Transcription
By the end of this video, I'm going to give you everything that I've learned in my 23 years of commercial real estate experience so you'll be able to buy your first commercial property. I'm going to give you five major tips that have helped change my life and they can be applied to help you reach your goals.
The first aspect is understanding different property types and different projects. As far as property types go, the most common are retail, office, medical, multifamily, industrial, and land. Each of the asset classes has its own pros and cons. Office, for example, has large deals, stable, long-term income, often good credit. However, as we know, the demand for office lately has trended down. What you're seeing is the urban cores and funky creative office doing really well. A lot of suburban office, b-dated office and that old lifestyle is of course moving out.
On the retail front, it's a never-changing market all the time. Ups and downs, transitions along with innovation. Obviously, Amazon has drastically changed the marketplace, adding a lot more demand for industrial while also taking away demand for traditional retail. But you're seeing savvy retailers adapt, change their strategies, become effective. You're seeing local market integrated retail strategies that are still winning and new emerging concepts and brands are coming out all the time. And the softness that we felt a few years ago in retail has recovered a lot into the industrial asset class. As demand for US real estate comes back due to tariffs, that's going to help an already strong market. Industrial's been extremely strong in the last period because during the supply chain COVID era their packaging, cardboard companies, logistics, all those things took off.
Multifamily that's commonly known as the most resistant asset class and it's an easy reason why people will always need a place to live no matter what innovation or change. The only trends that you're really noticing in multifamily are that trends back to the urban core are a big real thing and they're pretty awesome if you think about it because that way people have walkability, integrate with a retail community and they can work from home, work from the area and create their own little sub communities. For me personally, if you all know me, I like to ride my scooter back and forth between the markets where I work, live, and play. And I like to encourage the team and all my friends to borrow them, do the same bike, scooters, walk, that urban mindset I learned in New York City. And you start to understand, appreciate the logistics, the value of your time. And hey, maybe your real estate cost is a little bit higher, but I'm going to pick up ABC benefits of community time savings, happiness on the weekends, and those different things. Everyone's strategy is different. Also note, a multifamily cost across the whole economy are going up. So rents are going up. So, a lot of what you're seeing and hearing right now is an affordability crisis. It's really unfortunate that a lot of people's rent is so high that they're struggling. And why that's happening is because interest rates going from 4% to 6, 7% along with construction costs having doubled in the last 5 years. Well, jobs and rent can't increase as fast as those inflation. So, the system's getting squeezed. Um, and that's what happens in inflationary environments. And that's by the way that's why the government has tried to make measures to bring inflation down. As painful as it is for us commercial real estate folks that are having to deal with higher interest rates.
Moving on to the next medical office. That's a big asset class. It's near and dear to me cuz I've built hospitals all over the country. I've worked on all kinds of different things. What I like about that asset class is it is recession resilient, but it's very specialized and niched. Those centers are a specialized center. If your tenant does go out or you miscalculate the strategy and you have a vacant medical office, that's pretty expensive.
The last asset class is land. Uh we acquired about 250 acres in the downturn in the state of Florida and have worked on all different types of land development deals ranging from infill where you're dealing with the city, the municipality, the density requirements through rural, secondary market, suburban land where you're doing uh plots for homes and selling them to national home builders. Everything on the land spectrum is all in between. That asset class is often known as one of the more risky asset classes because it has no in place income and it has no structure that you can just go lease up. You have to actually buy it, hold it, carry it, deal with the risks, the carry costs, the entitlement process, the permit process, the development process, which leads into the next concept.
We've talked about property types. Now we're talking about project type. Project types are easily classified by core properties, which is an existing property with income. Value add, which is a property that may have some income. Think like a retail strip that's partially leased and you can fix the rest of it. And then think of opportunistic. Opportunistic is just what it sounds like. It's high-risk, high return. Within that asset class is buying distressed with a quick close or buying a uh development deal that requires government approvals, alignment of architect, contractors, your tenants and bring that whole thing together. When you do that, your returns are higher. Your risk is higher.
There's no right or wrong strategy as you're in commercial real estate. It just determines where do you want to be. Do you want to be 5 to 10% returns with in place income with lower risk? Do you want to be value add 10 to 15% returns based on taking on something that you can kind of already see where it's going to go or do you want to go opportunistic 15 to 10, 200% returns for that matter but you have no idea what you're going to go through and what risks and that's important because as you're putting together deals as the sponsor or developer or manager of the LLC you have to line your debt and your equity along with the right project strategy. If you have a misalignment at the partnership level, meaning that your investor was expecting a a coupon or a check in the first 12 months, but you set them up with a 36-month development project, you're going to sometimes have challenges in those types of deals. Um, and that is the a nice segue into the next part of the discussion.
Point two, the second point is understanding the marketplace as a whole. And this is a rather abstract topic in some regards. When people ask how's the market doing, that's extremely vague because like if you move to the stock market for example, the S&P as a whole moves at roughly 8%. And people use that overall market metric in order to determine how the market's doing. However, in reality, if you own a certain stock, it could be doing great while the market's doing bad. Well, commercial real estate is no different. You have the overall national market, but then more importantly, you have regional and hyper local markets. And then within those markets, the asset classes we just discussed may perform differently depending on if you're in an urban core, a secondary market, or a tertiary market.
So once you evaluate America as a whole, where are things going? Look, um there's a lot of uncertainty right now going on with distressed debt, high interest rates, tariffs, and unknown. As a whole, in the last 12 months, the market has been rather soft for development and commercial real estate investment at the national level. However, states like Florida, North Carolina, who have seen an influx of migration, companies, economics, and labor force have done pretty well despite the overall softening market. That's where we start to come down to the regional level where you need to study. Ultimately, if you're making a commercial real estate investment at the state, at the region, at the city, at the hyper local market, we're doing projects in Eore City right now, which is a submarket of downtown Tampa. And that's important to understand because that submarket may perform differently because Tampa as a whole is doing good and this market has a lot of emerging value. So when you pick that one property within that one submarket, just understand if someone asks you how the market's doing, it's not really a fair question. Now, if they said, "How is the retail market doing in urban Tampa for properties 100 to 300,000 ft?" Okay, that's something that we can have an informed discussion about.
So understanding the market means having hyper local knowledge and data and then knowing how to tie that into the national commercial real estate capital markets trends which are the movement of debt and equity to go into project. Remember you have commercial real estate capital markets the movement of money and then you have commercial real estate user markets which is an occupancy or tenant driven market. On this side, you either will work with a building or you'll work with a tenant. And that tenant needs space. And if there's a million square feet of retail space in downtown Tampa and there's 900,000 ft² of demand, then you're going to have 100,000 ft of vacancy. But if the population's growing and all of a sudden the retailers want to come follow the population, that can immediately create an imbalance and a development opportunity. So when I talk about hyperlocal markets, that's the kind of stuff that I'm talking about.
If you've never done a deal, you're probably wondering, "How much is this going to cost me?" Well, your strategy, of course, can start with, "What size deal do I prefer to do?" For beginners, it's very common to find commercial deals in the 1 to 3, 4 million range. And then from there, you ask yourself, how am I going to use debt and equity? Um, the 1 to 3 to 4 million space is highly competitive, though, because you have some residential investors, you have small commercial investors, you have small business, more players. As you move to four to 10 million, your sophistication doubles and your equity doubles and your risk doubles and your knowledge base doubles and your ability to present to banks and win deals. It gets exponentially harder. As you go from 10 to 20, then you're on a whole another level. 20 and above is typically more institutional, private equity, and extremely high net worth sophisticated individuals that are able to take multi-million dollar bets on one individual strategy or property idea. Of course, um that buyer pool or investor pool of debt and equity gets a lot smaller as the deal size gets bigger. Now, that is an opportunity because there's less competition in the space. But as you can imagine, the bigger you are, the harder you fall. When those $20 million assets go wrong, you're losing 5, 15, 10, 20 million. You know, you could lose debt, lo lose it all. Um so, bringing it back, regardless of the deal size, we're going to focus on a $10 million project today to keep the math simple.
First thing you do when you're looking at either an existing income property or a value add or opportunistic deal, you want to say to myself, how much leverage can I use? And what is a smart debt strategy given the asset class and the project itself? Smart debt strategy comes down to your individual risk tolerance. There's recourse and non-recourse loans. If you're doing a construction or opportunistic deal, you're likely going to have to sign on it. The bank's giving you money at a great deal, four, five, 6, 7, 8% returns to the bank, which are low. So they want to make sure they get their money back because they can't systematically give up give out billions of dollars and then lose a lot of money while they're only making 5%. Now if you're private equity you're making 20, 30% you can lose a few deals along the way and it's still accreted to the fund. So $10 million example 70% loan is a very common loan in the United States today across all asset classes. We mean 7 million of debt 3 million of equity. Where that equity comes from is all across the board. On one end you have institutions on the other end you have your money and then in between you have high net worth individuals smaller investors investment groups anyone can form an LLC go to a number of their contacts and say hey would you put money behind this LLC which is going to invest in the property LLC or business LLC that's very common that's how the private markets work in this country and that's why the country has done really well is because we have very uh efficient relationship trust and capital markets based on the banking system and the overall country's regulations.
So, of that equity stack, if you want to bring 300,000 of the 3 million, going to use that to put it under contract, get your architect, uh, get your engineer, get your attorneys, get everyone moving. Then from there, go raise the other 2.7 million of the 3 million in equity from a variety of investors, and then at closing, close the loan, bring the equity in, sign whatever contracts you need to do to improve the property. That is a really common strategy of how to get started. So the deal size doesn't matter. You can use that same logic on small deals or the largest deals in the country.
Now you need to understand if something's a good deal or not. We're going to go into deal analyzing. What a good deal is or not is certainly subjective to the person that's making the decision. Some people focus on can I capture equity. Other people focus on can I have long-term consistent cash flow. What is a good deal? um common metrics used to determine if a good deal is first and foremost return on and return of capital. You want to always get a return of the capital and you always want to make sure you get your money back. Warren Buffett is famous for his concept that he does not like to lose money on bets and over the aggregate if you look at his wealth accumulation he did really well because he didn't give money back to the house. On the other end of the spectrum, there's high-risk, high return investors that some of them do really great in this country and other ones completely fall off the map because they lose everything based on a high return strategy.
Cash on cash is a common metric that I like to use because it keeps it super simple. How much money do I put out on day one? How much money do I get at the end of every calendar year when you're studying the project? Going back to the $10 million example, you put out $3 million of equity up front for your partnership and the investors and you receive $300,000 of free cash flow after paying all your expenses in debt. That would be a 10% cash on cash. If you look at that each year, that's a very quantifiable consistent metric. What it doesn't take into account is appreciation, depreciation, and tax strategies.
Focusing on appreciation for a moment, that would mean that on a 10-year hold of a $10 million project, how much does it go up over that time period? That is your where the IRR calculation comes in, or your internal rate of return, which takes into account dollars out up front, dollars in each five years, for example. And then in year five, if you do an exit or a refinance or a recapitalization, money comes in, you then look at that big pop or money goes out because you're wrong about your strategy and you have a big negative here. Either way, that's how you determine IRR. So when you're thinking about is it a good deal for me or not, those are some commonly used metrics.
Other things to think about, does it align with my strategy? For me, I personally spend a lot of time on single tenant net lease and corporate build suits. I personally enjoy urban markets, adaptive reuse, historic renovation, culture, fixing Florida cities, making community. I have different land assets from previous strategies of buying distress. So when I think about is a good deal or not, besides just looking at the financial returns, ask yourself, does it align with what I'm good at, what I like working on, project doesn't align with those things, even if it makes money, you might want to consider stepping aside because your happiness and your expertise is what makes you truly sustainable in this country, regardless of what you're working on.
Now, you need to use your soft skills to help get into the right rooms to make the right deals. We've all heard of soft skills, but let's throw out the concept of networking and those types of transactional mindset. Let's focus on long-term relationships where you create value and mutually beneficial scenarios. If you focus on that and being in the right room with people that have done it before you, you build genuine relationships with them where you want to help them. And in exchange, what you'll normally find is people that are a little later in their career, if you approach them right and you want to help them right and you add value and you're consistent and professional and kind and reasonable, you do all those things right, the concept to send the elevator down is really common. And that's why you have on teams more senior folks working with more junior folks to figure out what the heck they want to do in their life and how they can help with your projects and to tie those win-win relationships together. And so those soft skills are the most important thing. They tie into basics though. Emotional intelligence, communication, empathy, doing right consistently. You work with high value people. They're going to understand pretty quickly if you're focused on the wrong things or transactions or short dollars or trying to benefit yourself versus focusing on the right way to approach a situation which would create long-term sustainability.
Anyone that's been in the game long enough and knows how to create wealth realizes one thing. Long-term sustainable relationships are one of the most important things in the whole landscape that you have to focus on. And focusing on that is the only way to creating overall success cuz going through relationships and transactions isn't sustainable. Integrity is important. Communication is important. Being prompt is important. There's so many things that you can do in the day-to-day that don't cost you any money or take any special skills. It's just showing up and showing up properly. Showing up consistently how you respond to challenging situations. The better you are at containing your emotions, the better you'll be at getting through tough situations. And once people get through tough situations together, they're even stronger. And once they're stronger, opportunity is when luck meets preparation. That preparation comes from your knowledge, your relationships, your liquidity, expertise, all those fun things being in place, which just comes with time, staying consistently heading in the right direction, and working hard.
Covered a lot of topics today. If you enjoyed what you've seen, feel free to comment below with any questions. We're happy to get back to you. and then subscribe, click below a like, follow along the journey as we're going to be covering a lot more investment, commercial real estate, and mindset skills to enjoy taking it to the next level in this great country.