April 20, 2017

JF961: House HACKING Bay Area to a $1MM Commercial Building

Danny Randazzo Real Estate Background:

– Owner of Randazzo Capital
– Took every available liquid dollar to buy my first primary residence in San Francisco Bay Area
– First purchase was a $1 Million dollar commercial building
– His portfolio holdings are focused on commercial and multi-family properties
– Based in Charleston, South Carolina
– Say hi to him at http://www.randazzocapital.com/
– Best Ever book: Mistakes Millionaires Make by Harry Clark


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Commericial Building Real Estate podcast



Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff.

With us today, Dan Randazzo. How are you doing, Dan?

Dan Randazzo: I’m doing well, Joe. How are you?

Joe Fairless: I’m doing well, and nice to have you on the show. Danny is the owner of Randazzo Capital. His first purchase was a million-dollar commercial building. He took every available liquid dollar to buy his first primary residence in the San Francisco Bay Area. He’s now based in Charleston, South Carolina. His portfolio holdings are focused on commercial and multi-family properties. With that being said, Danny, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Dan Randazzo: My background is in financial consulting. When I graduate from college, I was working for a small local company and started within the corporate world working a financial consulting job, traveling around the country, landing a project overseas in Abu Dhabi, United Arab Emirates, where I worked for about a year and then came back to San Francisco.

When I moved back home, I was kind of ripe with cash from my job living overseas and not having living expenses to pay for, so I took all of my savings and dumped it into my first primary residence purchase, in which I rented out two of the bedrooms and lived pretty much free (with the exception of about $400) in the Bay Area in cost of living.

I held on to that property for just over two years and came out with tax-free gains, sold it and that really created my equity nest egg (as I like to call it) to relocate across the country, start investing in commercial property. You mentioned my first property was a million-dollar purchase that I did on my own. So I put in about 200k that I had in savings to purchase the six-unit commercial office building which has currently five of the six units occupied and I’m in the process of getting a long-term 3-5 year lease in place with a national mortgage lender to fill up my six-unit. Once I have that six-unit filled, I’ll then look to refinance the property and get my initial investment back out, but also build up some equity in that property. So that deal should be a pretty good one for me.

My current focus nowadays is still on the commercial acquisition side, as well as multi-family properties. I’m really looking to get into some of these larger deals, as I feel that there’s more ability to control and scale your business having fewer properties to oversee and manage. That’s kind of been my strategy, to really go for the larger properties that generate more cash flow in order to build the lifestyle that my fiancée and I wanna have.

Joe Fairless: You took every available liquid dollar and you put it into your primary residence in San Francisco, and you’re basically house-hacking – you had some people renting out the rooms… Repeat what you mentioned earlier, will you please? How much did you actually pay after the rents were coming in every month?

Dan Randazzo: After the rents were coming in, I paid out of pocket about $400; part of that went to cable and internet, part of that went to heating and cooling, and part of that went to an HO A/C, because it was a condo. But for the Bay Area, I call that a win if you can live off $400 between all of your housing expenses and everything included. That was a big one.

Joe Fairless: How much were the rents?

Dan Randazzo: The rents were 900 for a basement room and 1,100 for an upstairs room.

Joe Fairless: How much would the room that you were living in had rented out for, if you had rented it?

Dan Randazzo: I probably could have rented it out for about $1,300-$1,400.

Joe Fairless: So you’re fiscally responsible, and I know because we know each other outside of just this interview… So I know you’ve had a budget ever since high school, to the penny, of the in and out of money in your checking account – is that correct?

Dan Randazzo: Yeah, that’s correct. I really enjoy tracking and understanding where all of my money comes in from and where it goes out to. I can see over the course of time “Am I spending a lot in areas where I don’t really need to be spending?” There was a period in my life where I was buying clothes and I played a little bit of golf, so I would buy some golf shorts and some golf shoes, and during the summer months during the golf season my spending was pretty crazy, and I was really getting no value out of purchasing some new golf shirts when I had several in the closet or in the dresser that would work just fine.

Having the ability to track to the penny of what comes in and what goes out was really important for me. As I look at my history of tracking my budget, if I didn’t save every single nickel, dime and quarter over that span of my life, I might not have been able to afford that down payment that ultimately got me into that single family house, which then ultimately lead me to build that equity nest egg, which then allowed me to purchase my first commercial property.

Joe Fairless: I’m glad that you explained that, because that’s what I wanna ask you about. You put every liquid dollar into that primary residence in San Francisco. Knowing that you do count your budget to the penny, it almost seems counter-intuitive – although I understand it, but an outside might think “Wow, he’s so focused onto the penny, but yet he’s going all-in on a primary residence in San Francisco.” What did you think through in order to actually pull the trigger in going all-in, where every liquid dollar was in a primary residence in San Francisco?

Dan Randazzo: Well, what I evaluated was the opportunity to purchase that property. As I moved back to the U.S., I had a pretty decent stockpile of money. I purchased my primary residence at $475.000, so the 20% down payment – 80k, 90k, almost 100k dollars was sitting in my bank account and I was thinking, “What is the best use for this money? Because I don’t wanna go out and buy any silly golf clothes, I don’t wanna buy a new car, I don’t wanna buy anything that isn’t going to generate some positive value and income for my life.”

Looking at the property that I was going to purchase, it was previously trading at almost $800,000 back in ’06 and ’07, so I figured that it would be a relatively safe play. The California market, and specifically the neighborhood that I was in within the Bay Area was just really stabilizing. From 2012 to 2013 it had a little bit of market appreciation, but over 2013, 2014 and 2015 there was some significant appreciation and growth in that specific neighborhood, just because the Bay Area was rapidly growing and the neighborhood that I was in was in the path of growth. So I was able to really buy it at a good discount, compared to the ’06, ’07 peak, and realize some of that upswing as the market continued to rebound and strengthen over the last three years.

Joe Fairless: And what did you sell it for?

Dan Randazzo: I sold it for 585k. On top of that, I had $400/month in living expenses, so the house – I was able to build a good amount of equity in it, but also pay down the principle interest and taxes really without using any of my own money.

Joe Fairless: You sold the property in San Francisco, and then you went East to Charleston, South Carolina. Why did you go from San Francisco to Charleston?

Dan Randazzo: Well, my fiancée and I were getting a little bit more serious and she was my girlfriend at the time, so we were having some discussions about life and lifestyle and what we wanted to do with our time and how we wanted to live, and one of my conversations with her was “Hey, I remember reading Rich Dad, Poor Dad back in school. I’ve studied and really enjoyed real estate. Let’s look at buying some rental properties here…” Just really using basic math, if you can buy a property and you get paid rental income that’s greater than all of your expenses, you’re doing pretty well. That’s kind of how I instilled the bug into my girlfriend and now fiancée.

So we eventually said and realized in the California market that returns were not very good, and capital was a high barrier to entry in that market, because most of the properties are quite pricey in the Bay Area. So we evaluated a few markets – Florida, Texas, a couple of cities in each of those, and then Charleston.

We settled on Charleston because the real estate market, first and foremost, is doing very well there, and we felt very comfortable in knowing the market. My fiancée is originally from Charleston, so she knows some of the ins and outs of the neighborhood, she had a built-in network there, her brother is also in the real estate industry, so we were a little bit more comfortable going there versus any other city, because we already had a network of people set up to help us. In addition to that, I was still travelling and still am traveling for my full-time job as a consultant, so going to a new city and me flying out for the week and leaving her there didn’t seem like the best option, versus going to Charleston where she has some people in the area to support her and support our real estate needs. It seemed like the best move for us.

Joe Fairless: So now you took the money that you had saved up, as well as earned tax-free from the sale of your primary residence to Charleston, and you purchased a million-dollar commercial property that is a six-unit office building. Tell us about how you found that and what is the business plan for you.

You mentioned that you’re gonna refi the property and get your initial investment back out, but is this a long-term hold? And any other details that you think are relevant.

Dan Randazzo: The property was identified, it was an on-market deal. Timing just seemed to be right. The property, when it was originally listed – probably about six months earlier – I think it was about 50% occupied and nobody was really interested in paying what the seller was asking with only 50% occupancy. So by the time that we had moved to Charleston and really got settled in the area, I started exploring and looking at properties, anything and everything that I could get across my desk around the computer. It happened to come up, and I looked at it and I thought, “If this property was fully occupied, it would be a pretty good deal.”

We contacted the listing agent, got the financials, and the property had actually gone up from 50% occupancy to 85% occupancy. Basically, one out of six units was vacant. We did some negotiations with the seller, we got a great deal on the purchase price coming into the deal, and then also the seller leased back the vacant unit for three months, and that gave us some time to do some marketing for the vacancy, generate some interest, and we should be signing a lease for that unit in the next couple of weeks, and we’ll have it fully occupied.

The property is currently generating about 30% cash-on-cash return. Again, it was just a great deal, great timing, and being open to analyze the numbers and think outside of the box a little bit.

Joe Fairless: What aspect did you think outside the box on this one?

Dan Randazzo: Well, having the property on market for about six months and going back to the listing agent and getting some more information on where it was currently at. The other piece that is a good tip for all of the listeners – the owner was the developer of the property and of about 10,000 single-family residences. They were a mid-to-luxury homebuilder, and this homebuilder had finished up their entire development project, so in that area there was really nothing left for them to do. They were trying to liquidate and close their LLC books on the development, but they were kind of burdened by having this office professional unit still on their books… So they were able to cut a really good deal where they were coming down off of their asking price by almost $250,000, because for them that property was a little bit of a burden to keep their business operating and functioning when they had sold off their main asset, which was the home development portion.

One thing that I learned is if you know a developer is selling and it’s towards the end of the month, it’s usually in their best interest to close or sell as many deals by the end of the month, so they don’t have any additional accounting or legal fees from their teams, because the developers have large fees and teams that are required to close those deals and close the books. I just had some good success with buying direct from developers, and if it’s towards the end of the month, they’re usually a little bit more motivated to sell.

Joe Fairless: You said the seller leased back the vacant unit for three months… Did they actually sign a lease, or did they just give you the equivalent of three months’ rent credit at closing?

Dan Randazzo: They did sign a lease for that unit, and they did pay monthly installments or monthly lease payments for that unit. The agreement was if I fill the space before their three months was up or due, that they wouldn’t have to pay anymore, so it was kind of a “pay as you go” piece, and we utilized all three months leaseback from them, and they paid on time and in full.

Joe Fairless: What did they lease it for and what’s the new prospective tenant going to lease it for, if you can share that?

Dan Randazzo: They leased it at market rent, which was $15/square foot, which is annual, so they leased it for — breaking down their square footage, they were paying $1,25/square foot/month in base rent. They also covered the utilities, real estate taxes, insurance and association fees, so it was a true triple net lease for that short period of time, but all of the tenants that I have in the five other units are all paying about $15/square foot and they’re all triple net lease setups.

Joe Fairless: Based on your experience as a real estate investor, what is your best real estate investing advice ever?

Dan Randazzo: My best advice is to get your mindset right and believe in your purpose. It took me some time to figure that out, and really believe in it deep down inside of myself. I had always wanted to be an investor, and the want was just not enough to drive someone to take action on the little things that are required to ultimately create a good deal. Once my mindset was there and deep down inside I believed in my purpose, my want really transformed into a need, and it really makes me unstoppable. I’m willing to do any little annoying, painstaking task to get deals closed, and it just doesn’t matter, I’ll get it done.

Joe Fairless: Are you ready for the Best Ever Lightning Round?

Dan Randazzo: I am.

Joe Fairless: Alright, first a quick word from our Best Ever partners.

Break: [00:19:54].10] to [00:20:36].21]

Joe Fairless: What’s the best ever book you’ve read?

Dan Randazzo: I’m currently halfway through it. It’s called Mistakes Millionaires Make, by Harry Clark. All too often I think people get a little bit overconfident in themselves, myself certainly included in that mix. Harry’s book really talks about some brilliant business men and women, some in real estate and some in just general business, who have amassed fortunes, lost fortunes, and even maybe rebounded some of their fortune. It’s a great read with tons of lessons on how to protect your business and your personal assets from any sort of risk that’s out there or financing, personal guarantees of that sort. It’s been great.

Joe Fairless: Who’s the author again?

Dan Randazzo: Harry Clark.

Joe Fairless: Best ever deal you’ve done?

Dan Randazzo: The best ever deal that I’ve done was that first primary residence purchase that really created the equity nest egg. I bought a three-three condo in the Bay Area for about 775k, rented out two of the bedrooms, which covered all but about $400 in living expense for me. I then sold the property about a little over two years later with tax-free gains in 2006 for 585k, and with those proceeds my fiancée and I started building our real estate empire.

Joe Fairless: So we should all move to another country, earn money, save it, move back to U.S., live on the West Coast, buy a primary residence, rent out one side or two sides, live there, and then move somewhere else that’s more affordable and then use that money to buy a commercial property…?

Dan Randazzo: That’s not a bad way to do it, but another option that some people might think they’re open to is if you have a relative, live with the relative cheaply for a couple of years, save up some money, live with your parents if that’s a possibility… I’m all about understanding and tracking your personal finances, so whatever income’s coming and whatever as expense they’re going out, really try to optimize how much you can save and how much money you can generate.

Joe Fairless: What’s a mistake you’ve made on a deal?

Dan Randazzo: The second deal that I did was a $960,000 commercial property. It was four office professional spaces and I syndicated that deal and raised about $200,000, which was just enough money to close the deal and make some improvements to the property. The mistake I made was forgetting to include startup funds for marketing and office professional furniture that we needed for that deal to be successful. So I had to go back to my investors and get more money from them, which wasn’t a problem… However, the investors only wanted to put additional funds in based on the equity share that we had agreed to, so I had to come out of my own pocket to cover my equity position in that property, which in hindsight, if I would have included those startup costs upfront, it wouldn’t have been a big deal to the overall return on investment for the investor, and I would have kept a little bit more money in my pocket.

Joe Fairless: What’s the best ever way you like to give back?

Dan Randazzo: The best ever way I like to give back is through what I like to think of as random acts of kindness. The other week I was traveling through the airport and there was this lady who was just struggling with holding her child, trying to put her stroller and all of her luggage down the plane, down the jet bridge and get on board in a reasonable time fashion to keep everybody else happy, and nobody was helping her. So I pulled off to the side of the line, helped her get her stroller, put away, helped her get her kid on board, and then notice that she was seated in the row behind me. I happened to be in first class, so she was in the middle seat and there were two larger gentlemen to both sides of her and she was very uncomfortable in her seat, so I gave up my seat in first class for her to be comfortable with her child, and for her kid to have some space on that flight.

So random acts of kindness, buying people cups of coffee when they least expect it, and just making people smile on a daily basis.

Joe Fairless: I love those stories, thanks for sharing that. Where can the Best Ever listeners get in touch with you?

Dan Randazzo: You can check out my website, RandazzoCapital.com. You can find me on Bigger Pockets, you can find me on Facebook at DannyRandazzo, you can find me on YouTube at Danny Randazzo.

Joe Fairless: Danny, thank you for being on the show and sharing your incredible start, as well as how your approach has evolved from house hacking in San Francisco to then moving to a more affordable market and buying a commercial property, getting at right now 30% cash-on-cash return on your million-dollar property, and it’s not even fully rented… Along with the lessons you’ve learned along the way.

Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Dan Randazzo: Thank you, Joe!

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