Step 1: Find the Right Property Type

Welcome. This is the Insider's Edge to Real Estate Investing with James Nelson, the principal and head of Avis and Young's Tri State Investment Sales Group. In this program, you'll learn game changing strategies to outperform the market. James will teach you how to source, execute and capitalize on the best real estate opportunities in New York and around the world. Now here's your host.

Welcome to episode number 116 of the Insider's Edge to Real Estate Investing. This is your host, James Nelson. Thank you as always for joining. Thank you for telling your friends and spreading the word that, yes, we have renamed the show, we are no longer Real Estate Investing Live from New York. But we're still sharing all the incredible things to make you the most successful, successful investor possible. So it's been two shows since we made the change to coincide with the book that I'm working on with my writing partner, Rachel Hartman, who will be joining us shortly. And the initial show that we did together was actually about my story. So you've heard over a hundred interviews that I've done with some of the legends in the business. But now you're going to hear my story. Last episode was one why real estate? The advantages of investing in real estate, why you can gain that inside edge that I don't think is available in other asset classes or alternative investments. So I think that's a great show for you to listen and a great preface to these 10 steps that we're now going to dive into. So step one for today before you jump in is to determine what to buy. Now this might sound obvious to you, but there's a lot that goes into this because besides the type of property, certainly the location, the risk profile, but also the management intensity. So how much time do you have to devote to this? Are you going to be an active investor? Are you going to be passive? So we're going to talk about a lot of great things today. For location, I always like starting in the neighborhoods where you live or work that you already know. You certainly have some history. You probably have a sense of what might work well in your area. And then also think about your own personal experience. Again, do you have experience in a certain asset class? Maybe you're a retailer, maybe you're an architect. So let's draw on those strengths we're going to talk about with Rachel, all the pros and cons of the different asset classes and how to get things started. So I'm really excited to start rolling this out. If you have not already, please Also check out jamesnelson.com that's where you can find the accompanying video series. Again, if you want a good primer to what we're going to be talking about and ultimately will culminate in the book, which is going to be out early next year. So a ton of exciting things to come out. We're going to have a brief word from our sponsor and then we're going to get into that discussion about what to buy. Thank you.

A different approach to putting our clients first Avis and Young's Tri State Investment Sales Group sells multifamily office retail, development and and specialty sales throughout the New York metro area. As experienced thought leaders in our industry, our 35 member group is available to help you make informed investment decisions by advising you on your current holdings or identifying new opportunities in the marketplace. Our one unified team is built on an industry unique platform which promotes unparalleled collaboration and teamwork. We share core values of hard work, integrity and expertise. We we put our clients first providing tailor made strategies to achieve superior results. Please Visit us at aytristateinvestmentsales.com and follow us on Twitter LinkedIn and Instagram amesnelsonnyc to learn more. Rachel, really thrilled to be working with you on this exciting project. You, you've got such an incredible background. I know you have a degree in business and you've written for the likes of U.S. news, Forbes, as well as a lot of the Fortune 500 companies. I know you've worked with Wells Fargo, Costco, Yahoo Finance and you've written on real estate as well. So I'm really excited to be collaborating with you on this book.

Thanks James. I'm so happy as well. For me it's just a thrill. I personally feel like every time we connect it's a chance to open up the treasure chest a little bit because you're just, just filled with knowledge. So I walk away with all this valuable information. I'm super excited that we can share it with others as well.

Perfect. All right, so. Well, let's get right into it. I know that the first step in real estate investing is to figure out what you're going to buy. So what would you Rachel, where should we kick things off?

Yeah, I think that first step to me is such a big one. You know, I see that and I kind of think to taking the plunge. You know, it's a big deal. We can talk all day about real estate investing, I can read all that I want. But if I'm a first time investor and I never actually buy something or make that investment. You know, I haven't entered the arena. So there's all sorts of issues and criteria, factors that you need to think through before you take that plunge. And I think for me, and maybe it's common for others, too, you know, when you start to think about making a purchase, there's two things that can happen. You know, one, I can feel incredibly overwhelmed. You know, all I have to do is step outside my door. And there's property types everywhere I live in. I live outside of Miami, by the way, so I'm in an urban area. But if you're in an urban area, if you're flying over an urban area, wherever you are, you can see there's so many different types of properties available. And, you know, are any two even the same? So that's one factor. But I think another big risk is also just being unaware, you know, so maybe I see, in fact, right now, just four blocks from my house, there's an apartment building under construction. You know, should I go there and look at it? And if I do and think it's great, have I thought about what other types are out there? You know, I haven't actually researched everything, so I'm wondering if you could weigh in and help spell that out a little bit for us. You know, when we say property types or asset classes, what are the main ones we should be thinking about?

Rachel, that's really great. And I love how you're kicking this off because you're immediately relating to this, your own personal experience. And yes, on one hand, you're looking in your neighborhood and you're seeing all different types of properties, but you already have a huge advantage because you know the area. You certainly know it a lot better than I do. And so you actually intuitively know what is actually needed in your neighborhood. Right. So do you have friends who are looking to move to the neighborhood, but there's not enough apartments available? Do you think that downtown needs another cafe? If there's not enough retail, Right. Is there. Are your friends interested in possibly having some workspace that's closer to home than having to go into Miami? So for our listeners, sometimes starting off in your own neighborhood, you have a much better sense of what's needed there, and I think that sometimes can help inform your decisions. But that being said, you do have to have an understanding of what are the different types of real estate assets and what are the better assets. If you're just starting out, if you've been in the business for a while, what are some of the asset classes where you can utilize your experience and skillset to profit. So, you know, simply put, you know, there's really four major asset classes that, that we talk about. One is multifamily. So these are apartment buildings. They could range. When we talk about commercial real estate investing, typically we're talking about five plus units. So if you buy a four unit and under, by the way, that's the way that a lot of real estate investors get started is they say, you know, I'd like to live in one of the apartments and collect income from the others. That's a great way to kind of learn what it's like to run a building to work with tenants. You also have a place to live. There's certainly benefits of homeownership as well. But once you go over five plus units, then we're talking about a commercial property. Now, you know, there's many more units you have to think about. You know, how are you going to professionally manage this? There's also considerations when you're going to the bank and financing it. So if you're going to go buy a one to four family, you know, you can still qualify and get a home loan, which by the way certainly has some advantages. Once you go to five units plus, that's, that's a commercial loan. It's a whole different process. So multifamily is by far the largest asset class across the country. It accounts for the majority of the dollar, over half the dollar volume out there. The next asset class, which used to be a close second, is office. So office buildings certainly account for a lot of the dollar volume, certainly in the large cities. But to run office is really for someone who has the wherewithal, has a strong partner, has the ability to actively manage and also run a property of that size. The challenge with office is it is very capitally intensive to get into. So not only if you're buying an office building, you may have to go in and do substantial renovations. But even if you position the building to rent it out for office, you're then going to need to secure tenants. And in order to do that, there's a lot of allowances, tenant improvements, commissions that will have to pay to get a building occupied. So, you know, typically office is for someone who's a more sophisticated investor who has deeper pockets, has a strong capital partner and can take a longer view because sometimes it can take several years before you see any income from office. The next asset class that I would cover is retail. And so retail could be your mom and pop dry cleaner down the street. It could be that restaurant, that cafe. And it also includes a lot of the tenants, the national tenants, we call them credit tenants. And in many of those cases, those tenants, when you see that CVS or Walgreens in your neighborhood, it's not the parent company generally who usually owns that. It's, it's usually an investor who's come in, they've made an investment, the company might have originally bought that property and then they lease it back to themselves. But they think most companies find that it's a better investment for them if they continue to use their working capital to continue to acquire new sites, build up more stores and then let someone else own the real estate. So, you know, but, but retail runs that whole gamut. I'm actually very bullish about retail right now because it's taken such a hit. Certainly first because of E Commerce, which, which closed down a lot of businesses. But now, you know, post Covid, post pandemic, a lot of these businesses have had challenges. Rents are way down. But I think there's a lot of room for that to grow back. And especially for these businesses where you can't, you know, but buy those items online or clearly if it's an experience like going out to the coffee shop or the restaurant, that, that's not something where, you know, the Amazon effect is going to take away from that. So again, you've got multifamily, you've got office, you've got retail. Development is the other fourth major bucket. This is definitely something that we only recommend for the most sophisticated investors because the process of getting a project approved out of the ground, overseeing a construction process, the financial structuring of that, it is a very high risk and certainly there's a reward there, but certainly for only the most experienced developers. So, Rachel, it's a long way of saying that my advice to you would be probably to start with the multifamily. Sometimes that can have a retail storefront on the ground floor. We call those mixed use properties. So you'd have retail on the ground floor, apartments above. You know, you could also have some, some straight retail. But I think office would be something to get into once you've built up a portfolio. If you have a partner who you could go into something with and develop is really something that I would steer clear of. The last thing I would say is that there are specialty type asset classes. Industrial is obviously the biggest one now that it's made a huge run. In fact, nationally last year there was more industrial sales dollar wise than office. So it's A huge, huge segment of the market. Now it's really dominated by a lot of the REITs, a lot of the big industrial users, like the Amazons of the world. That could also be a difficult asset class to break into. Although there are opportunities to own these smaller mom and pop type industrial properties. Maybe it's storage, maybe it's for a trucking company. So that's something that we can definitely come back to. Medical is another one, which is really more of a specialty type of office use. Certainly if anything with COVID the need for medical has even gone up. So there's that and there's, there's obviously a lot of specialties in the business, but I think for now that's a great overview of the different types of asset classes to explore.

Yeah, I completely agree. I feel like hearing you walk us through that is sort of clearing the fog. You know, you have all this scene where you have all these options, but you really break that down. And I appreciate those explanations of what you should be considering. Maybe when you're starting out, here's an asset class, but maybe harder to break into. That's a great point. So if I come to you and I say, okay, let's start with what you said, the multifamily unit, but I want to start small, what does that mean? If we say I want to start small, are we saying, you know, are you going to tell me, okay, stay under this amount when you invest, Are you telling me invest only this percentage of all of your assets and your net worth? Talk to me a little bit about that because I think a lot of people think, okay, let's start small because it just naturally seems like I'm taking on less risk. But what does that mean and how does that play out? What do you recommend?

Right, so for commercial real estate investing, I've got to say I would never invest an amount that you would not be prepared to lose. And it's just, and if I have to give a little bit of a disclaimer, and you should be working with an attorney who is a specialist who knows, focuses on real estate and the way they'll structure when you purchase a property. The most common form of ownership is an llc that's a limited liability corporation. It's a pass through entity for tax purposes. But the point is that you're setting up kind of a barrier there where your investment is limited to the extent that you've actually put in. So you know, now from there the only way that you can really go afoul is if you, when you're borrowing if you sign a loan personally with recourse. Okay? So the idea is if you're buying commercial property, you have the money to deploy, you're good with the amount that you've set forth. Of course the goal is not to lose it. But God forbid, if something happens, it's not going to change your life. But then the key is when you're borrowing, you're signing on for non recourse debt. That's really, really important because that would just be such an awful situation. If you put your money in, something goes wrong with the project and then the bank forecloses and then you're personally on the hook. And so we're really looking to protect our listeners so they don't make that mistake. So look, it really depends on, for your first investment kind of where you are in life and what you're looking to accomplish. And you know, if you're, a lot of our listeners are college students, they're probably out there. You know, maybe they're looking to get into the business. You know, maybe they've had some, some, some jobs on the side, maybe they've saved up a little bit. Maybe they have some family members who are willing to back them. You know, instead of, you know, I have a lot of friends and people I work with who've been renting for 10, 15, 20 years. Think about all those rental dollars that instead of investing them in the property, you're getting no benefit from. And also you have no stability because as the tenant, you know, the landlord can raise the rent whenever they like. I'm speaking to a friend right now who's just relocated down to Florida and he said they would only give him a one year lease and they're already looking to increase his rent by $500 next, next year per month. And there's really no security on that because you know, he's really at the mercy of the landlord. So I think part of this is also kind of taking control, taking ownership of your destiny. So my advice to him is, yeah, go buy that three to four family. Remember, if you're under four units, you can qualify, you know, for financing that that is very desirable. In some cases you can get 90, 95% loan. However, the caveat is when you are going for that personal mortgage that is going to be a guarantee, right? So that there you are going to have to personally guarantee that situation. That's not unlike, I have a mortgage on my home, I have to personally guarantee that again, I have no plans on not paying that. So I'M comfortable, you know, for that when there's that use component. So, you know, I would probably, that might be a good place for someone to start who is renting right now. If you already own your apartment or you own your home and now you're really looking to invest in real estate. I think if, you know, and I would caution you to do this on a loan for the first one, if you're going to go in and buy a 5, 10 unit, if you've never managed a building, if you've never been a landlord, that can be very daunting to jump in even with five or ten apartments especially, I mean, you have a full time job, you're a very accomplished writer. You know, the last thing you need is to be getting calls, you know, well into the night or on the weekends about repairs and issues. And so I, you know, look, we're going to talk later about having the right team. You can have a managing agent, you can have someone who helps you, but I'm a big proponent for your first day deal to have a partner who is actually in the business, okay? So if you have someone who you trust, who you know is already in the business, that is a great way to get into the business, right? And your role is finding the opportunity, right? Because unless if your friend is a very successful real estate investor and they say, you know, hey Rachel, I just want to do you a favor and I want to bring you into my deal and I'm going to share in the promote with you and the profits. They might say, you know, look, I'm the general partner, so I'm the one running this deal, okay? And I'm going to have you come in as a limited partner, okay? And so I'll give you a certain amount of return on your money. But then after I get that certain level of return to you, then I'm going to take a promote, right? And that's really where the profit is. So what I want my list, what our listeners to be, are to become active real estate participants, to become those general partners and receive some of that, that profit. And so, you know, the idea is if you told me, James, I have $100,000 that I'm willing to deploy, right. I feel comfortable getting into this and I have a good friend who's in the real estate business. You know, she owns, you know, 10, 20 units in town. She said she'd be happy to go in with me. Let's go buy another 510 unit building. If you were to bring in 100,000 and she was to bring in another 100,000. So 200,000 between the two of you, and you bring in the opportunity, right? And she has friends, investors who have invested with her before. On her track record, she tells you, look, I can bring in another four or five hundred thousand dollars. Okay? Now what we have is equity, right? So the amount of cash into the deal, let's say, of $700,000, okay? Now, typically, the type of financing you're going to get, conservative financing, is going to be about two thirds of the purchase price, okay? So if we had $700,000 of equity and we tripled that, now all of a sudden you have the purchasing power of close to $2 million, right? So now all of a sudden you're. I don't want to call it little, but your $100,000 contribution gives you a stake in a $2 million deal. And that truly is the benefit of, of investing in commercial real estate is using, they call it opm, other people's money. Okay? So you're not just getting the return on your $100,000. And look, you could go buy a $300,000 property. I don't know how far you would get, right? You could take your 100,000, you go borrow 200,000 from the bank. You know, maybe you get an apartment, small apartment that you could rent out to one tenant. But if you found that partner who could match your equity, bring in other partners as well and then help you get financing based on that Track record, your $100,000 contribution now allows you to get into a $2 million deal. And that's really what I want to talk about in this series, is that this isn't. This is about taking your game to the next level. This isn't just making, you know, buying an apartment or two, Right? But the way to do this again without getting in over your head is it does start with finding that right partner who can help you pull the pieces together and of course, then execute on the investment.

Yeah, yeah. And the guidelines you laid out are so great for reducing risk because I think, you know, once you think take it to the next level, that's so exciting. That also means we need to right away be laying the path so that we're on the up, you know, and this is going to bring that great return that we want. I have to ask, you know, you say bring in the partners. I think that's great. Great point. But also now, in this post pandemic world, we're seeing all sorts of shifts. Are we saying, as I'm Starting out, my partner should be local. We now, through the pandemic, we've created connections all over the place. And so you and I are talking right now. You're in New York, I'm in Miami. And so should I be making that investment down my street with my neighbor or assuming my neighbor is a great partner or. Not necessarily. What do you say for those starting out? Is local still best or not necessarily?

Rachel, It's a great question. I. I still believe real estate is very much a local game, because your advantage, again, is knowing your neighborhood. You're going to know. I mean, I could look at your market and, yes, I've been doing this for over 20 years, and I could try to figure out what looks like a good investment, but I don't know the drivers in your. In your neighborhood. I don't know what the rental market is like, the sale market. I don't know what the demand is, whether it's for retail or for office. So I really do think that certainly for your first investment, it is a great idea to stay in your own backyard or at least a neighborhood or a city that you're familiar with once you've built up an organization and you can start investing across the country. And look, if your only goal is, James, I want to get some exposure to real estate, and I appreciate your saying, hey, why don't you help bring in the deal and be a general partner and share in this promote and profits, but I really just want some exposure. I'm okay to be a limited partner. That's a different story if you want to. And I invest with trusted partners all over the country. Right. And my rule is, first and foremost, I invest with the partner first before I invest in the deal. So I have some partners who I've invested with over a dozen times, probably closer to 20 times. And now if they tell me, james, this deal is good, it doesn't matter if it's in Atlanta or Nashville. I know if they've scouted it out, I know what they're doing, and I'm willing to do that. But again, that's as a limited partner. They're promoting me as they should. They're the ones doing the work. And it's been, you know, a great relationship. However, for my own personal investments, where I am the general partner and I am the one actually promoting limited partners out there, I need to bring expertise and value to the table. And my expertise is here in the New York City market. And because, you know, I know the market here, I can outperform other Investors who are outside, who might not understand what the drivers are or the local nuances. There's a lot, and I know we're going to catch up on this later in this series about really knowing the areas and understand zoning and all the intricacies of investing, but that's part of having that local expertise. So. And then finally, you know, I've got a lot of clients who just say, look, if I can't walk to the property, you know, I don't want to invest in it. I want to be able to see it. You know, certainly again, you can have a third party manager who keeps tabs on the property. But I think there's no substitute for going to the property once a week, seeing what's actually going on. If you're doing a renovation project, is the contractor actually doing the right thing? Are they on the job? You know, this is a part of the business where you just can't hand this off to a third party. Right. Your role is the owner, the general partner. In the institutional world, it's the asset manager. You're the one actually overseeing this. And yes, you can have those professionals doing the work for you, but you're there in person to make sure it's happening. So again, a long way of answering your question that I do think you should stick with something local, certainly for your first investment.

Yeah, I think just staying local, you immediately get that inside knowledge, like you said, automatically you're an expert, which is one way to level up the game right there. You're bringing something great to the table that others just don't know, even if they know a lot about real estate, as in general in an industry. So you mentioned, you know, that management aspect. I think that's another key consideration to take into account that management intensity. You know, so if I'm getting a multifamily unit, talk me through how that process might work. You know, how am I going to manage it or how am I going to make sure it is managed? Like you said, obviously we're not saying that now all of a sudden we're becoming a full time management manager. And yet that can't be overlooked because it's an essential part of the, of the business.

Right. So for your first investment, I would absolutely encourage you to hire that third party managing agent. And their job simply is to help collect the rents, they help administer the leases and they help pay the expenses and then give you proper reporting. Okay. Now keep in mind, again, their job is really, you know, to, to, to make sure that it's run in an orderly fashion to oversee the upkeep of the property so that they may coordinate a superintendent to come clean the building, make sure repairs are handled. If there's tenant complaints, you know, that being said, their job is just to keep the building operational. Right. If, if you want to improve the property, if you know your idea and that, that's really the great part of real estate is to improve the performance. That's really incumbent on you to take a look at this situation and say, you know what, I think that although this apartment is laid out as a one bedroom, I really think this would perform a lot better as a two bedroom. So I'm going to bring in a general contractor and I'm going to, you know, make sure I'm going to create a second bedroom. I'm going to bring on a leasing broker who's going to maximize the rents here. The managing agent can of course will collect those rents, but again, you're really the quarterback to make sure that the property is running at, you know, its full potential. I think also the expenses. Look, these managing agents, they're busy, they're well intentioned. Many of them have relationships where, you know, if they're used to getting their, you know, their fuel, whether oil or gas, from a certain provider or you know, an insurance policy, again, that's, that might be who they do business with. But you might look at this and you might say, look, I think we need to shop for other options. So it's really, again, that is the job of, call it the asset manager who's watching over what's happening to make sure that the property is running to its full potential.

Awesome. Yeah, I think there's a certain amount of excitement there too. That opportunity to improve a place. You know, how can we go in, how can we as a team make it better and then in the end essentially make it a win win for everyone involved. I have to ask, you know, before when you were talking about offices as an asset class, I've seen headlines coming out about those office space. You know, I just think it's a reality of our world. We watched the pandemic go through, everyone flood office buildings. Now we have people working from home and hesitant to go back to the office. And I'm just starting to think about down the line, are we going to see more changes? I'm not necessarily asking if that property type is going to completely fall away, but, but what is your take on it? You, you've watched this all carry through. You have years and years of experience in this. What's going to happen with offices, or what should we be thinking about with that space for the future, with this new work life trend?

Yeah, Rachel, it's, it's a great question. And I think it also creates an opportunity because the world has changed, some would say for the better, with some of the flexibility that now this virtual option affords. So the consensus here, and obviously this varies market by market, is that hybrid is really going to be the new way. So it looks like a lot of the employers will end up giving the flexibility to their employees to come in, whether it's two, three times a week. Some have obviously gone completely virtual. And it does depend on the kind of work. For the work that I do, I need to have the team here in person. We're out showing properties. And so that's something that we couldn't do virtually. But it's going to be a new work environment, I think, for offices. The landlords I speak to today, instead of trying to, you know, fight the trend here, it's okay, well, how can we encourage workers to come back to the office? So instead of having, you know, all the, you know, the cubicles, maybe it's having more open, collaborative space, more amenities, giving people a reason why they would want to come back to the office. So I think it's very, very important that you stay ahead of these trends to kind of understand what do the tenants want? And that can be a very difficult question to answer right now because this is still evolving. And that's another reason why, again, if you're just getting into this kind of waiting on office might be a good idea because we just don't know how this is going to play out. I mean, we might all be wrong and who knows, we might find that this whole virtual experiment doesn't work that well and that people need to be back in the office. But for right now, it does seem like if people are not going to be using office space with the same intensity, there's going to be a less of a demand for physical office space. Right. And B, there's going to be a flight to quality, where if people are going to want to come into the office, it's going to be for good reason. They're not going to want to go back to, you know, kind of the older office format. And maybe those offices are opportunities to convert and maybe they become residential or maybe some of them, you know, become industrial or medical where there is more demand. I think the other thing is looking on the residential equation is, and you said it with a lot of people are working from home. You know, I could see certainly an increase in demand for live work apartments. In fact, I was speaking to a developer on this last week where, you know, with all this trend where people are now working from home, why are we not seeing new developments that are offered to accommodate that live work use? So I think that could be an opportunity.

Yeah, definitely. I agree, that's super exciting one. I think like you said, as first timers will maybe stand back, watch what others are doing first and avoid that risk. But I have to ask another question actually related to risks we want to avoid or at the very least understand. I write so much about finances and investments and across the board, whether you're talking stocks, funds, real estate, anything, you always see that catchphrase of risk tolerance, whether it's the financial professional or a different professional asking the investor, well, what is your risk tolerance? Which can vary very much. You have someone graduating from college who's single, Their risk tolerance might be very different than someone putting kids through college, someone who's three years away from retirement. Talk to me a little bit about how you can evaluate your risk tolerance when you're investing in real estate. I know you gave some good guidelines on reducing that risk, but what about how to evaluate what's my risk tolerance? What am I comfortable with?

It's a great question. And that also refers to your asset class selection. Right. And there's another reason why most first time investors gravitate towards multifamily. Because if you go and buy that 10 unit apartment building and one of your tenants vacates or stops paying, which is more of an issue if you actually have to go in and, and try to evict them still, you're only giving up 10% of your rent roll in that example. Whereas if you have a retail store, okay, a single tenant, and that tenant goes out, you lose your entire rent roll. So I think sometimes by positioning what type of property you buy, that can help mitigate. But there are trade offs. There's a reason why retail traditionally pays a higher yield than say residential. So for example, most multifamily investments trade somewhere into the 3 to 4% capitalization rate, okay. That the capitalization rate is the rate of return that the property generates before debt service is factored in. Right? So if I buy a property for $1 million and the net operating income, that's the bottom line. After the tenant pays the rent and we take out expenses, $100,000, that $100,000 divided by a million dollars, I'd get a 10% return, fortunately, not seeing a lot of those out there. But just for giving you simple math, but so, you know, if those residential properties are delivering 3 to 4% returns at the property level, you know, retail might be 6 or 7%, right? So you're going to get a higher yield going into it, which might seem a lot more attractive. And you might say, well, James, you know, I've got one tenant. I don't have to manage these 10 units. I'm getting a 6 or 7% return. I'm getting double what I'm getting for residential. And look, if it works out and the tenant keeps paying, you know, that's a great proposition. However, if that tenant leaves, you might, you know, have that retail tenant leaves, you might have some real issues. So I think again, that kind of goes back to, you know, what you feel comfortable with. The other thing is, just because you have that one tenant doesn't mean that it's always a bad thing. You might underwrite the property and you might say, well, listen, I know this cafe is paying me $5,000 a month, but I know from speaking to other restaurateurs in the area that the store is actually, the space is actually worth 10,000amonth. That's actually happening with an investment that I'm personally involved in. Right now we have a tenant where, you know this, the area has gotten a lot better and now the retail is worth double. So sometimes it can be a good thing. It doesn't always have to be a bad thing when that tenant leaves. But again, you need to do your research going into this to understand, you know, what is the underlying value. You know, again, so if that tenant leaves, can I replace them? And you have to allow for reserves because when a tenant leaves, I mean, if they give you the keys, you know, at least you don't have to, you know, the pay the legal cost to evict them. But sometimes if these tenants end up holding over, then yes, you have to go through that legal cost, that time and effort to get them out. Then you have to go and market the space. Then once the tenant takes the space over, I'm talking commercial here, on the retail side, you're going to have to give that tenant free rent to actually, in many cases they're going to do work to the space, but in return they're going to want free rent to, to compensate them for it. So, you know, a retail tenant goes out, it might be a year before you find you start generating rent for that space again. So you need to factor that into your proforma. Residential. Again, a lot easier because, you know, a tenant turns over, vacates, usually it's, it's very. If you're in the right market, it can be easy to find that that tenant. The one challenge is you really need to understand the environment that you're in from a landlord tenant perspective. Okay. If you go to evict a tenant in Miami, I would almost guarantee you that that process is going to be a lot faster than in New York. In New York, we would consider this a much more pro tenant environment where, you know, sometimes it can take months and months and months to get through that landlord tenant proceedings. So this is a very long way of answering that. There's, there's a lot of questions and considerations that go in to your risk tolerance when you're looking to make an investment. The type of property is, you know, the easiest way to mitigate risk. But there's a lot of other factors as well that go into determining, determining how much risk risk that you should take on and in exchange for what type of return you should be looking for.

Okay, excellent. No, that helps a lot. And I think, you know, looking at it as a process can be helpful too because like you said, it might seem more exciting to look at some of these ones that offer bigger returns but come with bigger risk. But you know, we're just talking about starting out so buying that first property, you know, and then things go well, you know, you can buy others down the line. So we're not saying that you need to stay necessarily in one place. We're just saying how do you get your foot into the business and such? So I think one other thing I wanted to touch on was, you know, it's such a big decision to invest, can follow all these guidelines. What about, you know, the personal benefits that we should be thinking about when it comes to investing? Talk me through how to keep that in mind, how to evaluate that and how that can play out.

So, you know, I think one of the number one reasons to invest in real estate is because you can have that inside edge to real estate investing. Right. When I invest in the stock market, I always figure that I'm the last person to know, right. And I have a great wealth advisor and he gives me incredible advice. But again, I'm one person and there's huge institutions that spend tens of millions of dollars doing research. And it's really difficult, especially when information is always out there 24, 7, to get that inside edge. In fact, if you go too far in stocks, you know, there's what's known as, you know, inside trading, where, you know, in real estate you're actually, I mean you have that benefit by getting, you know, learning about the situation, about the tenant and how they're doing. And so I think that one of the main reasons to get into real estate is to have that inside track and to really, you know, see those opportunities. I mean, I think also, as I mentioned before, the ability to not just get a return on your money, but also to benefit from if you're bringing on outside investors receiving a, promote a return above and beyond, a certain return that you're going to be paying out to your limited partners. And then also, you know, I believe that real estate should be viewed as a long term gain. And if you put great long term debt on a property, remember I said in most cases you're going to be financing about 2/3 of the acquisition. So if you buy a property for $1 million and you're financing 2/3 of that, right. Ten years later, if the property doubles in value, okay, you're still paying that bank off, you know, the right now clearly there's, there's been interest along the way, but you're paying the bank off for that original, you know, $667,000 loan in that example. But you're not paying them on the profit. Right. That extra million dollars of profit is, is really to your benefit. Right. And you look at that return based on your down payment, your equity in the deal. That's what really makes the real estate investing business exciting is that ability to benefit from that leverage. There's also some great tax advantages. Certainly this is something where you want to speak to your accountant about and get advice. But you know, real estate is a very tax efficient asset class. There's the term depreciation which over time allows, the IRS considers that a property loses value on paper over a term and you take that as a loss against your income that you're receiving. And so that helps shelter some of that. Also when you go to sell property, there's a provision called a 1031 tax free exchange where you can take your gain and as long as you invest, reinvest the same amount along with the same debt that you took on, that you can actually defer the GAAP capital gains tax due. So it's a great business because you can continue to grow your holdings. If you sell a property, you can go buy a bigger property, take those profits and you can do it in a tax efficient manner.

Yeah, I think one of the things I like the most about that is the opportunity to have that all close to home. It's so personal. You can be the expert expert, you can be local, you can have hands on. And there's so many other investments like you mentioned. Stock market is an example where just because of the way it's set up, you're at least several or many degrees away from the transactions going on. And so with that just comes more opaqueness or a sense of not knowing exactly what's going on. In fact, like you said, in most cases you legally can't. It's not set up so that it operates like that. So that's great. What about people looking for those up and coming opportunities? Before we talked, I was looking at some of these articles that were talking about the changing landscape. So we're seeing property types like data centers that we didn't have before, life science places, things that are coming up maybe because of the pandemic, just other trends in different businesses. What do you say to people who ask you about those up and coming opportunities? Are those places where you tend to invest because you can have great gains? Not necessarily for first timers. Is that more like the office space we were talking about that is changing? So hold back a little bit. What do you say for these new property types coming up?

Yeah, again, I really think those are specialized businesses where you have to have that expertise, you have to have that, that network, that experience. So I think for our listeners, unless if you had a trusted partner where you did want to make an investment as a limited partner, that's really something that I think would not make a lot of sense for a first investment. I mean especially, you know, you talk about whether it's data centers or life sciences, I mean the build out costs for those are exceptional and it's so capital intensive. So again, I think you want to start off with an asset where you buy a property that need some improvement. But again, the cost of your improvements are not going to end up 2, 3, 10 times what you paid for the property. Right. Because then you're not so much in the real estate business, you're really more in the operating business. And understanding it almost falls into that kind of development where there's just so many variables that you'd have to look out for.

Yeah, exactly. And I think it's important and valuable to know that because then we know, steer clear of this, go here, set your plan and move forward. I think I wanted to ask, as we draw this to a close, do you have an example that shows some of these things we've Just talked about, so what to buy a deal, or it could be something from your own experience that really played out well. So the opportunity was there, it was local, it had a great ending. I'd love to hear that so that we can kind of picture how that all works.

Sure, yeah. So it still remains my best personal investment of all time because I still have a stake in it and it's still bearing fruit. But this was a year or two into the business for me as a broker, and my job was to call up and down the blocks and speak to owners. And I was introduced to a gentleman by the name of Matt Blesso from Blesso Properties, still a good friend. And we went on to do a lot of business together. But he had told me that he had secured a contract to buy a property for this four story building down in Greenwich Village. It had a restaurant in, and I believe it was four apartments above. And so Matt was a very entrepreneurial guy, still is. And he said, and as a broker, I said, well, you know, Matt, it sounds like. And I was looking at the comparable sales, right. So I knew what other similar properties had sold for. And you know, I knew. And I think I might get the numbers slightly off. But he was in contract to buy it for about a million seven or a million eight. And I looked at this, I said, matt, I think this Property is worth 2 and a half million dollars. And again, this is what I love about real estate. There's no rule that you have to sell your property at the highest price. He had bought this off market. He wasn't working, you know, the seller wasn't working with the broker. Clearly the highest price was not generated here. So he said, all right, well, if you think you can get two and a half million dollars, I'll give you a short window. Why don't you go and run around with this and see if you can find a buyer to step into my shoes and close. That's cool. Called a contract flip. So he wasn't even going to close. He was actually going to sell the rights to the contract. So, you know, after a couple of weeks, I had offers 2, 4, 2, 5. And it was very clear that he had gotten an incredible deal on the property. So I said, okay, Matt, great news. We got two, five. Are you ready to, you know, to flip this? He says, james, I really appreciate your efforts, but this deal is just too good to, to pass up. I've got a plan for this. I want to convert this. You know, I think upstairs has great potential. I think we could Actually sell these apartments off. We could condo this. Well, he was saying I at the time, he said, I think I could do this. And so I said, well Matt, that sounds like a pretty great plan. And at this point I had a couple commissions under my belt. And I said, and I had never invested with someone else before, but I liked Matt and I trusted him. And I said, well, Matt, are you taking on investors for this? He says, james, as a matter of fact, I am. And so he was looking at the time to raise $600,000. I guess he was going to put in a couple hundred thousand dollars himself, finance the rest for this million seven purchase. So I went in for $150,000. And so we closed on it. And not only did he end up selling off the apartments for well, well beyond the purchase price, I think he sold the condos upstairs in aggregate for over $4 million. And clearly there was money that had to be spent to renovate these. But we had received all our money back times two. So the two times equity multiple and we still had a stake in the restaurant. So we were going to separate off the restaurant. So we were into that for no money at all. We held onto it for the cash flow. Just getting, you know, again, we were playing with the house's money at this point. And so then an investor came along and said, hey, I'd like to buy your restaurant. And so we said, all right, well that sounds great. But at this point, all of our basis, right, all of our profits were kind of locked into this ground floor. So he said, all right, we're going to sell this, we're going to have to go exchange this and buy something else. So we did that and we bought a mixed use building, entire building in Brooklyn for the price of just the restaurant. Then a couple years later, a developer approached us to buy the air rights from that Brooklyn property. We still maintain the building. So you know, and as a result our we've been receiving distributions back cash flow. It truly is the gift that keeps giving. So look, part of its timing, we obviously bought this at a great time, but it was also buying the right situation. This was a property that was not properly marketed. We bought it well below market. Matt could have easily made a quick profit by turning around and reselling the contract for a half a million dollars or so. But he received many, many more times return by actually going through and doing the improvements itself. So real estate is an incredibly fun way to invest and there's a lot of different avenues that you can go down and. But again, you got to buy in at the right price. You've got to have the right partner and the right plan, which we certainly did in this case. So really grateful to have been a part of that and to share that story with our listeners.

Yeah. Awesome. And congratulations, by the way.

Thank you.

Love, love that story and example and it just hits home, you know, on so many aspects that we talked about buying that property type, getting in with the right person and you know, just setting up your plan to continue. It's a starting point. You have to start somewhere. But honestly, the results and the gains can be probably more than you ever imagined when you first set out.

Wonderful. Well, Rachel, this was an awesome conversation. I'm so glad to be working on this, this project with you and we do promise to our listeners that we are going to have a title and we've got some exciting news. But we're, we're still working on things with, with the publisher. But this, this book is all about what this podcast has been about for the last two years. It's making you the best possible investor. We want you to have the inside edge to real estate investing. So we know over this 10 part series you're going to learn a ton. So as always, if you have not already, please connect with me at James Nelson nyc whether you want to link in with me. If you want to send your questions, we're happy to address them. Also check out james nelson.com I built this site for you to be a hub for you for information. That's where you can find this podcast. You can also find the video series that I alluded to. So Rachel, this was a lot of fun. Until next week. We look forward to being in touch soon.

Thanks so much. Can't wait. Appreciate it, James.

All right, take care everybody.

Thank you for listening to the Insider's Edge to Real Estate Investing. We appreciate your subscribing and sharing with your friends. If you haven't already, please connect with James at jamesnelsonnyc on LinkedIn, Instagram and Twitter. Please also visit jamesnelson.com where you can find the show notes, notes and other episodes along with an exclusive video series and other helpful resources so you can gain the insider's edge to Real estate investing. Until next week.