BiggerPockets Real Estate Podcast - 863: Commercial Real Estate: The “Buy Box” for Buying BIG Properties w/Kim Hopkins

Starting point is 00:00:00 This is the Bigger Pockets podcast. What's going on, everyone. This is David Green, your host of the Bigger Pockets Real Slee podcast. Here, as always, with my co-host and good friend, Rob Ava Solo. Rob, how are you doing today? Very good, my friend, very good.

Starting point is 00:00:12 My wife gets back from Paris today. I've been single dadding it up, watching both of my kids for the last five days. So I am excited to sleep again. Very excited. I can imagine. And thank you for joining me on today's show with no sleep,

Starting point is 00:00:26 but tons of information and a good time. That's right. Yeah, we have a great show plan for everyone here today. We're going to be talking to Kim Hopkins, who is a commercial real estate investor. Cue the scary music, who is making deals work today in this market. Yes, that's right. In 2023, today we're going to be hearing about a deal that Kim is working on. What types of commercial real estate deals pencil today?

Starting point is 00:00:47 The risks associated with this strategy and how not to get yourself into thy pickle. All that and more. This is a killer show. Let's get to Kim. Kim, welcome to the show. Hey, Rob. Hey, David. Thanks for having me.

Starting point is 00:00:59 Yeah, glad to have you. So if I understand it correctly, you've been investing in real estate for 10 years now, and you own 15 properties through the real estate business you and your husband run together. A few quick questions to get our listeners a sense of who you are as an investor. First one here. How many markets are you in? Let's see here. We have Oregon, Washington, Utah, Texas, Arizona, California, and Florida.

Starting point is 00:01:22 So seven. Okay. So just a few here. Some of those are short-term rentals that we abandoned as we moved from state to state. Now, you're investing in small commercial properties, like mom and pop type situations. What is it about that that drew you into it? You know, really, it was a process of elimination. So we didn't want to be fixing toilets and having tenants that were individuals.

Starting point is 00:01:43 So we didn't want multifamily. We didn't want single tenant properties because that increases your risk. If a tenant goes out on a single tenant property, that's it. No income. We didn't want the tenant improvement, TI expense that's often associated with office. And so that left us with multi-tenant. And from there, we chose multi-tenant industrial and small neighborhood retail. So what kind of commercial real estate deals do you think are actually working today for you?

Starting point is 00:02:09 You mentioned at the beginning of this that there are no bad markets. There are just bad deals. So give us a little bit of like what you look for in a property. What makes a good investment, all that good stuff. Yes, our buy box is single story, of course, multi-tenant. We want the tenants to be on the smaller side, about 2,000 square feet. feet for each tenant is our goal. No tenant occupies more than 30% of the space. We look for properties that don't have too much auto because they're dirty. We look for properties without too much

Starting point is 00:02:37 restaurants because they're dirty. And so that's kind of what we're what we're targeting right now. And then we are looking for about a 7% cap rate, although that really has to go up at this point because of where we are with interest rates. That really is closely tied to your terms of your loan at this point. Can I ask you a quick clarifying question? When you said that auto places and like restaurants are dirty. Do you mean like they're physically dirty and thus the wear and tear is just way worse on these types of spaces? Yes, that's exactly what I mean. So auto tenants seem to come with a lot of environmental issues. They also tend to park a lot of non-functioning cars on the property. And then the restaurants, we can get into this later. It's very relevant to the current deal we're

Starting point is 00:03:18 looking at. But same thing. The restaurants, especially if they're frying food and things like that, can really mess up your property. I would also imagine that restaurants and repair shops would probably require more tenant improvements. They're going to want you to bring in some money so they can put in a big car jack or move the floor plan around. Have you found that to be the case? Because you mentioned earlier, you're trying to avoid that by avoiding office. Yes, that's exactly correct. That's why I would definitely rank the multi-tenant industrial above the multi-tenant retail. They're going to have more TI requests with the multi-tenant industrial. We don't even have to paint the thing. It's like it's already a low maintenance space. And then the tenants are also very

Starting point is 00:03:56 low maintenance. Like, they would never call you if their toilet isn't working. They will just fix it. Which is why, like, Crossfits never have like an AC in them, even when it's like a hundred degrees outside. It's like, do you want me to just fry up in here? Is that, is that the idea? That's why they make the big ass fan. Have you heard of that company? The only frying that will be done is going to be at a CrossFit when you're hot, not at a restaurant, because Kim does not allow frying in any of her units. No frying loud. You do bring up a good point, though, because investors will often just get greedy for the highest ROI they can get or in this space they'll be looking for like the biggest cap rate that they can get. And you, when you're only looking at those

Starting point is 00:04:33 numbers, you don't think about the fact that in order to get that higher cap rate, maybe you got to spend $200,000 to outfit this unit so that your new tenant could come in. And then when their business fails after three years or they decide that they don't want to lease the place from you anymore, they leave. And now you have to spend money to get rid of the $200,000 you spend and spend more money to fix it up for the next tenant. And so that higher cap rate is being offered in order to entice somebody into where they're actually going to make less money. There's a lot of things in real estate that will take your money. It's more than just the mortgage, the taxes and the insurance. So I like that you're pointing that out. You're actually looking in a sense how to run a lean

Starting point is 00:05:10 business here as opposed to just being greedy and going for the biggest cap rate that you can get. What are you looking at today when you're trying to evaluate these deals? You've mentioned that you're, you don't want to get into office space, but is there a cap rate that you're specifically targeting? Is there a unit size you're looking for? What does your buy box look like? We're really leading with the numbers. So, you know, you could have an advertised cap rate of 7.5%.

Starting point is 00:05:35 But when you get into it, it doesn't pencil. You know, they're using pro forma numbers. They don't have a big enough vacancy. So we're really leading with the numbers right now. We targeted multiple markets this last round. We didn't pick a particular market. We're looking for deals. that pencil with the numbers.

Starting point is 00:05:52 There is no speculation. We're not looking for a deal that only makes sense with this value add. It only makes sense if you get to these market rents. It only makes sense if you can sell at this cap rate. None of that. We've seen a lot of where that's getting people right now that did have that value add speculation. And so we're looking for deals that pencil right now,

Starting point is 00:06:12 cash on cash return of hopefully 7%. But another comment I want to make is that we are also considering taxes. And I know that a lot of people say, oh, don't do a deal for taxes. And I agree. Never do a bad deal for taxes, right? But you do, that is something that you can consider. So, for example, if you're going to be on the hook for, you know, several hundred thousand dollars of taxes, and you have a deal this year in your hand that is only a 6% cash on cash return, and you think, okay, maybe next year I'll find a deal with a 7% cash on cash return. you need to take into account that you'll have, let's say you had $300,000 tax bill.

Starting point is 00:06:55 You'll have $300,000 less to invest next year on that deal if, you know, if you had to pay the taxes. And so, do you see what I'm saying? So the return next year has to be much higher in order to make sense. So we do take taxes into account too. So right now we're a little more lenient on cash on cash return number than we might be next year because we have these taxes to consider. Well, that's one thing that I always tell people because it does. seem like in general. I mean, this is something that David's sort of taught me over the past couple years. That cash on cash return is really just like one of those metrics, right? It's one of the four

Starting point is 00:07:29 big metrics when considering a real estate investment. You got your tax benefits, you got your debt pay down, your appreciation and cash on cash return. And so on the surface, a 7% cash on cash return might feel small to a lot of investors. But when you consider the actual tax benefits of cost aggregations, bonus depreciation, accelerated depreciation, all that kind of good stuff. It could really transform the return profile of any given investment. Yes. And also, I'll just point out to add to that, that our 7% cash on cash is that unsexy, no value add speculation number. That doesn't mean that that's where we're hoped to be in 40 years or three years or anything like that. But that's like how the deal makes sense now.

Starting point is 00:08:09 That's a great point. A lot of people make that mistake too. They just evaluate a deal in year one. And they don't look at, well, what is this going to look like in year five, right? Like you could buy something with the value add component or with, with lease bumps of five or six percent or something every single year. And that measly six percent cash on cash return is now a 17 percent cash on cash return. And oftentimes when people say, oh, how do you get these big returns? The answer is we'll buy it five years ago. And conversely, don't buy properties that aren't going to be improving over time because you got sucked into, oh, it's at eight instead of a six percent return. That's the best one. And it stays an eight percent

Starting point is 00:08:44 return for the next 30 years. As we get into this a little bit, tell us a little bit about the biggest risks for commercial real estate and real estate at large that you're seeing today because this is this is one that seems to be shifting quite a bit. Yeah, I mean, I think the risk right now is no one knows what the future is going to hold, you know? And so we don't know where the interest rates are going. If they go down, hopefully you can get a loan that has no prepayment penalty and refinance, but how do you know when to hit that button, you know? And if they go up and you've gotten a short term loan because you have a high interest rate, now you're you're in trouble. So there's a lot of risk around where we're headed and how these tenants are

Starting point is 00:09:24 going to do. Our industrial properties did really well during COVID. They did well during recessions, that kind of thing. But multi-tenant retail, I'm not sure how well they will do. It really depends on the market you're in and the nature of the business. If you have a Pilates studio as one of your tenants, do people need Pilates if time gets tough? I don't know. It depends on the people. You know, it depends on. What is the story on the industrial side? Because you said that was a little bit more, I guess, protected during the pandemic. Why is that?

Starting point is 00:09:59 Is it because those services are just always needed? Is it just the types of businesses? Yeah, actually, so the industrial and the neighborhood retail both did really well during the pandemic. So for industrial, yeah, we went through all our like 130 business tenants and we marked which ones were essential. Do you remember that conversation about like essential business business? businesses, especially in Oregon and California. Oh, yeah. Yeah, and they were all essential.

Starting point is 00:10:25 So they all kept operating, you know. In fact, I think the only one that had trouble was our CrossFit, but they recovered too because typical CrossFit goer, the pandemic doesn't really bother us that much, you know. So, yeah, those tenants did really well during COVID. If they had problems, if they said they were going to have a hard time paying rent, we would just send them the paperwork for the PPP government stimulus fund application. and tell them, fill this out and let us know once you fill this out. And most of the time, they would never respond and just start paying rent again.

Starting point is 00:10:56 Now, neighborhood retail actually also did surprisingly well during the pandemic. If you look at reports on retail, you'll see otherwise. But that's because they group the small neighborhood retail in with the larger retail tenants. And those are totally different product types, you know. So your liquor store, your CPA, your insurance company, these guys all have to stay in business. And so they did well during the pandemic as well. So you mentioned that the industrial side of things maybe are a little bit more padded or, I guess, more solid businesses to endure tough times. But then you also mentioned on the retail space that maybe like a Pilates studio wouldn't be quite as insulated.

Starting point is 00:11:35 Is there a type of tenant profile or a type of, yeah, like tenant that you like to take on in those spaces that that make you feel a little bit safer about making sure that your place is always leased out? The type of tenant is going to be your hyper-local tenant. So you want someone that people are driving less than a mile to. I'm okay with nail salons because they're hyper-local, you know? So that's the first thing is the type of tenant is going to be a hyper-local tenant that's not something that is one-of-a-kind that people have to drive a long distance to. And then the market in that case does matter. So if I have a Pilates studio that's in a tertiary market, even if I have an industrial property

Starting point is 00:12:15 in a tertiary market, that's going to pose a lot of risk right now. You know, you want something that's infill, which means that it's not out in the sticks. And if you have a Pilate Studio, you know, the property we're looking at right now, the Pilates Studio customers are driving nicer cars than I drive. Of course, there's a real estate joke that, you know, we all drive used Toyotas. But still, they're all driving nicer cars than I drive. So I feel more confident that during a recession, they're going to be okay. Makes sense. Make sense. And is there any other sort of things that you do to mitigate risk in terms of stabilization of your portfolio or going into a new deal? Yeah. So in terms of our existing portfolio, when we refi, we do not pull out

Starting point is 00:12:56 all the equity. So we're not burying these suckers. We leave a lot of equity in the deal because on one hand, if you pull out all the equity, that's fantastic. You can go reinvest that. So I totally see that point of view. But on the other hand, now you have this high appraised price of your property, And if the market dips, now you might have trouble because your debt payment has gone up, right, if you pull out all your equity. And so we've refined several of the properties refinanced, several of the properties in our portfolio a year or two ago when rates were great. And we left a bunch in the deal. So our LTV across our portfolio is pretty low. It's like 50, 60 percent, you know, our loan to value.

Starting point is 00:13:39 And then same thing with the deals we're doing now. I wouldn't say that this is totally our choice, but the loan to value, we're using pretty low leverage right now, much lower than ever before. I think we have 60% loan to value on this last property. And then, of course, if you don't want to do a low leverage, your other option is to try to go for seller financing. So that's a really good option as well. Yeah, there is a method to the madness of actually taking on less debt with commercial property and it has to do with the financing architecture. So with residential property, you typically get a fixed rate loan for the life of the loan, usually 30 years. You don't have to worry about having to refinance. You get to refinance if rates happen to drop to

Starting point is 00:14:21 where it makes sense. But with commercial loans, they're on balloon payment schedules. And so you're going to have to refinance it. So if you have a high loan balance and you got a rate of 3%, that might make sense for you. But what happens if rates jump to 6% or 7% and you're stuck at 80% loan of value? that can be catastrophic. So keeping a lower loan balance on commercial real estate, even when rates are low, it's still a smart move and a defensive maneuver because you don't know where rates are going to go. And if they go too high and you have a high loan balance, you can kind of get stuck there. So I think a lot of people hear this with commercial property and they go, that's stupid. Why would you ever do that? Why wouldn't you want to maximize how much money you take out of the deal and buy the next one? It's because

Starting point is 00:15:01 the rates aren't fixed. Yeah, you always hear them say, it's tax free. It's tax free debt. And it's like, you want to keep some of your equity in there. That way, if you ever sold your property, you actually walk away with the paycheck. That's how I always think about it. But now that we have an understanding of what Kim is seeing in the commercial real estate markets, we're going to dive into a deal that she just completed.

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Starting point is 00:17:43 insights in real time, and builds the reports you need for tax season. You can even automate transfers and move money around without paying wire fees. It's just cleaner. Sign up at baselane.com and get $100 bonus. Baselane is a financial technology company and not a bank. Banking services provided by Threadbank, member FDIC. Hello and welcome back to the Bigger Pockets Real estate podcast. We're sitting with a boots on the ground investor, Kim Hopkins and talking about all things commercial real estate. We're about to jump into a deal that she is doing right now. So let's take a peek behind the curtain. Kim, where is this deal located? This deal is located in my current hometown of Phoenix, Arizona. And why did you choose this market? We chose this market because we found a deal,

Starting point is 00:18:21 Rob. We looked in probably about 10 different markets, every deal we could find. And this is where we found one. Good enough for me. What type of commercial real estate is this? This is a neighborhood retail center. And what was the purchase price on the property? The in contract purchase price is 5.4 million. How many tenants are in this property currently and are there any vacancies? So that's a great question. It's about 20 tenants in the property. And I would say that we were paying turnkey prices for this property. It was advertised to us as 100% occupied with tenants at market rent. But as it happens, you know, just as soon as we got into contract, found out that two tenants were delinquent and one unit was vacant. It seems like they're putting filters on everything these days, even the way that deals are being advertised. Would you say that

Starting point is 00:19:10 this was a highly filtered pro forma that you were looking at? Yes, this performer was very Instagramable until you got into the details. Okay, so I want to go back a little bit because we asked you why you found this deal. You said it's because that's where you found the deal. But why did you choose this deal specifically? What was it about it that attracted you to it? So first of all, it's in a fantastic location. So it is infill, which means it's not out in the sticks. It isn't a very well-to-do, even better than well-to-do, a about to be extremely affluential area of Phoenix, which is exactly what you want. You see the houses being flipped around it that are, you know, those big houses on the small lot that are white and black, the trend right now. So tons of houses

Starting point is 00:19:47 being flipped around it. It's next to a Dutch brothers, who I feel like is better at picking real estate than we are. And so it's a great location. That was number one. Number two is that it penciled. always, always, always lead with the numbers, you know? And so the cap rate was reasonable. The pro forma actually was pretty fair based on what we knew at the time. And so it had a solid return. So I would say those were the two main reasons. I love that we're still saying penciled. How long do you think we can get away with that before the next generation wonders, why do we keep saying that things pencil? For as long as we're using pencils, I guess. Because Google sheeted sounds weird. Are they still using them though?

Starting point is 00:20:27 A-I'd out. It's spreadsheeted. That could come out wrong. All right. Now, on this deal, Kim, did you stick to your buy box? Or was there any creative maneuvering that had to happen? Slightly painful at the moment. So I think I said it at the beginning.

Starting point is 00:20:40 But our buy-box includes built on or after 1980. I might have forgotten that. But one of our buy-box criteria is built on or after 1980. We made an exception. We made an exception. This building was built in the late 1970s. But the current owner bought it. and added a ton of value. They did a ton of rehab. They redid the roof. They redid all the storefronts. They redid

Starting point is 00:21:05 the parking lots. Anyone want to guess what I might be missing in those renovations? Oh, the toilet, the sewage, the pipes. Wow. You have not seen the things I've seen. Those sewer scope videos look like the worst colonoscopy you've ever seen. You do make a great point, Kim, because a lot of investors just don't think about the fact that after something goes into the toilet, it has to go somewhere and there's a way that it gets from your property into usually the city's lines and you're supposed to put a camera through that and see what they look like. So I've seen like tree roots growing into the actual pipes and creating clogs in there. And then like some kid flushes a stuffed animal down the toilet and it gets stuck in there and it creates this blockade that can be incredibly expensive to fix, especially if you have to drill

Starting point is 00:21:54 into the concrete of the asphalt of the parking lot, then you have to find what part of the pipe that it was at? Was this a problem with this specific deal for you? Yeah. So we went against one of our deal criteria and the pipes are old. They have a finite life. They're cast iron and they're at the end of their life. So that is definitely a problem for us. Okay. I have lots of questions about this, but it's okay. We can talk offline about the sewer on this. Oh, go for it. I would love to talk about this deal. I'm hoping this is like secretly a private coaching call because I got I got questions on whether or not we should move forward. So when this happens, is it sort of one of those things where you have to like kick every, because usually like, let's say in an Airbnb or the long term rental

Starting point is 00:22:37 if the water turns off, you got to put them up in a hotel or you got to figure it out. But this seems like a pretty massive underground renovation across the entire property. So do you have to like shut down businesses while you make these repairs? Yes, I learned a ton about sewers that I didn't really want to know and still don't. But basically, the pipes are doing what's called channeling, which is where the bottom of it basically arose. And so the bottom is the earth. And if you catch it soon enough, you can do what's called pipelining, where you blow epoxy through the pipes and you line it and you basically create PVC pipes inside the old cast iron pipes. And this is fantastic because you can do this in theory without disturbing any of the tenants.

Starting point is 00:23:21 On the other hand, it's for this property, like a $100,000 expense. So you really want to know that it needs to be done. And I think you can guess if you have someone who's a pipeliner come out to scope your pipes, it's just like having a roof inspector who does roofs. What do you think they're going to say? Right? It used to have been done yesterday. Yeah.

Starting point is 00:23:43 And so it's a hard decision of whether or not to wait. Because if you wait too long, the pipes can collapse. And then you do, like you said, have to dig through the ground, disturb tenants, it's a big problem. Wow. So please tell me, were you able to negotiate any kind of concession, the purchase price credits anything with the seller? Yeah. So the two issues, just to recap, are these pipes. And then the other issue is these delinquent tenants. And, you know, usually that's not a big deal. I actually can't remember the last property I bought where there weren't a few delinquent tenants that just magically showed up as soon as we got into contract.

Starting point is 00:24:15 The issue here is really, we're paying a turnkey price for this property. You know, this does not have the same returns as the property we bought last year. We were told that it was in perfect shape and it was 100% occupied and all the tenants are paying market rent, right? And so that lost income in year one, you know, that's not something that we should have to eat. Like this was advertised to us, this turnkey, not value ad. So once you uncovered the backed up colon of the property, how did you use that

Starting point is 00:24:40 information to go back to the seller and try to negotiate a better position for yourself? Yeah. So we asked the seller for a first. phone call. I would be lying to you if I wasn't scared. But all my friends who are like co-salesmen were like, you got to ask for a phone call. You can't do this email garbage. You got to ask for a phone call, you know. So I literally reread, never split the difference. And I asked him for a phone call. And he said no. Because he knows that he has to make concessions. He's probably scared to negotiate because he's the one with no power. He did not want to talk with me. And so what we typically do,

Starting point is 00:25:17 I don't know if this is what you guys do on your end as well, but what we typically do is send a long email with lots of numbers that explains why we think we deserve this credit, right? And I just kind of felt that wouldn't hit home enough here. It wouldn't be enough of an impact. So I did something new. I did a presentation, like a Google sheet presentation. And then I did a loom video walking through the presentation. And so I sent him a link to the loom video, not even the presentation. So he had to listen to my voice. And I walked through showing exactly what these delinquencies would do to the income for us in the first year. And then I also walked through the cost of the sewer and showed him all the models, showed him the videos that we took of the sewer scope and asked for my credit request.

Starting point is 00:26:06 I think that phone call solved like 90% of the problems in real estate to be on. I was actually thinking about this last night. Everyone is so dang scared to pick up the phone and actually negotiate like we used to back in the day. Back in my day. And I had a situation where I was negotiating back and forth with the realtor who happened to be the wife of the seller. And I presented a couple of options. And then finally he just called me. He's like, all right, what are you trying to do? And I was like, well, in your offer, it doesn't actually cash flow. And I'm trying to, you know, put together a deal that actually cash flows for me. And we actually struck a deal. So very, very good on you. Because I know it's very nerve-wracking to probably talk to a seller. I mean, it's always a

Starting point is 00:26:45 nerve-wracking experience to like break the realtor barrier, but I think it's so important. Yeah, well, I tried. I ended up sending the loom video instead, but I tried for a phone call, and I think the loom video was second best. And so what happened? Did he, did he say yes? Did he give you the money back? So he sat on it for a week and a half, and we finally followed up with him while we were on vacation. And he said no. He said that he thought that he could, he could fix the delinquencies himself. He didn't think that the sewer was a big issue. And so, he said he wouldn't offer us any credit. So we ended up pulling out of the deal. Were you guys, were you close to saying like, let's just do it anyways? Or was it a kind of like, were you

Starting point is 00:27:24 resolute on it from the get go? Well, it's not exactly where the story is. So we pulled out of the deal. We got back our earnest money. We told the lender, all the things, completely done off to moving the elf around the house and Christmas shopping, you know, the important things this time of year. We pulled out of the deal, and then two days ago, actually, the broker called us, the seller's broker. And he said that he was willing to offer $100,000 credit. I didn't say initially, but we asked for $350,000 off. $350,000 off or a $350,000 credit? $350,000 off the purchase price is what we asked for.

Starting point is 00:28:02 So fast forward to today, you get a phone call from the broker and they say, hey, the seller wants back in. He's going to give you $100,000 off the purchase. It's fresh. Great. Okay. In the end. So, we said thank you very much, but call us back if it's 200. And has he called you back? Has he called you back? So, called an hour ago, and it's up to 1.30. Okay. Hey, that's progress. Is this the final number? Like, I'm just like, it keeps changing. Well, I mean, we could call them on speaker right now, but. That would be a first in bigger pockets history. I would love that, actually. sailing or flipping your first property, but not sure where to start? The truth is, deals don't just

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Starting point is 00:33:00 Yes, I would love that. Send me the bill later. Because I feel like we're in the middle of the negotiation. We're not hearing about a deal that was done for like five years ago. Here's what my thoughts are. If rates drop or stay lower, the seller's going to feel like I don't have to give her money. I'm going to get another buyer. But if you see another rate bump, what someone's going to be willing to pay for that property is going to change because now all the numbers that you put in the Excel sheet change. And that means that he's going to be more likely to come back and say,

Starting point is 00:33:27 you can have your $200,000, but at that point, you don't have the rate that you wanted, so it's probably going to be even more. Has that been communicated through the brokers like, hey, let the guy know that we'll buy it for a $200,000 discount at this rate. But if rates go up, he's either going to have to pay for me to get a lower rate or it's going to be a bigger discount later. Yeah, so our rate is locked. And one of our contingencies is that we close before the end of the year because we want

Starting point is 00:33:51 to take advantage of the tax write off that I was talking about earlier. but we have made the point to him. 80%. Yeah, we have made the point to him that if rates go up, he's going to have a hard time finding another buyer. I think he's having a hard time finding the buyer now. I mean, he called you, right? If he called you and he's trying to strike this up again,

Starting point is 00:34:11 you're probably it. Yeah, I think the issue here I've kind of realized is we are looking at two different properties. So the seller is looking at a property that he bought at a great price. This property was in, you know, bad shape. It was seriously in need of love. The property was practically vacant. You know, it was dilapidated all those things.

Starting point is 00:34:33 And so he's looking at this property that he bought at a great price. He also owns it in cash, so a lot less risk there. And so his point of view is, what's your problem? There's a couple vacancies. It's part of doing business. You just fill it. Who cares if it's $20,000 in TI to rehab this unit? Big deal, you know, because he's sitting on a gravy train.

Starting point is 00:34:53 But us, we're looking at this property where we paid kind of a premium price. The returns weren't great to begin with, but we were okay with it because it did meet the basic fundamentals. It wasn't great returns, but basic fundamentals fixes our tax problem. And we were thinking we were being handed something that was very low maintenance. Now we're sitting somewhere where we're going to rush to close on this deal before the end of the year. And honestly, that's a big factor for us. like we are interested in our quality of life. We're about what's your hourly rate, not how much

Starting point is 00:35:27 do you make per year? And it's a lot of work right now. So we're going to close in the middle of the holidays on this property and then we're going to inherit all these problems, you know? Here's my thought. And David, you can tell me if you disagree. I think he's going to go up a little bit more than that 130 just based on where you were at and the fact that they called you. But I don't think you should take that 100, let's say 50 if that's where you end up and subtract it off the purchase price because I don't think that's going to be significant in your overall monthly mortgage. I think what will be significant for you out the gate is getting $150,000 credit so long as that works out with the banking. There's a limit to your credits. And David, you can chime in on this. But I would take that as a

Starting point is 00:36:06 credit so that you can save that money in your down payment and use that to pay for that giant expense. And then at that point, you're now looking at the deal that you are analyzing initially. That's how I'd approach it. What do you think, David? Commercial financing may not allow that to happen the same. With residential financing, because you're dealing with conforming loans, the rules are pretty clear of how much a seller can contribute to a buyer's closing cost. It might not work the same in the commercial space. When they take it off the purchase price, it doesn't really affect a whole lot.

Starting point is 00:36:37 You just borrow a little bit less money. Well, we're keeping our loan amount the same. So we would be saving that money as cash in the bank. We would be putting, if he gives us a $200,000 credit or off the purchase price, we're going to be paying $200,000 less. Yeah, so it would be the same in your position. What if he goes in and makes the changes for you? I'd be very interested in that if he wants to deal with the sewer.

Starting point is 00:36:56 The question is, you know, can he do that post-close? Do we trust him, you know? It gets a little dicey because there are sellers who won't take that risk because the deal could always fall through. Case and point, this deal already fell through for that reason. And then you could always have some kind of contract that, you know, makes him do it afterwards, but that always is a risk in and of itself. So it's kind of a hard one either way.

Starting point is 00:37:19 Yeah. And I feel like I want to make sure I actually listen to the principles we talked about earlier in the show. You know, I want to make sure I'm not speculating on getting tenants to market rent. And another issue is that we actually were planning to self-manage this property since it's in our hometown. And do we want that headache? Do we want to take that on? We're going to do the leasing as well. And just uncertainty with where the market's headed.

Starting point is 00:37:43 Are we worried about the Pilates tenant, you know? are we worried about these tenants that are delinquent? Will we be able to relet the space? So I'm getting cold feet. I don't know that you're wrong. I think in this position with the way the market's headed, it is more likely that things are going to soften in the commercial space than get tight. So you've got that on your side.

Starting point is 00:38:03 And maybe Phoenix has been isolated from this a little bit. And so the seller doesn't realize that there's going to be a lot of commercial properties that are going to start hitting the market with much more competitive prices than what we have seen because rates are so high. And as these balloon payments start coming due, refinancing will not be an option. And a lot of these properties were something that people put money in together to buy.

Starting point is 00:38:23 So they have to sell it to pay back their investors. I think we're going to see more inventory hitting the market now than what we have before. And so times on your side to find the deal, times not on your side for the tax part. So that's really what you have to weigh. Is it worth taking the hit on taxes to buy the better deal or not? But I really appreciate you sharing the details of this story

Starting point is 00:38:42 because this is real life real estate. this is exactly what happens. I was told this and then it turned out to be that. And then I said this and then they said that and the story is always changing. Here's what I would say. I think I would move forward so long as I could get assurances that the owner was going to fix it beforehand or immediately after closing. Interesting. I like that idea. Because to me it's the same deal. If he's going to pay for it, right, through this concession, through this credit, however you want to slice it up, then it's effectively the same deal. You just have to make sure that the repair gets made. Interesting. Yeah. And usually we look for what we say. We usually look for

Starting point is 00:39:14 for problems that go away with the seller. You know, so give me an income statement that's written on a napkin all day long. I have no problem with problems that go away with the seller. But these are all problems that don't go away with the seller. They stick with us as soon as we close. So that's our hesitation. Well, I think you're doing the right thing. Stick to your guns.

Starting point is 00:39:33 If you have to take the hit on your taxes and that makes more sense than buying the property do it. But I'd also look at if I was in your position, if I have to pay 70 grand more than what wanted, would the tax benefit overall make up for that 70 grand? So even though the deal might not be what you wanted, big picture, this does make more sense. And if that's the case, then you just ask yourself, like, let's say your tax benefit was 40 grand, but you're going to have to, you know, your 70 grand apart from where you want to be. So you feel like you're 30 grand in the whole. Is this property in such a great location and such a great asset that that 30 grand is worth it?

Starting point is 00:40:08 Or with your experience and your knowledge and what you do, Kim, could you just go find a better deal that you could make that money back somewhere else. All right, everyone, if you want to hear an update on the story and follow along in the process, be sure to follow Kim on all of our social medias. Kim, where can people find you and get the juicy update and conclusion to the saga? Yeah, so to learn more about what we do and get on our list for updates and opportunities, they can go to our website, which is ironpeakproperties.com. Follow me on LinkedIn under Kim Hopkins.

Starting point is 00:40:36 And then lastly, on Instagram as money plus happy. And hey, maybe we should put this to a vote. You know, if you guys hear this, go ahead and weigh in on what you think we should do with this deal. All right. Comment in the YouTube comments. If you're watching this on YouTube, let us know what you think. All right, Kim, it's been great having you here. Thanks so much for sharing your story with us.

Starting point is 00:40:53 I'm sitting on pins and needles myself waiting to hear how this story plays out. So I'll be curious to hear myself. But we'll let you get out of here for today. Thanks so much for being on the show. Thanks so much for having me, guys. This is David Green for Rob, shipped his pants from Coles-Abos Solo. Signing up. Thank you all for listening to the Bigger Pockets Real Estate podcast.

Starting point is 00:41:29 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. On 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.biggerpockets.com. The content of this podcast is for informational purposes only. All host and participant opinions are their own.

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BiggerPockets Real Estate Podcast - 863: Commercial Real Estate: The “Buy Box” for Buying BIG Properties w/Kim Hopkins

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