BiggerPockets Real Estate Podcast - 4: Commercial Real Estate Investing With Frank Gallinelli

Episode Date: February 7, 2013

Commercial real estate is a powerful way to build and sustain wealth – yet is often feared or misunderstood by real estate investors. Luckily, on today’s podcast, we are excited to have a man who’s professional life is dedicated to teaching investors the ins and outs of commercial real estate investing, Frank Gallinelli. Frank is a best selling author, business owner, and real estate professor who definitely knows his stuff. This interview contains some powerful key metrics, data, and tools you’ll need if you ever plan on investing in anything more than a single family home. This interview, like all of our BiggerPockets Podcasts, is full of real-world, actionable content without all the hype. In This Week’s Podcast We’ll Explore: Why investors shouldn’t necessarily start with residential. When “Location, Location, Location” isn’t the most important. How to use “cap rates” with commercial properties. What a Triple Net Lease is and why it matters. How to use partners to finance investment properties. Lowering your tax assessment by challenging an assessor. Why chasing the “hot market” isn’t the way to build wealth. Why every commercial property is for sale Links from the Show RealData.com Frank’s LinkedIn Account Frank’s BiggerPockets Profile RealData.com BiggerPockets Company Profile BiggerPockets Summit Definitions: Equity Partner Cap Rate Net Operating Income Triple Net Lease Tweetable Topics “When choosing your real estate path, there’s not a “right” answer – but a “best answer” for each person” Tweet This! “You don’t buy an income property cause it’s pretty; you buy it because it makes money.” Tweet This! “There are no absolutes in anything – especially real estate.” Tweet This! “As a real estate investor, become an expert in your local area.” Tweet This! “Know the vocabulary of your business.” Tweet This! “There is no substitute for Due Diligence.” Tweet This! Books Mentioned in the Podcast The Big Short: Inside the Doomsday Machine by Michael Lewis Mastering Real Estate Investment: Examples, Metrics And Case Studies by Frank Gallinelli What Every Real Estate Investor Needs to Know About Cash Flow… And 36 Other Key Financial Measures by Frank Gallinelli Insider Secrets to Financing Your Real Estate Investments: What Every Real Estate Investor Needs to Know About Finding and Financing Your Next Deal by Frank Gallinelli 10 Commandments for Real Estate Investors by Frank Gallinelli – Download It Free! About Frank Frank Gallinelli is a best selling author and the President of RealData Inc, a software firm serving real estate investors and developers since 1982. Frank’s company is designed to help income-property investors analyze investment properties, structure partnerships, and produce presentations to buyers, sellers, lenders and equity partners. Learn more about your ad choices. Visit megaphone.fm/adchoices

You're listening to Bigger Pockets Radio, simplifying real estate for investors large and small. If you're here looking to learn about real estate investing without all the hype, you're in the right place. Stay tuned and be sure to join the millions of others who have benefited from BiggerPockets.com. Your home for real estate investing online. Hey, everybody. This is Josh Dorkin with BiggerPockets.com here with yet another great show for you. I've got my co-host, Brandon Turner with me. Hey, Brandon. Hey, Josh.

How's it going? Not too bad. Not too bad. Of course, today we're very excited to bring to you one of the greats in the business. A guy named Frank Gellanelli. Don't know if you guys have heard of him, but Frank is definitely one of the, he's one of the smarter kids on the block, so to speak. Frank's founder and CEO of Real Data created it back in 1981 before most of us were born,

providing the company provides analysis and presentation software for investors and developers. Frank is also the author of three books, mastering real estate investment, what every real estate investor needs to know about cash flow and 36 other key financial measures, and, ooh, mouthful. Insider Secrets to Financing Your Real Estate Investments, what every real estate investor needs to know about finding and financing your next deal. Frank is also the author of Insight. a e-book, which happens to be a free e-book. You can pick it up right now on Amazon.com.

Ten commandments for real estate investors. For all these books, you guys can find on our show notes at biggerpockets.com slash show four. Do you ever notice how every passive investment somehow turns into a very active lifestyle, active spreadsheets, active phone calls, active stress? Here's a better question. What if you could buy brand-new construction homes, 10% below market value in the best markets across the country without making real estate your second job. That's exactly what rent to retirement does. They're a full service, turnkey investment company handling everything for you. In some cases, investors get 50 to 75% of our down payment back at closing, plus interest rates as low as 3.75%. They've partnered with Bigger Pockets for over a

decade helping thousands invest smarter. If you want to do the same, visit BiggerPockets.com slash retirement to learn more. Most investors spend more time chasing deals than reviewing their insurance. But a quick coverage check can be fast, easy, and one of these smartest ways to protect and even improve your property's cash flow. As the months get colder, frozen pipes, icy walkways, and seasonal wear and tear can increase the likelihood of claims. And traditional insurance companies aren't always built to handle these claims quickly or smoothly.

That's why more real estate investors are turning to steadily. They focus exclusively on landlords, whether it's a single-family rental, a burr builder's risk policy, or midterm holiday guests. You get fast quotes, flexible coverage, and protection for property damage, liability, and even loss of rental income. Now is the perfect time to review your rates and coverage. Get a quote in minutes at biggerpockets.com slash landlord insurance. Steadily, landlord insurance designed for the modern investor. Most investors spend more time chasing deals than reviewing their insurance. But a quick coverage check can be fast, easy, and one of these smartest ways to protect

and even improve your property's cash flow. As the months get colder, frozen pipes, icy walkways, and seasonal wear and tear can increase the likelihood of claims. And traditional insurance companies aren't always built to handle these claims quickly or smoothly. That's why more real estate investors are turning to steadily. They focus exclusively on landlords, whether it's a single-family rental, a Burr Builders' risk policy, or midterm holiday guests.

You get fast quotes, flexible coverage, and protection for property damage, liability, and even loss of rental income. Now is the perfect time to review your rates and coverage. Get a quote in minutes at biggerpockets.com slash landlord insurance. Steadily, landlord insurance designed for the modern investor. Frank is a really good guy. He actually taught back at the Bigger Pockets Summit last year and got great reviews. He's a graduate of Yale University. He serves as adjunct assistant professor in Columbia University's Master of Science and Real Estate Development Program for developers.

And we are very excited to have him here. Frank Gelinelli, what's going on, man? Welcome aboard. Hey, Josh and Brandon. Great to be with you today. Good to have you. Good to have you. That was quite a mouthful, man.

You got three books with really long titles. Well, I didn't write the titles of some of those. It was my publisher who did a few of those titles. I wanted to write something called, you know, Sex, Life, and Ruffles and. real estate, but they just won't know. We got what we got. You know, you're a bestseller with what you got. And had you gone with the sex lies in real estate, you might have sold a couple more.

Well, actually, they've sold more than 80,000 copies of one of those books. So I guess I really shouldn't complain. Maybe they knew what they were doing. I'll give them credit for that. Wow. 80,000 copies. That's pretty substantial. So does that give you a big head?

Do you feel, you know, you know? you know you're a big shot well not really you know i do go into bookstores occasionally and and volunteer to sign a copy of my book if they have it on the shelf and they always let me do that then they always say oh by the way i also wrote hamlet can i sign that as well because they never checked to see so apparently i'm anonymous the entire world they don't know who i am i could be shakespeare for all they knew it wouldn't make any difference i could see you standing in the aisles of the of the bookstore waiting for somebody to pick up a copy of your book. I'll catch you.

I'll put that on you, too, but I can choose. Well, so we are here today to talk about income properties. And you've been teaching and writing and working in that space for a long time. And I guess we'll kick this thing off with residential versus commercial. Which do I want to think about as a new real estate investor? What do you think? Well, you know, I get that question quite a lot, Josh. And there's really not a right answer to that question, but there's probably a best answer for a particular individual.

One of the things that I've always seen is that most new investors, because they've lived in a house or lived in an apartment, that situation is a little bit more comfortable, it's a little bit more familiar. So they tend to gravitate toward that, the residential type of income property. The one thing I might be a little bit cautious about is if you're getting into that, watching out for getting into something that's too small. If you're looking at property that's four units or less, you're probably looking at property that's intended for somebody to live in rather than really an investment. So I advise people that if they're going to go with residential property, look at something a little bit larger, look at the five minutes or bigger.

When you get down to making that basic decision, though, between residential and commercial, there's a lot of things to think about. Some of them are global, some of them are local. Okay, okay. So let's talk about that because I'd say for the vast majority of folks on bigger pockets, for example, and a lot of newbies that I've come across, across over the years, they hear commercial, they hear five plus, and they start breaking down into cult sweats. So, you know, what is it about these multi-families that people need to know and not worry about, you know, what are the big fears that people have and how can they overcome those fears

in thinking about these properties? Well, if it's a residential property, it's really, in terms of its character, it's not a whole lot different from the two four family except that when you're trying to assess what the property might be worth in terms of a purchase price you have a lot more concrete information to work with because you're going to be valuing that property the same way the bank is valuing the property and that's based on its income stream when you get into smaller properties you know the one the two the you know the multiplexes that kind of thing the value really is determined to by forces that are outside your control.

You're looking at general economic forces that cause house values to rise and fall, which means you don't really have one of the big advantages of owning real estate as a long-term investment. You don't have the ability to create value yourself. People don't buy a single-family house or even a duplex for its ability to produce income. They buy it as a place to live, and maybe they get some income besides. But people buy the larger properties, the five and, and, and, and, and, and, and, you know, and greater for their ability to produce income.

And, you know, in 40 years of dealing with real estate investors and 10 years of dealing with grad students who are learning this sort of thing, I think I find the one issue that they have the hardest time kind of wrapping their head around is the notion that a property, if it's an investment property, if it's an income producing property, a true income producing property, that's value is based on its income stream and not on comparable sales. Gotcha, gotcha. Okay, so let's get into that because I think that's at the crux of what's going on here. Comps, as we know, are valuations determined based upon prices of properties in and around the area of similar type and style, I guess, so to speak.

And income property, as per your definition, is going to be a property that we're going to evaluate based solely upon that income stream, correct? Absolutely. And once you can really internalize that concept, you're halfway to mastering the fine art of income property investing. Because everybody thinks, for example, location is important. Well, when you're buying a single family house,

location is critically important because the value of that house is going to rise and fall the way the value of your neighbor's houses rises and falls. Okay? When you're buying an income property, you have to get it through the prism of its income stream. Yeah, location is important. But why is it important? Because good locations can probably generate a greater and more reliable income stream than dicey locations.

Everything really comes down to the income stream. You're going to buy that property not as a place to live in. You're going to buy it for the ability to produce income. I mean, you don't buy a stock because you don't like the stock certificate, okay, because it's pretty. You don't buy an income property because it's a pretty building. The fact that it's a pretty building may contribute to its ability to produce income. You know, people like to rent nicely buildings as opposed to ugly buildings. But what it really comes down to is the income stream.

Yeah, that makes a lot of sense. I know when I bought my apartment complex, a lot of people thought, you know, they gave me a lot of a hard time for buying. one that was in kind of a, not a rough location, but it wasn't, you know, amazing. And everyone always says location, location, location. But, you know, I could just point to the income, you know, that the property was producing and saying, well, this is why, you know, this matters more to me than location. I mean, it's not, I'm not saying I would go and buy something that's in the ghetto where I'm going to worry about getting shot. But just the fact that the income was there, that, that tip me in the way of buying it and not just passing on it like

everyone else seemed to have been at the time. Yeah, absolutely. You know, an example I give students each year when I teach this at Columbia is two properties that are right next door to each other, but one has normal leases that are going to escalate over time and where there are options and so on. And the other one right next door of virtually identical building is locked in to really below market leases and locked in over time. Now, physical property, physical location, everything about them physically is virtually identical. It's the leases and hence the future income stream that's different. So one is more value and a better investment than the other, even though they're physically is the same.

Gotcha, gotcha, gotcha. All right. So let's talk about that. The valuation of a property is determined based on that income stream. So how would somebody determine the value of a property? So you've got these two properties next to each other. One of the properties is deriving X dollars in income, and the other property, which is virtually identical,

is bringing in, say, you know, 60% of X in terms of that income stream. We can then say that the property that is bringing in X is worth a lot more today than that other property, correct? Yeah, and actually you just hit on a very key point here when you said today. because there's really two issues going on when you evaluate potential income property investment. And that is, how is it going to be valued today? And what do I think of it as an investment? Things don't always mesh perfectly, which is why you really have to be careful in how you look at these things.

With the value today, it's a pretty standard approach the same as your appraiser would do. You're going to take your gross income, you're going to subtract vacancy loss, you're going to subtract operating expenses, come up with a net operating income, apply a capitalization rate that you found out is appropriate by going out and talking to some commercial appraisers, and you're going to come up with the value. Now, where you can run off the rails on doing that, and where I've seen people get this wrong, is that they don't really understand the definitions of those various terms that I just use. They don't really know what is an operating expense and what isn't. And it's important because if you don't follow the same set of definitions as everybody else doing this sort of thing, then you don't come up with a value that squares with what a lender is going to come up with or what other investors are coming up with. So that's one big issue when you're looking at just the current value property. Gotcha. Okay. And that's probably, would you say that determining the value that a,

potential lender is going to be square with, I would assume then that that would be probably one of your most important jobs as the owner of these properties or a potential owner of one of these properties is to say, you know, this thing is worth X. We know it's worth X. Anybody else, there's not going to be any questions. An appraiser, there's no, you know, the bank, the potential buyers, everybody's going to be in complete agreement that the value of this property today is absolute. Is that true? Well, there are no absolutes in anything, at least of all in real estate, but you at least have a reasonable estimate of what the value is when you take this approach. But it's important for a number of reasons. And one is the fact that you're probably going to be looking for

finance on this deal. And if you're looking for financing, you're going to be able, you're going to have to be able to have a good understanding of what that property is worth, an understanding that squares with what the bank's appraiser is saying. You may need an equity partner in order to do the deal. Once again, you need to be able to show the equity partner that you've got your ducks in the row, that you understand what the property is worth. So you do want to come up with a reasonable estimate of value. Is there some give in those kinds of estimates, of course, because they're based on what's going on in a marketplace today in terms of capitalization rates that other investors are using.

And when you look at those sorts of things, when you get that kind of information from an appraiser, the appraisal will probably eight, maybe eight and a half. And so you develop a range for what is a value that you can live with with that property. But then you've got to go to that next step that I talked about and look at does it really work for you as an investment property? Gotcha. So you ran off a couple terms, and I just want to remind everybody listening that we're going to actually have these terms and definitions posted in the show notes, and that'll be at biggerpockets.com slash show for. It's biggerpockets.com slash show for. You just mentioned equity partners, Frank.

Let's talk about that a little bit. You're now talking specifically about. the financing of a potential purchase, correct? It could be very important to have an equity partner in certain circumstances. You know, the conventional wisdom about real estate investing has been, well, it's great to use other people's money, invest as little cash as your own as you as you possibly can, and finance as much as you can when you buy an income property. That can be a good approach in certain circumstances, but can also be a dangerous approach in other circumstances.

For example, in the kind of economy that we've looked at over the last four or five years where financing has been very difficult to get, it would have been impossible for you to get to get the financing that you need if you didn't have equity partners. And if you did get it, it would be on terms that would be so onerous

that it would eat up your cash flow. And in more normal economic times, still leveraging up your purchase to the hill means that you have a lot of debt service. And when you don't have any skin in the game, chances are your financing is going to be more expensive than if you were looking at a lower percentage of the purchase price that you needed to finance. So what I generally tell people who were dealing with this issue is, you know, for example, they say, well, you know, I want to have the whole deal to myself. I don't want to share it with equity partners.

I say, well, listen, would you rather have 100% of a negative cash flow? Would you rather have 50% of a positive cash flow? Because if you're financing it up too much and you're getting poor terms because you're doing that and you're having enormous debt service because you're doing that, you're minimizing your chances of having a positive cash flow. So maybe it's better for you to share that purchase with some equity investors. And maybe just as a side benefit, you might learn something from one of those equity partners because you'll be bringing another person into who may in fact have more experience than you do.

You know, I couldn't agree more, Frank. People give me, you know, they ask me why I use partners a lot. I use a lot of partners when I, you know, buy and sell real estate. And this is commercial or residential. And I was telling people, well, I'd rather have 50% of, you know, a good deal than have 100% of no deal. and, you know, people, I don't know, I have a lot of people that say, well, I wouldn't have done that with a partner. I would have just done it by myself. But when I started out, just trying to do things by myself, you know, sometimes it worked great and sometimes it didn't work out so great. And so I love going the partnership route just because of that. But I think, like you said, you know, sometimes it can be dangerous.

You just got to be careful when you're doing it. So I'd actually love to go back to something you mentioned earlier, Frank. We're talking about increasing the value of property. And I know that's one of the things. I absolutely love about commercial property is that, you know, on a residential, if you want to increase the value, you know, you talked about this earlier, there's not a whole lot you can do other than, you know, make it look pretty and make it look like the other ones. But the thing I love about commercial is that you can, you know, you can find ways to add income and that's going to add value. And it adds it at kind of a, I don't know what the word is, like exponential rate. You know, like if you can increase your rent $500 a month overall, that's going to increase

the total value by, you know, possibly tens of thousands of dollars just instantly. And so a good way, I mean, I've seen that is when you can find a property with rent that's undervalued, you know, if typical rent in the area is 500 per unit and you find one that everyone's at 400 and you can easily raise it up to five, you know, you can jump the value leaps and bounds overnight. You're absolutely correct. And, you know, since the property's value is based on its income stream, When you raise that income stream, you by definition raise its value. Let me give you, though, a kind of an example that is intuitive. We'll go back to even to residential as well as to commercial.

With resident, one of the advantages of residential is you have short leases, so you have a lot of turnover. And so you do have an opportunity with residential or with mixed use, a combination of residential. and commercial to work on building those rents up. One of the things that's kind of counterintuitive is that you'll take a look at a piece of property and you'll see that it has low vacancy rate. Not too many vacancies currently, not too many vacancies in the history. And you say, well, that's a good thing because I don't want vacancies. I want to collect all my rent.

one of the things that tell you, however, is that the vacancy is low because the rents are below market. So we're not that tuned in to exactly what the rents are in that market. A low vacancy history on a particular property could be a tip-off that you have below-market rents. And then what you – then your plan at that point is I want to buy this property based on its current income stream. Because you're not going to accept the argument from someone selling you the property that you should pay for what it could be. Yeah. You want to pay what it is. So you want to buy that property based on a current income stream, but you know in the back of your mind that that zero vacancy rate,

when everybody else's marketplace may be experiencing a 4% vacancy rate, that the zero vacancy rate on this property is your clue that here is an unusual opportunity. You can go right in there now. short turnovers, especially on residential leases, that you can raise that value. And the other side of that coin is not just raising income also. Would you agree, like decrease in expenses is also a huge way to improve the value as well? Oh, absolutely right on that. The euphemism I use is management improvements. Very often, people simply don't pay attention to what something is costing.

they don't they don't they don't shop there I mean you can't shop property taxes that's for sure but you can well but you can keep an eye on you get a reassessment I have successfully gone in and and talk to the assessor after a reassessment and I said you know how did you come up with this and had it and say right back oh look at that they used the wrong cap when they when they made your assessment you're right I'm we're going to lower your assessment. I didn't even get an argument, just that I looked at the NOI of my property. I looked at what I knew was the prevailing cap rate. This was a commercial property. I looked at what I knew was the prevailing cap rate for properties like that. I went into the insessor and

says, you know, A divided by B doesn't equal what I've got on my assessment. He says, yeah, you're right. I need to try that. Yeah, sounds great. There's a wrong assessment. Same thing with property magnet. Do you do yourself or do you, or do you farm it out? There's, there's, there's, there's, there's, there's, there's, there's an opportunity there sometimes to save some expense there. So actually, Frank, I have a question about that property management stuff. Something I'm curious about from my own investment, and I know I've seen it on bigger pockets quite a bit,

it's that, you know, the value of a property is based on the NOI, which we talked about, the net operating income. And obviously, a way to decrease your expenses is to not have property management. So what I'm wondering is, what do you think, if a person doesn't have property management, then that makes the value of their property much higher, right? Or do you include what it would normally cost for property management? So how does that work exactly? I think it's not really an enormous difference in the value of the property.

The typical property management expense would probably be a couple percent of the gross operating income. So there would be some difference, but I don't think it would be an enormous difference. many appraisers might indeed plug in a default number for the value of property management. So there's a possibility that they too would decrease the NOI slightly by the value of the property management expense that's not really being taken into account. In terms of whether you should use a property manager or do yourself, that's another one of those jumpball type of questions. If this is, again, this is residential property and you feel fairly comfortable doing it, that's okay.

However, when you get into a lot of properties or perhaps when you get into commercial property, where there's a lot of dealings with leasing, for example, and other issues, then it may be prudent to use a professional property manager. What this does bring up, however, is another kind of interesting question about understanding your own particular investment. objectives and preferences. This is a question that comes up a lot when we talk in Columbia in my classes. As a matter of fact, I've now built one of my case studies for my students that goes right to the heart of this subject.

And I give them a choice between a mixed-use property and a standalone retail, such as a standalone pharmacy. And it's kind of an interesting conversation that we have. have because the mixed use property is one that gives the hands-on investor a lot of opportunity to enhance that cash flow and therefore to enhance the value. On the other hand, the triple net lease property doesn't do that. So the question I ask my students and I tell them right off the bat, there is not a right answer to this question is which one of these properties would you prefer to purchase and why.

Gotcha. Let's actually talk real quick about the trip. You mentioned triple net lease. What exactly is that for those who don't know? Okay. Triple net lease is where basically the investor has very little personally to do with operating the property and very little to to have to pay. A triple net lease occurs with commercial tenants.

and it's where the commercial tenant will pay either all of or all of the increase over a base of certain operating expenses. Let me be more specific. You rent to a, that freestanding pharmacy that I was talking about, and as part of their rent, we call it additional rent, they will reimburse you the landlord for the property taxes, the property insurance, if there are any utilities involved, such as water, that might be getting billed to you, the landlord, they would reimburse for that. They would do all their own maintenance and repairs. They would basically do everything. The only thing you would do would be to open the envelope where the rent check comes in.

And the rent check would include these extra amounts to cover those expenses. You wouldn't ever let them pay those expenses directly because you wouldn't want to be relying on a third party to pay your property taxes or your property insurance on time. So they reimburse you. These things are really called expense reimbursements. But in a triple net lease situation like that, there is no property management expense very often because there's very little for the property manager to do. Also typical of that kind of situation is that you're anticipated return on your investment as lower.

If you're getting into that mixed-use property that I was describing where you're hands-on and you're dealing with tenants that are turning over frequently and so on, you expect a higher return because there's more risk, more uncertainty. That commercial lease, that triple net lease I was just talking about is five, ten years. Everything's predefined. You're not at risk for increase in property taxes because they're paying, they're reimbursing you. You're not at risk for maintenance expense because they're doing it. So it's two different situations.

So the interesting conversation that comes up in our students is, which would you prefer and why? Well, I was going to ask on the triple net, what other than the lower income, what's the downside? You know, I think people are going to sit here and listen and say, wow, triple net lease sounds awesome. I could go buy a property, not have to worry about any of these details. And okay, so, you know, maybe it'll pay me a little bit less income. What are we talking about here in terms of that? What is a little bit less in terms of percentages? and what are the other negatives that come with the triple net lease other than perhaps being

stuck with somebody for five, ten years that maybe you don't love personally? That is certainly one of the possibilities, but even if you love them dearly, you're still stuck with them five, ten, even twenty years. And what that means is that if you negotiated a lease where the rent goes up on average one percent a year. You might not actually raise it every year. It might be, you know, every three years, every five years, whatever. But you may have locked yourself into a 10 or five or a 10 or a 20-year deal where suddenly you find yourself in a tremendously hot market where if you would be renting these things, if you've been renting the space more frequently, you could have done significantly

better than that. Other issue, of course, is that if and when you do come upon a vacancy, it may take you a good deal longer to re-rent a property like that, then it would, for example, if you're renting apartments in a, you know, a 40-unit apartment building, everyone has to live somewhere pretty much. So demand for apartments is a kind of almost a universal constant that there's, you know, you can always hope to find a tenant for an apartment. If you've got a 10,000-s-foot-standing former pharmacy, your issues in terms of finding a replacement tenant overnight are obviously considerably greater. So you have that risk in terms of the rollover of a property like that, that would be greater.

One of the issues that I talked to my students about is, you know, I'm a lot older than you. So maybe I haven't got quite as much energy and desire to set the world on fire as you do. So maybe you want to buy that mixed-use property, spend all your nights and weekends, okay? You know, commercial tenants are commercial tenants. But residential tenants don't keep business hours. So if the toilet clogs up at 3 o'clock in the morning, you're going to get a call. You've got to be willing to be, you know, for that for that home run kind of return, We're willing to roll up your sleeves and kind of be 24-7 as a real estate investor.

You get to be someone who's a little bit longer in the tooth, such as myself. No comments now, Joshua. Maybe what I prefer is the lower return, but more predictable return, and the more predictable lifestyle that comes from not having to deal with the property on a daily basis. So I think that goes back to what you said earlier, where there isn't necessarily a right or wrong answer, but there is a best answer for each person. And so it definitely, you know, the triple net least commercial lower rate

doesn't necessarily entice me right now when I think about it, because I like getting my hands a little dirty. And I like going out there and working and, you know, find ways to leverage my skills and ability to try to get more return, where I can definitely, you know, in 10 years from now, I hope I'm not still doing that. And, you know, it gets back to a subject, again, that I probably kill a half lecture when I'm teaching. It's the subject of clarity.

And I say, you know, you're not going to be clear in terms of what you are trying to convey to other people in a transaction, but you have to be clear in your own mind. You have to be clear as to what it is that you want. What are you doing this for? Okay. Are you doing it because you're trying to hit, are you trying to hit open, and you're trying to, you know, ultimately live off your success as a real estate investor. Are you doing it for long-term security?

Are you doing to put your kids through college? You have to clear in terms of your own objectives before you can decide what road you're going to take on these investments. Gotcha. Gotcha. People love to call real estate passive income, which is interesting because most of the investors I know are very busy. Busy finding deals, busy managing teams, busy worrying they pick the wrong market. Rent to retirement flips that model.

They help investors buy turnkey new construction homes, often 10% below market value in top rental markets across the country. Their local teams handle the build, the property management, and the details, so you don't have to. In some cases, investors even receive 50 to 75% of their down payment back at closing, and there are interest rates as low as 3.75%. They've been trusted partners with BiggerPockets for over a decade, and if you want to learn more, visit BiggerPockets.com slash retirement. If you own a short-term rental, here's something worth knowing. Not all landlord policies are built for your type of property. And with holiday bookings, chilly weather, and higher guest turnover, having the right coverage is more important than ever.

Steadily offers insurance designed specifically for short-term rentals, covering property damage, liability, lost rental income, and even unexpected issues like bedbugs. Steadily works exclusively with real estate investors. So they understand the details that make short-term rentals unique, and they build build coverage to match it. A quick review of your rates and coverage every year can help you protect your property and your cash flow. Get a quote in minutes at biggerpockets.com slash landlord insurance. Steadily, rental property insurance for the modern investor. Most investors spend more time chasing deals than reviewing their insurance. But a quick coverage check can be fast,

easy, and one of these smartest ways to protect and even improve your property's cash flow. As the months get colder, frozen pipes, icy walkways, and seasonal wear and tear can increase the likelihood of claims. And traditional insurance companies aren't always built to handle these claims quickly or smoothly. That's why more real estate investors are turning too steadily. They focus exclusively on landlords, whether it's a single-family rental, a burr-builders risk policy, or midterm holiday guests. You get fast quotes, flexible coverage, and protection for property damage, liability, and even loss of rental income. Now is the perfect time to review your rates and coverage. Get a quote in minutes at biggerpockets.com slash landlord-indoor

Insurance. Steadily, landlord insurance designed for the modern investor. Wouldn't it be great if your houseplants paid rent while you were out of town? I mean, they've got the whole place to themselves, lots of sunlight, zero responsibilities. But no, they just sit there waiting for someone to spray them with some cool mist like a bunch of leafy loafers. But guess what? Your home actually could be earning you money while you're not there. Airbnb has a great feature called the co-host network, which makes hosting your home so easy. If you live far from your property or are away for extended periods, you can hire a local co-host to take care of the hosting for you. These co-hosts are vetted locals who already have experience hosting

on Airbnb. A co-host can handle all the details like messaging guests, creating your host space, and managing reservations, so everything runs smoothly. It's a practical way to earn a little extra money, maybe even some cash toward your next trip. Plus, you get to share your place with someone traveling to your area while you're off making memories somewhere else. Your home might be worth more than you think. Find out how much at Airbnb.com slash host. I want to jump to these deals in opportunities. Where can somebody find these income streams? Where can somebody go and find these deals? And I'm talking outside of, say, for example, a loop net or one of the traditional commercial broker sites online. Are you going to go and find a good deal from just calling

a commercial real estate broker? Or, you know, do you need to know somebody? How does somebody find a good deal? Commercial real estate broker can be a very valuable asset. So I wouldn't dismiss that idea by any means. One of the things that I've always felt strongly about, and I think I even discussed this in my little tent commandments book there, is operating locally. I know a lot of real estate investors, they try to chase the latest hot market.

I recall once I was giving a talk out, and this was in the late 90s, giving a talk out in Los Angeles and San Diego, and nobody wanted to talk about what I came here to talk about. They all wanted to know if I knew where the best places in Las Vegas were to buy property. I wouldn't know Las Vegas if you'd drop me in the middle of it, you know, out of a helicopter. I say if you can become expert in your local area, then you'll really know where the cracks in the sidewalk are.

And brokers can help you, but, you know, when it comes to commercial property in particular, essentially every building is for sale, whether it's for sale or not. So if you see something that you think has promise, there's no reason, it's not like walking up to somebody's house and saying, hi, I really like your house, but do you mind moving out? Okay. If you essentially make that same proposition to someone who owns a strip shopping center or that retail, that's freestanding pharmacy that I talked about, or the 40 unit apartment building, they'll say, well, let's have lunch or we can talk about it. We can see what, you know, I'll be happy to, you know, with the proper non-disclosure,

I'll show you my rent and expenses and so on, and we can talk. So becoming expert in a local area where you really know everything that's going down, and there's a side benefit of that. You not only know the properties, but you also know the local politics, you also know the local budgetary process. You know, for example, if you've suddenly now got a mayor who wants to, you know, to spend you into oblivion and your property taxes are likely to be going up, you know, you really have a sense of how things are going on, coming along. I think you nailed it right there with knowing your market. That's one of those things that I, you know, I hear all these new investors coming in, and particularly in the residential side, who say, you know, what market should I,

invest in where should I go and and it always goes back to guys you need to know where you're at you need to know your market pick one focus on it get to know it if you're doing houses walk every block in your market know every house that's for sale go to every open house go to you know check out these listings until you know it cold because when a new house pops up in the market you know that value you don't even have to go and run the numbers you can look at it and you can you know you can figure it out pretty quickly I would assume on on the commercial on the commercial side we're talking about the same thing obviously you might might take a little longer but by being familiar with your market you can you become an expert

whereas you know by by flip-flopping around and jumping all over the country and and different parts of your area for example you may not necessarily know the the different goings-ons Is that a word growing tones? Yeah, that's like, like Attorney's General. But you become a known entity, so that when you're going for financing, they've seen you here before because you've done deals locally.

Other property owners who might be thinking of selling their buildings know that you've been buying this kind or that kind. And so when they think of somebody to call, maybe before they call their broker, They may call you. So, Frank, do you see that, I guess, commercial real estate is a little more stable nationwide? And what I mean by that is, like, I probably wouldn't want to go invest in an income property,

like a residential income property, in Los Angeles or in Seattle or New York City, because the prices are so high you can, it's really difficult to make a return. Do you find commercial is like that as well? There's hot spots where it just doesn't make sense to invest, or is it pretty stable nationwide? You know, the commercial property is always, as I said, is typically a function of whatever is the prevailing cap rate, whatever is the prevailing rate of return that other investors are willing to accept. And yes, there are markets where you have to ask yourself, what are these people thinking? You know, when they're something at a cap rate, 4%, which means, you know, cap rate runs the opposite from value.

So as cap rates go down, values go up. you know, you'll find, find areas where the investors are buying at such high prices. You have to wonder how they can make a return. So like everything else, I think there are inflated markets, commercial or residential. So you have to be conscious of that. And once again, I think if you're trying to do this and you're sticking locally, you have a much better chance of having a real sense of what. is appropriate for the market that you're dealing in because you'll be seeing properties being

bought and sold all around you if you stick within a relatively modest radius. And so you'll know that when somebody has paid a price that doesn't seem to make sense to you, that maybe that should be your belt went. That shouldn't be your cue. So, okay, now he paid 4% cap rate where everybody else is paying 8. Which one do I want? he may be, you know, that may be an affirmation. You can spot an aberration, I think, more easily when you're dealing in a restricted area. And when somebody's starting out, what do they need to do? You know, we're talking about all these different things here.

And I think a lot of folks listening, again, are saying, well, you know, I'm new to real estate. How on earth do I get involved in commercial? You know, if I want to buy a house and flip it, I could buy a house and flip it. if I want to be a landlord at a house, great. You know, what do I need to do to get my ducks in a row? Do I need to put together a presentation material? Do I need some kind of package, you know, to go out there and convince a lender, perhaps, to lend me money?

Where do I find the properties? What do I need to set myself up to be this, you know, budding commercial real estate investor? That's a great question, Josh. It's really, you know, in an attempt to answer that question, that's why I've been teaching for the last decade, because basically, you know, people go into this and they don't know where to start. They don't know, they don't know what they don't know. So my advice invariably is that you have to start with a bit of education. Before you actually try to do something, you have to understand what it is you're doing. And so I urge people in the strongest possible terms to know the vocabulary of this business. to know what the terminology means because not only is it necessary in order for you to be able to make a sensible analysis of a property, but it's also necessary for you to have any reasonable credibility. If you don't get your terms right, you're just not going to make any headway at all as a real estate investor, especially in commercial real estate.

You know, not to sound like a suck up here, Frank, but your book actually, the 36 other key financial measures. That was the book that taught me almost every real estate term, you know, like the important things like cap rate. I actually checked that out from the library when I was first beginning, and that was really helpful. So this is kind of cool. I never actually thought I would get to say thank you to the author of that,

but thank you. Well, thank God. I right now, autographing my computer monitor for you. Nice. I guess you are a suck up, Brandon. Yes. You know, that's, again, and that's why I wrote that book because the typical real estate investor goes into this, starts off from this, doesn't know the difference between, you know, what is an operating expense and what is not an operating expense. What does net operating income really mean?

You know, what are these different terms? And so when they go to try to do a deal, their inexperience, they might be wearing a sandwich board saying, you know, I am a newbie, you know, take it. when they go into the bank, if they don't know what a debt coverage ratio is and they haven't done their analysis, lender there is going to look at them and say, why are you wasting my time? And if I ever see you walk through that door again,

I'm going to tell my secretary I'm busy. Someone who doesn't do the analysis, for example, and tries to go into a lender when the analysis would have shown that their debt coverage ratio is 1.0, means they just barely can pay the mortgage of nothing ever goes wrong. Well, if they had done their analysis, they would have known that they're not getting the loan on those terms. So by walking in there, they haven't accomplished anything. They're still not getting the loan, but they have

proven to this lender that they don't know what they're doing. So starting off with the basic education, getting to know the terminology, you know, every profession has its secret handshakes. And real estate investing is no different. So you need to know what these terms mean and how they're used. If you've accomplished that much, you've really, you've really gone more than halfway to getting it done. Then, Josh, to answer your question about presentations and whatnot, that falls right in with the same thing. If you make a good presentation, you're saying to the world, the world being the guy on the other side of the transaction, the seller if you're the buyer or the buyer if you're the seller. You're saying it to your equity, potential equity partner. You're saying it to the lender. You're saying,

I know how this stuff works. Okay. So we can do business because I clearly know how this stuff works. Let me give you a silly example, but it's one that I think goes to the point. Very often when I ask my students at Columbia, I give them a case study. I say, here are the facts. Okay. Work up a pro forma, do an analysis, but you're not allowed to use my company's software. Okay. You got to do it on your own. Let's see what you come up with. So one of the things that I invariably see is that there is no linear logic to the presentation. Things are all over the place.

You don't go from expenses to income to expenses, debt service, to cash flow and so on. Things are all over the place. If I were a lender or I were an equity partner, I would be asking, what are you trying to tell me? but the one that I find the most amusing is that they will do one of these spreadsheets and all of the numbers, I mean, I'll give them this this $15 million property to analyze

okay, and all of the dollar amounts have decimal points and cents. And I try to say to them in my most serious professorial voice if this deal doesn't make sense at $15

million, it certainly doesn't make sense at $15 million. and $27. Yep. Stop with the distractions. No investor looks at the loose change. You're announcing to the world, I never did this before.

This is my first shot. So, give me the $15 million, but don't forget my 27 cents. Presentation matters. And it gets back to what I said earlier on the subjects of clarity. You've got to, get your message across because you have an audience that you're talking to when you make a real

estate investment presentation. And you have to address that audience. You have to convey the information so that they can understand it and so that they can see your point of view. It might be the seller trying to talk to the buyer. You might be the buyer trying to convince the seller that his price is wrong. But whatever it is, understand that clarity really matters. That's great. That's great. Hey, really quick, I heard you plugging that software of yours and anybody listening could find out how to get there through the show notes again at biggerpockets.com slash show for and of course they can find a link to pick up a copy of that book of yours amongst the other books as well. You can spell realdata.com can finally figure out the software.

Real data.com. Is that R-E-A-L-D-A-T-A-com, Frank? You spelled it perfect. Unbelievable. It's amazing I could actually, they let me do this show. So we're kind of running out of time here. Before we go, let's talk about a couple really quick questions that I've got for you. One of them is what is your best piece of advice for new investors? Do your homework. Okay. That starts with learning the terminology as I mentioned before. But then when you go, get out of your book, out of your classroom, as it were, virtual or otherwise, then do your homework about your market and about the properties that you're looking at. There is no substitute for due diligence. And due diligence is not just about the property, even though that's essential,

but it's also about the market in which the property lives. You need to know if employers are moving in or moving out. You need to know if cap rates are going up or going down and what they are currently. You need to know what is the typical vacancy rate for properties such as the one that you're looking at. So due diligence is absolutely essential. If you start off by learning the terminology and then learning your market and finally learning your property and you're following the food chain just perfectly. That's great. Very, very, very good advice. All right, what is your favorite real estate book? And no, you cannot plug your own book, Frank. I'm being perfectly serious because I wouldn't want to have an idea that got imprinted on my brain,

which I then put in one of my books, and then, you know, I end up being one of these plagiarism kind of guy. So I try not to avoid, I try to avoid trying to, you know, read other people's stuff because they, they may have an undue influence subconsciously on me. But there are other good real estate books out there. I have no doubt about that. I just try not to indulge. That's a fair question. All right, what about business books?

What's your favorite business book? And don't give me that same VS answer, Frank. I guess the one I enjoyed the most is the big short when I was trying to figure out just how we got into the mess that we're in. I think, I believe it's Michael Lewis, if I'm not mistaken. The big short was a very interesting. expose, if you will, on how we got into the subprime mortgage mess and, you know, how that all played out. All right. So I got a question, Frank.

You've been around the industry for, you know, a long time. I'm not making fun of your age here. It's just true. So I'm wondering, like, what have you seen, you know, what sets apart the top performers in our industry? You know, the guys that are really crushing it and doing well and making, um, making a, you know, a future for themselves. What sets them apart from the people who come and go and the students maybe you've seen in your class that just jump in for a few minutes and then leave or, you know, try their hand

one time and it's not for them? You know, what sets those people apart, the top performers? I hate to be, it sounded like the proverbial broken record here, but it gets back to my answer to Josh's original question. I think it gets back to education, to taking the time and the trouble to learn how this stuff really works. Not to assume that there are some magic answers, there's some, you know, there's some, you know, a magic wand and some little, you know, dust that you can sprinkle on a deal and you'll immediately find that, you know, oh, everything's worth seven times this gross income,

a kind of simplicity, but people who take the time and the trouble to actually learn this business, the way you would learn any other profession. Those are the ones, I think, who have the leg up. Similarly, those who take the trouble to understand that even if they understand it, if they understand the property and they don't live in the vacuum, they do have to deal with other people, buyers, sellers, equity investors, lenders, partners, all this sort of thing. And in order to do that, they have to really work at the other part of my previous answer to Josh's question, the issue of clarity, of being able to make their point of view understood, to understand who their audience is and what it is they're trying to say.

The people who take the time to do this, to learn how it really works, then to analyze the property and to make an effective presentation to a third party where that presentation is geared to the interests of the third party. You know, a lender is concerned about certain things. In equity part might be concerned about some other things. So understanding where it is you're going. understanding your objectives in making the deal and trying to put the deal together. That's what sets the winners apart from the losers, I think.

Oh, that's great. That's great. Hey, Frank, what do you do for fun, man? I'm sure you've got a hobby other than writing books or do you just sit and write books all day? That's mostly what I do, but, you know, for a real good time, I sit around and I wait for you to call. And I'm so glad you did it today. You just made my whole day, guys. No, seriously.

I take it up on a bicycle and just ride and not to have my cell phone turned off and not have anybody call me not even you, Josh. That's great. And if there's anything else, I'd love to play with my grandkids. Oh, that's great. That's great. Hey, so listen, this was fantastic. I think we've covered a ton of really, really good information here and really just starting to explore a lot of these topics. and of course listeners can follow you online.

I'm assuming you have like Twitter and Facebook accounts and all that stuff. Do you want to share any of that or not? All that good stuff. You can find me on LinkedIn. You can find me on Twitter. We've got a Facebook thing. I don't pay as much attention to that one as I should. But I probably encounter more people on LinkedIn.

Just look me up on my name and you'll find me there. Of course, Frank is also on bigger. Pockets where he answers questions on our forums at biggerpockets.com slash forums. And again, you can find out anything about today's show. We're going to have links to Frank's various social profiles to his website, to his books, and to some of the concepts and terms and things that we've talked about today at biggerpockets.com slash show for. Frank, thank you so much for coming on the show.

We really appreciate it. And I know I'm very much looking forward to having you on once again in the future. Thanks, guys. It's been a pleasure. I really enjoyed it. Yeah, thank you, Frank. Hey, everyone. That was our show with bestselling author, Frank Allenelli.

We really, really hope that you guys learned a lot about commercial real estate today. And hopefully you'll end up using it to build wealth for your future. Of course, come check out the show notes at www. www. biggerpockets.com slash show four and leave us or Frank a comment. Also, of course, if you haven't yet signed up for a free biggerpockets.com membership, you can do that at www.biggerpockets.com. And finally, please do not forget to leave us a review in iTunes. This is really important, guys.

It helps us get more visibility for the show. So definitely be sure to check it out and leave us a review over at iTunes. Of course, if you found the show helpful, make sure to also subscribe to the show on iTunes as well. Finally, come check us out on Facebook at facebook.com slash bigger pockets. This is Josh Dorkin, signing off. You're listening to Bigger Pockets Radio, simplifying real estate for investors large and small. If you're here looking to learn about real estate investing, without all the hype, you're in the right place. Be sure to join the millions of others who have.

benefited from biggerpockets.com. Your home for real estate investing online. Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K.

Copywriting is by Calico content. And editing is by Exodus Media. If you'd like to learn more about real estate investing, or to sign up for our free newsletter, please visit www.w.w.com. The content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included, involves risk. So use your best judgment and consult with qualified advisors before investing.

You should only risk capital you can afford to lose. And remember, past performance is not indicative of future results. Bigger Pocket's LLC disclaims all liability for direct, indirect, consequential, or other damages arising from a reliance on information presented in this podcast.