How to Invest in Commercial Real Estate & Escaping the Rat Race

this is the Bigger Pockets podcast show 9917 what's going on everyone this is David Green your host of the Bigger Pockets real estate podcast to show where we arm you with the information that you need to start building long-term wealth through real estate today and I've got a surprise for you we've got a scen green episode that's right in today's show if you've never heard one before we're going to take questions from you the listener base that sent them into me directly and answer them for everybody to hear in today's show we get into if interest rates justify holding a property that's not performing well or if you should reinvest that money into better opportunities what to do with $70,000 if your job is to escape the rat race and a little back and forth going on in the Bigger Pockets forums what to do when you've got a bunch of equity in a bur stir that's a bur property that's now a short-term rental and more up first we've got a flipper wholesaler who is looking to expand into multif family and storage he wants to do all the things and wants to know where he should start most importantly though if you want a chance to ask your question please go to bigger poo.com David where you can submit a question be featured in the show if you don't remember what I just said we also put the link in the description I love it when you guys listen to me thanks so much for submitting your question let's kick this thing off all right up next we have Mike Larson out of South Carolina he was featuring on episode 275 of the rookie podcast and he's here joining us on seeing green today Mike what's your question what's going on guys first I just want to say thank you for having me um this is truly a ton of value um so you know right now I own a small wholesaling and flipping business and I've built up the systems to you know find single family homes but I want to start to scale into like storage and multif family and you know I use your basic um marketing you know Cod calling texting PPL PPC direct mail and stuff but how are you guys marketing and finding like properties that are 10 plus doors or storage facilities that are 100 plus doors James what are you doing to find these you got like a whole bunch of apartment complex stores don't you yeah we've been buying a lot the last 24 months too um even with these high rates um you know one thing that we've learned you know and Mike I started I I started the business doing what you're doing we had a wholesale business Fix and Flip brokerage and we were always the people self-generating our deals um for small multif family Fix and Flip any of this the residential space but then as we started to grow our doors what we notice at least in our Market is we had to expand our Network because large multif family a lot of times is a smaller group of Brokers that actively know that product so the good thing about commercial brokers or multif family Brokers they're not as wide as we are as investors and so when you when you get into that space you you want to kind of expand your network you know and so again again I self I self-generate a lot of my own product with coal call Rooms Direct Mail door knocking referrals from other investors but where we get most of our larger multif family once we stepped in that space is those commercial brokers because commercial brokers work specific areas and because there's only so much product in a lot of those areas they know the sellers a lot more and by getting to know your seller leads more just like you do with wholesaling you get higher conversions right if you know what's going on you're staying in front of them and so we've had really good luck just working with our our commercial broker Network and multif family broker Network always bringing this deal flow because a lot of times these multi family properties do never hit Market they're trade off Market these guys are good at finding the opportunity selling it they're motivated by their commissions and and that is by far the the the most product we get is from our broker Community what do you think Mike makes sense to me I mean I'm good about the networking aspect um as far as what I've been doing so far because I'll hold you know once a month do a Meetup to try and meet other people in the market and have other wholesalers send me deals so I guess I could just do the exact same thing as far as you know going after the commercial brokers try to meet up with more of those guys so you mentioned the similarities like you said you network with residential people like wholesalers and agents now you're going to be networking with commercial here's the differences so that you're not walking in blind most wholesalers and agents aren't worried about if the person asking about the properties is a serious buyer CU it's not hard to get financing for Residential Properties there's a million different loans that you could get right now you got people that are putting together money and they're throwing it at investors just like please take my money there's more money to lend than there are deals are when you walk into the commercial space those Brokers are going to be way more concerned that you're a tire kicker that you're wasting their time that you're not a serious buyer than what we residential investors get used to so you're going to want to understand their vernacular you're going to want to get like cut to the Chase and be able to portray yourself as a serious person this isn't like H real estate agents are willing to give me a free education in real estate hoping that I become their client these are sharks they're only here because they spend their entire life building relationships with wealthy people that own these commercial properties they're understanding what triple net leases are uh the different financing options with these things how you're going to improve the net operating income they're going to use phrases that you may not know if you haven't gotten involved in this and if you're staring at them blankly it's a really good way to lose the trust and then that deal is not going to you it's going to someone with the proven track record you kind of got to fight your way into the good old boys club if you want to be a commercial investor yeah and the reason it's like that too is these commercial brokers are working this targeted area and and they have a small a lot of times they have a small group of Sellers and they don't want to jeopardize that relationship they've been working on for two years so that's why they want to vet you correctly but as you go into the markets too other things you know commercial brokers they can be a little standoff sometimes and and just like David said you want to kind of qualify yourself but if you're getting some push back or they're not bringing any inventory other ways that we do Target multifam and and Mike if you're a wholesaler you could definitely do this because you know how to Target direct or you know direct to seller or targeting um a lot of times we like to pull the recently rented properties and then we pull the information on them so like let's say apartment building was running for $1,000 a unit we pull that tax record up cuz that looked below market value and we see when they bought it then we can look at how much they've depreciated from that property based on you know if they've been there 10 years they depreciated most of it then we're looking at their Equity position and we and we run the return on equity and that's what we approach these sellers with is going hey we have an opportunity for you you have almost a fully depreciated building you're right now you're collecting this much in rent with this much equity which is this return and usually it's going to sound pretty low 1 to 2% cuz it is and and that's how we get these multif family sellers to at least start listening to us because they're more sophisticated than your usual single family seller and when you're talking to them in when you're talking to them about buying their property and you're giving them this the the information that they already understand the benefits of depreciation and return on Equity but they just don't realize it sometimes and so by summarizing it it can get them to kind of work with you a little bit more and so those are ways that we're looking for because we can call them with an opportunity they they should upgrade their portfolio we want to buy and so those are good Target list and another really good way to kind of find more multif family is to reach out to multifam um property management companies say hey look I'm looking to buy if you put up together the deal I'll use it as a broker and I'll keep your property management in play they have a lot of sellers that you know it's in their best interest to sell that get them into another property anyways and they might know landlords that want to move and it's another good way to dig out deals without having to pay the broker fees that's genius I love that there you go Mike thanks a lot man appreciate it and good luck to your nephew in his wrestling tournament today thank you sir thanks guys have a good one all right James now we sort of covered there with Mike that the networking component is different with commercial than residential the financing component can be pretty different too especially when you're a residential investor that's used to buying distressed properties can you kind of cover what people can expect in financing differences if they make the jump from res idential to commercial yeah a lot of times especially when you're buying those Burr multifamilies 2 to four um you know a lot of investors including myself you utilize hard money in construction loans because you want to buy it below Market increase it with the construction funds and then refi into a permanent loan commercial is just a lot more it's a lot different right because you're not getting 30-year financing typically on these buildings they're commercial loans uh they have balloon payments at 57 and 10 years and typically when we're buying these multifam small or large we're working with local banks and and that is a big difference between your residential lenders too when you're getting your commercial financing you're actually meeting with your Bankers you're talking to your local bank and they're they're looking at it like an actual asset whereas if I'm getting a residential loan I'm dealing with the mortgage broker who's making sure that I'm packaged up right and they're dealing with the bank and so you know commercial as you get into multif family these relationships with local banks are really important it's good to go meet with them establish some move some deposits over the more you get to know the better leverage they would get and when we buy value ad multif family it's always a two-step loan but it's rolled into one transaction so we buy these properties we set it up with a bank financing that give us a construction component it's interest only little bit higher rate but it's about three points cheaper than a hard money loan when we close on that loan we've already had our permanent financing locked so we know when we get done with the stabilization what are interest rates going to be and I do think that's really important for people to look at as they get into multi family you don't want to buy a property without a locked rate because it can you know if the rate changes your performance going to change and so the beautiful thing about multifam is you can get your construction loan and your perm loan all locked in in one so you can actually reduce your risk but you want to work with a local bank that understands multif family and does construction there you go another little perk that I like with that is if you're maybe unsure of your underwriting or the process of buying commercial properties if you're going the route you're saying James you have a couple other sets of eyes looking at the deal that you won't have yourself right it doesn't hurt to have more experienc people looking at it and maybe saying hey this could be a problem or we would want to see this become better because you'll learn from that experience great point there all right in this segment of the show I like to take questions from the Bigger Pockets forums or comments from YouTube or reviews that people left wherever they listen to podcast and share them with everybody today we're going to be getting into a question from the bigger Market forums which Real Estate strategy works the best to escape the 9 to-5 Rat Race my question for anyone that escaped the 9 to5 rat RAC is what real estate strategy did you use for example if you had between 20 to $770,000 to invest in real estate how would you use that to replace your income of Seven Grand a month from your job would you do fix and flips tax leans mortgage notes buy and hold rentals airbnbs what would you do they then go on to say that they think house hacking would be a great strategy but they prefer tax leans and short-term rentals now Abel Cel from Queens New York responded with hey Rodney great question and you came to the right platform each strategy that you listed requires different experience risk tolerance networking connections project management and initial Capital to invest have you tried looking further into those strategies I'd suggest that you weed out the ones that don't fit your end goal and your schedule rentals and Airbnb seem to be the most common route for investors in your situation depending on the cost of living in your local market and avail ility of two to four unit properties house hacking may be a strategy worth exploring Travis timens from Houston weighed in and said my path was owning a business that I sold and acquired real estate along the way it's going to take more time than you were planning and be harder than you thought real estate doesn't pay you well if you need the money it's like the house knows you need the cash and something's going to break and deplete all of the cash flow for that year as far as the strategy goes I would suggest leaning into your current skill set and knowledge to find an unfair Advantage flipping short-term rentals tax leans at ET are all great strategies if you are good at them and terrible strategies if you're not if I had 20 to 70,000 to invest I'd buy a house hack in Dallas if your debt to income ratio is solid so it seems pretty clear that Rodney with around 20 to $70,000 is trying to escape the rat race and the people in the forums are saying you're probably not going to do that with 20 to 70 grand you should start house hacking now why are they saying that he should house hack it's because they're recognizing that Rodney needs more Equity or more cash to invest in real estate if he wants to get enough cash flow to quit the job and house hacking is a great way to start that Journey you start the time ticking or you start the snowball rolling of building equity and when you get enough of it you can invest it at a return that could provide you with enough income to quit your job but like Travis said it's going to take you longer than you think it's going to be harder than you think this is a one step at a time Journey this is not a thing that you're just going to learn in two to three years and then have $220,000 of cash flow coming from your single family rentals that you can just quit that job and that rat race it's one of the reasons that I wrote pillars of wealth how to make save and invest your way to Financial Freedom because you got to focus on three things making more money saving more money and investing the difference not just investing to get where you want to go and in the book I talk about you got to find a way to make money that you like doing you got to find a way to fall in love with the process of becoming great we really want to be chasing Excellence not not just chasing cash flow because when you catch Excellence money will find you and you will have a lot more to invest which will turn into cash flow great conversation here I appreciate everybody's engagement and I love being a part of a community that asks questions like this and shares it for everyone to here if you're liking Today's Show and you're enjoying the conversation please take a second to leave me a five-star review wherever you listen to your podcast and comment on YouTube and let me and my production staff know what do you think about today's show and what do you wish that you could get more of all right everyone let's see is it snow cone or is it 10:31 let's get into the next question hey David uh Rory corpo from lawnmont Colorado here long time listener first time poster U so hey we've got a mountain property that we did as a burster we built it back in 20 2021 and the short-term rental market has really slowed down but we are sitting on a ton of equity um really thinking about what our next steps are looking at either a 1030 1 exchange uh moving that into turkey Properties or an RB park or Self Storage um something with real estate involved um or potentially or multif family um another option would be to have a helck on it and use those dollars to invest in some other uh building projects that we're looking at um as well as perhaps buying a cash flowing business love to get your thoughts on what we should do with the equity we've got about 600k that we're sitting on right now and uh yeah love the show love what you guys have going on and really appreciate your help thanks bye Rory you got he's got the same question we all have what do we do with this equity and how do we maximize it um you know when I hear this especially when we're you know we're talking about relo it into uh like 10 different asset classes we got self you know it's self storage business RV parks multifamily um and again that comes back to all the noise in the internet now because everyone's promoting that their strategy is the best and you know what it probably works really well for them um anytime that I'm looking at making a trade on Equity you know I want to put it if if you've earned $600,000 in equity you did a phenomenal job you bought the right thing you grew it correctly how you execute even higher is buying something that you know and you're familiar with and so when I'm looking at doing trades I like to look at what is my skill set and how can I maximize this cuz if I did it with a single family house that maybe I was a heavy renovator the next transition for me would be into going to like maybe a value add multif family because it's the same type of asset it's the same type of product but a little bit different asset class to increase the cash flow I have to renovate it like a single family house I have to lease it like a single family house and with your short-term talents you might be able to do two short-term rentals and a couple stable R uh long-term tenants to keep your kind of investment more stable and you can do a hybrid blend um and so I would say you want to audit what what do you want to do with your equity what is the return that you want to make What markets do you want to be in and then what what products should you be looking at to meet that return expectations rather than just the next hot sizzly asset class and and I think a lot of people are in this Jam right now with the short-term rentals they bought a lot of good property that grew in equity and as that slowed down the returns have diminished and so you're doing the right thing is my asset producing me the right return right uh yield and if it's not relo it out but do that Soul search ma find out what you're good at what you what you want to make on your return then go look at the asset class because each asset class pays you differently 100% first off I don't think that you should have Equity burning a hole in your pocket I guess it doesn't burn a hole in pocket that's cash Equity would what burn a hole in the house don't worry about it though you don't have to invest that $600,000 you could take your time second just like James said don't ask the question of well what's the best return out there cuz I don't know that there is a best return out there ask the question question of well what do my skills my opportunities and my competitive Advantage offer me do you have opportunities to put that money to place that someone else doesn't because of the background do you have a construction background do you have a finance background are you really good with short-term rentals and so you can buy more short-term rentals in the same area that you already have some now and get economies of scale think like a business owner and then lastly James what do you think about somebody like this lending out like maybe taking a a HELOC on their property and lending that money out becoming a private lender to other investors you know that is actually how Banks make money and a lot of times people kind of forget that they they borrow money and then they Reland it out and they make an interest yield you know I think that's a great way as long as you are not jeopardizing your own asset before you do that you really need to know how to vet a loan you need to vet The Operators and and the the more experienced your operators and the more you understand how to vet a hard money loan the the less risky it is I I do thousands of hard money loans a year um between our company and myself privately we have a I have a default rate over a 16-year span that's less than a quarter per. and or it's less actually excuse me it's less than 1% uh I've only lost money on a loan less than a quarter percent but that's by underwriting it correctly underwriting the borrowers I'd be cautious about taking out a HELOC if you're going to get it right now hel loocks about 9% you're going to Rend it out about 11 to 12% or maybe get some equity in there and so the yield small and the gain would be small for you and and so make sure that you really understand it because you don't want it being too high of risk for that little return if it was me I would look at 1031 exchanging go buying a property so I can get that depreciation right down the taxes and then maybe pull some out to invest it in hard money separately so you're not taking on more leverage I'd rather pay the tax than take on more leverage and have a smaller yield you know hard money is a great space if you want to make cash flow the one negative is you pay high tax you don't get all the same benefits as you get from owning a rental property the appreciation the depreciation the write off expense it's just it's ordinary income you're going to pay it it's a high you know typically I'm paying 40% tax on my hard money loans and there's not a lot of relief there but it is steady cash flow and it is how I live my life today everything I do today is paid for by my hard money uh passive income great Point James different opportunities come with different pros and cons and one thing that analysis paralysis is investors that are trying to find the one option that doesn't have any downside but you're not going to get it if you're trying to avoid the tax implications you're going to take on more work or more risk if you're trying to get the best return possible you're probably going to have to learn a new thing if you're like man I just want a high return with no work you can put it in a retirement account but you're not able to use the money for something else so the key is to look at the downsides of every single option and find the one that's the downsides affect you the least all right our next question comes from Dan way in Madison was Johnson Dan says I'm wondering how saving money in the future through refinancing would look most of the time I hear about refinancing it's when rates are lower than when you originally purchased the property how can we ever expect to lower our monthly payments without the expectation of seeing lower than 3 to 4% rates I'm looking to find my next property through Fanny May loans for the low down payment aspect however the monthly payments associated with these properties with the low monthly down payment make it almost impossible to cash flow which I understand is harder to find in this market at this time in this first place but how can I even rationalize these deals with little to no possibilities of lowering those monthly payments in the future all right so this is an interesting question here James if you're getting in at a 3 to 4% interest rate you have no possibility of really refinancing any lower than that it's hard to picture rates getting lower than that but if you're buying property now and you're waiting for a refinancer rates to go down you don't feel like you're in control of your own investment future because you don't control when the rates are going to go down and it looks like Dan's thinking hey I'm willing to buy a property that doesn't cash for right off the bat if I have hoped that I can refinance these things in the future but how do I rationalize these deals with little to no possibility of lowering the monthly payment in the future so the question is should we be buying real estate right now if we don't know that we can refinance into a lower interest rate later what's your thoughts there you know I think one thing I would really remember is interest rates cost of money is just the cost of the deal and you know I don't make my investment decisions based on interest rates um I I make it based on on cash flow and returns um very Rec very recently I just traded a property that cash flowed $1,200 a month and I had a 4.25 rate on it um and I traded it for a property that basically breaks even and I have a 7% rate on it and there was a purpose to that um I don't get don't I think a lot of investors get caught on that rate they're like I can never get rid of this rate um and and I wouldn't look at it that way I would look at okay if it's not working for me I need to explore other markets that give me better return um I do think you're doing I think it's important that you evaluate hey I'm try here's my strategy you've came up with my strategy I'm going to use a fanny made loan to buy a rental property with low down I'm going to get better financing than an investor that is your strategy now it's going how do I execute it and maybe the market that you're looking in right now is just not working and you need to go to outside markets because you can cash flow in this market you just might have to explore cheaper once if that is your plan I would go find the market that it works in utilize that loan and then look at pivoting your strategy out later because you can only do so many low down loans anyways um I would utilize it put that money to work but change how you're implementing it not how you're doing it that's a great point I'm also not a huge fan of that I have a two and a half% interest rate I can never let it go I just I've never heard a person who did really good in real estate and when I talked them about how they did it they said well you know what I got 3% interest rates and I held them the whole whole time they always talk about the deal they talk about the property they talk about the increase in rents they talk about the increase in value which is usually a function of the location that they bought in or the time when they bought it's never about the rate and so I I just don't know why we put so much emphasis on that other than the fact it just stings that it used to be better than it was but isn't it always like that we talk about 2010 real estate it used to be better than it was I wish I had bought then in 2016 everybody thought that real estate was too EXP expensive compared to 2010 now now in 2024 we look back at 2016 prices and say oh I wish I had bought then and you know what in 2034 we're going to be looking back at 20124 prices and saying oh I wish I had bought then we are not going to be thinking well the interest rates were seven and a half and so it didn't make any sense to buy it just it never actually works out that way so try to take your attention off of the rate and try to think about the other ways real estate will make you money can you get a tax advantage from it can you shelter income from other things with it can you set it up to making extra payments on your principal and pay it down quicker can you add square footage to the property can you add units to rent out can you buy an area before everybody else gets there that's the next upand cominging Emerging Market let's just think a little bit more than just what fits into the spreadsheet and sometimes those answers will pop out all right and that was our show for you all today just a little recap here we talked about networking for commercial properties and how to build a pipeline whether you should keep a property because of the interest rate or think about the overall Returns what what to do to escape your 9 to-5 with $70,000 and how to handle the problem of having a whole bunch of equity and not sure what to do with it thanks again everybody we love you we appreciate you for being here I know you could be listening to anybody to get your real estate investing Knowledge from and I really appreciate the fact that you're coming to me you can find my information in the show notes if you want to reach out to me personally and if you've got a second let me know in the YouTube comments what you thought about today's [Music] show [Music] woo

Channel: BiggerPockets

Views: 15,669

Keywords: escape the rat race, escaping the rat race, commercial real estate, how to invest in commercial real estate, mortgage rates, interest rates, real estate investing, invest in real estate, investing in real estate, real estate investment, how to invest in real estate, home equity, home equity loan, home equity line of credit, how to use home equity, how to invest home equity, mortgage interest rates, rental property, income property, biggerpockets, biggerpockets podcast

Id: IFXFUbUblBM

Length: 26min 13sec (1573 seconds)

Published: Sun Mar 24 2024