July 28, 2023

JF3249: Ash Patel — Learning From 10 Years of Mistakes and Mindset Struggles in Commercial Real Estate Investing




Ash Patel is the founder of Invest Beyond Multifamily, which invests in daily-use, necessity-based commercial real estate properties in growth markets. He is also a host of The Best Ever Show podcast. This episode features a recent talk Ash gave at the Best Ever Cincinnati Real Estate Meetup. He discusses the major lessons he’s learned over the past 10 years as a full-time investor and advice for time management and goal setting.

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Slocomb Reed: Best Ever listeners, welcome to Cincinnati's Best Ever real estate investor mastermind. Check that out before it fades off [unintelligible 00:01:38.27] That's good stuff. Exactly what I was going for. This is our local Cincinnati market meet up for networking with local investors and people who are interested in investing in this area from other parts of the country. We have a phenomenal speaker for you today, Ash Patel, who is going to speak on his own experience scaling in commercial real estate. He is the founder of Invest Beyond Multifamily, also a host of the Best Ever podcast himself. He has a breadth of experience in commercial real estate investing. He's been through market cycles and has plenty of experience there that he can speak from; very much looking forward to hearing from him.

Ash Patel: Thank you, Slocomb. Hey, guys, thank you for your time and attention tonight. It's my goal to give you as much knowledge in a short amount of time as possible, so let's get into it. I've been doing this for over 10 years as a full-time commercial real estate investor. That means I've got 10 years of mistakes and mindset struggle. My goal is to have all of you avoid those same mistakes that I made.

I'm going to give you a quick backstory, and for some of the people that know me, sorry if you have to hear this for the 10th time... But I had a 15-year corporate IT career. We've got some immigrants in here... I had these immigrant parents that made me go into it. I hated my career, hated going to work every day. I went up the corporate ladder, and always had a side hustle, because I knew that I wasn't going to work for somebody forever. And every time one of these side hustles paid off and did well, I'd go to quit my job. And they would talk me out of it. They would buy me out of it. They would give me a promotion, a raise, an assistant, and I would fall for it. I took the easy road out, over and over again. I was single, I had no excuse other than probably fear; fear of failure. "What if the side hustle works now, but what if it doesn't later?" And I stayed that corporate route.

We lie to ourselves, man. We'd go to happy hours, and hanging out with friends... And the commonality was, "I love my job." And everyone's like, "Yeah, dude, I love my job, too." It was all a bunch of BS. And look, anybody here that loves their job - well, you work for me, so you have to... Alright, thank you for raising your hands. But in my definition, if you love your job, if you won the lottery, you would still go to work for free, because you love it. It's often a necessary evil, not something you love.

So we'll fast-forward many years, and I've finally found commercial real estate. I was looking for a tax break, and I heard real estate was the way to go. So I bought my first building. It was in Clifton. Anybody familiar with Clifton that knows the Ravine Street Market... Ravine and Warner. So that was my first building. You know why I bought that? Because I thought once the store lease is up, I can get another source of income by running or managing or something with the grocery store. So I have these apartments above me, and not only do I get rent from the apartments, but I could somehow become a convenience store guy, like the typical Indian guy. So that was a mindset that I had when I went into that building.

I get in there, rehab the building, got college kids into those apartments... Another mistake that I made was I knew the college year starts mid to late August, so I had these apartments renovated and ready to go by like August 1, put the For Rent signs out... Nobody. Crickets. College kids get their apartments January/February for the upcoming year. Mistake number one [00:05:19.19] That was one of many mistakes that I made.

Nonetheless... So fast-forward a little bit, I was unclogging a tenant' toilet one day, it was a Saturday afternoon, and I look out the window, I could see the roof top of the store. And there's an HVAC company out there replacing rooftop units for the store. So I go downstairs and I ask the store owner, I said, "Hey, what's going on?" He said, Ash, our A/C went out, so we're replacing the entire HVAC system." And I'm like, "Alright..." And then as I'm walking out, he stops me and he's like, "Hey, do you mind if we remodel the bathroom down here, too?" I'm like, "Nah, go ahead."

And I got in my car, I'm like, "Wait a minute... College kids and residential tenants destroyed my property, and these commercial tenants actually improve it on their dime." So I dropped the side hustle that I was doing at the time, which was an IT consulting company, went full-time into becoming a commercial real estate investor. That was my very first building. I've since gone on to buy office, retail, mixed-use, restaurants, co-working spaces... A little bit of everything; anything that really doesn't have residential tenants. I'm just not good at that. Residential tenants just drive me up a wall; I fall for all the sob stories, I let them go [unintelligible 00:06:38.12] and it just always ends bad. So I focused on commercial real estate for the last 10 plus years. I'm going to share with you guys the lessons that I wish I learned earlier.

I don't think I'm a fast learner. And in hindsight, I wish I did a lot of things differently. So my goal tonight is to make sure you guys don't repeat the same mistakes and mindset issues that I had. So the first one is have a benchmark. There's actually two lessons here. In 2015-2016 - I don't remember which one it was - I thought the market was at a peak. And it was getting harder to find commercial properties. A lot of coastal money was coming into the Midwest, buying things up... It wasn't as easy as calling a broker and say, "Yeah, let me tour this and I'll buy it, because it's a great deal." The competition was getting excessively more fierce, and the returns were getting lower. So I took the lazy way out. I made excuses, and I said, "Okay, the market's got to be at a peak." This is 2015-2016. Things were hot, and I thought the market peaked out, so I started selling my properties. And I thought, "Okay, the next time the recession hits, I'll get back and do the same thing over and over again." Well, I was wrong, because the market didn't come down until seven, eight years later. So I sat back on the sidelines for about six months, and I started investing passively with Joe Fairless. His returns at the time - the performers were about 20%. But when those deals actually hit upon sale, it was about 26% annualized cash on cash return. So I used that as a benchmark. Any deal that I did on my own better exceed 20% annualized cash on cash, with sale. Because if I can get that passively, and I'm doing all the work, I better be rewarded for that.

So have a benchmark is lesson number one. Along with that lesson, don't try to time the market on small levels. Now, we all know interest rates are pushing prices, there's a lot of carnage on the streets... So we know we're heading into a downturn. That's not timing the market, that's reading the news. Don't do what I did and say the markets at a peak, and don't try to time it when you think it's at a bottom. A good deal is a good deal regardless of the market cycle. So buy right; who cares about the market? Stress test your deals, expect more pain to come. Don't say "Hey, look, it's making money now. Fed's going to reduce rates at their next meeting." It's only real estate and Wall Street people that ever think the Fed is going to reduce rates. Everybody else is realistic, and they know the Fed has to inflict a lot more pain to accomplish what they set out to do.

Another lesson that took me many many years to learn was raising capital. I've been lucky that Joe and I have been friends for a number of years... Every time he heard me do a deal, he'd asked me about it, and he'd ask "Did you raise capital?" "No, man. I paid for it. I got a loan." Okay, next deal, "Ash, did you raise capital?" "No, I got this." Next deal. He stopped asking. He knew I didn't raise capital, and he would just mumble, "Should have raised for it..." I'm like "Shut up, I got this." And subsequent deals, "Should have raised for it, should have raised for it..." And I never gave it much thought. I don't know why I didn't raise for it. Actually, I do know why. I stayed in my comfort zone. I stayed between $300,000 and maybe $800,000 in purchase price. Because those are the deals I could take down with 20% down bank loans... Didn't have to raise capital. And I also lied to myself and everyone around me and I said, "That's the sweet spot, with the highest returns." In commercial real estate, apparently, I've found out that 300k to 800k... Nobody else knew this but me. It was the sweet spot, with the highest returns. Well, that wasn't true. That was, again, me lying to myself. And the thing that convinced me to raise capital from others was talking to some of my high net worth friends and seeing what they're investing in. They'd invest in bars, like the new trendy bars that are popping up in OTR; they invest in restaurants, they invest in marijuana companies, they invest in crypto companies, and they don't make any returns. They're shooting for the stars, or they're just not presented with enough opportunities, and they're not educated on how to invest their money. And these are lawyers, doctors, business owners, people that you think would have a grasp on growing wealth and their financial future. You'd be amazed how they spend all their time and energy on their craft, and never take the time like all of you to educate yourself on growing wealth.

So I realized, finally, that I'd be doing some of these people a favor. If I raise capital, let them into our deals. And you know, for years they'd been asking, "Ash, we'd love to get in on one of your deals, and here I am..." "Okay, I'll let you know if I ever need capital, but I'm good man, I got this." And again, it was fear of taking other people's money. What happens if I lose it? What happens if the deal goes south? Guess what, we're all big boys and girls; be honest with all your investors, present the risks, present the rewards, and they make their own decisions. We're not selling, we're presenting. When you raise capital, you simply present your deal. You're not trying to convince anybody. Hopefully, you're not picking up the phone, calling random people and saying, "Hey, I've got this great deal for you." You're using your network and presenting the great deal that you have. That's raising capital; it's not selling.

So I started raising capital, and the business started picking up. A lot more deals... I am now becoming inundated. There's not enough hours in the day. Who's in that situation right now? Who is swamped? Maybe you've got a nine to five and you're doing real estate... Look, man, I've been there. Borderline nervous breakdown; like, didn't know which way was up. No matter how many hours I work, it wasn't enough. And I had spent 15 years in the corporate world, I knew the right answer; should have hired somebody. That's what we do in corporate, get more resources.

Well, there was a reason that I didn't hire people. I was afraid. What was I scared of? It was one of two things. It was either "I'm so disorganized that whoever I hire is going to come in here and they're going to be like, "I can't work in this kind of environment." That was a real fear of mine. The other fear of mine was that, okay, maybe I'm just being dramatic, and I really don't have that much work, and somebody that I hire will come in, they'll clean everything up, and then what? I'm gonna have no work for them. Those were the two fears that held me back for a long time.

I met somebody at [unintelligible 00:13:30.01] Anybody know this guy? Yeah, great guy. He's just like, "Ash, you're a dumbass. Put an ad out on Indeed, and hire somebody." He's like, "Look at all these responses that I got from a simple ad on Indeed." And I'm like, "Oh, my God. It's that simple." And again, I should know better. Right? I used to hire people all the time. Put an ad out.

I hired an incredible young lady, who's now my operations manager, and we've never run out of work. And we've actually hired more people, and we still have an endless amount of work to do, which is a great problem to have. So for all of you guys and girls that are inundated - look, there's the VA route. There's some people in this room that I know use VAs very effectively. There is the local hire. You'd be amazed at how many young moms and dads who took off of work to raise kids - now their kids have gotten older, they're college-educated, and they realize they can't stay at home all day doing nothing... So those people are out there, right? They want to work flexible hours, they want to work maybe 20-30 hours. There's a fit for you out there if you're inundated. I promise you, if you get some help, it'll free up your time to do what's more rewarding, and do what's more effective use of your time. Alright? So no excuses, "I'm being inundated."

This also comes from the book "Who, not how" by Dan Sullivan. If you guys are inundated, if you're your own worst enemy, if you're doing things you shouldn't be doing, read that book, do a time audit. On your phone, set in a timer for 55 minutes, and do it for a whole day. And what you do is every time that timer goes off, every 55 minutes, you spend five minutes writing down what you've done the previous 55. Don't check it for a week. Don't look at what you wrote down. A week later, look at it. And you'll be beside yourself thinking "What a waste of time. I shouldn't be doing that. I can automate that. I can offload that." And then dive into it a little deeper. Out of these tasks, what pays me money? What costs me money? What's a good return on my time? But also - we're not robots. Break it down. What do I enjoy? What do I despise doing? What do I really enjoy doing? Don't be afraid... If something makes you money, but you hate doing it, offload it. Or find a partner.

So the partner track was more handfuls of mistakes here... For many years, I was a one-person shop. And I had a buddy of mine who was a homebuilder. He wanted to partner up with me on deals. Sure. So we bought a half-built office building. The guy ran out of money, vacant for five years... We end up buying this, and it ended up being me doing all the work. The expectations weren't there; we both went into a gung-ho, "Yeah, we're gonna turn this thing around." And as soon as we closed on it, because we didn't communicate, he expected us to hire out all the work, I expected me to do all the work, and that was a big point of contention.

So I've seen a lot of these partnership deals where people get in bed with each other, expecting to build a company. My lesson that I'm going to implore you guys follow is find a partner with people, do it on a deal by deal basis. If you can do multiple deals together, you work effectively together, get a partnership agreement - it's like a prenup for partners - and then form the company. But you can't do it until you've done a number of deals together. I get it, you hear "If you want to go far, go together." It's good to partner up with people. It's more fun than sitting at your desk alone, to have other people to bounce ideas off of. But I've learned that partnership lesson the hard way, way more than I should have. So lesson for all of you guys - partner on deals. And then if it's natural that you guys are just killing it, girls are killing it, then start a company and partnering on more, but you're not tied. Right? If you find a deal with somebody else, by all means, go do it. So that's a partnership lesson.

I ended up forming a partnership with two incredible young ladies that are family friends as well, and we've complemented each other very well. So how many people in here are the type where they start a lot of projects, and their desk is never organized? Can't follow through on things. And for years, I blamed myself. In the corporate world, I would see people with a clean desk. Every morning and every day when they left, their desk was clean, and mine was stacked. And I'm like "After this project, I'm going to clean my desk, I'm going to start acting like that. I'm going to get there." I never got there in 15 years. Even my wife would tell me, "I wish you'd follow through on things. You start all these things, but you don't follow through." I don't like doing laundry. Somebody else do it. But reading the book "Rocket Fuel" - who's read that book? For anybody that raised your hands earlier, that's not organized, please read that book. Is that Dan Sullivan also, Rocket Fuel? Gino Wickman, sorry.

So Rocket Fuel teaches us that you're either a visionary or an integrator, if you're the leader of a company; or really for any partnership, to be successful. The visionaries are the people that can't have a clean desk. We really can't follow through, and all my life I thought that was a curse. "I need to get better, I need to fix that, I need to follow through more." And really, I learned it's just being a visionary. My mind is on to the next idea, like a lot of yours are, too. But we need somebody that's called an integrator to complete the tasks that we start. That's an effective use of a partner. That's how great companies expand and do well.

I saw something recently about Steve Jobs was a failure when he was with Apple the first time, and when he came back he was an incredible success, because he had Tim Cook, the integrator. And you could tell, Tim Cook, now that he's the CEO, not really a visionary. Didn't pump out the products that Steve Jobs did. He's an integrator.

So if you're an integrator, an integrator is the number two person in the company. Nothing wrong with that. You don't want to spend your brain cells on being the visionary, coming up with ideas, motivating and energizing people. You just want to see things get done. And that's okay. Partner with a visionary. Good?

You guys know Nate Barger... One night I'm at his house. He's like, "Hey, man, why aren't you doing more?" I'm like, "Dude, screw you. Like, I'm closing on a $5 million strip mall." He's like, "Oh, okay, what about after that?" I'm like, "No, I'm gonna hold this. What do you mean, after that?" He's like, "Why are you gonna hold it?" I'm like, "Dude, we're going to increase the value of this thing. The rents are going to increase, more money's coming in, more income." He's like, "No. Get it 80% of the full value and sell it." And I'm like, "Man, you're crazy. Why? This thing's gonna cashflow." He's like, "No, move on to the next one." And I left his house at night thinking the guy's crazy, man. Like, this thing's gonna spit out some cash. And we're increasing the value from like 5 million to 7.5 million dollars, so why wouldn't I keep this?

I started thinking about it, and he also said, "Have a goal. By the end of next year, or by the end of the summer, close on $100 million of real estate." I'm like, "Man, you're crazy." So I went home, did some of these numbers... Turning and burning real estate, in my opinion, is a better way to build wealth than buy and hold if you are a value-add investor. How many people in here have goals, a number of doors or passive income? Monthly passive income, yearly passive income. I started the same way. I had a goal -- I don't even know how long ago it was, or how much it was, but there was a goal of how much passive income I needed, whether it was to retire, cover all of our expenses, whatever it was; that was the goal. Hit that number in passive income. But all of you know your passive income goes up and down. It fluctuates when you buy and sell. That number is pretty fluid. I'm going to ask you to get a better goal. Have a net worth goal. It's a number that doesn't lie as easily as passive income. You can become over-leveraged and get your passive income number. If you're over-leveraged, your net worth number is still going to reflect that. It's a truer number of where you are in terms of your success.

So everybody, please, do your balance sheet, your personal financial statement. If you've ever gotten loans from banks,   you know they're going to require that. If you're new to real estate investing, and think you're going to apply for bank loans, do a personal financial statements, or as simple as a balance sheet; it's all the same thing. Assets, liabilities, net worth. Your house, your investments, your 401k, whatever, assets, your car payment, your car debt, your home debt, liabilities. The difference between all the assets and all liabilities is your net worth number.

So if you invest in real estate, your net worth number might go up a little bit when you buy. You're gonna hopefully buy right, so on day one you've got a bump in your net worth. When you go to sell that property is when you realize most of that net worth bump. Because we're not going to be overly ambitious on what our net worth number is; it's going to be realistic. Now, this is being recorded, but I'll just say it anyway... When you present your balance sheet to the bank for a loan, you can be a little bit more optimistic on your numbers, for assets. Don't lie, but if you think this house is worth 150k... Maybe 170k on a good day. But your balance sheet that you present to your partner, your spouse, yourself, needs to be the truest and most conservative number you can imagine. Because that's going to be the truest value of your net worth, and a measure of your future success.

So what do I mean, your passive income lies, and it's not a good goal? I promise you, if you get to a $5, $6, $7, $10 million net worth, you're not going to care about how much passive income you have. You're just not, because you know you can sell a property and have a million dollars in cash. The passive income will no longer matter once you achieve a certain net worth number. Does everybody understand that? If it doesn't sink in tonight, just please, give it some thought.

So goals - create a number that you want to achieve for net worth, and then double it. Come up with a realistic number of what you think you can hit, or what you want to hit. Or it might even be a little bit of a stretch. But whatever that number is, I want you to double it. Because what happens is you hit that net worth number and you get demotivated. Because money no longer motivates you. The goal, the net worth no longer motivates you, and you kind of step back a little bit. And that happens. So double it. It took me a long time to realize that one, too.

And then go bigger. Back to Nate Barger... If you look at people that are successful over a period of time in real estate, the advice they would give their younger self is "Go bigger, faster." That doesn't mean get over-leveraged, it means go bigger, faster. Do bigger deals. We typically won't touch deals under a million dollars; it's not worth the time and effort. So all those years I lied to myself saying that sweet spot's between $300,000 and $800,000. All I did was cost myself valuable time. I should have gone bigger, faster. I had the skill set, I was conservative in all the deals that we bought, I just didn't have the courage to take down those deals or raise capital.

Any questions so far? In a nutshell, these are my lessons learned - have a benchmark; don't try to time the market. Raise capital, if you could be a good steward of your investors hard earned money. It really shouldn't be called raising capital, it should be called raising hard earned money from other people, is really what it is. If you can truly be a good steward of someone else's money, raise capital. It will help propel your career, it will help propel that net worth number a lot faster.

Get help. When you get absolutely inundated, get help. Hire it out. Ask for mentors, ask for help. Real estate people are the best, man. We'll help anybody. So get help. Don't get to the point where you're gonna have a nervous breakdown and you don't know which way is up. Partner. When I formed that partnership with these two young ladies, one of them said, "Do we have to split everything going forward?" "Yeah." "Even this building that we're about to close on?" "Yes." And it might seem counterintuitive; we've got these great deals lined up,a nd now we've got to bring in a third partner... Because initially it was me and one person. And then I've found a family friend who would be a great fit. And that was a question that came from the other partner, "We've got to split this three ways now. How does this make any sense?" If you look at the trajectory of our net worth, since the two partners, had a big bump; since the three partners, it went parabolic. So although it might seem like you're spreading yourself thin, you're cutting the pie in too many pieces, I promise you with the right partners you'll excel much faster. It's all about hitting that net worth number. And that's it, guys. That's all I have for you. I would love to do Q&A. Yes.

Audience member: [unintelligible 00:27:22.10]

Ash Patel: Oh, that's a good question. Yes, I think you need one visionary. I've been involved in deals with multiple visionaries... It's tough. Great question. I don't think so. Anybody have a counter argument to that? Is anybody both a visionary and an integrator?

Slocomb Reed: Sure. They're very different and very inherent personality traits, and people tend to fall into one camp or the other... Chances are, if you find yourself the visionary and the integrator in your company, you're not accomplishing nearly as much as you would be if you figured out which of those roles is actually a good fit for you, and found someone else to be the other, the partnership of the two. You would be able to go much further, much more than twice as big as the things you're able to accomplish if you're trying to fill both roles yourself.

Ash Patel: Yeah, I completely agree. Integrators are typically more introverts. They enjoy sitting at their desk, heads down, knocking off checklist items. Visionaries - they want to be here; they want to be where you guys are at. They want to network; they want to come up with ideas, they want to brainstorm, they want to motivate others to get things done. So great question. Yes.

Audience member: [unintelligible 00:28:45.15]

Ash Patel: Yeah, great question. So my wife and I agreed that once we hit this net worth number, she would quit her job. Hit the number. Sure. Real proud, man. Like, once a year I do my balance sheet, and I give a copy of it to my wife... And she looks at it, she's like, "Ah, cool." She doesn't pay much attention to it. She doesn't really know half the things that we own, because she's just not motivated by money. And I don't think either of us are. But man, I hit that number. I worked hard to hit that number. I hit it. And she didn't quit her job. I'm like, "Whoa, what are we doing here?" She's like, "Look, I enjoy working, and I need something fulfilling to do. What am I going to do if I quit?" I'm like "Come work with me." She's like, "Hell no."

So that was a number of years ago... She's still working. And what I realize is the money doesn't motivate me, right? Earlier, some of you heard me say "If you love your job, you'll do it for free." Look, if I won the lottery, I would still be doing exactly what I'm doing now, with the same people that I'm doing it with. So, yes, I worked really hard, and then I sat back a little bit, thinking, "Okay, we did all this, and for what?" Until I realized that working with partners, having people work alongside with me, having investors along - I do it for them. I do because it's fun. That's it. It's fulfilling and it's fun.

Break: [00:30:27.19]

Audience member: If you're raising capital for a deal, say just for example if you're raising $5 million for a deal, what is the number of investors that you find to be manageable, or what's too many? And do you take care of all that accounting in-house, or via a third-party accountant for regulation?

Ash Patel: Good question. Initially, we would take on people at $100,000 only. So not more, not less. There's some people that want in for more. But to give everybody an opportunity to get into these deals, we capped them at 100k. And to justify all the cost of getting the regulatory stuff done for the investors, you have to come in for at least 100k. There is a company called Avestor - and there's others like that, but Avestor is one that we use... They do all of your fund accounting and fund legal. So now you could take on people for $25,000, $50,000, and there's really not much more work on the backend, because they do it all.

So yeah, great question, because prior that, it's a huge undertaking, getting all of that done. To set up a fund, it's about $15,000. And I think it's 18k now. But every subsequent deal you do is about $5,000. Whereas each individual syndication you do, the attorneys will charge you about $15,000. So if you know that you're going to raise money for multiple deals, set up a fund. And there's also one portal that all of your investors can log into, and they handle all of that. Yes.

Audience member: How much money have you raised capital-wise, and then also what's the average return for your investors?

Ash Patel: Good question. So I still put in usually half of the money for our deals, because I see a lot of multifamily syndicators - they raise all the money for their deal; all of it. They don't have any skin in the game, and they always kind of baffle me. So our deals - I would love to take them all, but I know at some point we run out of money. So I'll typically invest 50% on the LP side, and raise the other 50%. And also, our deals are not like multifamily, in that the dollar amounts are much lower. There's plenty of $30, $40, $50 million apartment communities out there. There's no $50 million strip mall. Strip malls are usually five, to eight, nine million dollars. So total raised - maybe 3, 4 million, all in $100,000 [unintelligible 00:35:06.06]

The very first deal we did, I wanted to come out of the gate swinging. So we offered our investors an 18% preferred return, and a 30/70 split at the end, instead of a 70/30. So for anyone that doesn't know what that means, if you put $100,000 into our deal, every year until we sell it you get $18,000 back. When we sell it, you get 30% of the profit beyond that. The deal was going so well, we bumped that 18% up to 22%. So now they get $22,000 for every $100,000 they invested.

Since then, since we came out swinging, we've been a little bit more conservative, and we've aligned ourselves with the market. So there's multifamily syndicators that are raising at a 6% pref, 13%, 14%, 15% IRR. So recently, we did a 10% debt deal, where for any money you put in, you just get a straight 10% every quarter. So four times a year, if you put $100,000 in, you get $2,500 four times a year, $10,000 a year. We've also done 50/50 splits; I think it's an 8% preferred return, and when we sell it's a 50/50 split.
Every deal is different with us, because some of them cashflow great on day one. Others are value-add, where they don't make a ton of money upfront, but we're going to add the value and have a huge win at the end. So there's no blanket approach to how we syndicate. We just look at a deal and figure out what the best scenario is.

Audience member: You mentioned a few books... Is there a book that you would recommend for mindset in terms of - the biggest limiter for a lot of people is their mindset. Is there a book that you would recommend for real estate that would improve someone's mindset to make them realize the things that are possible out there, aside from those

smaller deals?

Ash Patel: No... But I would recommend aligning with people that are very, very successful, and getting bits and pieces of knowledge off of them. Like Fairless, when he brushed me off and he was just like, "Should have raised. Should have raised." Over time, it finally sunk in. There's no book that will compare to the advice that's tailored to you, from somebody that knows you, and they've been where you're at. I wish I had a better answer for you, but no.

Look, even on Bigger Pockets. Get on there. Ask for advice. Tell them your situation. "I'm this many years old. Here's what I've done, or here's what I want to do. What advice would you give me? And what advice would you give your younger self? Just take it all in." Look, people love talking about themselves... So get somebody talking about themselves, and then ask those questions. Add value to anybody you interact with. If you want advice from them, figure out what you can do to make their life easier, whether it's an introduction to somebody, or doing some busy work, doing some research, whatever it is. Offer to help somebody. Alleviate some pain or bottleneck, and you'll be amazed at what they'll do for you in return.

Audience member: [unintelligible 00:38:23.23]

Ash Patel: Yeah, start with a mixed-use building. Mixed-use is some kind of retail or office on the first floor, and apartments above it. Why? Commercial guys like me hate them, because I don't want to deal with the apartments. Apartment guys are scared, because they don't want to deal with the commercial part of it.

I had somebody call me up one day, I had a building in Norwood - this was 4633 Montgomery Road in Norwood. I owned that building, it was mixed-use; it had restaurant, and it's now a failed restaurant. Don't ever get into the restaurant or bar business. I should have put that on the lessons. But [unintelligible 00:39:20.29] Because of bad partners. I was supposed to be a passive investor... That's a 45-minute episode. But the building next door to us came for sale, and I had no desire to buy it. My partner in the restaurant there was trying to convince me to buy it to make it into an event center. We couldn't figure out how to make money with this restaurant, and now we want an event center; that's also going to cost us a lot of money.

So we could have bought it for $165,000. I didn't want any part of it. And I got a call from somebody that's attended these sessions, and they said "Ash, can I pick your brain on a commercial building?" "Sure." He said "It's mixed use in Norwood." "Tell me the address." "4631 Montgomery Road." I'm like "Ah, I own the building next door, and I tried to buy it... They'll sell it to you for a buck 65", because that's what we got him down to. He's like, "The problem is the commercial scares me." I'm like, "Alright, hold on... The apartments scare me... Why don't we partner on it?" He's like, "Yeah. alright..." And he starts talking a little bit more, he's like "The more I think about it, I just don't want any part of that commercial." And I said, "Okay, let me ask you this. If this was a fully leased, the apartments, and it was just a four-unit apartment building, imagine the commercial space wasn't there, drop the building down a story..." I said "What would you value this building at?" And he said, "Well, ARV probably 280k, 290k." And I'm like, "What?!" Because I don't really look at apartment prices. I just... I don't.

So I'm like, "Okay, hold on. I'm gonna buy it." He's like, "Yeah, go ahead..." I'm like "Are you sure you don't want to partner? Because I don't want to manage these apartments." He said, "No, go ahead." I bought it for 150k, not even 165k. 150k. It appraises at 520k ARV. Now, it was a full gut job problem... But that's what I mean - nobody likes a mixed-use building. Banks hate them also.
Right now you advertise a four-family in Norwood, needs a full gut reno... What would that cost right now? And what kind of bidding war would you have? Everybody would be wanting a piece of that. But because you throw in an extra commercial unit, it scares everybody away.

So start with commercial. Often, the apartments will pay all your expenses; mortgage, everything. So the commercial's just profit. Or vice versa. There's times where commercial people like me have mixed-use buildings... We got the commercial rented out; don't want to deal with the residential. But the commercial pays for all your expenses.

Audience member: [00:41:48.12]

Ash Patel: No. that's another myth. Everyone thinks that triple net - that's mailbox money. You hear "Triple net - all you do is collect the check." Not the case. Every triple net lease is different. Unless you see the words "absolute triple net", or zero landlord responsibilities. McDonald's, Walgreens, Starbucks are typically absolute triple net. Most other triple nets - landlord is still responsible for roof, HVAC replacement. Tenant will pay for repairs, landlord will pay for replacements. All the devil's in the details. We have a strip mall in Fairfield... Every lease is different. The triple nets are all different. Whatever the tenants negotiated is what went in there. Some of them have caps. The tenant will pay for repairs up to maybe $500 per occurrence. Others will pay for replacement of HVAC, plumbing, everything.

So the devils in the details. If you buy something that's full triple net, the returns are going to be so low, because there's so much 1031 money chasing those deals... People just want to park money with no headaches. So you're not going to get ahead, you're not going to increase that net worth number much by buying absolute triple net. I would consider buying something that's a mix of triple nets, mom and pops, vacancies, national tenants... But start underwriting those strip malls that you see around you. Whenever you drive by and you see something in your neighborhood that advertises for sale or for lease, whether it's office, retail, industrial - make the phone call, ask about the numbers. Let them know you're new; get whatever numbers you can, underwrite it, and see what the returns are. Just get the wheels turning. Otherwise, it's going to be one of those barriers that you never overcome. And I'm telling you, there's so much less competition in commercial than there is residential. And for that reason, the returns are much higher. We still would rather not touch anything under 20% cash on cash. We'll go down to 13% 14%, but there better be a huge value-add in the backend. Yes.
Audience member: [unintelligible 00:43:56.09]

Ash Patel: I'm glad you have a balance sheet. How much equity do you have tied up in those properties. I don't want a number. Jus tthink about it. How much equity do you have sitting idle in those properties? Now, the argument is "Well, just do cash-out refis and reinvest that money." That's great, but you're only cashing-out/refying today, 70%. How lenient are banks really right now? They're not doing 80% anymore, are they? Well, commercial they are, but residential, they're probably not. I'm assuming a lot of these are value-add properties that you bought and improved the value. Imagine if you sold everything and kept buying value-add. Do a three-year plan, a four-year plan. Where would you be? The problem is we get complacent. We added the value, and now we're sitting on it and we're cash-flowing. This is the easy way out. This is good. It's not much of a headache. You maybe got a property manager involved... "I'm good." But if you want to grow your net worth number, you've got to sell it because there's a cost to having that idle equity sitting there.

So that $5 million strip mall, that we can get to seven, seven and a half million, that I wanted to sit there and cashflow forever - why not sell that and maybe buy two $5 million strip malls with the profit? Take into account capital gains, ideally hold the property for a year or longer, 1031 if you can... Don't make dumb decisions because you want to satisfy a 1031... Everybody understand 1031s, or no? Okay. Does that answer your question?

Audience member: [unintelligible 00:45:47.11]

Ash Patel: Yeah, so we all have a finite amount of capital. If you continue on your current trajectory - and kudos for doing a balance sheet. But if you continue, you'll be able to see what path you're on. Versus go back to when you were hungry and buying those value-add deals, and see where that'll put you. So that's the [unintelligible 00:46:13.02] But yes, hard mindset, because we all come from "Buy and hold. Passive income."

Audience member: [unintelligible 00:46:20.24]

Ash Patel: No. It's really maximizing value up until 80%. So you leave some meat on the bone for the next buyer. And don't be greedy... You never go broke making a profit. So in 2015, I don't regret selling those properties, because I made money. I made a profit on them. Yeah, you kick yourself, like "Well, I should have held on to them." Look, grandpa had a house in 1972 he should have hung on to. Don't blame yourself for making a profit. So don't be afraid to sell, and don't be afraid if you sell to pay the capital gains taxes. Try to avoid paying ordinary income taxes if you're in a high tax bracket. You don't go broke making a profit. Good question. Yes...

Audience member: [unintelligible 00:47:06.02]

Ash Patel: For capital gains you don't. It's not here.

Audience member: [unintelligible 00:47:12.00]

Ash Patel: [unintelligible 00:47:13.28] So 1031s are different. But... [unintelligible 00:47:18.04] Yes, if at all possible. Avoid a short-term deal, right? Figure out the tax game, too. It's another way to win in real estate. But don't make decisions solely based on tax savings. Focus on your profit first.


Audience member: [unintelligible 00:47:38.01]

Ash Patel: So playing devil's advocate on there - we look for heavy value-add deals. If somebody's in this room, they are most likely a professional real estate investor or a broker. What kind of deals can you score there? Great value-add deals?

Audience member: You can get value-add deals, you can get steady, just regular income deals, a place to move your money, we can park your money someplace... If you have a boot in an exchange, there's going to be a place for you to put your boot. There's all kinds of deals there, because it's not the same philosophy. Take a property as far as you can, and then go to the next property. It can get stale on a property really quick, too. When you sit on the portfolio for a long time, it gets stale. That's one of the things I've tried to explain to all my clients - take the property as far as you can and get rid of it. Trade up to the next thing.

Ash Patel: Yeah, that's a good point. Thank you for that. Questions? Yes.

Audience member: [unintelligible 00:51:01.13]

Ash Patel: Good question. So when I say churn and burn, there's some properties that we're going to hold for six years. And the reason for that is we bought a strip mall that has all triple net leases, but it has no renewals. Now, imagine that brand new strip mall, these restaurants and boutique stores and salons have gone in there, and the builder never thought to put renewals in, and the tenants never thought to ask. So in commercial real estate, renewals only benefit the tenant; not the landlord. The reason for that is with apartments, you guys can raise rents sometimes in good years 12%, 15%. It's crazy what's been happening with apartment rents. If we're in a five-year lease with a commercial tenant, it's going to say 3% increase every year. They don't care what inflation is, unless there's a CPI clause built in. But while rates were low, it was a set increase every year, 3%, 4%, whatever it was. So at the end of that five-year lease, or that three-year lease, tenants will typically negotiate a renewal. I will renew for another five years, and I'll pay a 10% rent bump.

Well, in this one strip mall, no renewals. So at the end of five years, all these established businesses are left with month to month leases that we have all the leverage on. They're already paying way, way below market, so we'll get them a little bit closer to market, and it'll be a huge home run. But we have to wait the five years until those leases run out. But now, when we bought it, it was a 13% or 14% cash on cash return. And every year that goes up by 3%. So it's true triple net, tenants pay for everything. So that's a six-year hold, but it's still a churn and burn, because we know we're getting out of it in year six.

And part of the question was on debt... With commercial loans, all of our interest is fixed for 5 or 10 years. Historically, it's been 10-year fixed loans. Now because rates are going up, they're doing five year fixed loans. We've never done anything less than that. Even if we do interest-only loans. How many apartment investors do we have in here? So out of those apartment investors, do you do interest-only loans? Just during rehab. Okay. So the multifamily game, the Playbook says do a three-year bridge loan or interest-only loan. Those three year loans are variable rate loans, month to month. So every month they readjust, and your mortgage payment goes up. For us, maybe similar to you guys, when we do an interest-only one year for a construction or a lease up, that rate is set, and the rate beyond that for the next four years is set as well. All of our debt's always been fixed.

Audience member: I know that there's supposedly going to be the retail syndication apocalypse coming up soon. I heard today the number is like a fourth of the loans that are gonna need to be refinanced next year won't be eligible... Are you seeing that in your space? And is that something you think you're going to be capitalizing on heavily? Or do you think your business plan doesn't really --

Ash Patel: A lot of those metrics are based on readily available data from CMBS loans, commercial mortgage-backed security loans. And those are typical institutional loans, or loans over $10, $15 million. Now, those are -- when you look at that Whole Foods strip mall, The Best Buy strip mall, the Home Depots, the Bed Bath and Beyonds, the JC Penney's. There's a big box apocalypse that's been going on for a while. JC Penney has been around for 120 years, went through the Great Depression, recessions, world wars... And COVID, or Amazon, or whatever - it was gone. So yes, there's going to be a lot of pain in retail. But here's what you don't see - when you google "Commercial real estate retail news", you'll see that retail vacancy is the lowest it's been since 2004. It's at 6%. So we don't see that in the headlines, because we see that Bed Bath and Beyond is closing. Tuesday morning is in bankruptcy. All the pain is what grabs the headlines.

And also, if you look at suburban office and suburban retail, COVID kept us close to home. And COVID also brought the millennials out of downtown, into the suburbs. They were going to do that anyway. COVID accelerated that. When you graduate college, you go and live downtown, in the city centers. Well, during a three-month lockdown, these young people realized "This sucks, living in this box. I'm going to get a house in the suburbs." So it accelerated their move to the suburbs. It put a void in city centers.

So when we buy retail, we don't buy city centers. We don't buy the Whole Foods strip mall. We buy suburban retail. So if you think about the hair salon, the nail salon, the barber shop, the pizza place, the deli, the dog groomer, the optometrist, the dentist - those are internet-resistant and recession resistant. [unintelligible 00:56:24.19] They do have a higher turnover. You can alleviate that by getting national tenants in, or getting tenants that have more than one location. If you have a mom and pop tenant, there's little you can do to protect yourself from them leaving. Even if they have a five-year lease, a mom and pop tenant, if they default, it's because they're in financial pain. You're not going to sue them to take every last dollar from them. They're going to exit their lease. It is what it is.

So when you start getting credit tenants in there, you have a little bit of a backstop. If you have a regional tenant, a national tenant, or a physician's group that has more than one location, they can't just bankrupt the LLC. It behooves them to keep paying, even if they go dark.

Look, retail is alive and well. Suburban office is on fire. Anybody that has offices in walkable suburbs, like walkable -- downtown Milford, downtown [unintelligible 00:57:20.06] those areas, small offices are absolutely on fire. And it's because COVID -- everybody worked from home, and now people are realizing "My kids are off for the summer. My spouse works from home. I've got a puppy running around... I can't effectively work from home." So we have a lot of tenants that will rent single offices, and they're telling us "I need a place to work, that's conducive to me working." So small offices that you can rent for 400 or 500 bucks a month are on fire.

Audience member: [00:57:52.00]

Ash Patel: We do. We've developed medical centers, strip malls... Currently, we've just purchased land that we're developing a strip mall and a flex base building. [unintelligible 00:58:04.27] No, this is in suburban Atlanta. [unintelligible 00:58:08.24] I just bought an old restaurant mixed-use building. More questions? Anybody else want the mic? Thank you guys.

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