May 13, 2022
Joe Fairless

JF2810: Failing Forward: From Losing $200K to Closing 79 Value-Add Deals ft. Sean Katona


Before becoming a full-time commercial investor, Sean Katona worked at Microsoft and EA Sports selling X-Box ads to automotive manufacturers and Hollywood studios. In 2013, he turned his side hustle into a full-time career, and as he says, he’s been “failing forward ever since.” Today, Sean spends his time seeking out fixer-upper commercial deals in the Greater Phoenix area. In this episode, Sean discusses the ins and outs of value-add commercial real estate and the toughest lessons he’s learned in his career so far.

 

Sean’s Tips for Investing in Value-Add Non-Residential Commercial Real Estate

  • Don’t be afraid to say no to deals. Sean wanted his first commercial deal to be a great one, so he remained cautious and said no to several deals over one or two years before closing on a defunct shopping center in 2017, with which he made a profit of $1.5M in 16 months.
  • Buy broken deals that you can force substantial appreciation into. Sean has been doing this since his house flipping days, and it still serves him well in commercial real estate. “I just feel like it allows us to build wealth so much faster when I can double the value of a property, or I can effectively own 10% or 11% caps instead of 6% or 7% caps,” he says.
  • Don’t worry too much about incoming cap rates. Especially when you’re buying a vacant building at a 0% cap rate. When Sean is done renovating and leasing, he’s often able to turn a 1% or 2% cap rate into a 9%, 10%, or even 12% cap rate. 
  • Work with brokers to find deals. Sean says he leans heavily on brokers to help him find deals, and he spends lots of time networking and making calls to them. “I try and honor the brokers and I just say look, paying commission is part of the game,” he says. “It’s part of the tax, and I’m going to pay that because I want to do five deals with this broker, and I want to become their favorite buyer around town.”
  • Offer a tenant improvement allowance at lease signing. By offering to contribute a certain amount of money per foot to help your commercial tenant build up their space, you can make additional income and increase the value of your property. 
  • Work with your struggling mom-and-pop tenants. Sean says he uses a “honey and vinegar” approach with mom-and-pop tenants whose businesses might be struggling, offering to help tenants get back on their feet through co-marketing, filling in more vacancies, or relieving a month of rent and rolling it into subsequent months. 

 

Sean Katona | Real Estate Background

 

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