Commercial Real Estate Investment Success

These are the questions that come up and best thing to do is go to someone who has an extensive background in working with commercial investors. I know as an investor myself, it’s not something that I just went out and jumped into. I aligned myself with professionals who understood the market, understood what it is I was looking to invest in, and then helped me achieve those investments.

In this webinar, what I’m going to do is we’re going to talk to Pam Goodwin of Goodwin Commercial. She’s a friend of mine. She’s a fell speaker at the Think Realty Events, in which we teach together. Actually, she’s a Think Realty coach and she brings a tremendous amount of expertise to the table. I thought this is the person I wanted to get on the podcast. Pam, thanks for being on, how you doing?

Pam: Thank you so much, Clint, for having me. It’s commercial real estate, one of my favorite subjects to talk about.

Clint: Yeah absolutely. Before we get started, why don’t you give us some background? How did you even got started in this space? Because I don’t imagine you just jumped right into commercial, or maybe you do.

Pam: I’m always encouraging people to get into commercial real estate, but just a little bit about myself, graduating at the University of Nebraska with a degree in interior design. I always wanted to do commercial design and I only did that for a year. The first half of my career, I started off in designing office buildings and then working for large shopping center developers. Then eventually went on the tenant side, I always think it’s good to have landlord experience, tenant side. I went from Omaha to Baltimore, Maryland to Los Angeles, and now, based here in Dallas, Texas. I went on the tenant side working for Brinker International, developing more than 50 Chili’s from the ground up on the development side.

I met a landlord who once he did a Chili’s development deal, the 10 year ground lease, he was able to sell that ground lease and make about $800,000 to $1 million profit on one deal as an investment, I thought, “Oh my gosh, I’ve got to learn how to do this.” After developing 50 plus, it gave me great experience. Back in 2006, I started my own company. We actually partnered up together with this landlord developing properties. We specialized in single tenant net leased properties, which is a great way to get started investing in commercial real estate.

Clint: You just said something there the ground lease. For those listeners who are not familiar with that, that’s a whole other way of looking at commercial real estate. Most people, when they think of commercial, “Got to go buy that building, then I need to find the commercial tenants to put into that building.” Why don’t you explain what a ground lease is?

Pam: We always prefer to work with the national tenants, so we’ve been developing Walgreens, Chase Bank, McDonald’s-type tenants, but will take McDonald’s because it’s one of my favorite tenants. We owned the land, we bought land, and what I did with my business partner is always identify the best property to put under contract first and then go find the tenant or you either have the tenant in hand. In this case, one of the first projects I worked on my business partner and I, we were able to look at five acres and a ground lease with McDonald’s. Basically, what it is we leased the property to them for $60,000 a year. That’s what they paid us as the landlord to lease the property on this particular property in a smaller town in Texas.

It was a 10 year lease with bumps in it, but for the first five years they paid us $60,000, then there’s rent bumps for that. Then, they’re able to sell that $60,000 rent on a certain cap rate, which means something every single tenant has a different cap rate and as the return of money that you’re able to make out of money. A typical McDonald’s ground lease these days as if you’re developing them, the lower the cap rate when you’re selling at the matter it’s kind of a different mindset. You want to buy high at a cap rate, which means you want to buy at a high 10% cap rate, so instead of making 0% on your money in the bank or a little bit, you’re actually making 10%.

A typical, McDonald’s deals are selling at a 4% cap rate, which is really good if you’re the landlord and you’re selling that investment. If you’re buying it, you’re only making 4% on your money, but people really like to buy those because it’s a secure way of knowing that you have that money every year and it’s growing.

Clint: So in a situation like that, what you’re doing is you’re buying the land and McDonald’s is putting the structure on the land, correct?

Pam: Correct. They’re building the entire building. They’re maintaining it. They’re paying the taxes on it. They’re paying the insurance which is triple net, common area maintenance taxes and insurance—that’s what the three—and it’s typically mean they’re a double net or a triple net. That’s why it’s so nice as a landlord. You’re making that mailbox money and it’s really nice to have that cash flow is the overall goal in commercial real estate investing or any type of real estate investing, that cash flow every month.

Clint: I know. These land lease arrangements, I have a client. I first just heard about them about 18 years ago, where they had a piece of property and Safeway came in and built a grocery store and then expanded to a gas station on this property. They’re making $30,000 a month from Safeway to have this land lease. The only thing they bought was a property and everything else is maintained by Safeway. They don’t have to do anything to collect this type of revenue. I thought that is a neat way to invest. You have to worry about structures. When they move out, you get the building. You can turn around and lease it to someone else.

Pam: Definitely, that’s why it’s a really, really good niche to be in this part of the commercial real estate because you can even buy them, which seems low for commercial real estate asset, but you can actually buy one of these for $300,000, some of these commercial real estate where the tenant is paying everything off for you in your building equity.

Clint: Yeah. If people are looking for that, what would you recommend that they look at in a particular location? If I’m trying to figure out, “Hey, I see a piece of land that’s available. It’s zoned commercial, should I go in and try to just look for raw land or should I look for a structure that should be torn down that’s in a great location?”

Pam: Well, there’s always three different ways to get into it and most highly profitable are the ones that you’re actually, most of the time, developing from raw land and putting that brand new structure on there. You can either buy an existing tenant that already has a ground lease in place. We were able to buy at existing Texas car title from a just a local guy who had it and he was retiring, found out he was retiring and that was highly profitable when we were able to sell it.

I always tell people, “You know your community the best if you drive around at 1-5 mile radius, you’re driving by and you know if you need a Starbucks, McDonald’s, Chick-fil-A or what type of use is missing in your community. You’ll see an old Quick-Serve place, old burger place go out and some of those buildings are excellent to buy and do a quick redevelopment on those. The banks really like those and the tenants really like it too because they can do a quick redevelopment and move in right away.

Clint: What I’m hearing, you said this earlier, is that if you want to get started in this, first try to negotiate, work with a professional like yourself who understands this space, negotiate an option on the property to tie it up and then go out and start looking for tenants that are interested in this. If you’ve identified, like you said, Starbucks is missing in that area or maybe some type of a tire service or automotive service, then start approaching them. Do you approach the national chains?

Pam: Right, I always feel that’s the best one for investment property are the national, in which we have a lot of events every year with the international council of shopping centers. They have, you can look that up, icsc.org and that’s for all of our retailers, anywhere from movie theaters, to your Starbucks, to your Walmart, anything in the retail sector, because that’s what we specialize in Goodwin Commercial. You can also just go on their website, too.

If you go to McDonalds, they have a full real estate section right there. Just click on it, it tells you exactly what size they need, who to contact in the region. A lot of those national companies have it right on their website you can go to.

Clint: Wow, that’s amazing. All right, were going to take a short little break and when we come back, I want to talk about that single tenant net lease and some of the things people should be looking at when it comes to investing about where the market is going. Let’s take a quick break and we’ll come right back with Pam Goodwin from Goodwin Commercial.

Welcome back, everyone. Hi. It’s Clint Coons here with Anderson Business Advisors. This is our podcasts and on this special edition podcast, we have Pam Goodwin of Goodwin Commercial and we’re talking about commercial leases.

In the last segment we went through the importance of a ground lease and how you can benefit from that. Right as we ended there, we started getting into single tenant net leases. It’s something that Pam had brought up. Pam, maybe go a little bit deeper on that, what you meant by a single tenant net lease, so the listeners understand what that product is and what they should be looking for you want to go to commercial route?

Pam: Single tenant is exactly pretty much how it sounds, so instead of having a multi tenant building, it’s actually a single tenant. Some of the prime examples are your fast food, your Wendy’s, McDonald’s, Taco Bell. Those are all single tenant net leased properties that you can purchase. It’s great because you can actually own the land and then own the building but the best part is you don’t have to operate it. As the landlord, you’re just collecting that monthly rent. You talked about how to get into commercial real estate. I recently had two clients who wanted to start investing in commercial real estate.

For example, one client, they have been leasing from an office space for more than 30 years and after a while, they were tired of really paying that landlord that rent. We were able to find them a condo just $310,000. Finding them a bank loan, what they were going to have to pay in HOA dues, all of that, their monthly expense was going to be a lot less than what they were paying in their office rent, they owned it, they were their own landlord, and they were happy as can be. That’s how they were able to get into a commercial real estate.

Another quick story, a client of mine, she’s been placing senior living people in a variety of different types of homes throughout the Metroplex. She took her idea, you know, “I like this house and this one, if I could just put all those ideas in my own senior living homes,” so she teamed up with her brother. They bought a fairly inexpensive two acre piece of land and I helped her. She hired me as a consultant—I also do consulting work—and we were able to get $3.3 million loan to develop her own single living. She had no experience on how to develop, hire the architect, but that’s why you said earlier, teaming up with the right people and now she’s going to be owning her own commercial real estate. She was able to get a loan, seeing her dream come through. If you have your own business, why not own your own building? I always tell people.

Clint: Yeah, and the SBA has great loans for people that are looking to buy their own properties to run their business out of. That’s something from a financing standpoint, you can look at. I know I’ve been down that road before because just as you described, where we run our offices out off, many of those offices, we actually own the actual building. We found that from a financial standpoint, it’s much better to be putting cash into our own pocket building equity, than paying it to someone else. That’s a great angle.

When it comes to these properties in trying to find them, of course, many times you may be working through an agent. How do you find the right people to work with? Would you say there is there any interview process someone should go through if they wanted to go out there and start working with an agent like yourself that can help them look at ground leases, the proper land, or structure?

Pam: Right, it’s definitely as you know in your business being an attorney how important it is to do your due diligence and being hooked up with the right person. In commercial real estate, a lot of us really do specialize in different things, so you really want to find that expert who knows. I do a lot of restaurants and primarily retail or people that do storage units, multifamily. You don’t want to hire me to find you multifamily because I do not have experience in that. You really have to ask around, drive around, find out in the industry.

Start attending different networking events in commercial real estate. There are so many of them on Eventbrite, meetups, all that stuff that you can really start meeting the local brokers in that area to help you find it. Definitely, interview them to find out what type of deals they do and really find out the person, like I said, exactly the type of investment you want to buy. Make sure they’re the expert in that so that they definitely protect you.

Clint: Let’s say that I approach a broker and I ask him if he has an expertise in self storage and he says, “Oh yeah, absolutely. I do them all the time.” Well then, how do I know whether or not he is BSing me or not?

Pam: Well, you’ll definitely ask for examples and definitely ask for references of partners they teamed up with, or actual projects that they’ve done. If anybody asked me, I have a whole brochure PowerPoint presentation of the different locations we’ve done, and the different projects, and definitely ask them what properties they’ve worked on, get some information on that, and see what type of returns they’ve had. Talk to people before you invest with them.

Clint: I think that what you just said there is so key that people need to interview, ask for references, rather than just blindly take what they’re telling you as a gospel that they really have that expertise, because they may not. They’re just trying to win your business over, then they lock you down, and you’re stuck working with that agent for a set period of time. Get the references. That’s really, really important. Now, the market for commercial. Where do you think it’s going?

Pam: Well my crystal ball says being in this business for 30 years plus and surviving, it definitely has its ups and downs, and it’s still a growth market, but can kind of feel that it’s slowing down a little bit. People always hear when I speak that I think everything is for sale, and interest rates are still coming down. What that means, it’s still an opportunity to buy. I probably should think about it more but I don’t, to plan for that, because I’ve gone ups and downs but I still think the market is really booming. Like I said, since we’re here in Texas and we’re fairly landlocked definitely here in Dallas, we have to shop and we have to eat, so they’re still popping up everywhere, so hopefully.

Clint: What I’ve seen on the multifamily side is that when you’re out looking for investments, the cap rates on multifamilies as you just said, you want to buy high, sell low. Most people right now are buying low. I see investors getting involved in five caps, three caps, and I’m just scratching my head thinking, how do you make any money at that? With commercial, have you seen that same run up in price scene or is it still attainable where you’re going to get a decent cap if you look and that hasn’t been all so called picked over.

Pam: Some of the problem going on is that people don’t want to sell because there’s nothing that they can do with 1031 exchange and buy and return, and some of those people with those low cap rates, we do not buy that low of cap rates just because it really seems like the property taxes are eating up their profits very quickly these days. They keep escalating and that cap rate just keep shrinking on your returns. It will be interesting to all those people that are buying those multifamily at five or below cap.

I’ve had some single tenant below five cap that people are buying and now trying to sell. It’s a little bit tough out there because somebody doesn’t want to buy that none credit tenant that they bought at 5%, so it is kind of changing.

Clint: Yeah. I’ve looked at that myself and people ask me, “Do you have any multifamily yet?” and I don’t right now, because I’m kind of sitting on the sidelines waiting to see what’s going to happen with these loans that they have in five years, three years when they start resetting. Whether or not it’s going to be an issue form because cash flow just doesn’t support it or the property values have dropped. There might be opportunities. The banks get involved for investors.

Where to invest? This is a question that comes up a lot. People listening to this podcast come from all over the country and you brought up California before we were talking. Where are the hot markets? Because haven’t you been in 16 different markets or 16 states, 80 cities?

Pam: Right. I invest where I have done projects and have done development deals in. Right now, we’re just focused pretty much 100% in Texas and every once in awhile we do tap into Oklahoma, because it’s still a growing market up there. Dallas is still a really good market, the Atlanta, there’s still a lot of really good market that were kind of quiet before. A lot of people still like Texas because we don’t have the state income tax which I think you’re in a state, too, correct? That doesn’t have state income tax?

Clint: That’s correct and they make it up in other ways.

Pam: Right. I was showing a friend that was just visiting from Massachusetts and showing her. I’m like, “Look at this brand new home you can buy for $350,000,” and she could not believe it. I have this brand new beautiful home which was such a great price in Texas and that’s why a lot of people are still moving here. Gas, I’m paying $2.08 and I was just in California and they kept it at $4.99, just stuff like that that were half the price of so many markets. You get so much for your money. I’m still a big supporter of Texas. I always tell people to stay in their own market, you know it the best. That’s where I’ve just been studying the last several years, is in my own market.

Working in my Brinker days, chilly days, the markets that have under 100,000 people the tertiary markets have been gold mines where you can find a lot of good opportunities because so many of the sellers will work with you and it’s great to work with the local. I always tell people in their own markets to go visit your economic development director because they know everything happening in the city. They know every property owner and they know every single tenant that they need in their community too. Go look on websites, go make an appointment to go meet with them, they’re a wealth of information.

Clint: Yeah. That’s really important because a lot of people will tell you, investors that have made a lot of money doing this, they bought in the path of progress we hear that term all the time but I don’t think people really understand what that means or how they bought in the past. it’s because we’re going to talk with the economic developer and finding out where the growth is projected, where they’re bringing in facilities, to which area of the city, and what they planned out, because that’s going to be where you want to own because you can get it cheaper now than you will after all that work has been done.

Pam: I know. Another odd thing that I do on Facebook, a lot of times, the city council or the planning and zoning especially the city council on Facebook, they actually post those live on there. I can just sit here and find out all the upcoming hearing of who’s developing where, if Wal-Mart’s giving a presentation, I’m going to go buy a […] from them or maybe next door. Like you said, you can find out a lot of information ahead of time. Even driving on a Saturday or Sunday to some of those communities because the main properties are off market to go by, and getting out of the car, and taking a new path, and eating at a new restaurant, I always enjoy doing, and you can always find lots of property or buildings to buy.

Clint: Well that’s great. This has been extremely informative. I thank you so much for taking the time out of your day to come on this podcast with us. I know the listeners are going to want to reach out to you and we have your information in the show notes, but if somebody wants to contact you to engage with your services, what is the best way to go about getting a hold of you?

Pam: Definitely reach out to me pam@pamgoodwin.com and definitely follow me on all the social media, especially LinkedIn. I pretty much post daily on that. Hopefully providing valuable content on there, but look me up on LinkedIn, follow me on that, and definitely follow me on Instagram, Twitter, among all of those social media.

Clint: Well great. Pam, thank you very much and I want you to enjoy the rest of your day.

Pam: Thank you so much Clint, I hope to see you soon.

Clint: Will do.

Pam: Thank you.