In this episode of Beyond Multifamily, Ash Patel shares his story of how he got started in real estate to demonstrate the hidden value of mixed-use buildings. Some of the benefits of investing in mixed-use buildings:
They are the perfect segue from residential to commercial properties.
If you’re a residential investor looking to dip your toe in the water of non-residential commercial investing, mixed-use properties are a great way to explore another asset class while maintaining a bit of a safety net.
Commercial tenants will often improve your property on their dime.
When Ash was called to help a residential tenant unclog a toilet at his first mixed-use property, he was surprised to see an HVC company on the roof of the property’s store. It turns out that the commercial tenant had paid them himself to replace the entire AC system and the inside furnaces. He also asked Ash if he could remodel the bathroom. It was this moment that convinced Ash to become a full-time commercial investor.
The competition is low.
“Most lenders do not like older, mixed-use buildings,” Ash says. “We now have commercial guys and residential guys and girls that don’t want a mixed-use building, lenders that don’t want the mixed-use building, and that creates the perfect scenario for super-high returns.”
Ash also notes that there is no easy way to search for mixed-use buildings. You can’t specifically search for them using MLS, so you often have to search in both the commercial and multifamily categories to find them.
Multifamily investors can adapt easily.
“There are so many great multifamily operators out there,” Ash says. “If they open their horizons to mixed-use buildings, they have great systems in place, they’ve got great maintenance people, great leasing people — they would absolutely crush it.”
Click here to know more about our sponsors:
Ash Patel: Hello, Best Ever listeners. Welcome to The Best Real Estate Investing Advice Ever Show. I'm Ash Patel and this is Beyond Multifamily, where we explore topics besides multifamily investments. Today I'm going to share with you my story of how I got started in real estate, and we're going to talk about mixed-use buildings. This is really a story of dumb luck that changed the trajectory of my life.
About 10 years ago, I remember my wife and I were both W-2 earners. We would meet with our CPA every April, and we would ask what we can do to reduce our taxable income, and we never got a good answer. Finally, one year, I probed a little bit, and I'm like, "Hey, really, what can we do to reduce our taxes?" I remember, I'll never forget this, my accountant was looking down, didn't even look up at us, and was shuffling through some papers, and just mumbled, "Oh, if you make it, you've got to pay it." Well, that wasn't a good answer, and I also didn't buy that that was the only answer. So I went out to try to figure out what we can do to reduce our taxable liability.
We looked at some exotic things like captive insurance and offshore trusts... But in the back of my mind, I always remember hearing "Real estate is a great way to offset taxes." I didn't know exactly how that worked, I didn't know how depreciation was calculated, but I figured, I had no other options. If everyone says real estate's a way to offset taxes, let's buy some real estate. I went to one of my local realty websites and started searching for properties. I remember, it asked me if I wanted to search for commercial properties or residential properties. I often don't do things like everyone else... A good example of that is a few years earlier, we bought a church that we converted into a house, and that's been our primary residence for over 15 years. Nonetheless, obviously, I chose commercial properties, and I started looking at commercial properties. My budget was just about $250,000 or so at the time, so I kept looking and I found a property that stuck out to me. It was a mixed-use building in a college town.
Now, mixed-use typically refers to some type of retail or commercial on the first floor, and apartments above it. The kicker here is this building stood out to me for all the wrong reasons. I saw that on the first floor there was a grocery store, in a college town. Essentially, they served a lot of beer to college kids. My mentality, my mindset at the time was, "Wow. So when the store owner's lease is up, I can go in there and run the store, manage the store, put somebody in there, and now I have multiple streams of income. I have apartments above, and I have a business that's running on the first floor." That was my mentality back then.
I put an offer on this property, and I thought I knew what I was doing. I used the listing realtor as my own realtor, and she disclosed to me that she's personal friends with the sellers. In hindsight, that should have been a red flag. Nonetheless, I ended up getting the building for $230,000. The mistake that I made in using the listing realtor who was personal friends with the seller... Just before the closing, I said, "Hey, were there any deposits from the apartments or the store?" This lady almost jumped up and down in joy as if she had won. She rubbed it in that I never asked her about that before, and it was never in the contract, so it's my loss. I come to find out later the state law would beg to differ with her. Nonetheless, just a side lesson that I learned. If the listing realtor is personal friends with the seller, you may want to get a second set of eyes on your contract, your paperwork.
So here I am, I now own a mixed-use building in a college town, and now I've got to figure out what to do with this. It turns out that the roof is leaking, all of the gas lines inside this building have been red-tagged, and there are four-story chimneys where anytime the wind blows, bricks are falling off the chimneys onto the sidewalks where college kids are walking. I spent the next several months rehabbing this property and I was able to finally get it fully rented.
But another hard lesson that I learned is I knew college starts in August. I had these apartments ready in July, ready for college kids to come in right when the semester starts, and nothing; just crickets. I realized that college students will sign their leases a semester ahead of time. By the end of the school year, they already know where they're going to live for the next year. So the apartments were vacant for the first semester, I was able to lease them out halfway through the year, and now I'm a landlord.
I remember one particular call, and this is what changed the trajectory of my life. It was a Saturday afternoon and a tenant called me and said that her toilet was clogged. Of course, being that new landlord, I tell my wife, "I've got a situation that I've got to handle." I grab my tools, I load up my car, and I make the 30-minute drive to downtown Cincinnati for this building. I bring my tools up to the third story and I'm unclogging this toilet. I look out the window, because I keep seeing shadows go by. Finally, I look out and I see a number of people from an HVAC company on the roof of the store, and I don't have any idea of what's going on. So I go downstairs to the store owner and I'm like, "Hey, what's going on? I see the HVAC guys up there." They tell me that their AC went out, so they're going to replace the entire system. All the rooftop units, the inside furnaces, and they're doing it on their dime. I'm blown away. I tell them if they need anything, let me know.
As I'm walking out, they stopped me and they say, "Hey, do you mind if we remodel the bathroom down here?" Of course, I'm like, "No. Have at it." That was the moment I realized that residential tenants will destroy or put wear and tear on your property, commercial tenants will improve it on their dime. That was the pivotal moment where shortly after I became a full-time commercial real estate investor.
The reason I share this story is I want to encourage all of you to look into different asset classes. My opinion is that mixed-use is the perfect segue for residential investors to get exposure to commercial properties while having a bit of a safety net.
Break: [00:08:18] - [00:10:05]
Ash Patel: I want to share with you another story about a mixed-use building. In addition to being a full-time commercial real estate investor, I also own and operate a couple of restaurants, one of which is in a building that we purchased a few years ago. It's a mixed-use building, a roughly 3000-4000 square-foot restaurant on the first floor, and four apartments on two stories above it.
After about a six-month renovation, we were able to get our restaurant open. My business partner in the restaurant told me that the building next door, a very similar footprint building, was for sale. He thought it'd be a great idea to cut a hole in the wall where the two buildings are attached and make that into an event center and/or overflow dining. I wasn't keen on the idea, I'm not a big fan of getting into the restaurant business. Nonetheless, I thought if we can get a deal on it, we'll explore it.
The building had been for sale for a number of years, the listing price was, I believe, $190,000. We offered $150,000, they came back at $165,000... I really wasn't that interested in taking down another massive renovation or getting deeper into the restaurant business. So I passed on it. A few months later, I get a call from a good friend of mine who is a residential investor, a multifamily investor. He says, "Ash, will you help me underwrite a commercial building?" "Sure." He gives me the address, I said, “Okay, listen. I know this building very well. I own the building next door to it. What can I tell you?"
He's like, "Well, the condition of the apartment..." It's all pretty rough, but a little lipstick could they could get the apartments ready. The commercial space probably needs to be gutted, but you've got 3,000 or so square feet of just wide-open commercial space. I also shared with him that we offered $150,000 on the property, they wanted $165,000, and we were not interested in countering. My friend proceeds to tell me that he wants the apartments, but he doesn't want the commercial space. I thought, "Perfect. I want the commercial space, but I don't want to deal with the apartments."
I asked him if he wanted to buy it, we'll partner up on it, we'll go in halves, or whatever works. After giving it some thought, he walked away. He was not at all interested in this building. I paused for a second and I asked him, I said, "Hey, if this was just for apartments in this location, in this building, pretend the commercial space wasn't there... What would you value this building at?" I should know this, but I don't really keep up on the residential market. I'm, again, full-time commercial. He comes back and tells me the ARV on four apartments in this location would be $280,000.
I asked him again, "Do you want to partner on this? Do you want to take it down yourself?" "No, I want nothing to do with this." Awesome. I told him, "I'll make a run at it and see what we can do." In my mind, I'm thinking if this is for apartments that's worth $280,000 ARV, why not just board up the commercial space and not even deal with it, versus walking away from this deal? I ended up going back to my $150,000 offer, and surprisingly, they took it this time. I now owned a building that just four apartments will be valued at $280,000 ARV, and I've got a free commercial spot out of it.
I go to get a loan on this building, and the appraisal came back at $510,000 ARV for the entire building. The point of this story is that these mixed-use buildings fall under the cracks. The commercial guys don't want them, the residential guys don't want them, and lenders really don't like them.
Back to my original mixed-use building, when I wanted to get a loan on this property, I found three local lenders and a big bank. The big bank, I had been banking with for 20 years since I was a kid. I went to all of them and said, "Here's the contract. Here's a building that I'm buying." At the time, we had enough money in the bank to pay cash for the property, but I want the leverage that. So as the next a week or so goes on, none of the lenders reach back out to me. So I follow up with all of them, the three local lenders, one of them just refused to talk to me about this property. Another one told me that the bank president drove by there and wanted nothing to do with this. The third small lender said the same thing, they are not interested in financing this property. My big bank at the time was like, "Sure, let's do it. No problem."
As it turns out, they were not interested in financing the property either. Because I had been a long-term customer of theirs, they ended up doing a last-minute favor. Got the building financed, but I had to put down way more money than I originally thought.
The lesson here is most lenders do not like older, mixed-use buildings, which again, keeps the competition low. We now have commercial guys and residential guys and girls that don't want a mixed-use building, lenders that don't want the mixed-use building, and that creates the perfect scenario for super-high returns.
Speaking of high returns, I did another Beyond Multifamily podcast where I talked about all the benefits of commercial real estate. There are so many great multifamily operators out there. If they open their horizons to mixed-use buildings, they have great systems in place, they've got great maintenance people, great leasing people. They would absolutely crush it if they opened their horizons to mixed-use buildings. In terms of underwriting, often with these mixed-use buildings the apartments should pay for most of your holding costs, including debt service. Taxes, insurance, maintenance, banknote, all of that should be paid for by the apartments, and the commercial spot is typically what your profit is.
From my experience, I usually see these marketed where the commercial spot is vacant and the apartments are occupied, or vice-versa, where the apartments are vacant and the commercial space is occupied. And often, the other needing renovations, meaning the non-occupied side needs renovations.
Another reason there's less competition, in my opinion, is there's no easy way to search for mixed-use buildings. There's no MLS that I've ever seen where you can specifically search for mixed-use. It's either you search for condos, single-family, multifamily, land, or commercial; never mixed-use. You often have to search in the commercial category and the multifamily category to find these properties.
One more tip on underwriting these properties. When you look at the surrounding area, if the apartments are vacant, look at the surrounding areas and see if that's the norm in the area. Likewise, if the commercial spot is vacant, look around the area and see if there are a lot of boarded-up storefronts and a lot of "For lease" signs. If that's the case, it may be a bit difficult to get the commercial spot rented out.
A great tactic that I've used a lot is if you get the property under contract, during due diligence, take out ads on Crexi, Facebook, Craigslist, and advertise that commercial space, see what kind of response you get for that. Talk to some commercial tenants in the area and find out what they're paying, find out if they're interested in the space, and find out if they know anyone interested in renting additional storefront space.
To recap this, I am a huge proponent of people exploring additional asset classes, specifically different types of commercial properties. A lot of you multifamily guys are so well-suited to transition into commercial real estate by using and adapting all the systems that you have in place.
At the end of the day, I hope this was an inspiration to a lot of you investors out there to look at mixed-use buildings. I see so much competition for multifamily, hard earnest money on day one, multiple offers. Meanwhile, a block away could be a mixed-use building, sitting there with no competition and no offers.
Best Ever listeners, thank you so much for joining us. My goal is to continue to do these Beyond Multifamily episodes and try to inspire and educate all of you into looking at other asset classes. If you enjoyed this episode, please leave us a five-star review and share the podcast with someone who you think can benefit from it. Also, follow, subscribe, and have a Best Ever day.
This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.
The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.
No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.
Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.
The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.