00:01

Welcome to Episode 2 of Season 10 of the Growing Empire show. I'm here with my special guest, Adam Von Romer. And we are going to talk all about the world of commercial real estate. So stay tuned.

00:13

Welcome to Growing Empires. Hosted by real estate entrepreneur and trusted investment advisor, Jennifer de Jesus. Growing Empires provides insight to building wealth through passive income producing real estate investments for those who want to build and manage a more profitable real estate portfolio.

00:33

So welcome, Adam to the Growing Empire show. I'm so glad that you're here. Thank you. Thank you. Let's kick off this episode with your sharing a little bit about yourself and how you got into the work that you're doing now in the commercial real estate world?

00:45

Sure, sure. Absolutely. Well, believe it or not, I got my start in about 1980. In Pennsylvania. I grew up in central Pennsylvania, Lancaster, Lebanon, Camphill, Mechanicsburg area. Familie’s a bunch of contractors. You know, I was an indentured servant, you know, at the age of 13. It was kind of like, you're not driving me nuts this year, son get on the truck. And I found out that, you know, I had a, let's say, a certain pinch shot, if you will, for building and, and in particular for commercial stuff. Schools, warehouses, self storage facilities, things like that. And it just did, it always intrigued me. And then I read a book by a guy named Robert Allen, entitled, “Nothing Down”. And I went and bought my first duplex at when I was 18. Oh, wow. Yeah, I bought it bought a duplex. And I don't think I was legally allowed to buy it. But you know, nobody bothered to ask and I certainly didn't tell them. So I bought it assumed the I think it was a VA loan then. And from there, I went on to buy small apartment complexes. And most recently, I have an industrial park. But you know, I started let's say on some very humble beginnings, I think my duplex was, I think it was a princely 39 9 when I bought it. Oh, I had I think I think I threw a whole like gift $3,000 down or something. It was it was funny. And in retrospect, it's it's pretty comical. But I bought that in Colombia, Pennsylvania, I bought an apartment complex in Marietta. And then through a series of you know unfortunate events, my family kind of spun and broke up. We ended up stuck with a bunch of houses. And they said to me, Well, you're the one who can cipher pretty good. So you're gonna get to sell these things. And I got into, you know, got into the business. Very quickly found out that I do not have the temperament for residential. I, I don't like going on the caravan. I don't like doing showings. I don't like screaming kids in my luxury vehicle. It's not it's not what I do. So I did a transaction with a guy who borrowed I think he took about $15,000 on a HELOC to buy a it was a four unit, possibly five unit building in Lancaster. And Jen, you'll get this but, every one of my stories has five parts and I don't know how much time we have the for this. Yeah, there's there's a whole backstory to this and what he did and how he did it and how we put it together. You know, we bought out a kid who had inherited it. And we did a note and a mortgage. And you know, just it was it was one of those things where, you know, it's like the the poster child of like, nothing down using none of your own money. But it was his HELOC put it together. And he ended up buying that thing for 40 I think it was 49 Nine. But his actual net was like 39, nine or 30, maybe 43. At the end of the day, he put his brother in law and it fixed it up over the winter he was laid off from Bethlehem Steel. And that following spring after it was fully sold for 129, nine, holy and paid back the HELOC he paid, paid the mortgage off, paid everything off. And then we did a 1031 and we 1031 I think into a 12 unit next and then we 1031 into 18 units. Wow. So yeah, and it was it was kind of fun because, you know I found my niche. I also found out that I wasn't quite as smart as I thought I was because I called a broker in town and I said hey, I've got a buyer for your property. And he says to me, he's goes Adam, are you a CCIM and I said Nope, I don't even know what one is. He says call me back when you are and I was like what? So that was kind of my my starting introduction to the business. And from there I just kind of kept going into multifamily, retail. Did a lot of I did a lot of leasing. I mean I did a lease. For example, it was funny because everybody gets the whale story about the 100 million dollar deals. I've been at this 40 years, I've never done $100 million deal. Yeah, biggest deal I've ever done was like 15 million. And it was a lease. But it was a 20 year lease, and it was pretty substantial. Yeah, the the million, you know, the billion dollar transactions, I mean, they just don't happen. I've heard them all seen them all, they never existed, or they blow up. So it's just, it's just not not, you know, it's not really where it's at. As I said earlier, you know, I own an industrial park, well I owned it, until recently, here in South Florida. And, you know, and I'll speak to that a little bit later on. But I think that's really where the, you know, the market is right now. And that's one thing that your listeners have to understand is one of the, one of the constants in commercial real estate in particular is change. It will change and it cycles. And I've been through, I've been through four market cycles now. They're about seven to 10years long. In fact, let me back up a second, I've written to date nine books. I'm an instructor I have or had two courses license for CEs here in Florida. And I had, I want to say, five courses licensed for CEs for attorneys. Not talking about the legal aspects of it talking about the economics. And that's, that's kind of what I want to kind of gravitate to today.

06:24

So for my listener that may not understand the residential or commercial while it's commercial world of real estate in general, do you want to explain quickly what CCIM means?

06:35

Well, CCIM, um, yeah, CCIM is the designation given to or given by the National Association of Realtors, to about 6% of the entire population. What it required when I went through it was you had to take five graduate level courses, two electives, and then pass what they call the comprehensive course review. Which was a six hour open book, open prayer exam. You know, and it's funny, too, because the program then was designed to weed people out, right. You know, you went to a class, there are 100 people in the class, at the end of the class 42, were left standing. Yeah, the next class you had, you know, the same, the aggregation of 100, from the last 42, and you had another 40, left standing. It cost me in total about $15,000. It took two years, and I had to show $20 million, I believe in commercial transactions. And it's been like into the PhD of commercial real estate. Now, I can tell you that, you know, it doesn't save you from making booboos. Because I've made a few and, you know, I'm not one of those gurus who doesn't tell you about am. I blown my legs off plenty. But I think that's, you know, really instructive to your career here. When you're, when you're trying to start out and build something, you're gonna, you're gonna blow your own legs off. It's how you recover from it, that that's really going to make the distinction. So now, that's, that's pretty much it. You know, I was thinking, as you know, we're getting ready for this, I believe you asked me a question about what I thought the most common mistake in commercial real estate was. And, you know, first off, they have to understand and define what commercial real estate is. For people just getting started, and I advocate this for anybody, if you can buy a single family home, or a duplex, that's not commercial real estate. But it's a great start. And, and you really need to understand what it is you have, and the metrics behind it. And you know, one of the things I encourage people as they go through this process is one, you take advantage of that 1031. But two, you've absolutely positively got to know, beyond a reasonable shadow of a doubt, the value of your property at any given moment. And, you know, I also want to mention that, that value, especially in income property is driven entirely by the cash flow.

09:05

100% I agree.

09:08

And anything, you know, and the beauty of it for people getting started is anything under five units, you can get FHA loans on. When you start to get into the bigger things, you know, now you're talking about a different, you know, different metric. Under, you know, under five units, they look at the borrower over five units, they look at the asset. So, you know, it's an entirely different world. But if you get your arms around, I mean, literally, you can pyramid I mean, I've got I've got a guy right now that I've done business with that I think I've sold him three Walgreens and CVS. Right. And that's, you know, $28 million. Wow, how'd you get started? A little warehouse building in Providence, Rhode Island. Right. What he paid attention to was he paid attention to the market. He didn't know hold out for the last nickel when he got, you know, a nice, a nice, comfortable profit he sold. And then he took advantage of the 1031 tax deferred exchange. Right. So that's how he kind of leveraged up. And if you're if you're judicious and you're paying attention to that stuff, you can you can make a pretty good portfolio for yourself. Yeah, example I got one today it's a $1.875 million warehouse. It's a two cap.

10:28

Oh, god. Yeah. All right.

10:30

Yeah. Well, yeah, good luck with that, even in today's market, a two cap rate is ridiculous. Now what happened? The owner, and this is this is one of the things that that your listeners have to pay attention to, decided not to raise the rents to market rates, because she had had a relationship with the tenants for the last eight years. Right. So it's like this love fest. But properties worth technically about half of what it's being sold for.

11:00

Because of the cash flow. So let me guess she's like everybody, including all the people that live in Pennsylvania that think that they can sell their their property based on a wish in a bottle in a future hope.

11:12

Well, I have a I have a note here to myself to talk about the greater fool theory. Not, there's not somebody that's gonna come down the road, that's that's, you know, dumber than you and is gonna buy your mistake, you're gonna have to do something about it. Yeah. It's just the way it is.

11:28

One of my questions for you was and you already started on it was what are some common myths surrounding commercial real estate? So one is not knowing what commercial real estate really means. But the other one is being a fool. And thinking that somebody is going to buy what you wish would be?

11:41

Yeah, no, no, I'll tell you the one. And people usually freak out when I say this. But the one that drives me absolutely insane, is especially you know, especially when you go to the, like the investors meetings and stuff. Everybody's running around talking about cap rates. Right. Okay. And I want you to make a note of this that Adam Von Romer on November 19, of 2021 said, cap rates are doodoo. They’re meaningless. Well, and let me tell you why. The cap rate only compares the net operating income against the purchase price for the last day of that year. Right. Okay, so how many investors buy a property for the last day of that year? Yeah, exactly. It just, it just doesn't make. Now does it serve as a rule of thumb or a guidepost? Yeah, absolutely. But let's try this one on Jen. Here you go. I'll sell you my office building at a two cap. You take her? No way. Okay, well, let me let me let me paint a different picture for you. What I didn't mention was that I just signed a 50 year lease with AT&T. Okay, that's a different story. And they're gonna load up my building at you know, 80% of my building will be taken up by AT&T for the next 50 years. It's a two cap today, it's a 10 cap and a month, right? That's the problem with cap rate. Or conversely, I've got an eight cap on a building. And, you know, the tenant has a go dark clause, and they have a 90 day right to terminate. And the you know, the event precedent to that just happened, so my 10 cap just turned into a two cap on the back end.

13:21

The episode will continue in just a moment.

13:25

As an investor, we know it's important to stay on top of market trends and real estate opportunities that add value to your portfolio. We also know that having a trusted source of reliable information to help you stay a step ahead of other investors is critical to your success. If you're interested in having these types of resources, as well as access to me and my team, I invite you to join the Empire Investment Club. A free service that gives you an easier way to make sense of today's and tomorrow's real estate opportunities. As a member of the Empire Investment Club, you'll get access to relevant resources and investment focused experiences such as live interactive webinars, market trend presentations, and investor socials designed to equip you with what you need to succeed. So whether you're an active investor, passive investor, a combination of both or just starting out the club is where you'll get what you need to build a portfolio you love to join. Just head over to JenniferdeJesus.com, sign up, and we'll see you in the club, where everyone's on a journey to becoming a better investor.

14:22

Yeah, I always say, you know, when people are talking to me about cap rate, I said cap rate? What about the cash flow? Oh, yeah. Well, we have when we talk about what is truly important here. Let's talk about you know, cash flow. But you're right, I mean, Cap rate is a you know, to me, it's like it's like a first pass kind of look at a property. Absolutely. Absolutely. Right. You want to you obviously want to look at a bunch of deals before you decide which ones are the right ones and you've got to source you know, multiple deals before you find the right one. But it's like a first pass right. Does it on the surface, right?

14:58

Well, the deal I talked About earlier for 1.87 5 million. There's a guy chasing it right now. And he's you know, he's given me a hard time about the 2% cap rate. And I told him, you know, we've got, we've got long term leases. So he's running around like his head's on fire. But we've got weak tenants. Number one. And this is the thing that really makes it kind of interesting. He owns all the other buildings on the block. Oh, wow. Yeah, it is. And this is the corner property. Right? This is the one that's right on the corner. Do you think that's compelling? Very. Is that a reason to overpay? No. Why? Cuz he's gonna control the whole market.

15:40

Well, that's true. I guess it depends on what it is and where it is. Right?

15:43

Well, and what's an industrial small industrial building, but as those tenants go out, guess what happens. The income in that property is going to double almost overnight. Right? So even though it's, you know, it's like a two cap today. Right. In, let's say, the next over the next 36 months, this thing is going to be about a 12 Cap. Yeah, that's what I said. And you said it, you said, we've got to look at the cash flow. And from my perspective, I look at internal rate of return. And I know that's way beyond the scope of what we're talking about. But all that is, is the inverse of the cash flow. Right? I'm looking at my yield based on the cash flow. And it's just, it's just a little bit more sophisticated way to dial things in. But I think the biggest mistake that people make, and the other one that goes right out the window, I don't want to hear about gross rent multipliers or gross income multipliers. That's that it's completely meaningless. Yeah. It takes it makes no consideration for expenses, capital improvements, none of that stuff, no vacancy. No, nothing. And you'll you I'm sure you hear it all the time. Yeah, of course. So it's just to me, it's just silly.

16:50

So what do you find is a major difference between, you know, somebody that wants to purchase like larger apartment buildings versus commercial buildings? What are you seeing in your marketplace as distinct difference between the two? And do you have a preference? I mean, I know you definitely spend a lot of time and you're exclusively into commercial real estate. But you've also had, you know, your own apartment buildings. So you know, what made you make the transition from that apartment building initially to those commercial buildings? And where do you feel right now, is the sweet spot in the marketplace?

17:20

Well, you know, that's, that's a great question. I owned apartment buildings, and I will tell you that I will own apartment buildings long enough to sell them and 1031 into an industrial building. Okay, Right now, and again, right now you've got to look at what's going on in the marketplace. I do only industrial and investment real estate. The last house I sold was about 29 years ago. And it was by accident. It was for a family member said hey, can you find me a house I'm like, alright, I'll do it grudgingly. But, you know, for somebody who's getting started, I think that the perfect, because of the size and the price point, the perfect place for somebody to get started, is in the duplexes and triplexes. You know, five units, eight units, etc. And then just keep pyramid thing that, again, using the 1031. Once you've got to you know, I should say like a critical mass. That's the time to start looking at other product types. I personally think that industrial is going to be very, very strong for the next several years. And it's because of all the last mile distribution that's going on. I mean, literally, I ordered I ordered toner cartridges yesterday morning and they were there yesterday afternoon. You know, it's so it's it's a lot of that logistics that's absorbing the space and and your your market Lehigh Lehigh Valley. Oh, yeah, nuts. It's on par with us down here in South Florida.

18:48

Yeah, it is it is 100%, the logistics capital of the East Coast for sure.

18:52

Absolutely. Now understand, understand, Jen that that's going to change over you know, over time, it will probably pull back again. And if we have any major, let's say hiccups in the economy, we'll see that, you know, kind of drop off. But you know, my my thought process is, if you've got single family homes, if you've got duplexes, if you got triplexes if you know it, and it's working, do more of it. Just 1031, aggregate the dough, buy a bigger property. When you get you know, when you get to a certain what you believe to be a critical mass, you know, then then look at something else. I'll tell you right now, I would not I would not buy any special purpose properties. I'm not buying into, you know, golf courses or anything like that. I'm not a big fan of retail. I think retail is got problems. Yeah, there's some,

19:45

It's volatile. It's very volatile.

19:48

Yeah. You know, there's a There's a book out a number of years ago called The Sleeping Scale of Investments and was written by a guy named Burton Malkiel. It's about you know what to invest in and he talks about. He couches the book with things like, Well, if you buy this, you get a full night's sleep and a nap in the afternoon. By the time he gets to the other end of the scale, it's like you can't sleep and you've chewed your fingernails down. So, you know, I want your listeners to think about that what's performing now will not be performing in seven to 10 years. But look at what's safe. Look at the trends. Again, I'm not a fan of retail. Multifamily is good, but it's a little bit of a question mark. For example, the thing that really kind of got me was the you can't throw tenants out for not paying rent? Well, somebody comes in first and last security, and they're in your apartment for the next year. And yeah, then COVID prevents you from from, you know, getting rid of them. And I understand I'm not trying to be, you know, I don't know, social return or something like that, I get the need for that. But think about the landlord. Now he's got a mortgage, and I can assure you, the bank isn't going Ah, now forget about it, you know, when you get around to paying the mortgage, pay the mortgage. Right? That's not how they operate. And you know, they are certainly not going to forgive and forget. They want to get paid, and they want to get paid on a monthly basis. While we're talking about mortgages, the other thing I want to make, and I want to really kind of hammer home is that the people that are listening should understand that the single biggest cause of failure in investing in properties that I have seen over the last 40 years is people who overleveraged. Completely agree. I mean, I did 208 loan modifications and workouts back in the, you know, the the crisis, the recent crisis. All commercial hotels, apartment complexes all over the country. And the biggest denominator that I saw, was they overleveraged. Right. And that will eat you alive.

22:01

So how do you what would you advise for somebody to make sure that they don't over leveraged themselves? Use a certain metric? Do you use a certain calculation of cash flow? Is it just setting expectations up front about what you're buying and what the needs are going to be?

22:17

Well, there's an old expression that you buy your profit. And you realize that when you sell. So when you're investing in commercial real estate, you're buying your profit today. You get to reap the rewards of it, you know, 5, 10 years later. Absolutely. So I would look at the market very carefully today. And I would suggest that I would not want to see leverage beyond 65 to 75%. Unless there's a real compelling reason. You know, unless you've got a story like, you know, you've got five units, it's completely vacant. And it's, you know, an 80% LTV on the cost. Well, if you turn around and fill it up, it's 129,000. Now your your LTV is down to 60%. Right, that makes sense. But you can't leverage stuff. And you know, understand like today, you'll see people offering apartment buildings for five and six caps, or four caps. Well, if the cost of capital is 3.75%, right, you're getting a four or 5% yield, how much of a downturn can you withstand? Right? Your toast.

23:27

Yeah, that's very true. And that goes back to kind of those inflated prices that, you know, if your cash flow doesn't justify the price that you're asking, you're over, you know, you're overpaying or somebody is over buying, you know exactly what

23:39

I joke about it being like having an alligator in your backyard, as long as you keep feeding them, you know? Yeah, that cash flow going everything's fine, but when you stop feeding that alligator guess who's next on the menu? Yeah, right. Not not a good scene.

23:55

Thank you for listening to part one of my special guests interview with Adam Von Romer. Please make sure you stay tuned to our next episode, where we continue our conversation on the world of commercial real estate. Until next time, take care.

24:10

For more information about how Jennifer can help you plan, develop and manage a strong real estate investment portfolio, visit growing empires.com