What You Need To Know About Commercial Real Estate Lease Option

Hey, it's Mark Podolski, the land geek with your favorite niche real estate website, www.thelandgeek.com and today's guest. We're going to talk about something that we haven't really talked about in a long time, which is commercial real estate options, I believe. Yeah, commercial real estate lease options. Scott Todd, you ever talked about commercial lease options before?

I don't think that we've talked about that, but I'm interested.

I'm interested. So we're going to learn a lot about our guests, but I'd be remiss if I didn't really properly introduce Scott Todd. You know you love him. Scott todd.net landmodo.com you're not automating your Craigslist and your Facebook postings. Posting domination.com thelandgeek get smarter. Learn anything about anything. Investor ninjas.com Today's podcast is sponsored by none other than flight school. Learn how 16 weeks can literally transform your life. Go up that mountain of land vesting with yours truly, Scott Todd, your land geek Sherpa. Quickly, safely, efficiently start making passive income without renters, without rehabs, without renovations, without rodents. Learn more go to landgeek.com forward/training. Our guest today is Peter Conti. He is the founder of Real Estate 101 which provides step by step guidance for commercial real estate investors. He's the co author of Commercial Real Estate Investing for Dummies and currently lives in beautiful Chesapeake Bay in Annapolis, Maryland. Peter started out as an auto mechanic but bought his first commercial property 30 years ago and has never looked back. He's partnered with thousands of people all across the world to them to make the transition to becoming successful real estate investors. His focus now is on commercial lease options which involves acquiring commercial property using owner carry and commercial master lease terms combined with an assignment contract to create sizable upfront paydays. Peter Conti, welcome.

Hey, thanks for having me on the show.

So Peter, let's just rewind the tape. Tell us what it was like when you were an auto mechanic and you woke up one day. You thought, hey, commercial real estate.

Oh my goodness. I was scared to death. I came from a family of seven kids and my parents basically got us together and said, we expect you all to go to college but we obviously can't help you, so good luck. I kind of didn't, didn't have anyone guiding me. I didn't even realize there were grants and things available. So I ended up not going to college. I was working as an auto mechanic and I realized that real estate was kind of my one, one way out to have some more opportunities in life. And I was really afraid I was going to blow it.

So when did you wake up to commercial real estate?

I got involved in commercial right from the very beginning. One of the things that I liked about commercial properties is that I could determine the value using some simple formulas rather than houses. To me at that point in time was confusing because it seemed like the value was based on the emotion of, you know, what someone was willing to pay for a particular property recently. And commercial just made a lot more sense to me.

So in the commercial real estate realm, like when I think commercial real estate, I automatically think of a high rise building. But when you think of commercial real estate, what do you think of?

Well, it's everything from small, small apartment buildings. You know, a lot of my students start out going after just the 5 to 50 unit part of the market that a lot of the bigger investors and real estate investment trusts obviously don't bother with. Smaller areas like that includes mixed use shopping centers, self storage, mobile home parks, all of that. So the interesting thing right now is with what's going on with the economy and the whole coronavirus thing, it's just really upset everything. So who knows what's going to happen with commercial real estate and residential real estate for that matter. Which is why I feel this is one of the very best times I've seen in my entire 30 years to go out and acquire properties.

Yeah, I can only imagine. Scott Todd, what are your thoughts?

You know, I look at commercial real estate, I like the model, right? Like, I like that little niche that you're in there. And you know, like I've looked at this multiple times. I honestly really have. Right. Like I get shiny object syndrome. And I go out there and I start driving, I start looking at these things and I start thinking. And then, you know, like the thing that I don't like is I don't like the concept of going to the bank and asking for a mortgage on this property. Like, I'll be honest with you, a couple of years ago I had shiny object syndrome and a multifamily deal went out there. We put it under contract. They go through the credit check, you know, like you had to go to multiple banks. Literally, next thing I know, my, my credit scores destroyed, my partner's was destroyed. It was a mess, right? Like, all because of all the credit checks that they had to go through. And it was a pain, it sucked. And I ran back to land where I have no banks. So like is that the biggest downside behind commercial real estate is the financing component of.

Certainly is if you do it conventionally. That's why I don't deal with banks. You know, I've acquired. And one of the things I teach my students to do is go out and acquire properties without having to go out and qualify for a mortgage and without having to make big down payments, which, you know, if you think about the current market, why would anyone want to, you know, put it. Put a down payment or get a. Try and get a loan in this environment to acquire any type of property? I'm real big on structuring transactions where you've got all the upside with little to none of the downside.

Okay, that's really interesting. Let's get into that a little bit more in detail. So I, Scott, and I own a mobile home park. And, you know, let's say that our cap is 10%, so our net operating income is $100,000, and we want a million dollars for it. So you would say to us, okay, yeah, well, we'll buy it for a million dollars. But Mark and Scott, you need to own or finance it. And Scott says to me, well, Mark, I want a million bucks. I don't want to finance this thing. What happens then? How do you convince Scott to not take the million bucks and go through it and take a little bit of the risk and carry the paper?

I don't. I don't. That's a great question. And that's a common misconception, I think, that a lot of people have is that somehow we've got some secret ninja negotiating tactics or something to talk someone into doing a creative transaction or carrying the financing when that's not the best option for them. So just like someone who's buying houses, if they're going to go out and buy a house, they're not going to get a great deal on. A house that's all completely fixed up, was listed two weeks ago, and everything's in perfect condition, and the owner has no motivation to do anything right away. The deals we put together tend to be done with people who are motivated or they're in a situation or a problem. They've maybe inherited the property they never really wanted to be or intended to be a landlord. They maybe live far away from the property, the property has degraded somewhat, maybe the vacancy rate is up. We like properties where they're owned by people that we refer to as lazy landlords. People who've just owned it long enough that they just really don't care. They decided to keep their rents low so that their tenants never move to decrease the hassle factor for them or the property management company. And that gives us a nice upside when we control that property using something like a commercial master lease. But to answer your question, you know, big picture, you basically need somebody who's got a problem or a situation that you can come in and be the hero and solve their situation using some creative methods rather than talking. Talking someone into doing the deal. A good example of that is we tend not to work with commercial brokers. We tend to.

I've lost. I can't hear.

Yeah, Mark, I got it. Can you hear me? I heard Peter.

Don't worry.

Yeah, you know, Peter, it's funny because. It's funny that you're saying that, because the one thing that I think of a lot is a lot of times people will ask me when I'm teaching or when I'm out at boot camps or whatever, hey, you know, what about, like, almost that same question, how do I convince somebody to go do something? And your answer is very simple. You don't.

Right?

Like, you cannot force somebody to do anything. You really can't. They have to have a problem, and you have to provide the solution to the problem. And I guess what you're saying, too, is really what it comes down to is talking to enough people and you'll find some portion of the. Some percentage of the people that have a problem that you can fix. Otherwise, just keep. Keep looking for the problem. Is that kind of what you're saying?

Yeah, absolutely. I think there's also an element of having a willingness to reach out and connect with people and. And get them to open up to you, to start sharing, you know, what's really going on. I found that you guys have, I'm sure, have found this as well. Being in real estate, if you ask somebody, you know, what do you want? The answer is always, oh, we want all cash. Right? So, sure. Sometimes it takes a little bit of creating a connection and getting to know someone and find out what's going on, what else they've tried to find out, you know, what. What's really going on. And typically, you know, some of the properties that have problems or owners that have problems, they tend to go together. Right. If an owner has issues, maybe the property hasn't been taken care of or there's deferred maintenance or just hasn't been run like a business, which, as you know, is bad for any type of property. And what we see is, we see a property where they want to get the price that they thought it was worth one day when it was 98% occupied. Now it's 85% occupied and they expect to get that same price. So the basic conversation is, hey, look, I understand you want to get X dollars. From what I can see anyone else looking at this deal is going to look at it the same way I am. Here's the situation. It's whatever the vacancies up, the rents are below what they need to be. There's a whole bunch of deferred maintenance. It needs a new roo. The parking lot is going to need to be repaid within a couple of years. Anyone else is going to look at this thing the same way that I am. So should we talk about some ways to maybe come up with something that would work or probably not. I mean, you're going to end up having this conversation with another buyer later on down the road. Why don't we go ahead and have that conversation right now, today?

I love it. I love it. So, Peter, let's go back to our mobile home park that is worth a million bucks. It's throwing off 100,000 a year in income. But now the situation is different. Scott and I are old and fat and happy. We haven't done anything to the property in five years. Every time Scott goes and visits, he brings a whole thing of Wawa donuts. We just eat them. We don't even look around at the houses anymore. We don't care. So eventually, though, we get that call. We're annoyed. The tenants are complaining, we want to sell. And you come up and you say, hey, look, here's our creative option. Walk me through the lease option aspect of it and how you're going to make money with it.

Well, let's back up a little bit. One of the first things that I'm going to find out is what is it that you're trying to achieve? Because I found that property owners, a lot of times, they, they have this idea of something they want to achieve and they just think they're going to achieve it by doing an outright cash sale of their property.

So we don't want a cash sale. We want. We want the cash flow. We're happy to own a finance.

Sure. Oh, okay. So the conversation I'm going to have with the property owner is I'm going to find out, you know, if you did sell, what would you be doing with that? If someone's telling me, oh, well, we want a 1031 into another deal. That's obviously not a good prospect to be Spending time with. But if you tell me, like many people have over the years, that, well, we're just, you know, I want to retire. I want to have cash flow. I want to not have to worry about stuff anymore. I just want to kind of. I'm at the point in my life when I want to start to take it easy. You know, I had a seller one time tell me, I'm just going to take the money and put it in the bank and I'm going to get 5%. Well, that was, you know, a few years back when you could get 5% in the bank account. And we put a deal together where he carried back almost all the financing at 6% interest. And so we bought that property for 600,000 and then sold it four years later for 900,000. So not a huge deal on a commercial basis. But that maybe gives some of the listeners an idea of what you can put together and how those dynamics go.

No, that's great. But then walk me through the lease option piece of it.

Yeah, the commercial lease option is similar to a lease purchase on a house. If some of our listeners have maybe done one of those or heard about those or at least understand a lease purchase on a house with a commercial property, say an apartment building, it's the same basic concept. What you do is you agree to pay the property owner a set amount each and every month, which is the lease amount. That could be tied into enough to cover the payments. It could be tied into. One of the things we do is we look at the cash flow. For example, your mobile home park has gotten a certain cash flow. If we look at the P and L statements over the past couple of years, if there's a way that I could put a deal together that got you that same average cash flow over the next five to 10 years and you wouldn't have to worry about anything. So the investor comes in, agrees to make a monthly payment. The investor runs the entire project. Everything from fixing up the units, renting them out, evictions, collections, paying the property taxes, everything from A to Z is completely done by the investor. And of course, the investor is collecting the rents out of that. They're making the payment to the owner. And you need to agree on two other things. One is how long of a term you're going to go. And the other thing is what the purchase price is going to be. Obviously, from the investor standpoint, we want that purchase price to be as low as possible from the property owner's perspective. They, you know, they're probably going to Want that to be as high as possible. But the generally the way these things fall into place is the purchase price is going to be probably fairly close to what, what the property's current value is worth in its current condition. Which is why I mentioned we like properties where maybe the rents are below market or there's a higher than normal vacancy. There's some upside to the property. So basically you're locking that price in, you have a period of time. I don't like deals that are any shorter than generally about five years. When you're doing terms deals, more time is your friend. If you have longer time period in a deal, to me that means that there's a much more likely chance you're going to make a larger amount of money and you're more assured of making that profit. You compare that to someone who puts a deal together with a six month or a one year master lease on a property, unless there's some huge factor like the rents are 20% below market, that you can rapidly make that change and increase the value of the property. I don't like deals like that where the pressure's on. I like to get into a deal, ideally have the property be generating enough money to be making the payments to the owner and then let time be our friend. Let the tenants in there make their rents. Well, normally make their rents, some of that's not happening right now. But make their rents, pay that mortgage down, do other things to increase the net operating income of the property, as you know, which increases the value.

So, Scott Todd, what are your thoughts?

You know, Mark, that is honestly one of the things I like about commercial real estate or you know, in that aspect is that you get more, basically more doors to cover you instead of one door. And you also get that pay down of equity. Right? That mortgage gets paid down, you build up equity. It's not like you're necessarily making those payments. It is kind of scary though when you read stories that say like 30% of renters last month didn't pay their rent payment. It's like, there goes your profit, there goes your profit. But that said, I do believe that America will always be stronger tomorrow than it is today. I truly believe that. And if that's the case, then ultimately this might be a good time to go buy something.

Yeah, it could be historically good because there's going to be so much fear and doubt and uncertainty. And if you own this asset and you're at that point in your life where you don't want the headache anymore. Peter's strategy is like just music to your ears.

Well, let's just touch real quick on the risk factor when you structure these correctly. Basically you've got a deal in place where comparing it to a conventional deal, if you put 30% down and signed personally and guaranteed a loan on a commercial piece of property, you're maybe not sleeping so good right now. With a commercial master lease, when it's structured properly the way we do it, basically it's structured where if you ever wanted to exit that deal and we're not going to go into a deal thinking that we'll just get out if it doesn't work out, obviously we do our due diligence. We're going to only go into a deal if we think we can make it a winner. But worst case, if things keep going and people aren't paying their rent for another, you know, five years from now, worst case, if you're in a commercial master lease, if you have it structured correctly and I'm not an attorney, check with your own attorney on this. But ours are structured where we just stop making the payments. If the property can't afford to make the payments, we can't pay the owner. There's default language in the agreement which states that the owner has the right to take the property back and they retain all amounts that we paid them to date as full and complete liquidated damages and hold us harmless. So it's a way to go into real estate right now when things are very uncertain, provide a sense of certainty to the commercial property owners out there to say, hey, I'm going to handle this thing for you. While also knowing that worst case, if the sky continues falling or who knows, I mean you could, you could have. I've always figured that, you know, a dirty bomb could go off in the neighborhood or the next door property. The owner could have some undisclosed environmental contaminants on the property. There's stuff like that that happens. I like to have an exit out of a deal. Worst case where you can get out of it with, with minimal damage.

I love the model. Scott Todd. I don't know why everyone doesn't do this as their, as the way to get into commercial real estate. You don't have to put a lot of money in, if any money in because the owner is doing the paper and carrying the note. You don't have to come up with even a big down. Probably because they, you know, you're solving that problem for them. They just want the cash flow. You don't have to deal with outside banks which, as we discussed in the beginning of the podcast was a major issue. And then it's just kind of a due diligence game and seeing where can we improve the property where the properties that we're going after are distressed in some way. So there's lots of opportunities to typically improve the property. So in the sense that they haven't kept up with, you know, the roofs or they haven't raised the rents, there's improvements everywhere. I like it.

Peter.

Scott, Todd, what do you, what do you think?

I like it too, Mark. I think you got to do some research, but it sounds like a good way of doing something.

All right, well, I love it. So, Peter Conti, we are at that point in the podcast now where I think your mentorship has been fantastic. But we want to get one more tip. A website, a resource, a book, something else actionable. The art of passive income listeners to go improve their businesses, improve their lives. What have you got?

Yeah, I'll give you two tips today. One of the skills that I teach my students and I think it's been really helpful to, to me over my 30 years of investing is being able to create a connection either with brokers or property owners and involves being able to quickly create rapport. It's the business of, I think of as creating friends fast on purpose. There's a book available called Instant Rapport. It's by Michael Brooks. I believe the paperwork is still available on Amazon. Great little study guide on how to get up to speed on creating rapport quickly. The other thing I'm going to say is that right now really is an amazing time to get going investing in real estate, whether it's with commercial properties or investing in land or any of the other myriad of techniques out there right now, let's face it, if you're quarantined in home, you got lots of time to be focused on doing something new. People right now are generally home and available. They're watching their email, they're answering their phones. These days it's easy to get a hold of people. It's just an awesome time to get out there and get started. So my recommendation is to those of you listening to this, get out there, just, you know, pick, pick something, pick a strategy, a method, a teacher, and get out there and start taking some steps and see what you can get going right now because this is the very best time I've ever seen to get going investing in real estate.

All right, fantastic. Scott, Todd, what's your tip of the week?

Mark, check out this website elocance. I just Put in the chat for you. E, L, O, C, A, N, C, E. Elocants. And what it does is it takes your reading list. You know, those websites you go to, and you're like, save for later. Like, I'll read it later. And it turns it into a podcast. So it takes whatever you want to read, and then it turns it into, like, audio version of it so you don't have to sit there and read it. You can take it for your walks or whatever. If you're not going to listen to a podcast, like, hours or whatever. It's a cool way of looking at things differently.

Turn written content into a podcast instantly with eloquence. Everything you don't normally have time to read cannot be listened to.

Huh.

Sign up and we'll send you the app. Brilliant. All right, very cool. I'm in. You. You know I love to listen. Yeah, you can even. They even have a chrome extension. Yeah, I don't have to read anything online.

No, that's what I'm saying. You'll love it.

Okay, I'm in. Well, my tip of the week is the best tip of the week because Peter has been kind and generous enough to offer a free book and just go to Peter's free book. Is that right, Peter?

That's right.

Petersfreebook.com Petersfreebook.com will have a link to it in the show notes and read the book and start learning about lease options and how you can profit from it. So, Peter Conti, are we good?

I'm good. Yeah. I enjoyed getting to hang out with you guys. And hi to everyone out there listening. Hope you have a great day and a great time making the most of this strange world we're in right now.

Yeah, absolutely. Scott. Todd, are we good?

We're good, Mark.

Well, I want to remind the listeners the only way we're going to get the quality of guests like a Peter Connie is if you do this three little favors. You got to subscribe, you got to rate, you got to review the podcast. Send us a screenshot of that review to supporthelandgeek.com we're going to send you for free the $97 wholetailing course, how to Double youe Money, 30 days or less. So please do that. Hopefully you're getting a lot of value from these podcasts. And thank you. So, 1, 2, 3, let freedom ring. Thanks, everybody.