of return that, that you want.

They break it into a bunch of different categories. So if you want a pharmacy, the way those are typically structured, those are more for retirement plans.

When someone's going to pass away. Estate planning, Those are typically 25 year leases in the primary term. And they don't have any rent bumps, any rent escalations each year.

You didn't misspeak there. You really mean 25 year leases. Right. So we're not talking month or a one year lease, like a residential 25 years.

Well, that's stability right there.

Yeah. Yeah. Well see, as far as pharmacies go, they're the most stable because they have, some of them have a hundred year history. So lenders love them. So you know, you can get in with those with, you know, like 10% down or 5% down because the lenders love those properties. And you know, for instance, Walgreens you know, you're talking a multibillion dollar corporation. You know, that's about as good as it gets now, you know, your returns are less there.

Versus a, you know, restaurant or something like that. You know, restaurants typically have a lower shelf life. So even, you know, say a Red Lobster or Longhorn Steakhouse or something, those brands might typically have a 30 year or 40 year shelf life at the longest.

Because that industry is constantly churning. So with triple net, you have what I call the corporate tenants and the mom and pop type tenants. The mom and pop type tenants, you can have a triple net lease on a $200,000 gas station. But that's typically not what my clients invest in. They typically like the corporate tenants because they're more stable. The mom and pop type stuff where you just kind of create a triple net lease for it's kind of a mixed use type product. And when you try to get a loan on it, you don't have as many lenders competing to loan out on that type of property because it can be hard to dispose of if something happens to it down the road.

Well, here's my question and I've never really fully understood why this is. Why does Walgreens rent, doesn't that seem like silly that Walgreens, a billion dollar company, why don't they just buy the building? Why are they paying some investor money to rent? What, what's the deal?

Okay, so what question by the way? Yeah. What happens is with all while these companies love triple net is because, you know, with the land they might purchase, you know, Walgreens always wants corner locations. So they might purchase the land for a million dollars for that acre, acre and a half. Then it cost them with their development crew another $2 million to build a building or something. So they might be at $3 million. Well, Walmart's not in, not Walmart, Walgreens isn't in the real estate business. And so the Financial Accounting Standards board, fasb basically you have a write off where you can on your accounting books. You can actually take it as a loss paying rent every month. And so versus them owning the actual property. And so for someone like Walgreens, they would rather be taking their money and reimaging existing stores that are older in great locations or putting that money toward developing more new stores rather than owning the real estate themselves. Okay. With the tax write down.

And so it's, it's a better return on their investment to be reinvesting in their own business rather than dropping $3 million of their own money permanently. In real estate.

Right, exactly. You know, what they're the best at is running their business and their pacific asset class that's, you know, returning the profits to their shareholders that invest in their stock on their company. You know, they're not focused on the real estate aspect of it.

Gotcha, gotcha.

The single tenant net lease is kind of the obvious. Is there like a multi tenant net lease? Do they have strip malls that are triple net lease or things like that?

Yeah, you have multi tenant net lease mtnl. And one of the advantages to those is they haven't compressed as much so the caps are higher on those. So you might find a, you know.

A 10 unit strip center where it might have some corporate tenants and it might have some mom and pop in there on the triple net lease and you can even increase your debt on that. So you know, in the single tenant net lease space, the way those transact, you're generally putting, you know, if it's a restaurant or something else, you're Putting, you know, 25, 30% down on the multi tenant net lease. Say they want 25% put down. Sometimes a lender will let you allow you to have secondary debt, mezzanine debt, a B piece loan on the property. So you know, your B piece loan might be 9 or 10% interest rate on that smaller piece, that's 10 or 15%. But then you as the buyer, instead of putting 25% down, you're only having to put down 10% to buy that strip center.

Gotcha, Gotcha. Yeah, so, so tell me, I mean this sounds, sounds really interesting. You know, it's, it's not dealing with tenants. I mean, I guess you got to find them, but once you find them, you're pretty much done. What do we do? You know, hey, I want to, I want to go and buy a Walgreens, you know, in Denver. I want to go and, I don't know, find a strip mall somewhere around. How do you find someone that's selling something triple net? Is it labeled that way or do you have to kind of weed through things? How does that work?

Well, you won't really find signs out in the front on commercial properties because it'll spook the tenants, customers. Sometimes even if you own a piece of property, you don't want people knowing you're putting it out on the market. So sometimes they'll have off market properties. So.

For instance, you can find some triple net properties on LoopNet.

If you have connections with sellers, you can look up their addresses and do mailers to them. You can have relationships with developers that might have held a property for five or 10 years instead of selling it off right away and they're a seller of a triple net property.

When you go on LoopNet, what a lot of people don't know is when you go on LoopNet, you only see, you know, a certain small percentage of the properties. Unless you're a premium paying member, you know, paying 90 or $100 a month, you don't get to see all the properties. That's how LoopNet creates their money, is by either making you a premium searcher or a premium lister on the broker side. So, you know, if you don't want to pay that money.

You know, are you looking for someone that's knowledgeable about triple net? You know, you can use someone like me, that's a broker that specializes in it, that already has a premium membership, is already spending that money, already has the connections to the developers and the properties. Like for instance, I had my secretary.

Look up, you know, all the dollar stores, the addresses, all the Walgreens, all the Rite Aids, all the cvss, and we have the numbers and owners of all those different properties that we mail out to so that when they're ready to sell, you know, they call me. I also have relationships with other brokers. It's more of a specialized field. It's not only residential where you have, you know, a million agents trying to sell a house or something. It's a highly specialized field. You have small groups of different brokerages that specialize in it and we each talk to each other and you know, they present off market properties to me or stuff before they put it on the listing service because they know that I qualify my bro, my buyers and educate them ahead of time.

That's great. That's great.

So you're saying find a broker.

Well, yeah, an experienced broker now because, you know, it's one thing when someone has $20,000 and they're putting it down on a house and yeah, that's substantial amount of money. But say you have 500,000 or a million dollars of stocks or you had some money sitting in a bank you really don't want. That could be your life savings, it could be your family's life savings. You don't want to.

Go through someone who's not experienced in that specific asset class where they miss a couple of mistakes. They could end up costing you dearly.

Yeah. So really quick and then we're going to have to move on. What, what are the downsides to triple net investing?

Well.

A lot of it Comes down to the type of tenant. When you underwrite a tenant and you do your due diligence on them, a mom and pop type tenant.

Has a lot more risk. They might only own one location or a few locations or something like that. So the downside is that the property at some point could go dark, which means the business shuts down. Now you've got to figure out what are you going to do with that building or location, how are you going to repurpose it? So, you know, Walgreens going dark, it's not really going to happen. They might move to a new location and not renew their option period after, you know, 20, 25 years. When their 5 or 10 year option kicks in, they might move to a different area. But really the location of the property, if you, if you buy the right location, you're going to be insulated because you know, if that tenant moves out, there's five or six other tenants that are clamoring to get that corner location and it's going to be easily re rentable if it does go dark.

That makes sense.

Yeah. If it's a dollar store, sometimes they put those in off the wall places off of a commercial corridor and it can be down the road and it's sheet metal constructions on the front and the back, cheaply done. And you're going to have more problems with those type of properties if they go dark because they're kind of off the beaten path. And your second or third generational tenant that comes in isn't going to pay the same kind of money that the dollar store was paying.

So the key with everything else then is really location and location, location.

Yeah. And the credit of the tenant, how strong they are. There's basically.

Four levels of strength of a tenant. Basically, you know, the smallest level is a franchisee, you know, say, say a Hardee's and they're just a franchisee and only that one location. And they're doing a guarantee. You might find their cap rates a little higher. You get it in an eight. And then their annual rent bumps are, you know, two and a half percent or something like that going up the next level from that. You could have a franchisee of a Hardee's that owns, you know, 50 locations and has been in business for 10 or 20 years. And they can offer a lot more stability. They can warranty up their other properties to secure the lease and give you a lot more security. You know, they might be two and a quarter rent bump a year or something like that. Then the next highest level is Say Hardee's itself, that has a couple thousand locations. But they, for the state of Georgia, for instance, they might have 300 locations where the lease is only guaranteed by the 300 locations they have in the state of Georgia. And so the parent company isn't guaranteeing the lease in that situation. The subsidiary is that they've created, which is, you know, the 300 restaurants at that point. And then the most security is actually a fully corporate guaranteed lease backed by the parent company. Those are, that's the highest strength you can get. Now when it comes to the annual rent bumps, you might find the cap rate might be 50 or 100 basis points lower. And you might find the rent bumps are only, you know, one to one and a half percent a year escalations. But the quick tip on that is, is that the great thing about triple net is totally hands off. But the other great thing is if you're getting one and a half for 2% a year, you're actually getting that increase because the tenant is paying for everything versus an apartment complex. Your rents might go up 3% a year, but if you're paying water and all this other type of stuff, those expenses will go up too, offsetting your gains.

Maintenance.

Yeah, yeah. So where you don't have that in triple net, so when you get, you know, 2%, you're getting a true 2%.

That's.

I never thought about that way. That makes a lot of sense.

Cool.

All right, so I think we should move on.

Yeah, no, listen, I mean, lots of fascinating stuff and I think if people have questions on this stuff, they can definitely hit you up on the show. Notes@biggerpockets.com show47 and of course, Joel likes to spend his days, when he's not working, trolling around the bigger pockets for him. So I'm sure if you put a post about triple net, he, he's got an alert set up for it and he'll jump in and help you out. But it's time to hit up.

It's time for the fire round.

Yeah, you like that?

Beautiful. All right, fire round. These questions all come from the BiggerPockets forums. These are questions that Joel, you've probably even seen because you're on there a lot. So here we go. First question. Mixed use properties. What's your opinion and what is it? First of all, for those who don't.

Know, mixed use property is where you have something that's not a defined specific asset class. So you know, you might have.

Commercial storefront on the bottom and residential on the top or something like that. So it's a combination of different asset classes into one building or location there. I, I would save those for the experienced investors.

I would really, you know, if you're used to buying houses, apartments are probably going to be the easiest transition. You're going to understand to move to first. Or if you want some passive, you can go triple net or something else. When you, when you get into mixed use, there's not as many lenders for that product. It's more risky when something goes bad. It's harder to sell off and dispose of. So.

There'S a lot more knowledge required and there's a lot more risk with mixed use properties.

Gotcha. Okay, gotcha. All right, so here's next question. When you buy a multi family property, do you need to sign all new leases and should you?

Well, it depends on.

What was the. What are the existing leases that are in place? You know.

Are they just on a continuum, month to month, the leases that you would be taking over?

You know, were they poorly written? Is there a lot of problems in the leases that you would be taking on as the new owner?

If they're really crappy leases that are detrimental to you as a new property owner, then definitely part of the condition of buying the property is you would want to go in and have the tenants agree to those new conditions of the property because.

If they don't, you're inheriting those problems. You think you're going to get a certain return going in.

And you buy wrong, then your returns are going to be diminished. So you know, definitely looking at leases is a key component with multifamily or anything that goes. Just a quick note, that goes for, you know, triple net as well. You know, you have to review these leases to make sure there's not any hidden time bombs in there before you make the purchase. Right before. Yeah, it's part of your due diligence. Yeah, just a real quick 30 second thing that I didn't mention. On the triple net, basically you got three segments. You got the ground lease which is you're basically leasing out the land. You don't have any tax depreciation there. You've got a double net lease which the landlord is responsible for. Sometimes it can be utilities or the parking lot or the roof or the structure. And then you've got absolute triple net lease which you're not responsible for anything. And you know, you own the building and the land. On the double and triple net, you get the tax depreciation. On the ground lease, you don't but you always have to review the leases to look for any hidden problems.

That's great, great advice.

Okay.

Yeah.

All right. So last week on the show with John Clouse podcast 46, he mentioned a phrase actually referring to Jerry Puckett, which was show 21 market like a wholesaler. And what he mentioned, what he meant was when you market for properties like a wholesaler would, maybe through direct mail, you can get really good deals. I'm wondering, I'm kind of adapting this from a question on the forums, but can you do direct mail the same way a wholesaler might for let's say apartment buildings or commercial properties like this?

I mean you can.

The difference being the sellers that you're talking to are usually very sophisticated. So you know, if you're sending a letter to someone on a single family house, you know, it might be a 40 or $50,000 house that they inherited or it might be, you know, someone that owns a house and they don't really know anything about real estate. You know, when you're conversing with someone on a commercial property that calls you wanting to sell their $3 million apartment building.

They'Re usually a pretty sophisticated investor that built up their capital to a point to where they were be able to buy that building in the first place.

Makes sense. Alright, next question. If a property is master metered, meaning all the properties, the properties run on the same power, all the units paid by the landlord, how tough or expensive is it to go and rewire it?

Well, the first question you want to ask is do you even want to do that? Because what you got to know for that area is what's customary for the tenants in that area. So you know, if there's 25 large apartment buildings within a three mile radius and it's customary for the whole area for the landlords to include all the tenants utilities, you go out and pay all this money to separate everything out and guess what? All your tenants just go right down the street where all the utilities are included. So that's the key. Now if you're looking to buy an older building in the area where most of the buildings the tenants is separated out and the tenants pay your own utilities and you just got an old building that was never converted, then in that sense it would make sense to spend the money to do that because the tenants in that area are conditioned to paying their own utilities.

Is there like a set, is there like a per unit price that sometimes it might be or that just too varied.

I mean, it's just too varied. I mean you know, with a bigger apartment complex, you could have a, you could have a length of the run.

That can make stuff go into, you know, 40 or, you know, $50,000. Just a quick example is some of the older apartment buildings used galvanized pipes as the water main coming from the street to the buildings. And, you know, they rust from the inside out. The water pressure keeps getting lower and lower. So even if you put on the plumbing in the buildings, the main itself won't carry the water pressure to the buildings because it's backed up. So in that case, if you've got to, you know, cut open the water line and half the water line is running through your paved parking lot, you now have to use a cut saw, cut open that whole parking lot, take that line out, put a new line in, and then repave the parking lot and then put all the dirt back down. Depending on the length of the run. You know, you could be talking $40,000 for something like that, you know, so.

So there's just too much, too many variables in there to really.

Yeah, I mean, it depends on the size of the building, you know, what's existing there depends on the local city or county if they'll let you do separate meters. If they say, no, we won't allow you to do separate meters. And you got to get like a private water company that puts meters on your property, but you're still responsible for the bill. But you build the tenants, you know, directly and try to recover. You know, not all of them will pay you back when they're supposed to, and you'll have to sit collections on them and stuff like that. So it's just, it just varies. But that's why it's so important. I mean, you know, if you're going to put your money at risk, really get with another investor or, you know, someone that's a broker and an investor and that really knows the business. Like, for instance, I don't know much about industrial, so I have a friend of mine that's been in Industrial for 28 years and that's all he does. And someone calls me about industrial, I'll send them to him because I, you know, I know the basics of that. But really multifamily and triple net leasing is what I do day in and day out. So, you know, that's where I'm gonna help people. The other stuff, I'm just not experienced enough in it.

And that's a, that's a good tip right there too, is, yeah, find somebody who's experienced in it. So.

Alright, next question of the fire round is, you know people real estate agents typically make on a residential house, like 6% commission is kind of the general number. I'm wondering what is that general number for commercial real estate? Is it 6%? You mentioned earlier you made $34,000 or whatever. Is that, is that still the same.

In commercial? It's different, it varies on a host of different factors. If it's a, you know, if it's like a FDIC property or foreclosure type thing, those listing brokers signing agreements typically at a reduced commission a little bit. So they might be at 4 and a half or 5% total instead of 6. Or sometimes if you get a say, there's a real estate investment trust to REIT on triple net leasing that owns 30o Charlie's restaurants in their portfolio and they say, hey Joel, I want to list, you know, we want to dispose of 10 of these properties and they're going to be, you know, two and a half million dollars apiece for a total of 25 million. For disposing of all these properties for us. We want a reduced amount for that. So in those situations the amounts you know, typically go down, you know, you know, maybe that's a million sales price or 2 million and it's a private seller, you can still get like a six or five and a half or something like that. If you double ended it when you start getting up into 5, 10 million dollar property, stuff like that, the total commission amounts might go down to like 4, 4.5% or something like that.

Gotcha. Yeah, that makes sense. All right, last question. Where's the best place to get a commercial loan? How do you do that? And should you pay, I'm going to add to that. And should you be paying any fees up front for said loans?

Do not pay any fees up front.

Thank you.

The residential, you know, in residential before it was highly regulated from all the foreclosures. There's really a lot of fraudsters out there. And when residential got highly regulated, guess where they moved to?

Commercial. Yeah, there are so many commercial scumbags out there. I mean there's really no other way of saying it. And you know, we see it, I'll see it on the site and we'll try and you know, get rid of them as quite quickly as we can. But you know there's all these, these guys who have these, you know, pay us the money up front and we'll hook you up with this great loan. There's alternatives, right?

Yeah, yeah, that's due Diligence, you know, they'll call it all kind of crap. Due diligence, fees, insurance, deposit, let's call it a host of different. And sometimes what they'll do is they'll say, well, there's no upfront fees, they'll get you an application process. And then halfway through they'll kind of say, oh, by the way, there is this one little fee now that we didn't know about that you need to pay before. Anytime someone wants you to put money somewhere. A good tip on that, have your attorney hold those specific funds. They can send a verification letter to the whoever this lender is or funder or whatever and says here, this money is put aside in this account for this specific purpose. And here it is and my attorney's holding it. My attorney will not release it until we close at the closing table. You know, all the scammers go away really fast if you say you're not going to pay any upfront fees. Now when it comes to bank financing, it really depends on what you want to do with the property. So in commercial it's different than residential. Most of the banks do what's maybe like a 5 year loan or a 10 year loan at the best for a fixed rate term.

You won't really find. Sometimes you can find.

25 or 30 year loans on the commercial side, but the cap rate's higher. So not the cap rate, the interest rate. So you know, if you go to local bank says I'll give you a five year loan at 4.6% fixed over a 25 year amortization, you might find a 25 year product out there, but they might want 100 basis points higher. And they might say if you prepay this loan any earlier than five or 10 years, there's a $300,000 prepayment penalty, defeats its penalty with this loan. And so knowing that you're getting longer term debt spread out over a longer period of time, but your interest rate is much higher, about 100 basis points higher. So when you go buy at your cap rate, you're spread between your debt service and your cap rate. That's going to make your cash flow lower because you're paying higher on your mortgage. So you've got to balance everything out. Typically what I do is I tell people kind of the sweet spot is to get a regional bank because they'll go like a 10 year term and that's a pretty good amount of time to pay down the debt. And the basis points aren't that much higher, maybe 40 basis points higher where you can still cash flow.

Well, okay, okay. So that all makes sense. And the big piece of information.

That really rings out to me is definitely, definitely be careful and avoid these guys because there's a ton of the shady practitioners in the space these days.

Oh, yeah. A lot of people aren't even a mortgage broker. They get some course or become an affiliate of a company and they want to take a point, and this person takes a point. And you've got four people trying to take a point in a chain and none of them knows what they're doing. A quick way to get rid of these people is say, what have you funded lately? Give me the addresses of it. Show me all your typical cost breakdown. If they go away and they don't respond, you have your answer. Or if they get defensive. If they get defensive, that's another way of trying to control and manipulate somebody to try to extract a fee out of them. To try to change you off the topic, I've been running through that stuff for years. And so I see those people a mile away. You know, just go directly to banks. You know, banks like for instance, my secretary, I had her call around to all the. I believe there's a couple hundred banks in Georgia. Call around to every single bank and ask them versus them selling off the paper versus keeping portfolio loans that are in house that they underwrite themselves. So I'm building a database of, you know, all the different banks, what areas they lend in, if they have any in house products that, you know, they're just not selling off the paper on Wall street with the buyback provisions, because the ones that are selling off the paper.

You have to fit in this tiny little box to get approved for a loan. Because if it goes south later on on Wall street with a buyback provision, they can force the bank to buy back that loan.

Gotcha. All right, so, hey, Brandon, do you have anything you want to add to this or should we move forward?

Let's move on. But I want to announce that we actually have a kind of a cool thing here. There's a guy who reached out to me. His name is JT Spangler. I hope I'm saying his last name right. And he actually recorded us a new Famous for jingle. So check this out. It's time for our Famous for.

Nice, Nice. Now that's awesome, man. Very, very cool. Thank you, jt. We, we definitely, definitely dig the jingle. So we appreciate it.

Yeah. Follow him on twitter@twitter.com JT Spangler S P A N G L E R All Right. And with that, our Famous Four.

So.

Yeah, you want to start a Josh Famous for. No, we're not doing that anymore.

This guy never.

He never learns.

There you go. All right, Joel, what is your favorite real estate book?

Well, the.

Well, I've read so many of them, I think, you know, my. My favorite resource is actually kind of crazy. It's.

Going through the.

Federal and state statute codes and reading all the different real estate sections. There's just so much information in there. It's just.

That is a new one. You're kind of like a CPA type of guy there, Joel.

Yeah, I like that. The next one I want to get and read that I've heard is real high remarks. Brian was talking about it the other day was the Ray Alcorn's commercial book on real estate investing.

I want to get that one and try to work through that. I've heard that's really good.

Gotcha. Gotcha. But for light weekend reading, you recommend folks go hit up the local commercial statutes on real estate.

Yeah, I mean, it's actually not that hard to understand. I mean, once you get in there and look at all the titles and it's broken down by title, then you can get down to the pacific chapters on different things. And it's not that bad once you get the hang of it.

Gotcha.

Wow.

Gotcha.

Well, I won't really be linking to May. I'll find some good ones in my weekend light reading. All right.

So, you know, all joking aside, I bet you there's a ton of value in that stuff. It's.

I'm sure. Yeah.

So cool. Something. Something we haven't heard before.

Cool. All right, next question of the Famous Four. What is your favorite non real estate, like, business book?

I saw him in person years ago when I had my pizza restaurant. And it's Jeffrey Kitmer. And it's people don't want to be sold, but they love to buy.

Okay, I haven't heard of that one.

Interesting. Interesting in 10 seconds. What's the gist?

Yeah, it's basically a mindset shift on how do you create relationships and business with people in a way that you're not trying to hard sell them, you're just connecting with them naturally in a way that wants them to keep doing business with you and developing the relationship where they're. Where they're drawn to you instead of repelled by what you're trying to do.

Gotcha.

It gets more complicated than that, but you just have to kind of read the book to get the full examples and Everything perfect.

No, that's great. That's great. Well, and we will link to that and these other books in the show notes@biggerpockets.com show4seven really quick. So what do you do for fun, Joel? What are your hobbies?

Let's see. I like to travel. I like, I enjoy martial arts.

I should already be a fourth degree black belt. I'm a third degree black belt now on the taekwondo side. And I took kung fu for a number of years and what I've been recently doing the last few years is Krav Maga. It's a Israeli secret service self defense what they teach overseas. And it's basically a realistic self defense based program where you, you know, encounter multiple attackers, knives, guns, you know, going outside with attacks and everything else. It's, it's all reality based.

Nice, nice. Well, I know, I know when Brandon and I went to this conference in St. Louis, he was, he was trying to pick a fight with a buddy of ours, Brandon, who's rather, you know, rather big dude. I wonder if you'll do that with Joel now.

I might pick a fight with Joel at whenever we have our next biggerpocket summit which we'll have to talk about about sometime.

Josh, how about the pressure? How about the pressure?

Yeah, I got to keep it up. All right, final question of the fire round is what do you believe sets apart the successful investors from those who just give up, specifically referring to commercial investors, that you see.

Perseverance. You know, real estate is like a roller coaster.

You know, it's going to have fast lows and fast highs and you know, where you're kind of coasting in the middle and you really have to do those things day to day. The tasks to make yourself successful without other people watching. You just have to, you know, do things for yourself, set those goals every day and you know, run it like a business, not like a hobby. You know, you know, like I'm going to do it an hour here, an hour there. You really have to lay everything out, follow an actionable plan and small steps, those small steps will turn into big results over time.

That's good. That's good.

Cool. Cool. Awesome. Well, why don't we, why don't we wrap this thing up, Joel? Where can people find more about you? Where can we connect with you at?

Okay, so you know, I can be found on bigger pockets as a moderator, of course. And also my website is just www a w commercial.com so the name of my company is All World Realty. That's my Brokerage. So I just made the website aw commercial dot com. And, you know, they can just email me or call me or whatever they like to do. Kind of the information we talked about today.

Very, very basic. I might have gone over on the triple net side, maybe 10% of the stuff. So typically a client contacts me, will converse through emails over a few months, and it might take, you know, three, four, five, six months to find the right property. That's for them. And to where they fully understand.

How the process works and how to invest their money and how to find the right property.

Right on. Right on. Well, Joel, listen, we definitely appreciate having you on the show. Thank you so much for the time and we'll look forward to seeing you on Bigger Pockets.

All right. All right, thanks, guys. Brandon needs to get back to work now. He's been slacking for the last hour and a half now, it seems.

Yeah, you know, hamster will need to be run.

Nice.

Thanks.

Nice. All right, Joel, take it easy.

All right, see you guys later.

Bye. All right, guys, that was our show with Joel Owens. I know. As always, my brain is busting. It's overflowing with. With lots of new stuff. I don't think we do a podcast without.

Learning new things. Even as hosts on the show. Brandon's looking like he wants to say some smart ass comment.

I was gonna say, well, that's not too hard to overflow your brain, but you took the wind out of my sails. Thank you.

There you go. That was awesome. So, yeah, anyway, getting back to it.

As I mentioned in the beginning, guys, jump onto the show notes@biggerpockets.com show47. That's biggerpockets.com show47 and ask Joel any questions you'd like. Thanks again for being with us on yet another episode. And as I mentioned in the beginning of the show, please head to itunes and leave us an honest review. Beyond that, of course. Connect with us over on Twitter, Facebook, G, LinkedIn, Pinterest. We've been trying to play in Pinterest a little bit. So come join us and share our pins. And most importantly, come hang out with us on BiggerPockets. If you're not doing that already. If you're just a listener of the show and haven't gotten active on BiggerPockets, my action item for you is to sign up, create a profile, introduce yourself. Do it. Do it now.

Do it.

Do it. Yes. All right, so, Brandon, let's get out of here, man.

Let's get out of here.

I'm Josh Dworkin. And I'm Batman signing off.

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