BC BUSINESS
Saved by @Mollyycolllinss

The wealthiest person I know prints millions out of thin air in the real estate business.

This is what he does...

A thread.

 He finds a distressed retail plaza. Let's say 50% of the space isn't leased.

On a 300,000 sf plaza that might mean 150k square feet is vacant.

If asking rent is $8 per square foot per year, that means the building has a "potential revenue" figure of of $2.4MM.
So in this retail center 50% is leased and 50% is vacant. So the actual revenue, right now, is $1.2MM.
Most retail leases are whats called "Triple Net" or "NNN". This means the tenant pays the taxes, insurance, maintenance and CAM (common area maintenance).

They basically pay all of the landlord's expenses (except debt service on any loans he/she has, of course).
Commercial properties are valued based on something called a "cap rate".

The equation is:

net operating income / (cap rate) = value

The cap rate is a %.

Think about it as the return on your money, annually, as a percentage, you spent to buy a property.
If you want a 7% return on your overall spend (not taking into account debt on the property) you'd buy at a 7 cap.

An 8% return would mean an 8 cap.
Cap rates (as a measure of value) change based on risk, upside, trends and investor appetite for a certain type of asset.

But the bottom line is this:

Commercial real estate is valued based on how much money it makes (Net Operating Income)
Increase NOI --> increase value

Decrease NOI --> decrease value
Back to my friend.

He's looking at a distressed asset. Half vacant. So there is some upside potential. That potential is baked into the cap rate he can buy it at.

So he makes an offer to buy at an in-place 6 cap.

The NOI = 1.2MM

Cap rate is 6

A quiz -> what is the value?
You guessed it. $20MM.

So my friend gets the property under contract for $20MM.

And while its under contract, before he buys it, he pulls an ace out of his sleeve.
You see my friend owns several Planet Fitness franchises and also several trampoline park franchises.

So he prepares his plans to sign long term leases with both of these businesses the day he closes on the property.
And the day he closes he does so and they both move in.

And now the retail center is 100% full.

Bringing in $2.4MM a year in NOI.
So now what cap rate would we use to value this full retail center with long term leases in place across the board?

The upside is gone, so the cap rate will go up slightly, and my friend generally achieves an 8 cap valuation here.
So with $2.4MM in NOI, what is the new value at an 8 cap?
You guessed it. $30MM.

So my friend just bought a building for $20MM, signed two leases, and now its worth $30MM.

So he created $10MM of value out of thin air.

And he does this to two or three retail plazas a year.
If you enjoy stories like this and want to learn more about the dynamics of real estate, sign up for my newsletter:

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The hardest thing about entrepreneurship, real estate, or anything else worth doing:

You have to be able to look at incomplete information...

Or a complicated problem without a clear-cut solution...

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There is nobody who can take you by the hand and lead you through a step by step guide to win.

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The 1,000 important decisions I made to win will look nothing like yours.

This is why success is so hard to teach..

Because there is one skill you need to have to win:

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20% of your customers will also produce 80% of your headache.

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With their hand out.

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It’s not about you!

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One word for you:

Don’t.

Here’s why

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Leverage can be a beautiful thing.

Appreciation takes over and all that value you bought with debt grows and you amplify your returns.

But there is another, darker side of debt.


Values drop 5 or 10% and you’re underwater. You have zero equity or negative equity.

Ask the folks who were over-levered in 2007 what happened on 2011?

Real estate is a frothy space right now. Money flying everywhere and values higher than they’ve ever been.

Debt is cheaper and easier to get than ever.

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We've used "seller financing" on two self storage deals in the past year.

And it raised our cash on cash return by 20%+.

And lowered the amount of capital we needed by $500k.

Here's a THREAD about a deal of mine and how this magical debt structure can work.

👇👇

My method is simple. In the late stages of negotiation I submit two offers:

One at a lower price.

And one at the exact price the seller wants but with him holding back 10-20% of the purchase price in the form of a 2nd mortgage (with a second position to your bank loan).

Contrary to popular belief seller financing rarely includes the seller holding back 70-80% and acting as your bank.

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#2 most want most of their money now.

Have you heard the saying:

"you name the price and i'll name the terms?"

This is a case of that situation exactly.

Lets paint a picture here:

Last week I was negotiating with a seller on a property in a small western PA town.

Not many interested buyers so I knew I had some leverage.

His asking price was $4.5MM. I wanted to pay $4.2M.

After a week or two and a lot of back and forth I found his lowest number.
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A thread on how real estate investors, developers and operators can make millions a year and pay almost nothing in TAXES by using depreciation, bonus depreciation, and 1031 exchanges.

How it works:

Depreciation is the act of slowly, over time, deducting the initial expense of an asset against your taxable income. Generally over a 27.5 (residential) or 39 (commercial) yr time frame. So each year you can write off 2-3.6% of the purchase price against your income.

Thats a big deal. We're buying a new property, a $3MM self storage facility. Thats a $60k a year write off against about $260k in NOI and 200k in cashflow on a $3MM deal.

It makes 30% of our cashflow tax free.

Very powerful but there is much more to it...

Different parts of the asset can be depreciated on different schedules.

We'll have a cost segregation study done to split up the depreciable lifespan of different parts of the building. The raw land can't be depreciated so you have to give that a value.

But other items can be depreciated on a quicker timeline. A roof, road, sidewalk, fencing, walls, gates, doors, latches, flooring, air conditioners, pavers, curbing, landscaping, etc.

The IRS has a depreciation schedule for each type. Some parts are 5 yrs. Others 15 years...
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