The Easiest Commercial Property for Beginners to Own

all right I'm caffeinated and excited because today we're going to be diving into what I think is the easiest commercial real estate asset for anyone to own whether you are a beginner or you're an advanced investor Flex space is basically the equivalent of five plexes in multi-family but hobbza tell us what Flex space is because I know that there's some confusion out there as to what it is and sometimes isn't I would say an easy entry for any beginner think about a single story single family home I would compare the flex based equivalent to that in the world of commercial real estate what Flex space allows you to do is it basically allows you to build these small metal buildings and you can have multiple tenants within one building there is a huge demand right now and we just can't keep up I'm gonna do something that I haven't seen anyone else do on YouTube and we're gonna actually dive into every single aspect of the deal and break down the numbers from land acquisition to rental rates so that you can go out there and confidently build or buy one of these assets yourself what kind of tenant base do you typically find in Flex space most people I think get intimidated and think these are industrial manufacturing guys who you know are coming in and doing heavy lifting and it's really not the case pickleball is probably now the number one most desired tenant to have in a flex space because all they're really looking for is empty space last year or the year before rather it was uh podcast Studios we've seen daycares we've seen boxing gyms CrossFit Gyms uh you know we have swimming pool companies lawnmower repair facilities anything that might need a little bit of Warehouse or wide open space in addition to their offices and may or may not have Loading Docks but probably do have larger row up doors so that businesses can move product in and out depending on their needs and you probably guessed that it is very creatively named because of how flexible the uses are within this asset talk to us about the the vacancy and demand rates for this type of product I like to see them being built in high growth corridors in brand new neighborhoods where land is abundant and still relatively inexpensive so that the numbers work and the deal makes sense right now one thing that you may or may not know is that Flex space is actually one of the most in-demand commercial real estate products out there aside from affordable housing vacancy rates and flex space are unbelievably low in fact they're probably at historic lows today and that's because we cannot build Flex space fast enough to accommodate the tenants that are taking them how do you make the numbers work on a flex based deal like when you say you know we're looking for cheaper land what does that mean to you to make it very simple criteria is extremely simple right land needs to be below five dollars a square foot you need to have at least an acre for the numbers to work so one acre below five bucks a foot um and then you need to build at least 10 000 square feet anything more than that is I would say just added value that you are going to benefit off of but let's get into the numbers of this deal I'm gonna break it down from a build and development perspective if you want to skip ahead to buying these Assets in as is condition check out the time stamp at the bottom of the screen but I will say there is far more money to be made on the construction side if you're going to go develop these yourselves and it's really not as difficult as most people think it is so if you're looking at developing your own Assets in the flex Warehouse world the first place you're going to look is for land that is actually affordable to where you can build this asset and make it profitable so we know that our land is going to cost about five dollars a square foot but what about construction costs well just like every other property type in real estate construction costs have gone way up on Flex space but the good thing is it's still cheaper than most other types of commercial real estate out there because you're not having to finish it quite to the level that you would say a hotel or an apartment complex you can expect to spend anywhere from 85 to 125 dollars a square foot on the site development and building costs so your horizontal which is the ground round and your vertical which is your structure so if we take our five dollars per square foot for the land and we attribute 100 of that to the 10 000 square foot building plus our build costs that gives us 136 dollars a square foot for our build costs 136 dollars is just an example you could do it way cheaper it could also be far more expensive but in my experience 136 dollars a square foot is fairly conservative so chances are pretty good that you'll be able to come in under that build cost so to break that down a little bit further for those of you that may not know how to run numbers on dollars per square foot per acre five dollars per square foot per acre is about two hundred and forty thousand dollars an acre there's forty three thousand five hundred and sixty square feet in an acre so just multiply the two and that'll give you the number finding land at that price is not really going to be feasible within the urban core of any Market but that's the beauty of flex space you don't have to be immediately downtown in order to make these deals work a lot of these companies just want to be located on high traffic corridors near interstates so that they are easily accessible and the benefits of that is they don't have to deal with traffic when going to work so if 240 000 an acre for a 10 000 square foot building works but you might be able to build more imagine how much better those numbers will look if you can build 15 or 20 000 square feet so let's say that you're able to build 20 000 square feet but don't necessarily have the cash to do it today or you don't want to raise that capital from investors just plant it in two phases build the first ten thousand square foot building lease it up pull all of the cash out through a refinance and build your second building this is a typical 2x return or 2x multiple exit for you right so if you put a hundred thousand dollars in you're gonna get a hundred thousand dollars out so it's very easy to run numbers on an existing asset and what your potential exit will be but what kind of cap rate should you assume when you're building commercial properties well it really comes down to the yield that you need to get on your property typically what I recommend is an eight percent to nine percent cap rate upon completion and Foley stock that gives you enough spread to cash flow if you need to keep it but you'll probably be able to sell it for a seven percent cap rate which means you're going to capture the Delta there in your profits so let's break that down a little bit if you're building a 10 000 square foot building at an all-in cost of 136 dollars a square foot you're going to be at 1.36 million dollars total cost now if I'm going to rent it at an eight percent cap rate I'm going to be renting it at about 108 800 per year on a triple net basis now if I sell that income at a seven percent cap rate so just dividing 108 000 by seven percent that's going to give me an exit price of one million five hundred and fifty four thousand dollars so the Delta between those two is just under 200 000 not including any real estate commissions or fees or closing costs if you're going to have to pay that so let's break down what the returns would look like in this case now my underwriting is a little bit more conservative than hamza's but let's assume you put 25 down on the 1.36 million which is 340 000 and you've profited a hundred and ninety four thousand dollars which gives you a 57 return in probably about two years at over 25 percent a year that is almost twice the value that you can get out of the stock market and anything better than you could get in multi-family today considering how high interest rates are and how low the cap rates are in multi-family now if you're wondering how we got to the 108 800 yes it was an eight percent cap rate but you're going to assume about 16 to 18 dollars a square foot triple net on the leasing rates depending on your Market maybe a little bit less could be a little bit higher if you're in an area like Nashville but that's a pretty good estimate for you to use when you're putting together your initial underwriting when I was starting off obviously um there's two schools of thought one of them is cash flow and the other one is a refi so you refi out you get a little bit a little bit of equity in um I actually created a whole new school of thought which is sell the whole thing entirely just because the demand like I said is so high if you think about it right every deal that you sell and let's say you're making a 2X return minimum right every deal that you sell allows you now to do two deals and if you follow that path if you follow that Journey eight years down the line on a refi scenario you would do let's say three V fights over 10 years or eight years whatever it is versus every deal gives you two deals you end up with like eight deals at the end of eight years versus just three so once you're looking to sell this asset seven percent cap rates are a pretty realistic exit considering today's interest rate environment and market conditions now depending on where you are located it could be a little bit lower it could be a little bit higher but when I'm running my underwriting I like to assume that we're going to be in the middle of the road right so seven percent is probably what you should underwrite and it's expect to hit as you're exiting these Assets Now if you're buying these assets you'll want to make sure that there is some room for Value add right because you can't really afford to pay a seven percent cap rate with interest rates at seven to eight percent and expect to make any spread unless you're planning on paying all cash now that value add could be from filling up new tenants raising rental rates and more of your operational side of things or it could be adding another building to the property and leasing that up as well the good thing is that a lot of your due diligence on Flex warehousing should be fairly simple If the product is newer because a lot of landlords are going to a triple net style lease meaning the tenants are responsible for their share of the common area maintenance the property taxes and the building insurance so if you're coming from multi-family into Flex warehousing you don't have to worry about your insurance rates going up like they have over the past year you don't have to worry if the property taxes go up those costs get past directly through to the tenants so your base rent is what you are going to collect and what you can count on for the next three to five to ten years depending on how long your leases are what do people often get wrong about Flex space as an investor what people often get wrong is they get intimidated by the fact that it is commercial real estate and they think it must be difficult to get into so I'm going to go ahead and buy four more houses and deal with four more tenants and four more roofs and four more hvacs and I think that is where they get everything wrong which is why I took it upon myself you know to start social media get on YouTube get on Tick Tock get on Instagram and talk about all of these things and show people that look these are my tenants I actually go and have a conversation with them and this is the business that they do it with and believe it or not I think I've changed quite a few Minds as of you and uh I think we'll continue to do that man as we as we progress now having gone into all of that with Hamza today I think that Flex space is by far the easiest commercial real estate investment to own let me know what you think in the comments below and if you want to learn more about development so you can do these projects on your own check out this video here

Channel: Tyler Cauble

Views: 278,172

Keywords: commercial real estate, commercial real estate investing, real estate investing, buying commercial real estate, passive income, passive investments

Id: aT__2naizG0

Length: 11min 7sec (667 seconds)

Published: Sun Sep 10 2023