October 3, 2022

JF2951: CRE Investing Advice for a Hypothetical Investor | Round Table

Each week for the Best Ever Round Table, the three Best Ever Show hosts — Ash Patel, Slocomb Reed, and Travis Watts — come together for a deep dive into a commercial real estate investing topic.


In this episode, Ash, Slocomb, and Travis discuss what they believe a hypothetical investor should do with their money, assuming the investor is accredited and has $100K to invest in real estate. The three hosts offer up their investment vehicle recommendations based on the insights they’ve gained from their own careers.



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Slocomb Reed: Best Ever listeners, welcome to the Roundtable. I'm Slocomb Reed, an apartment owner-operator in Cincinnati, Ohio, and I'm joined today by ash Patel and Travis watts. Once a week, the Best Ever hosts get together to discuss a commercial real estate investing topic, and today our topic is what a hypothetical investor should do with their money. Let's say his name is John Doe, or Jane Doe; they have $100,000 to invest in real estate. They are accredited. They don't need this $100,000 to live on. But if their capital or equity falls below 50,000, they're never coming back to real estate investing. So the question for each of us with our diverse set of backgrounds and commercial real estate investing track records - what investment vehicles would each of us recommend to this hypothetical John and Jane Doe investor? Quick caveat - because John and Jane are not real people, we don't know what their goals are, so we're going to have to make our recommendations based on what we expect their goals to be, or say something along the lines of "Well, if this is what they want, then this is how they would get it." So this $100,000 hypothetical investor - let's start with Travis. Travis, what do you think these guys should do with their money?

Travis Watts: Great question. Hey guys, Travis Watts, full-time passive investor, director of investor education with Joe Fairless over at Ashcroft capital. Thanks for the disclaimers, first of all; we're never giving anybody financial advice, we're not financial advisors, so we seek licensed advice. This is just for informational/educational purposes only. So with that in mind, just a further disclaimer - I've got compliance ringing in both ears right now... I'm going to answer this from my own perspective, as if this were me, so not telling Jane and John what to do... But I would focus on -- whether I was an LP, limited partner in a syndication, or whether I was an individual buyer, or whatever the situation may be, what I would do if the goal was not to lose capital and to ideally grow your capital base using 100k, I would look for a stabilized, cash-flowing value-add piece of multifamily real estate. I would look for things like a low breakeven occupancy; I'm talking about, ideally, somewhere in the 60% range. So if you had a 100-unit property, you could have 40 units vacant or not paid and you're still at a breakeven, so you're not going underwater with the property. I would invest in a deal that has very low leverage, so not 80% or 75%, but 60% leverage, meaning a debt or mortgage on it... And it would have fixed rate, longest-term possible debt. So for commercial, that's usually around 10 years or so. And I would make my business plan half of that timeframe. So that's a bit of the model that Joe Fairless has created as well. You want to put ideally twice the debt term as compared to how long you anticipate holding; in case the economy gets wonky and crazy, you still have some time to figure it out. You don't have your loan coming due, and then interest rates at twice what you locked in at in the first place.

So from a high level, that's what I would focus on; that's what I do focus on. It's not always easy to find those low-leverage deals. If you do, they're not going to cash-flow very well, but equally so, you're not probably going to be losing money in the process. And breakeven occupancy, just for some transparency on the industry, is usually more in the 70% range, sometimes even the high '70s... But again I'm using as conservative of an example as possible. I'd rather clip a 5% a year cash flow and do a deal like that, than I would try to chase the 10% and then maybe you do have a capital call or some unforeseen circumstances. So that's my answer.

Ash Patel: Hey, Best Ever listeners. Ash Patel. Slocomb, how old are John and Jane?

Slocomb Reed: That's a good question. I do want to thank Travis for the additional disclaimers at the front end of this. He lives in this world of talking about other people's money much more than I do. Let's say that they are in their mid-40s.

Ash Patel: Do they have full-time jobs?

Slocomb Reed: Yes.

Ash Patel: Alright. So 100k, and they can't fall below 50k... I would find active people to partner with. I don't believe you'll build a great deal of wealth doing this passively. I think the faster approach would be to maybe divide that up into two $50,000 segments and find the right partner to take down active deals with. And these aren't large syndications. These are maybe smaller, heavy value-add deals; but mixed use properties... And do they have to be passive, or can they invest the money themselves?

Slocomb Reed: They can invest themselves, yeah.

Ash Patel: Depending on their experience, I would try to find something as heavy of a value-add as they can handle. That's how you're going to initially grow your money the fastest. Mixed-use buildings, smaller retail, multifamily if you can get a good deal, add a lot of value... And that's it, man. If you have a full-time job, find a good partner that's already in the business. Don't risk all of your money on one deal... And that's it, man.

Slocomb Reed: Ash, what you're saying makes a lot of sense. What Travis said makes a lot of sense as well, especially given your backgrounds. I'll answer the question myself before I ask my follow-ups... And I'm going to take a different assumption, that John and Jane are working full-time in their mid 40s, but maybe one of them is not happy with their career, or needs a transition because they've been laid off, or have had some other adverse event come up. Some reason that they need to leave their full-time work, and this is the money that they have. If you need to generate income or cash flow quickly, I think we will all agree that the first best investment that you can make is in educating yourself. Your first best investment will be in yourself, coaching, mentorship, training, books, opportunities to learn a craft within commercial real estate investing, getting the knowledge that you need before you have to put your money into anything. And then I would say that -- if this $100,000 needs to replace a previous full-time source of income, then you're going to have to get transactional pretty quickly. And I mean that in the way that Gary Keller talks about in the Millionaire Real Estate Investor, that generating transactions is going to be the fastest way to create income for yourself. That's why a lot of people start out in real estate investing as wholesalers, is because the theory at least behind that is that you can generate a lot of income without needing to have a lot of money.

If you're willing to take higher risk than Travis is recommending, then you can buy things that are experiencing greater distress, like an empty house that needs significant renovation to be turned. In a market like Cincinnati, $100,000 can get through one of those house flips, if you're getting good financing that allows for rehab financing.

So if this $100,000 - again, we're not actually giving any financial advice here. This is not intended to guide anyone's individual investing; this is purely for hypothetical... I would say that there's enough money there to start getting transactional, and definitely enough money there to start educating yourself if this needs to be a career shift and if this needs to become an active source of income for you.

Break: [00:09:10.21]

Slocomb Reed: Now let's take a step back... The reason why I chose $100,000 as our benchmark here is that especially for a passive investor in commercial real estate that's not enough capital to generate, possibly a lifestyle improving, but not a lifestyle sustaining source of income. A lot of people in the residential space come to me or have come to my team or other residential agents who work with investors when they have saved $20,000, because that feels like a lot of money to have saved, and it does require fiscal discipline. And then they come to someone like me to ask, "Hey, how can I invest this $20,000 in real estate" and the first answer I give them is "You need 50k. Or you need to educate yourself and get transactional and use that money on your education." That being the case - and Ash brought this up thinking about $100,000 being two $50,000 positions. But I want to go to Travis first - you painted a very conservative, very stable picture here, that does not lead to very high returns. So Travis, if you were planning to stay passive, and we'll stick with you instead of John and Jane Doe... If you were planning to stay passive with this $100,000 in commercial real estate investing, given all of the variables you laid out and how to best protect yourself on those variables, if you need to increase your returns, how are you going to do it?

Travis Watts: That's a great question. And first of all, I'll never go in first again, because you guys just kept adding to this; we now know about this couple's dogs, and their lifestyle, and their ages... I would have had a whole different answer. But anyway; now I suppose I'm last, so I'm gonna circle back to it. But I want to throw an alternative out there, too. I'll answer your question, but this is another thing that my wife and I did too, that I've found pretty conservative and stable, with a higher cash flow amount... We bought a home in Denver years ago, and it was a 1930s Tudor home, and the basement had a completely separate entrance to it, and it was completely isolated, the top and bottom... So we Airbnb-ed that out. So first of all, we all need a place to live, right? So we just lived on the top floor of this house. And then that Airbnb brought in $2,200 a month, which paid for our mortgage. So I've found that to be a pretty conservative way to do it. And if you looked at our down payment on the house, compared to $2,200 a month cash flow, that was a solid investment; we were making a 20 something percent annualized return off of that. So something else to throw out.

Ash, I like what you said about diversifying... The way I do it is if I go into syndication today with 100k, and it sells in five years, and let's just use some simple math and say I've doubled my money, now I have 200k, I diversify as well. So I'm not going to usually roll all that 200 into the next deal with that particular operator; I'm going to cash out - I'm not really a 1031 guy - and I'm going to do 100k over here and 100k over there. Now I have two passive income streams and more diversification. To me, that's obviously risk reduction and sustainability, and all that good stuff. So I keep doing a rinse and repeat of that. We all start with our first deal - so did I - and then it became two, and then it became four, and then it became eight, and now it's 50, or whatever it is... So it's a front-loaded business, it does take some time, but that's kind of the approach that I would take with it.

And sometimes, you guys -- I'm not just a multifamily guy. When I have small amounts of capital and I want to get experimental with it... Just the other day I put $10,000 into my brokerage account, and there was a beaten up REIT that was distributing or is distributing about 11% annualized yield. That's not a game-changer in terms of lifestyle. I might be clipping 120 bucks a month off that; but I'm just an advocate for continuously adding incremental amounts of passive income, so that you can then enhance your lifestyle a little bit more. For someone listening, $120 a month could be a couple cell phone bills, or it could be your car insurance premium, it could be outsourcing your landscaping and having someone mow your yard, getting a house cleaner a couple times a month, whatever. So to me, that's all very important, even though the dollar for dollar is low. And I like experimenting with that lifestyle enhancement. So that's a more broad answer to your question.

Slocomb Reed: And taking that REIT example, correct me if I'm wrong, but if it's distributing an 11% annual yield, if you put an entire $100,000 into that, you'd be looking at 11 grand a year, which is almost 1,000 bucks a month, which makes a pretty significant dent in a lot of bills, and it really adds to the lifestyle and the personal finances of a lot of people.

Travis Watts: It does. And I'm not a huge fan of the stock market. I do that stuff to diversify and play around with... But one thing I didn't talk about in terms of syndications - because I know we were just talking about cash flow, and stuff like that, and I mentioned conservative 5%... We're not including the equity upside. So yeah, maybe 5% for three or five years, but then we may end up doubling our money in the equity side of it.

So in general, in my own experience, historically speaking, no indication or promises of the future, that tends to be how those deals end up is - yep, they sacrifice a little bit of cash flow year-to-year, and all of a sudden, you get the lump sum payout, then you diversify, and now your passive income has just doubled from whatever it was before.

Slocomb Reed: Awesome. Ash, different follow-up question. Being that you are the commercial, non-residential guru of the three of us... Let's say I have this $100,000 that I want to get invested into non-residential commercial real estate. I want to buy something by myself, without partners, and I want to control it. I want to self-manage, because that's my personal style. Not necessarily me individually, but that's what this hypothetical investor wants. Where can I place lucratively $100,000 in commercial non-residential real estate?

Ash Patel: Slocomb, you can probably buy two mixed use buildings that need work. I've done a solo podcast on this... Mixed use buildings, which are typically -- and when I say mixed use buildings, the older ones, the ones that are 100 years or more old; you can find them in a lot of Eastern cities where there's maybe four apartments over a retail shop. And a lot of these mixed use buildings fall through the cracks, because residential people don't want them, commercial people don't want them, and lenders absolutely hate them.

I'll give you a good example that I've shared maybe before, but I have a restaurant and a mixed use building. The building next door came up for sale; we were going to make an event center in that building. And I didn't want it bad enough, I didn't want to get into the event business bad enough, so I made an offer for $160,000. And they wanted 190k. And again, I didn't want it that bad, so I let it sit. This was on the market, and this was in Norwood, for anybody in the Cincinnati area. Several months later, I get a call from somebody that we know, who's in the residential space, and they said, "Ash, can you help me evaluate a commercial deal?" "Sure." They gave me the address, and I said, "Well, listen, I own the building next door. I know that building well." I told him all about it, and I said he could probably get it for around 170k. And he's like, "Yeah, the commercial really scares me." And I thought, "Oh, I want nothing to do with the apartments. Why don't we partner on this?" And he said, "Yeah, now I'll just give it a pass." And I asked him, "What do you think the ARV on this property would be?" And if I recall correctly, his answer was "About $280,000." And I thought to myself, "Oh my God, why would you not buy this building?" And then I thought to myself, "Why would I not buy this building?"

So I thought about it and I said, "Hey, look, if you don't want it, I'll probably make a run at it." I ended up buying this building for $150,000. It appraised at 450k ARV.

Slocomb Reed: Wow.

Ash Patel: And again, this sat on the MLS forever. And the question that I specifically asked that person who approached me about this was "If this was for units, and no commercial, basically chop off the first floor and lower the building, same location, same facade, same condition..." That was his answer, $280,000 ARV. Well, getting a free commercial spot scared him away from the deal. And it's crazy how people have these blinders on where commercial people don't want them, because again, they don't want to deal with residential tenants; we've graduated from that. We deal with business owners now. The residential investors are so scared of the commercial, even though the apartments will pay all of your debt service and then some, typically. And you can find these things for under $200,000 all day long. Split it up into two mixed use buildings, or one mixed use building, use the remaining funds for rehab. But that's the way that I would do it. That's the highest and best use of that money, I think, in real estate, if you're going to be active.

Slocomb Reed: Ash, that makes a lot of sense. Thank you for that. I remember summer of 2021, I was looking at a lot of properties like that, because I was looking for an office hack for myself, and I thought mixed use might be the way to go. I ended up with a property off market, but I do remember analyzing a lot of those deals... East Coast makes sense, a lot of the Midwest does as well, especially Cincinnati... Any markets that are old enough that neighborhoods had to be walkable and have local businesses like grocers, bakers back in the day, you're gonna find a lot of that mixed use where you have some sort of retail commercial space on the first floor, with apartments above it. There's a lot of that in Cincinnati, and it's ripe with opportunity.

There's been a lot of great ideas that have come out of this conversation, Best Ever listeners. I hope this is not exactly the situation that you find yourself in. Again, it was not our intention to give anyone direct advice. But you've heard a lot here about how to take an amount of money like $100,000 and do things that get you really high returns, take some risk; what's the best way to stay conservative and protect your assets. You've learned about some residential and commercial ways to get involved, to get active and transactional, as well as passive.

So Best Ever listeners, thank you for tuning in. If you have gained value from this episode, please do subscribe to our show. Leave us a five star review, and please share this episode with a friend who's engaged in real estate investing that you know that we can add value to through this episode. Thank you, and have a best ever day!

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