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PODCAST EDUCATION

Why Residential Real Estate Investors Are Going Commercial

Episode 044

John Larson and the Real Estate Cowboys talk passive income real estate investing.

Hear new episodes every Sunday morning at 8 a.m. The Cowboys talk commercial real estate and why it can be safer and more lucrative to move into that segment.

Keep the #CowboyCoffee hot while listening to John, and the Cowboys talk about how to #BeACowboy and earn passive income in real estate.

Episode Transcript

Keith Weinhold: Hey, this is Keith Weinhold from the Get Rich Education podcast. You are listening to my friend John Larson and the Real Estate Cowboys. Don’t quit your daydream. 

Robert Helms: Hey everybody, it’s Robert Helms, host of the Real Estate Guys radio show, and you are listening to the Real Estate Cowboys. 

Announcer: Have you thought about becoming financially free through real estate investing, but don’t have the time or knowledge to get started? Welcome to the Real Estate Cowboys podcast. Each week we discuss passive income investment opportunities in the red hot Texas market. John Larson and the Real Estate Cowboys will show you how to leverage their team to build wealth in real estate through passive investment opportunities. And now here’s John. 

John Larson: Hello. Hello. This is John Larson with the Real Estate Cowboys. Welcome back to another week’s episode. This week we are going to be talking about why many residential real estate investors are starting to go commercial. And I think with that it’s like me. It’s easy to break into residential real estate, the financing is relatively easy to obtain. The financing is really good to where it makes it a little bit more affordable to get into investing in a single-family home as opposed to a large commercial building. But once you get enough single-family homes under your belt and you start to feel comfortable investing in real estate, I think it’s everyone’s just human nature to want to go bigger and go faster and start just doing larger deals that yield larger profits and larger returns. And I think that that’s where we’re at really right now at American Real Estate Investments and Real Estate Cowboys. 

We just developed a hunger for larger deals and to do bigger deals. We talked a lot about that at the Real Estate Guys, Secrets to Successful Syndication seminar here in Dallas this past weekend. We had some great speakers there. Dave Zack, guy’s syndicated $100 million in funds. He has been very successful at it. We obviously talked with Russell Gray and Robert Holmes spoke, and it was good to see Tom Wheelwright there as well, talking about all the tax benefits that are available to real estate investors. And every time I hear him speak, I feel like I learn something new. But it was a tremendous event. Over 200 people came out for that event and I got the opportunity to go on stage and talk about our debt syndication opportunities here at American Real Estate Investments and the Real Estate Cowboys. 

So such a great event. It’s great to see some of my listeners. Some of the Real Estate Cowboys listeners out there, they were in attendance as well and learned a lot at the event. I love going to the events and we talked about, and Russell talked about specifically on stage about showing up. Building your brand, building your network and you can’t do that unless you show up to events like this where there’s a lot of like-minded people in the audience. Truly a blessing to go out to that event. I try and make that event every time it’s here in town in Dallas. Really fun and really good to see everybody. 

Back to the topic this week, with residential real estate, like I said, I mean it’s a great way to get started. It’s how I got started as a real estate investor, but over time it’s good to use residential real estate, single family homes as a building block to then parlay yourself and elevate yourself into larger deals, which we’re now offering today at American Real Estate Investments through our debt syndication opportunities by doing larger deals like the 30,000 square foot office building that we just closed on here in Dallas. And we have about 50 investors who syndicated funds to purchase that building and renovate that building. And we actually just kind of valuation back on the building. So I bought that building for 2.6 million and we raised 3.5 total for the deal because we’re going to rehab the building, but I got a valuation back from our insurance company and they have already valued the building at over $5 million. So that was just such a home run deal. I’m so, so excited about that deal and I’m so excited for my investors who are part of that deal because that’s an easy refinance to get our investors paid back and look to the future for another debt syndication opportunity here in Dallas or with our CBD Business Mile High Bioscience. 

If you’ve been following us and following me specifically, you know that I’m also in the CBD industry and own a company that produces the CBD isolate that goes into these products that are sold to the consumer. There’s many delivery systems out there, chocolate, gummies, pills, tinctures where you can put the CBD oil on food or just ingest it, just put it under your tongue. Dog treats, it’s great for pets, great for dogs who have anxiety or allergies. There’s a lot of studies coming out showing how CBD is helping people with anxiety, seizures. There’s even been some testing that it’s helping with cancer patients. So really, really excited about what we’re doing in the CBD side of things. And we’re also starting to syndicate money from our investors on the real estate side to get more and more equipment for CBD companies so we can extract the CBD content from the raw hemp biomass that’s out there on the market. 

And the passing of the Farm Bill back in December has made hemp legal to grow in all 50 states and legal to sell CBD products in all 50 states because there is no THC or very little THC in these products. So it’s just for the medicinal benefits of the flower. There’s obviously it’s not intended to have any recreational use. Really excited about that and really exciting and honestly I have to admit, I would not be here today. I wouldn’t even have the opportunity to break into a profitable business like CBD if I didn’t start as a real estate investor. If I didn’t go out there and build my brand and build my network through real estate I don’t think that it would be possible to do what I’m doing today with CBD and Mile High BioScience which is my CBD company. 

And we’re also in the process of putting out some consumer products as well. I’ve created a couple of brands, I’m not going to mention them just yet, but I’m sure you’ll be hearing about them soon and some retail brands that will be out on the market for consumers. So we’re going to offer some edible products to deliver CBD into your system and a few other really great products that are hitting the market that are used as a delivery system for CBD. So be on the lookout for those. And I will be sure to update you all as new developments start on the CBD side of our business. 

But back to why residential real estate investors are going commercial. Like I said, a first-time real estate investor is more likely to go residential than commercial and it’s because the acquisition process is very similar to that of buying their own home. You understand how it works, right? Many of my listeners out there, I’m sure you already own a home, you’ve gone through the process of closing on a home. So it’s very similar when you’re buying a rental property for an investment. That’s the same type of process, same type process with the lenders, so on and so forth. 

But the end goal with a rental is to have enough cash flow to cover the mortgage, the insurance and lien some. And hopefully, the property appreciates over the years. That is one benefit of single-family homes. They do appreciate if you buy them in the right market, the right neighborhoods. 

Residential property investments are excellent ventures, but there’s definitely more lucrative options out there. And so when a buyer closes on a residential property, they immediately enter a long term relationship with the bank. If the property costs $200,000 after the 20% down, you’re still in the hole for 180,000. That’s what you owe the bank over the next 30 years and most of those mortgage payments will be interest charges. Even if the property appreciates over five years, the amount owed to the bank barely flinches, which is true. At the beginning of your loan, you’re really just paying a lot of interest, you’re not really paying the principle down. Later in the loan term is when a big chunk of the principal starts to get paid down, but commercial investments can often have a larger price tag, which means getting a loan from a bank becomes more challenging. Yet commercial investments present the investor with an opportunity to get creative. 

Investors can team up with private lenders to take multiple pieces of the loan pie. These loan repayments are complete within one to three years, so that’s what we do on our debt syndication side. So for example, the building that we purchased just recently here in Dallas, that was only a year term. The idea is to pull the funds together, purchase the building, pull the funds together for the renovation, get the renovation complete, get those final two to three units that were vacant in that property leased up, renew the leases, or bring in tenants that will pay a higher rate, on the expiring leases and bring up that cap rate on that building and then go through the refi process and pay our investors back. That’s the goal. 

A residential property, you can require a very hands-on approach. More hands-on than what we’re doing with our debt syndications. And some investors, they’re gonna really like the aspect of having control over a tangible asset. And at the same time, the investor can hand off the property to a property management company at roughly 10% of the monthly rental income, which can make the experience a little bit more passive. But as we talk about on the show I don’t want to create some unicorn and some dream out there that rental properties are completely passive because they’re not. 

Even though a management company is managing the property for you and collecting rent and taking care of any maintenance that may occur, you’re still gonna have to deal with your management company calling you and saying, “Hey, the plumbing went out, a pipe burst and it’s going to be thousands of dollars to replace and fix.” Or “Hey, your tenant didn’t pay rent this month, so we’re going to have to file an eviction.” Or “You’re tenant just skipped out on a lease. And now you have this property vacant and we have to go in and do a turn.” So, there’s a lot of unexpected things that can pop up with a rental, which is going to in turn make the experience not as passive as you would like. But with our syndication opportunities in doing commercial deals, it seems to be, in my opinion, a little more passive than owning single-family homes. You’re still dealing with tenants, but you’re not necessarily dealing with tenants that are occupying the property 24/7, their kids aren’t there breaking things. 

These are business professionals, these are people that occupy the property for only 40 hours a week as opposed to 24/7. And just the relationship between the tenant and the landlord or the management company just seems to be overall more passive experience. And when you come in on the debt side, you’re not dealing with the tenants anyway. You’re just taking the role of the bank. So it makes it even more passive because you’re really just collecting your monthly dividend and you’re not hearing from tenants. You’re not hearing about maintenance requests, you’re not hearing about things like that. You’re just collecting money. Which is one thing that my investors really, really like. 

With rentals, turnovers are gonna typically occur every 12 to 18 months. A lot of times we like to push our tenants into two-year leases. So, that way you’re really only experiencing turnover maybe every 24 to 30 months as opposed to 12 to 18 and obviously those turnovers are going to trigger vacancies and other unwanted costs, right? 

When the property is not occupied, it’s not bringing in money. So now that monthly mortgage payment, that’s not going to go away just because your property is vacant doesn’t mean your mortgage payment’s going to go away. So now you’re covering the mortgage payments until you get the property re-leased. Commercial property investment options go beyond the rent to live tenant. There are business tenants, like I said, retail stores, e-commerce warehouses, distribution centers, small businesses like salons and bakeries, tech startups, gyms, laundromats, they all fall into this pool. Owning a commercial property can be very hands-off and very passive once it’s up and running. 

All right, so it’s time to take a quick commercial break, but when we come back, I want to talk a little bit more about debt syndication and we’ll also discuss where to find good commercial opportunities. So we’ll be right back. 

Welcome back from the commercial break. This is John Larson in the Real Estate Cowboys. This week we are discussing why more and more investors are moving from residential real estate investments into commercial real estate investments. And so now I want to talk a little bit more about debt syndication and the benefits of syndicating with investors here on Main street, so to speak, which is everyday people just like, myself and those of you who are listening. 

So what I’ve noticed is real estate pros are just constantly looking at the mortgage rates, anticipating an overall increase this year. The National Association of Realtors forecasts the rate to hit 4.9% by the end of the year. And so even though experts say the ground floor of the US economy is in good shape, the financial markets are definitely volatile. 

So those who are diving in the commercial investment pool are no longer looking at banks to float them along. We have enough power just in our network to where we can pull funds together, get money out of main or out of Wall Street and get it into Main street so to speak, like Russell Gray from the Real Estate Guys likes to say, and pulling our funds together to go do larger commercial deals, who in my opinion, like I said, I believe are a little more safe, less volatile if invested in the right market like Dallas Fort Worth where we’re already home to the most corporate headquarters in America and more and more people continue to move in. DFW is leading the nation in growth, population growth. And it has been, it seems like for the past decade. 

There’s more people move in, more businesses continue to move in. There’s going to be more and more demand for these commercial spaces, right? There’s gonna be more and more demand for office space, medical space, whatever it may be. And so not only do you have the opportunity to build new commercial space, but there’s an opportunity to go buy some older buildings and bring them up to today’s standards and drive up the lease rate and get these properties occupied. There’s definitely a need in this market for a commercial space. 

And so it seems investors are taking on debt syndication as a means to acquire property and investments without actively concerning themselves with the market swings. The syndication process allows us to line up financial resources to meet our desired capital and also get that desired capital quickly. The repayment period is also pretty quick, which is why it makes that syndication so attractive to our investors, right? They loan money and they get that money back in a year, 18 months, two years maybe tops. And the lenders can receive their dues in a timely matter and the investor can have 100% ownership or 100% first lien position on that project. This means the entire return goes straight into the investor’s pocket shortly after the purchase, which would be us. 

So on this building that we just purchased in Dallas, it was 90% occupied. So this building was already cash flowing and after all of our expenses were taken out of the equation, what it’s leased at right now, which is undervalued, we were still netting $16,000 a month. So that’s money going into our pocket right away. Using our investor’s debt to acquire the building and rehab the building, we’re already making money on the property. 

So you in turn could do that yourself. If you’re listening to this episode and you’re interested in debt syndications and you just want to come on a passive role, just loan money. Great. Or if you’re thinking to yourself, man, I have some friends and family that have some money and they probably have some friends and family that have some money as well, if I find a deal, I could syndicate the deal, I can be the owner of the property, I could manage the renovation, oversee it, and then I could go out and refinance the building. Refinances on commercial buildings are based on how much income the property is bringing in and it’s not necessarily on the credit score of the owner. So if you acquire a building and pull some funds together and you renovate it and you get it occupied, or maybe it already is occupied, that rental income’s going to come into your pocket. 

So same thing with us. I want to touch on the fact that once again debt syndications are not equity syndication. So I don’t want to confuse anybody, right? The difference is the loan from the lender is basically a silent partner and this lender takes ownership in the project too, in the form of first lien position and deed of trust, right? The investor you, if you’re the sponsor of the syndication and you’re the project manager and you’re going to see the project through, you are in charge of fulfilling the project’s goal. 

And the economy has to be cooperative as well. Right. In order to pay back our lenders, which is why I like the DFW market, which is why I moved here because I feel like it’s about as close to recession proof is any market in America. So even if we do go through another recession here in an economic downturn, history has shown that DFW was not really affected by the past recession in 2008 so I don’t foresee it really being effected in a future recession. And that’s because of the fact that the economy is so diverse when new people are moving here and it’s very still very affordable to live in Dallas in my opinion. If the sponsor, us, American Real Estate or if you who’s listening to this program want to go out and do some of these deals and syndicate funds, you are responsible for the project. You are responsible for seeing the project through and you are responsible for paying back these lenders who loaned you the money, right? 

If this doesn’t happen, the project and the property return can suffer and it can cost the investor and then maybe you’re not able to pay your investors back, fail safe, they have first lien, they can file foreclosure and take ownership of the project and then maybe see it through or just flip it back on the market and sell it and just try and recoup some of their funds. Either way, the economy is going to play a role in this project and it’s really up to that project manager and the sponsor and the borrower to see the proper project through and to pick markets and opportunities that are going to set them up for success. Right. There’s tons of deals out there. 

Someone asked me at the conference this past weekend, “John, what kind of deals do you have? Do you have deal flow?” Absolutely. There’s tons of deals even here in Dallas, but deals are few and far between. Good deals are hard to find. I get deals dropped in my lap every day. It doesn’t mean they’re good. So we have to be very, very selective about the deals that we put our investors into. And that’s why I love the CBD business because it’s just a burgeoning business right now. It’s just blowing up and there’s tons of money to be made for the real business guys out there. For the guys that have some capital, the guys that know how to run a business and structure business, and regulate a business. There’s a huge opportunity and that’s why we’re such big proponents of this CBD industry. It’s helping people and there’s money to be made and it’s craving a legit company and a legit team of professionals to come in and structure this business. So that’s why I’m so excited about it. 

I also want to discuss where to find commercial opportunities. And like I just said, deals are dropped on my lap every day, but where do you find good commercial opportunities? Well, number one, the market has to make sense. So DFW, in my opinion, makes sense. Checks that box. So if not Dallas Fort Worth, if that’s not the market that you’re looking for, then you need to be looking for other growing areas with recent home value appreciation, job creation, and business friendly policies. One of the things that makes it so great is the fact there’s no state income tax here. So businesses love that. So more affordable to operate here for your employees to live here as opposed to California and New York. So that’s another reason why find it so attractive. 

Even Chicago, it was more affordable for these companies to move to Dallas or Austin or Houston or San Antonio because the cost of living is just so much more affordable. The cost of real estate’s more affordable. And so, I mean, Texas overall is just business friendly. People moving into the region can find affordable housing. Like I said, I meet so many people who moved here from California and they’re just shocked at what they’re paying now for a home or an apartment as opposed to what they’re paying in California. It’s night and day. It’s alarming really. But it’s great for them and they love it. That first it seems like people from California, they move here and they’re like, they’re bummed out. There’s no beach. There’s no mountains. Once they get here and they find out how much more affordable it is and now they have extra money to spend on themselves and have fun, their tune changes really quickly. 

So I also want to point out that our recent survey from CVRE, they polled commercial real estate investors here in the US and these commercial real estate investors ranked Dallas Fort Worth as the second most popular place for commercial investments. And that was not surprising to me. LA still’s ranking number one, but that is changing more and more as more companies continue to move from California to states like Texas. And it seems like they’re all moving to Texas. But that just goes to show that Dallas Fort Worth is on every commercial investors’ radar and it should be on your radar as well. 

So last tip I’m going to give is when it gets to the point where you need to refinance your commercial project or the commercial building, whatever it is. So let’s say you syndicated the funds, you did the rehab, you got the property leased up, now it’s time to pay your investors back and you want to do that in the form of a refinance instead of a sale. 

It’s best to work with lenders in the area who are familiar with the market and the neighborhoods for sure. Once a market and the type of commercial property are selected, the investor can pitch a lender, it also works in reverse. Pick the lender and allow them to guide you towards a profitable market and investment. Sometimes you can even use the lenders to provide some insight for you and sometimes lenders have projects waiting on the table for the right investor. The commercial experience can be much more passive and steady than a residential investment. It’s larger, it seems a little bit more daunting, but trust me, it can become more passive and it can give you a better experience when it comes to investing in real estate. Take it from me. 

There’s no harm in starting the conversation with a lender to see what you can accomplish this year or starting a conversation with a group of lenders, family and friends who have some capital that they’re looking to invest. And so if the idea of getting started in commercial real estate, residential real estate has you worn out and you’re ready to graduate into larger deals, I think a good way to start is to come in as a lender first. Start analyzing these deals, reading the PPM, understanding how these deals work and how to structure these deals. And I think it’s great to come in on the debt side, earn double digit fix returns. You have a self directed IRA or 401k or if it’s not self directed yet, look into self directing. And if you do all that, you can loan through your IRA in 401k and have those dividends sent back to you tax free or tax deferred. 

And you could keep that going through an IRA or 401k. I think it’s a great investment option for a retirement account. But if you want to start doing these deals yourself and syndicating money yourself, I think a great place to start, like I said, is coming on the debt side and just see how the projects are structured, learn how the projects are structured and then you can start going out and finding your own deals and syndicating your own money, right? 

And so if you’re interested in that, go to our websites, RealEstateCowboysDFW.com or AREIUSA.com. The PPM for our new opportunity, which is going to be on the CBD side, we’re raising money for equipment extraction equipment for CBD. You can review that PPM and see if you want to get in on this opportunity. This particular opportunity is paying 12% for a year, a two year term. So if you put in $100,000 you’re gonna make $1,000 a month for one year. So great, great return there on a business that we’re already making money in, we’re already profiting. We just need to increase our bandwidth and control the extraction piece because the extraction piece is so vital. 

So if you want to learn more about that deal, like I said, go to AREIUSA.com this opportunity is only for accredited investors, so you must be accredited to review the PPM, but if you are accredited, feel free to go download that document and read it over and reach out to a member of our team or a member of my team will reach out to you. Once you download that PPM, make sure that you understand all the information in there. If you’re interested in moving forward, we can get you signed up and get you in on this next raise here that’s paying 12% for one year. 

That’s all the time that we have this week on the Real Estate Cowboys. I hope you enjoyed this episode and we will be back next week for some more great information and once again, remember, what is your return on life? Have a great week everyone. This is John Larson signing off. I’ll see you again next week. 

Announcer: All opinions expressed by the host of the show are the opinions of American Real Estate Investments LLC and do not reflect the opinions of guests or sponsors. No personal or professional advice on this program should be considered an endorsement to follow a real estate financing or investment strategy. Before acting on any information, seek advice from your financial tax, mortgage or real estate advisor, as the information is not guaranteed and investment strategies have the potential for profit or loss.