From Zero to $48 Million: Secrets of Successful Commercial Real Estate Investing with Tom Rauen

Foreign. Hello, this is Ginny Bowling with Pivot to Prosperity which is sponsored by Pivotal Real Estate Investments. We talk with people that are in the syndication business for the most part and that involves all kinds of different property types. And we have a real unusual guest here today, Tom Rowan. And to. Tom is an entrepreneur investor with a passion for community marketing and innovation. He's grown his real estate portfolio from 0 to 48 million in a short period of time. His portfolio consists of big name tenants such as Starbucks, Arby's, Applebee's, Jimmy John's and FedEx. And I can tell you this guy knows his stuff. Tom is the founder and CEO of 1800 T Shirts.com which is 3X Inc. 5000 company. Fast food landlord, Rowan Capital, co founder of Shirt Lab, Midwest luxury limos, Dimensional Brewing company and a partner in the field of Dreams movie site. That's pretty cool. Tom and his wife Amanda started their own family foundation with a mission to give back to to the community with their signature event Mac and Cheese Fest. And he is an endurance athlete who has run and won multiple 50 and 100 mile races. I didn't know that. We got to talk about that too. Now Tom launched a fund for busy professionals like you to create monthly passive income by partnering in commercial real estate deals. And we'll share an opportunity on how you could be a part of that at the end of the interview today. Tom, welcome. Thank you so much for coming.

Yes, thanks Jenny for having me.

So what wasn't in there that, that occurs to you as you hear your own bio? Anything?

Yeah, no, I, I live pretty busy and fulfilled life so I'm, I'm very active and like to just get out, explore and you know, keep, keep seeing what's possible and doing things.

So what I always say is commercial real estate should be your number two asset with your health number one. So I gotta ask you, where do you usually end up running?

Yeah, so we're very fortunate. I'm in Iowa and we've got like that and, and then that takes me basically anywhere I travel to. I try to find trails or any type of nature areas to get out, explore. It keeps me healthy, physically healthy, but then also very mentally healthy because that is my sanctuary, that is my meditation time and that's where I get all my thoughts gathered, everything in my brain sorted out and gives me that focus and clarity to just really operate at a high level in business.

That's terrific. That is, I think that really holds true too. Well, so. And tell us about your journey.

Yeah, so I I started real estate about 10 years ago with a fourplex and it was an absolute disaster. Everything that could possibly happen, besides someone being murdered, happened at that fourplex. We had flooding, they burnt part of the place down. We had arrests and overdoses and just all sorts of crazy things that happens when people are living in a property. And so I quickly learned I do not want real estate where people can live. And that got me to focus on commercial real estate. And then I operate other businesses as well with 1,800t shirts. And I knew I needed to focus on real estate that was more passive, more hands off, and in a specific niche that didn't quite a lot of hand holding, a lot of babysitting. And that's where I discovered triple net lease. Real estate, commercial real estate. And triple net lease simply means the tenant pays for the insurance, the taxes and all the maintenance and upkeep and everything else. I don't have to worry about plowing the snow or mowing the grass or fixing light bulbs or toilets or anything else. I simply just get paid rent and that's all.

Yeah, yeah, I'm with you. I, I talked to you recently about a friend of mine that has a triple net lease.

Yeah, great opportunity.

They're powerful, especially with the types of tenants that you deal with. You've got. How do you, how do you, how do you market your, your whole, tell us your, your whole operation there?

Yeah. So do you mind if I share with you a few slides here and how it works?

Yeah, yeah.

All right, so we're going to start off who owns the post office?

Jenny, do you know U.S. postal Service?

Usually, yes. Most people think it's the U.S. postal Service. And so this is a picture of the post office in my hometown of Farley, Iowa. And I just turned 40 years old and I just realized that someone has been collecting rent there for the last 40 years. Someone in my hometown. Just another guy that lives there. Small town guy. Right. And then I, I did a little research. I found out the United States Postal Service leases over 25,000 properties in the United States with an average lease time of 45 to 50 years. Does that blow your mind? The average tenant staying in an apartment is only two and a half years. And so I saw that and that kind of, you know, kind of rang a bell a little bit. And then, then I watched the movie the Founder. Have you seen that movie?

I have not.

All right, so who owns McDonald's? McDonald's, right. You drive down the street and you see McDonald's. So.

Right, yep.

So Ray Ray Kroc built McDonald's empire by acquiring some of the most sought after real estate on the hottest corners in every city. And McDonald's CFO famously said, we are not technically in the food business, we are in the real estate business. And when I heard that, it totally blew my mind. I was like, wait a minute, this is fascinating. So I started researching this and then I realized that most of the national franchises in the main commercial areas in our town were not in fact owned by the company, but by real estate investors which these big corporations are paying them rent. So currently McDonald's only owns about 40% of their real estate.

Really?

Yes. So you could actually own a McDonald's and McDonald's could pay you rent. So what does that look like? Like, look at these, these stores that we own that we're getting rent from. Typically you drive down the street and you see this and you're like, oh well, you just assume that they own their own building, but they don't. So you know, they're paying these long term leases. They're very hands free because they manage, they fix all this stuff, they handle everything. And so you're not even touching all this stuff. Like I said earlier, they're paying the taxes, the insurance, everything. And so that's what we do here at Round Capital and Fast Food Landlord is, you know, we're investing these. So the next question, Jenny, you're going to say, well I've never driven down the street and seen, you know, a for sale sign in front of McDonald's, right? Like that's not gonna happen. So here's why it's such a big secret is because you'll never see a for sale site in front of one of these stores. And that's because, and you'll never see them in the Sunday newspaper, you know, with other, you know, real estate for sale when people are looking at open houses and, and stuff like that. And most of the time these properties are held for generations within a family and they never come available for sale. Other times these properties are bought and sold on a regular basis, but they change hands without people even knowing it. So here's some sources you can find these types of properties. Crexi.com, loopNet.com they're both commercial brokerage websites where you can find these. Now by the time they end up on those two websites, a lot of these deals have been looked over and you might not find the best deals. So here's how we found our best deals. We've been building relationships for many Years with lawyers, accountants, bankers and the current landlords. And what that looks like is the owners of these typically or if it's multi generation or whatever, we wait for a pain point. And that pain point is someone going through a divorce, someone going through business partner, you know, breakup, where they're no longer getting along or they're both going different ways, someone's trying to retire, someone else isn't. Whatever it is, they get handed down to kids. The kids don't want to deal with the real estate, so they just want to sell. Gets handed down to grandkids and they don't want to carry on the legacy that their dad or grandfather or great grandfather started with developing these properties or just some other life event, it might be medical reason or something else. So that's typically where we might find or see these, is building those relationships with the people that know what's going on with them. So there's three ways you can do this.

You said find your ces. Is that what you said?

What?

That's where you find your what?

That's where we find these properties.

Oh, I thought you said ces.

Yep, that's where we find these properties. So there's three ways you can do this. You can do it on your own. And so that's, you do all the work, you find the property, start building those relationships to find when a deal like this comes along, you can analyze the deal, go through the due diligence, look over the lease, negotiate the terms, get financing lined up, find a property management company, all the stuff. So that's, that's what it looks like on your own, or you can do it with a partner. And that is someone who's an expert in investing in real estate like me and you, you know, we're the experts here. And in dial in a plan to fit what your goals are and let the partner find the deals and manage them. And then typically you're coming in as the capital investment investor partner in that deal. So you've got the expert in the real estate and you got the person with the capital and doing like a 5050 partnership. Or you can be in a limited partner in the deal and that's in a syndication or fund. And what that looks like is it's completely passive. You've got a little bit less control and flexibility than a JV partnership, but is structured and is very simple. Really all you have to do here is find a good operator in an asset class that you're looking for that has that return profile that fits what your goals are. So if you're trying to make a certain return on your money or a certain time frame, what does that look like? And then just start building a relationship with that operator and invest with them. So this is getting into the phone and we're not going to get too far into the, into the weeds here. But just know like, here's the responsibilities between a general partner and a limited partner. And, and I think I point those out and those three structures of doing on your own or doing that JV partnership or doing the syndication. Because depending on each person's situation that's listening to this or watching this, everyone's got kind of a different what they're looking for in returns, different time. And our most valuable asset is time. So really it's, do you have the time to do it on your own or is your time more valuable partnering? 5050 or is your time better just being completely absolutely passive and doing that syndication or the fun side of things. So we've got a fun going right now. I don't want to get into that right now. Jenny. Let's, let's talk more about this structure and any questions you have. Whether it's about a syndication or fund or about the triple net lease stuff. I'm happy, I'm a wide open book, so I'm happy to answer any questions that we can give the most value we can to anyone listening.

So let's cover a couple of the basics. If they decide to just be a passive investor, their risk exposure is limited to the amount invested, correct?

Yes. That's another big one. So depending on where, where people are at in their, you know, if, if someone's 30 and investing versus 50 or in their 70s, that makes a big difference because you might not want that risk of a lot of debt. So when you're doing it on your own, and let's just say the Property is a $2 million property and you put 20% down, so you put $400,000 down. Now you have a $1.6 million mortgage on it. You have the responsibility and you have that risk of that debt attached to it. Right. When you're investing as an LP partner, a limited, and it's called a limited partner because you're only limited on what your investment is. So that same, that same property, two million dollar property, you can invest alongside an operator who's putting on the fund, sometimes the minimum might be 25 or $50,000. So you can get in at 25, 50, maybe $100,000. And your only exposure and only risk is that 25, 50 or $100,000, you're not exposed and you don't have the risk of the full, the full property. And because you have the partners, you have the sponsor who's taking on that risk.

So it never affects your credit rating, doesn't show up as a liability. None of that when you're a passive investor. Right, right. That's I think huge for some people to realize. And your typical holding period, what are you looking at?

Typically so on our funds we do 10 years.

Okay, so it's in a liquid asset, right. You buy in, you get a figure 10 years. It's money that you don't need. So are you getting a lot of retirement money invested?

Yeah. So you know, we'll get people that invest a self directed 401k. We get people that are just looking for that passive income without having the management, without having the risk involved, but also being part of something to diversify away from maybe some of their other investments. And then you get the other benefits of real estate because you're a partner on the K1, you get the benefits of depreciation. So that's a nice tax write off paper loss, you know, against any other income you have. And so there's numerous benefits like that, you know, involved with this.

And I imagine you do the extra segregation studies for accelerated depreciation, just like most commercial assets, right? Yes, yeah, yeah. So that's a big plus too. It's especially big right now. While that's in place for next few years. And then so your fund, I know we don't want to make it complicated, but. So do you do one fund per property or is it multiple or.

Yeah, so in the past we've done syndications which are basically investing in one single asset property. But right now with this fund, we're going to be, we're going to be raising $5 million and acquiring between eight to 12 properties. And the reason for that is we're looking at it as a diversification place. So you know, it's a mix between assets in that triple net lease space. So there could be some fast food restaurants, there could be some distribution stuff like FedEx. There could be some quick service restaurants, there could be like a Midas muffler type of thing. So we're looking at that diversification into just different types of businesses. So it isn't the same and it really just lowers the risk.

So. And you're getting leverage on that too, right? Financing? Yes, that 5 million, what's your loan to value ratio on those?

It'll be about 70%. And what we're looking at on the financings, It'll be about 70% and what we're looking at on the financing. So given the current market, the deals we're currently looking at, we're structuring seller financing at a much lower rate than what the current market is at. So we're locking in these deals and we're getting the seller to finance between 3 and 4.5%.

Nice. Excellent. Right, right. So what does the typical McDonald's or post office go for?

It really depends on the area. I know, size of the town, how long they've been there. I will say this, the, the longer the lease. So post office with a 40 or 50 year lease, the return, the return isn't going to be as high as someone only signing a one or three year lease. Right. Because there's more risk involved. But when the risk is lower because you know, McDonald's is in the absolute number one best location in your town. They've been there for 20 years. They're going to be there for probably cranking out french fries for the next hundred years. Right. That your return is going to be a little lower. But at the same time, you know that it is tried and true and they're going to be there. And that rent check is coming every month on the 1st. No questions asked.

Yeah, yeah, that's, that's excellent. So are these like AAA rated tenants pretty much, or do you have a requirement?

Yes, most of them are. So we know, you know, a Starbucks, it's not Joe's coffee Shop from down the street that, you know, might say, well, we're doing this for five years and we're going to hang it up now. Or, you know, they don't have the back end to support the, the business that's happening. You know, we're dealing with big national brand, have the financial capacity to, you know, make sure they're paying the rent that, you know, have the marketing and everything to, to be able to get their product out there and to keep the business going and things like that with multiple locations. So yeah, we look at, you know, where's that property located? Who is the tenant? Are they Nash? Do they have a great credit rating? Are they going to file bankruptcy? Because we've seen that with big companies too. There was just a big fallout with Pizza Hut and where a franchisee had, you know, a number of locations go out. So in the case of that is we want to make sure the location is rock solid, that if one does go out, which we've seen happen. There's somebody else lined up right away to fill that in. Because the location's so great. They're like, you know what we want in there. And you know, there's a waiting list or a bidding war over who's going to be taking over that spot.

Yeah, yeah, that's great. Right? Is there like a threshold, though for credit rating that you all use or is that not that.

No, it's not quite as important. You know, there's, there's a lot of other metrics we look at that probably way heavier than what the national company's credit rating is. The other part, you know, there's franchisees versus corporate owned. So you want to look at that, you want to look at how strong the franchisee is, if the franchisee, how many units they have. So sometimes you have a single unit franchisee where the franchisee, this is their only one. Some you'll have a smaller regional one where maybe they own four or five, you know, McDonald's or whatever. And then you've got these bigger ones that own 100 or 200 locations. And so it's, it's knowing that and getting some financial background on those as well. A corporate guarantee is much stronger than if it's just a franchisee personal guarantee. And that all weighs into the underwriting and knowing the value there and kind of what that looks like on a risk versus value equation. And that's where, you know, someone getting in on their own and trying to learn all this takes a little bit more work. But when dealing with, you know, professionals like me and you, we've gone through a lot of this. We, we understand it and we know what those nuances are and the ups and downs with that.

So, yeah, that. I would certainly think a corporate signature is worth a lot to y' all too. I, I have appraised a lot of properties with the big tenants, but yeah, I haven't bought into triple net. And it's very enticing. It very, very much is. Let me ask you, the, the heavy hitters, the, the corporate owned, are they, are they really tough to get a decent rate out of? You know, I'm talking rent rate.

Yeah, yeah. So, you know, in the most, most cases, it's pretty clear cut. Here's what it is. There's a certain threshold of, you know, revenue. If, if they've got a certain number of revenue, typically they want their, their, what they can afford to pay in rent is somewhere between 5 to 10% of revenue. And so you want to look at that number. And, and they know, like, they'll tell you, hey, the revenue here does not support paying that rent payment or vice versa. Right. So, so knowing what that revenue of that store is and the better location, the more revenue that they're going to generate, the more they can pay in rent, you know, the more per square foot. So that's why, you know, you see the most highest traffic can afford to pay 40 or $50 a square foot, which is, you know, a pretty high rate in a small town. And versus, you know, if it's in a not as good location, maybe it's, it's half that or less. And then the same, same goes for whether it's a small town or a big city like New York or Chicago, where, you know, on Michigan Avenue in Chicago, where you have millions of people literally a day walking by that storefront, they know that that revenue is going to be way higher than if you're on, you know, the corner in Dubuque, Iowa. So all that kind of goes into it. And you know, they have big real estate departments, they're big companies and they deal with this all the time. Especially when you're dealing with a company that's got thousands of, you know, Starbucks, they have how many thousand tens of thousands of locations. Right. So this is what they do. And they're, you know, it's overhead for them. So yeah, they're gonna, they're gonna negotiate the best terms possible. And at the end of the day it's, you know, how do we make it fair, how do we make it right for both sides to win? So you know, as the landlord, you just have to know like, all right, here's what the market rate is. This makes sense for us to get the return we need for ourselves and our investors. And it also has to work for the tenant because if it's too high for the tenant, they're not making a profit, they're not going to stay at that location.

Right.

So it's got to just be that right number that's a win win for both the tenant and the landlord.

Yeah, I like that. I like that. What would you say your typical lease term is? How long?

I would like right now Our average is 10 years, maybe a little bit more. We've got a few that are 25 year. The Applebee's is 25 years, Arby's is 20 years. The Starbucks are doing 10. Some of them are 15. We've got a couple of the multi tenant ones which are, you know, like a strip center, a multi tenant building. We've got a few local tenants mix in like a nail salon and a laundromat and stuff like that. And they're, they're typically signing five or seven years. Those don't go quite as long but you know, they've been there for 20 so they're nice long term tenants. And we know they just don't like to commit and guarantee that long of a threshold.

And I imagine you do annual adjustments, is it annual and CPI kind of based on CPI like in the old days?

Yeah, I don't see the CPI as much which, especially in the last couple years with inflation. But typically most of these will have rental increases already pre locked in where you know, they're increasing maybe 2% annually or 10 every five years is, is typically what we're seeing.

Okay, okay, what am I missing? What's another good juicy question?

You know, people always ask like, how do you, how do you find these? And you know, and again I, I said like, you don't, you don't see the sign. It's starting to build relationships. If it's not build relationships to find the property, it's build relationships with, you know, you know, people like you and me that are going out and have, have those ones already. And so then it's, it's learning about those deals as they come available and those opportunities to invest in them.

Yeah, yeah, I think that's great. And so your fund is a 506C, is it?

Yes, it is.

So that's why we're able to talk about it. You want to give a few more details before we wrap it up?

Yeah. If anyone's investing in learning more about this, they can learn more@fastfoodlandlord.com and again, it's more about the fund and how to invest in something like this, but also just education of, you know, learning more about triple net leases in this whole world of real estate funds and syndications.

Right. And if they want to reach you, how do they reach you?

Again, it can reach me. Basically any of the social media handles are at fastfoodlandlord or fastfoodlandlord.com we'll have links to everything as well.

Okay, okay, well great. Well, thank you so much for coming on. I think there's going to be a lot of talk about what triple net can do for people, especially when you realize how much safer it can be when, when, well, syndications in general, I, I am a huge believer in spreading risk and diversification. And since now you can get into commercial property at such a smaller amount than what we ever dreamed of in the past. It's huge. But, but, you know, everybody's been piling into certain asset classes, the self storage and the multifamily. I think triple nets on the rise. To, to be honest, I, I love it. I, I if you got the right people in the right place.

Yeah.

And the right plan. And that's just it. You find the people you want to do business with. And so Tom's out there. He's done it for many years and part of our mastermind group and very helpful. I, I appreciate you coming on, Tom.

Awesome. Thanks, Jenny. Appreciate you.

Take care.