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Welcome to Episode Three of Season 10 of the Growing Empire Show. I am back for part two with my special guest, Adam Von Romer, and we’re going to continue our conversation about the world of commercial real estate, everything that you need to know to invest and be successful in this segment. Stay tuned.

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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.

0:40

So you mentioned something earlier that I wanted to make sure that we didn’t forget to touch on and that was, you know, you’re referencing COVID and kind of the dramatic shift of landlords control over their buildings and people not paying right. So commercial real estate, as many people do know already is drastically different from from a lockout, get rid of you, you’re not paying kind of standpoint. So tell me some of the differences share with some of my listeners, the differences between like, what happens if you do have a commercial tenant that doesn’t pay? What happens then?

1:14

Off they go. Off they go? I’ll tell tell you what, I had a tenant one time in a house that I owned and she was what I call a professional renter.

1:23

Oh, yes, I use that term a lot.

1:26

Yeah, she had, you know, it was her and her three kids that moved in. And then when I went over to collect her first rent check of $35, because I put her in a subsidized. It was her, her boyfriend, his three kids, her four kids and like eight cars parked on the lawn. Oh, gosh. And, you know, the issue became, during her tenure, she was supposed to pay me $35 a month. Right, and never paid it once. Wow. And you go to court, you know, and she’s a dental hygienist she’s left alone with these kids. And I’m I’m not, you know, I’m not commenting on that. But the judges attitude is, you know, you gotta you gotta help out here. In a commercial tenancy if your commercial tenant doesn’t pay rent pursuant to an agreement, the, you know, the judge basically goes, Did you sign this? Is this you? Guess what, pay the man or pack up and go. And such a hugely different process. The other thing is briefly, you can’t use a Office Depot, Office Max lease on a commercial property. Not Not unless you want to have all kinds of problems. Yeah, bite the bullet, find a good real estate attorney, have them write you a lease. Not your brother in law, the property casualty attorney, or the divorce attorney down the street. A real estate attorney. It may save you lots of headaches later on. So you want to have that document. The other thing is, you have one lease for one building. You don’t have 16 different leases for you know, 16 different tenants. One lease document, you know, the terms may change, but the documents, the covenants, the rules and regs, they’re all the same. Just makes it a whole lot cleaner and easier to work. So, you know, I just like I said, I just think that it’s it’s a better it’s a cleaner business, because now it’s business person to business person, you know. There’s no really there’s no emotionality involved. You know, it’s just simply did you sign the lease COVID or not, you know, you’re operating there. The reason why I said earlier to that I don’t like office right now, is obvious. I mean, I’m sitting right now in my home office. I have an office, you know, basically over at the port just outside the port here in Fort Lauderdale. And we’re in a five story building. I have mostly government tenants in the building. And it seemed like during the height of the COVID crisis, there was like a new case of somebody having COVID in the building, like every month. Well, that’s, that’s a little bit of a concern. Yeah, and what would happen look like the Ghostbusters would show up every time we’d get a notice that the guys from the, you know, the cleaning company that we have would come in and hazmat suits and spray the whole building down. And, you know, a lot of people started working from home. And that’s I think that trend is going to continue. You know, why? Why go?

4:29

Yeah, yeah, it certainly changed the workplace in brick and mortar, you know, locations permanently.

4:38

Absolutely. Now the other the other one that we talked briefly about was like retail. I think retail is getting its butt kicked. But I don’t think there will ever be a time where you will see the disappearance of like all those basic needs. Like grocery stores are not going to go online. You can buy on a grocery store, you can buy online, but you know the grocery stores are going to be there doctor’s offices, pharmacies. Yeah, you might be able to buy something like that. But you know, you’re not going to see it, you know, online. Dollar Generals, Dollar Stores, things like that I like because it’s like, okay, you’re on your way home, you’re like, God, I need some highlighters. Pop in, grab a pack of highlighters. and off you go. So I think you’re going to see, you know, a lot of that, and I gotta tell you, I mean, I am, I am a big fan of like Amazon. Yeah. And I use shipped for my groceries. I don’t think I’ve been in a store and probably six months. And it’s it’s not because I can’t go it’s just because I hate it. Yeah. Why Why bother? Dropped at the front door. But yeah, I think I think probably your best bet is to kind of, like pyramid up and then look at something that’s stable, and is not suffering that you know, the changes in tenancy. The other one that’s really good, but it’s big bucks, senior housing, students, student housing. Yeah. Again, you know, they’re bigger transactions. And that’s, that’s probably one of the key distinctions, you know, your, your listeners need to get is a residential transaction can be 50, 150, 300, 400, you know, and typically up to, let’s say, up to a million bucks, depending on what market they’re in. When you start talking about doing things like an industrial building, or a triple net deal, you know, some of those are three, four, or $5 million or more. So you’re going to have to have a pretty good 1031 Exchange, or maybe you and you and a couple of buddies get together. And and move into that.

6:37

Yeah, I was just gonna ask you. So you know, for the listeners that maybe are not comfortable with that size of purchase, or maybe you’re not ready financially to do it, but want to tiptoe in that world, would you suggest maybe investing in like a syndication or something that that does industrial buildings? Or something of that nature to kind of get like a taste of it without being financially, you know, invested in a larger capacity?

7:02

Well, I’ll tell you and answer that. That’s certainly, that’s certainly a good way to go. But it’s not going to give you any direct operational experience. It’s being run by somebody else. You’re not going to, you’re not going to see the day to day, you know, behind the scenes machinations. I will tell you that what I’ve seen lately, for example, I missed buying a brand new bank branch. A 2000, square foot bank branch. You’re gonna love this. Two drive throughs, 2000 square feet, brand new 20 year lease, by the largest savings and loan in Montana. Uh huh. And somebody says, Well, I live in Pennsylvania, you know, why would I want to buy in Montana? Well, that’s the beauty of a triple net transaction. You don’t have to do anything. The tenant pays the insurance, the tenant pays the maintenance, the tenant pays for the taxes, they send you a receipt showing you they’re paid, if the buildings destroyed the tenants responsible to rebuild it. And here’s the kicker, that was only a $600,000 deal. So if somebody could scrape together $150,000, it was an eight cap in year one. It had, I want say 3% increases in the rent. And literally, the management responsibility for that deal was you had to manage to keep your bank account open. That’s it. That’s it. No, no, no toilet paper, no tenants, no toys in the plumbing, none of that stuff. And that’s why like I said earlier, I got out of you know, apartments and into the the investment world you know, triple net deals and industrial. You know, my industrial buildings. My my turnover for a tenant, is I send my guy over there with a leaf blower and blow the dust out. Here’s your warehouse, you know? Yeah, the tenant and servants I’m not changing carpet. I’m, you know, I’m not doing anything.

8:54

And that’s a very, that’s a very good point. Because you can kind of that standard in industrial, even commercial real estate is that white box, right? People refer to it as a white box, right? You don’t you don’t do anything. It’s just it’s walls, the ceiling of floor. That’s it. Right?

9:07

That’s it. Absolutely. And there are smaller industrial buildings all over the place. I know Allentown is full of them. You know, you know, the 1500 2000 square foot bays. And those The reason why I like those for, you know, a neophyte investor is you’re gonna have a hard time getting hurt. The guy who’s going to rent your building is the landscaper, or the guy who rebuilds you know, CV joints. Or it might be a cabinet shop, or any number of those other units. These are the guys that can’t park their truck in front of the house in their community. So they need somewhere to store their equipment. So they’re, you know, they’re in there. They’re in there on a daily basis. They’re paying the rent because they need somewhere to keep the stuff and as long as you as a landlord are keeping an eye on the rents and the values and the marketplace and you’re making those adjustments accordingly. You should do just fine. And then it’s, you know, once you’ve reached a certain point I like to use, for example, the, the 20% mark. You know, once I’ve gotten to a 20%, you know, appreciation, I pull the trigger. I’m not holding out for 25. I’m not holding out for 27. I’m not going for 30. Because by the time I get done doing that, if I miss my guess, yeah, now it’s now it’s I lost 20%.

10:31

Right, right. You’re going down the other side?

10:34

Oh, yeah. And so And listen, some people don’t buy this. But I was doing a modification in Detroit. And it was a six unit, apartment, condo townhouse thing. And it originally was going out at 1.2 million. And when I got it landed on my desk, there was a 90% loss severity on that property. So the property was worth 1.2, you know, two years ago was worth $120,000, then, wow. Yeah. If you held credible, if you held out for the extra 5%. Guess what? You were you were up to your eyeballs in it? So that that’s really one of the things that I would would suggest your readers need to pay attention to and really focus on, make sure your rents are competitive with the market. Love is zero and tennis is zero in real estate. Like your tenants don’t love them. They’re paying the market rent. And understand that you know that that pride of ownership is great, but it doesn’t translate into your bank account. It’s an asset. And at some point in time, that asset has got to trade. Right. So don’t fall in love with that property. I mean, now, from a negotiating standpoint, every property I have is my favorite property.

11:56

And it’s the best one on the block.

12:00

It’s much better than anybody else’s. I inherited this, reminds me of my grandfather, you know, that kind of thing. But, you know, at the end of the day, it’s an asset and it needs to get traded. And then I just take the proceeds and move into something else. So that’s, that’s really you know, what I what I’m like and what I’m looking at. For the apartment segment, you know, you folks really need to stay like I gotta tell you, we’ve got an apartment building that just opened up down the street here. And they’re renting a I want to say it’s a two bedroom two bath for $3,000 a month. Yeah, well, I Well, they’re asking $3,000 a month. Here’s the newsflash and you guys know this, you know, at $3,000 a month, if you back into the numbers, you have to make $100,000 a year to afford it. The median income in Broward County is 58,000 bucks. I was just gonna say, I bet it’s not 100 No, it is not. So you know, I look at that and I go, okay, you know, where are you going to go with this? And, you know, it’s just a situation where you know, it’s red hot. Everybody that’s fleeing the Northeast is coming here. Yeah. And, you know, they’re, they’re selling their house. I mean, one of my one of my neighbors and friends, they sold their house up in New Jersey, for over a million bucks. I think they sold it for like one two or one three. They came down here and bought a house in Delray, that was bigger than the house they sold. I think they had I think it was a $500,000 brand new home. They paid all cash.

13:34

Yeah, it’s certainly a different market. I mean, New Jersey is obviously very premium priced and very inflated taxes are high and fall. Yeah, probably not one of the best states to have investments in but yeah, a lot of people do go south. They do go to the affordability. More affordable.

13:50

Well, that’s that’s what I’d say the your listeners have to focus on is that the affordability. And understand Yeah, you’ll hear about like I said, all these rarefied air big deals, understand that 85% of all commercial transactions are private party deals….. The moms and pops, it’s not you know, the REITs that are doing the business. And literally when you look at the REIT market, the REIT market on $1 value. You know, the big boys is probably 17 18% of the total market. So the other 72% of all transactions, all dollars, is private party stuff. Maybe the mom and pops, it’s the guy who has the your the mechanic shop, the pizza shop, the you know, the 711 whatever, that that actually is driving the real estate market.

14:40

The episode will continue in just a moment.

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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.

15:42

So I think that your listeners need to really focus on you know, affordability, trying not to get out of that, you know, that golden mean, where they’re right, you know, right, straight up the middle, you’re not taking a flyer on, you know, $3,000 a month, you’re not renting for 300 a month unless there’s a reason. Yeah. And and you’re staying right there where the biggest percentage of the population can afford to pay your rent. Yeah. So that’s that the other one, the other one that I got to tell you and less. And it’s funny, because I used to go to these, you know, the real estate investors club meetings all the time. Because they wanted me to talk about commercial real estate, you know. And I’m hearing about all these wholesalers and the fix and flip and all that stuff. And my opinion is that fixing and flipping and wholesaling is a lot like musical chairs. Yeah, it works great as long as the music’s playing. But at some point time, somebody is gonna end up without a seat.

16:43

I absolutely love that analogy because it is 100% true.

16:48

Oh, no, I had Listen, I have a friend who’s a doctor and he decided he was going to become a real estate investor. Now, you know, doctors are the worst real estate investors on the planet. They think they know everything number one. And number two, they just make bonehead decisions as far as real estate goes. So this guy went out and bought a, I want to say it’s probably like a $200,000 house wholesale, right? I think he paid about 180,000 bucks for it. And he’s telling me how he’s gonna go in and skin it. He’s gonna flip it for 240. And he’s gonna do it in a month. Well, that didn’t quite work out as he had planned. Because he went in and this was a foreclosure. And before the people left the home, they flushed sakrete cement mix down the drain pipes. Oh, gosh. Oh, yeah. Yeah. So in order for him to get the house working, he would have to replace the pipes. But before that happened, somebody flushed the commode and flooded the house. Oh, God. Now all of the new hardwood flooring that he put in, which wasn’t laminate or you know, composition flooring, literally blew off the floor. Right all it all got swollen and pop right off the floor. So there goes his. there goes his floor throughout the whole 18, 1900 square foot house. Now in order to fix the plumbing, we don’t have basements down here. Right. So what you do is you hire a crew. And these guys literally tunnel under the house, and get the pipes out from underneath the house, the picture this? You’ve got five or six guys who’ve descended on your house digging out all of your drain lines underneath your house. Oh, gosh. So it But wait, there’s more. He, he’s got the plumbing permit to do this, right. And while he’s getting the permit work done, the inspector comes out and goes, Oh, hey, by the way, your service entrance is inadequate and doesn’t meet code. So you’re going to replace your service entrance. So a new electrical service entrance for that house was like 2700 bucks, no big deal. But the problem with it was that the service entrance was on the side of the house where the air conditioning unit was. And the air conditioning unit was too close to the service entrance to the code. So now he has to move the air conditioning unit over like six feet from the new service entrance. Right to get that done, gets the plumbing fix puts a new floor in it. Guess what happened to his $60,000 profit?

19:26

He had? None. None.

19:28

And here’s here’s the funniest part about it. There was a little bit of a market correction. So the 240 he thought he was going to get became 220. Yeah. So he didn’t come out of that too. Well now. Yeah, let me let me let me add a cautionary tale. However, I have a buddy family friend. He was a buddy of my dad’s up in Lancaster, who started out buying houses. And when I last spoke to this guy, he owned 300 of them. He would buy a house that was $100,000 House for 50,000 bucks. He had his own crew, he do all the work himself. He was a general contractor. Right? So he’s not paying, you know, retail for the work. He’s paying wholesale. And that’s how he survived when weather got nasty throws guys in the house and say go in and you know, drywall this thing, put a new kitchen in, etc. So unless you’ve got a real strong exit plan, and or you’re buying it right, in, you know, the metrics, fixing and flipping is something that should be left to you know, people who’ve either got the expertise, or you know, have more money than God.

20:36

Yeah, no, I completely agree. It’s a very, very risky business, and it’s so much impacted by the marketplace and the marketplace, as people know, today can change overnight, literally overnight.

20:48

Oh, yeah. Oh, yeah, absolutely. And it listen, here’s the thing. People don’t understand that, for example, right now, you know, and I’m not going to try, I’m going to try to stay apolitical. I’m gonna try and stay out of politics okay, but, you know, I went to school by my background is in economics. And anytime you have inflationary pressure, like we’re experiencing right now, you’re going to see an uptick in rents. You’re going to see an uptick in prices. But then something happens. When I was a kid, the first one I remember happening back in, like, 1973, was the oil crisis. Everything was going along swimmingly, until we A in 1971 took the United States currency off the gold standard. And everybody freaked out. And then the oil prices went from 25 cents a gallon to $1 a gallon, you know, and it was like, people were pulling their hair out and throwing themselves out of building windows. Well, all of that caused a contraction in real estate. So the house that was trading for 60, or 70,000, wasn’t getting sold. It was sitting on the market for 9 months, 10 months, 12 months, or longer. And they’d have to make concessions to get the house sold. After that, you know, the market picks back up again. And you know, we don’t we don’t necessarily know what the next progenitor will be. But we had the 1980s 1979 big thing there was the Iranian hostage crisis. Okay, well, that that caused a huge stir in the markets because OPEC was involved peripherally, and everybody’s flipping out about that. And, you know, there was this shadow of war and all that. And guess what, the economy went sideways, right? So now, we’re retrenching, again. Then you move into the 1990s. We had the savings and loan crisis, and that bailout in 1989. And 90, then that was followed 97 by the tech implosion. You know, and all of these things are not in real estate. But because of the amount of capital that’s involved. Right, you know, you’ll see this you know, the happy dollars dry up, right, people pull back.

23:03

Completely agree. I think it’s really important in any kind of investment, real estate investment, let’s be specific, is that you try to identify things that are recession proof, you know. Now I say COVID proof, or pandemic tight, you know, trying to find things that are still essential, right, housing is essential. Warehousing is essential. Oh, yeah. Medical is essential. Right? Um, you know, your little mom and pop shop not so essential, right?

23:35

Well, how about bowling alleys, want to go into a bowling alley right now?

23:38

Right? Or, like you said, those specialty type of, you know, golf courses, stuff like that. So you’ve got to think about the market corrections, you got to think about things outside of your control and how they affect how people spend their money.

23:52

Well, I’ll give you an example. I know this is a little, little macabre. But I was involved peripherally with a company that specializes in cemeteries. And the rule of the cemetery is the guy who develops it, goes broke. The guy who buys it from the guy who developed it goes broke. It’s the third guy who buys it that actually makes it work. And it’s just because of the cost associated with it. Yeah, and the timeframe, and then let’s face it, you know, you’re you’re talking about a commodity there where people aren’t exactly beating a path to your doorway. In fact, it’s usually an afterthought. It’s kind of like, Oops, now what do we do? So you got to be very cautious in what you’re what you’re putting your money in. I think, again, right now for the smaller investors, it’s a great time to get started. In single family housing, you’ve got to be very selective though, because of the prices. Right? You got to really take a look at the rental income. From there on out I’d say you know, duplexes. four units, things like that. And then once you got to a point where you’re comfortable, I’d say move into something like that triple net bank. Right? I love triple nets. I mean, it’s just like, okay, they, they send me, my, they send me they don’t even send a check anymore. They just wired it’s direct deposit. So, you know, I think every now and again, I’ll hop on the, you know, like Google Earth or something and look at my building. And, you know, I’d like to, I’d like to buy one like in Las Vegas, so I have a business reason to go to Las Vegas, but my wife’s not a fan. So I have to stick was stuff a little bit closer to home. But that’s, you know, that’s really what I like, and what I’m looking at. I am firmly of the opinion that the market is going to correct. And in some cases, it might actually implode. And it’s just because the the relationship between returns and capital costs, there’s no relationship, I mean, formerly there was, you know, you got to have a margin of safety, that service coverage ratios of one to one to five, you know, and if it does, you know, it makes sense, they fund it. But again, if if the guy who’s in your unit can’t pay $18 a square foot to store his lawn mowers, right, it’s gonna be real hard for you to collect enough rent to pay the mortgage. Right? You’ve got to be very careful. And that’s why I said you buy your profit upfront. And then listen again, don’t fall in love with the deal, and just move on and know

26:25

Thank you for listening to part two of my special guest interview with Adam Von Romer. I’m excited to announce that we have one more segment and that’s the conclusion of my special guest interview. Please make sure you stay tuned to our next episode, where we will continue and conclude our conversation. Until next time, take care.

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