What is the state of industrial investing today? What are some techniques you can use to buy industrial properties? Darren Smith, Principal of Solid Growth Properties LLC will share his insights, he has been investing in real estate for nearly two decades and decided to focus on industrial for the last four years.
Tell us a little bit about you.
Industrial has picked up since COVID. It's been more popular, for good and for bad. But there are a lot of asset classes that fall into that category. My story with real estate started back in 2003, I had just gotten out of serving in the army, I was in the computer field, and one of my co workers was a small time investor, he had a couple of rentals and was doing a little bit of flips in Baltimore. After talking with him, I got the bug, I started reading all the books, Rich Dad, Poor Dad and every other one I could get my hands on, I shattered him as much as I could to learn from him. And it was it was very exciting just to think that you can earn money from money. And that was a new experience for me.
It never ceases to amaze me how many lives that book has changed. Why did you decide to focus on industrial? What is the state of that asset class today?
Like most investors out there, I started in the single family and dabbled in multifamily and mobile home parks. I actually got hurt really badly in mobile home parks during the last crash. I definitely took some lumps, made some money, so I was able to kind of recover but I've tried a lot of different things. The usual transition from people who are doing single family houses, flipping, wholesaling, rentals is to go into multifamily, maybe they get a duplex or a fourplex. And then they scale up from there into larger and larger number of units. I have several good friends who own hundreds and in some cases 1000's of units in multifamily and are doing it very successfully. What I learned from watching them, though, that it is ultra competitive, my friends are really sharp people that are working really hard. They got really creative and they put these deals together with syndications on cap rates that I would not be comfortable doing. And I didn't know if I could compete in that market. They're just better than me.
And I thought, What do I know from having bought hundreds of houses already? What do I know that maybe can help me somewhere else. I'm really good at the marketing and the operations side of it. I have an amazing team of four people who helped me with a lot of the stuff that I do. I took those resources and I thought, where can I possibly get a better return than in housing, which was getting more and more competitive in the multifamily side. I dabbled a little bit in all the commercial asset classes from researching, talking with sellers, I've had contracts on office, retail, industrial, and multifamily. The one I ended up settling on was industrial and the reason was, one there were less people in it at the time, I've only been industrial for about four years now. But even just in that time I've seen it just become so much more competitive. It's not one or two people talking with sellers, a lot of times three or four people are talking with the sellers now, so it's a little bit more competitive, but still less so than multifamily.
When you look at cap rates across the industry, especially in tier one cities, cap rates for multifamily, even on Class B-, C assets, I'm seeing three, four, or five caps on a 1980s building, and that doesn't really happen in industrial. I'm not saying you can't find some rare cases like an Amazon warehouse or something like that, but most of the time, you're looking at at least a five cap or above. And you can get quality assets with long term, top tier, maybe even national credit tenants in the sixes and seven caps fairly easily. That's just what's listed online. If you put the effort in and take the marketing, and all the things that I know how to do from houses, and you get to talk with these people one on one, not only can you hopefully do a little bit better on the cap rate, but a lot of times I've been able to put terms together by talking with the sellers one on one, and try and crafting a deal that is the best fit for them.
Getting top dollar, all cash out of the property is not necessarily what's best for them. Sometimes they're trying to do things for tax reasons where they can make more and put more in their pocket, by leaving money in the property. Or maybe I can pay more money for property if they leave a little bit in. I don't do that in all cases, I definitely bought properties all cash and closing in 30 days, if we can make it work, but I like to take those skills from the single family side, sit down with sellers and figure out the best way to make it work for them.
And there are many ways to find properties. You have a different and maybe unique approach to find industrial properties, please tell us a little bit about that.
I'll preface that with nothing that I do, I have came up with on my own. I'm in several masterminds and I network with other people. I just try and learn as much as I can, I'm always the perpetual student, all I did was I took the things that other people taught me on the single family side, and I just applied them to industrial real estate. I take those things, and I step them up to a higher level of quality. If you're marketing to houses, maybe you'll have someone from South America doing your cold calling, maybe you'll mail them a postcard or more generic type things. Whenever I'm dealing with the commercial side, having that level of sophistication as high as you possibly can when you're interacting with these people is important, to show your credibility.
I have a girl in my hometown, I coach her, we work together, she comes to my house. She's that real personal touch of somebody who knows the area, she can say, I know that town, I went to lunch there two weeks ago, and making sure that you're at the highest level where you can have those conversations to build that rapport. For our mailers, it's the same thing. I like to target properties from 5,000 square feet up to 200,000. When you're marketing to those, you run across a lot of different types of owners, you have institutional type owners that own lots of property, and maybe it's even a fund or someone who owns many businesses down to, in smaller properties, it might be the only building that they own, they might have had their business in it. The letter that they get from me is thick cardstock, you can feel the difference, it's like a birthday sized envelope, it has a real stamp on, they have machines now that actually write with a real pen for the address and the return address and the letter that's inside. It costs more. I put my business card with my picture in it in every envelope before we seal it up. When they're talking to me, they can see the person that they're talking to. And I don't know how much of a difference that makes, but I definitely have had people comment on it, they can look at the person that mailed them the letter and make that connection. That's how I target and get people to respond to my letters when I'm mailing, or get people to actually pick up the phone and allow my assistant to set that appointment.
Are you finding properties only through mailers today?
That is the vast majority of properties that I come across and that I'm talking with, it is direct marketing. That said, I do love working with brokers, two of my favorite long term hold properties that I have right now were listed with a broker. As long as I can talk with the seller, because I'm trying to have these conversations through my agent, through their agent, and there are these roundabouts, and I can't really figure out how can I best help this person. What is their situation? What are they trying to do? How much money do they need for whatever they're trying to accomplish?
My two favorite buying holds were listed with brokers, I talked to my brokers, and I said, Let's just all get together and see what we can work out and have that conversation, go grab a beer, go grab a lunch, whatever it may be. And that's how we got it done. I love brokers, I love paying full broker commissions, I don't begrudge them a single penny, because I've made a lot more money working with brokers than I would have otherwise. I love the job that they do, the connections they have. If you can have a really good broker in each of the markets that you work in, each city, or each county, whatever that may be.
One example is a property that I have under contract right now. I'm either looking to rent or sell this one. In this case, I worked with the seller, I got him exactly what he needs, the amount of money that he wants, but he's not in a big hurry. Because I'm paying a bit more for this property than I would be comfortable for an all cash sale (but we are doing all cash on this one). I said, I need a little more time to get this one done. And the reason that I worked that out with him, and it worked for him for his timeline, is because he wasn't in a big hurry, he wanted to get the most money possible. I said, What I'm going to do is I'm going to fix this property up, I'm going to the landscaping, it is all overgrown and needs a lot of work. I probably have about, 20 to $25,000 of rehabbing on this property already, and I don't even own it yet. I'm still under contract, I have it listed for sale or for rent. And as long as I can meet one of those terms with somebody who comes to the table, and I can get a good lease contract, I'll happily buy this property myself, lease it out and hold it, if somebody comes to the table and say here's an offer price, I will end up novating or assigning that contract. What that does is it allows me to make the spread between my purchase contract, and then what the end buyers are paying. And the seller knows this, he's happy with this, he has no problem with it. Because I'm the one who's putting all the effort, I'm putting in the risk of my money, my time, to get that property in sellable shape, he doesn't have to worry about it. I'm actually paying him rent every month, he would be out of his rent right now, if he didn't have me involved in this scenario. And that's all on top of the purchase price. So he's getting that every month. And he's really happy. He actually was in the building today, he emailed me saying, I checked it out, and it looks so much better, thanks for taking care of this for me. So he's happy however long that takes and whatever I end up doing with it.
That's why I love having a broker in every single market because I wouldn't be comfortable putting out that kind of money and that kind of effort if I didn't know this was a good quality property, if I didn't know I had people in the area that could get that kind of work done for me. And I do have a great agent, this one is outside of Harrisburg, Pennsylvania. And he said, Hey, Darren, we are going to get this property done, I like this one a lot, it's just going to take me a little bit more time. No problem, I understand, let's get it done. So that's how I'm able to work out these deals to make it the best possible scenario for the seller, he wouldn't get this much money if he just listed himself, but because I'm putting more money in the property and then going through all that effort to make it shine. That's why I think I'm going to be able to make a profit on it. Whereas he wouldn't have made as much.
A lot of times brokers are very protective of speaking to the sellers directly, how do you go about that?
I don't go around it, I really want to work with these brokers. Just as if I'm talking with a seller, I always want to try and find out what are they trying to accomplish? What is in the seller's best interest? How do I help them? I have that same conversation with the broker, Hey, Mr. broker, Mrs. broker, I bought a lot of properties, this is kind of how I work, this is what I like to do and what I like to accomplish, what I found has been really successful in the past so that I can get you your full commission as soon as possible is if we could all just sit down and see if there's something that we could work out.
I don't know if I've ever had a situation where I talked to a broker and I said, Can you go ask the seller if they're open to terms? That's a DOA conversation. The deal is dead because the first thing people say is no, I want all cash, top dollar. Well, sometimes that property may sit on the market for six months, they may want all cash top dollar, but what if maybe I could come to them and say, What if I paid you top dollar, but you held a 20% second against the property after the bank. So you're going to get 70% from the bank, you're going to get 10% of my cash, and you're going to hold 20% as a second. That gets you the price you're looking for, you're no longer paying 1,000's of dollars every month against the property, it's not sitting vacant, getting more damage, paying utilities, etc. It gets them exactly what they want, but I can't have that conversation through a broker. And that's just one example of many ways you can structure a deal.
There are all sorts of things you can do. But if you can't sit down and talk with the seller, there's no way you're going to figure out what works. And I have that conversation with the broker first, to explain to them how I can help them get their commission as fast as possible, and their full commission because that's what they're worried about. Are you going to go around them? Are you going to try bypassing or cutting them out somehow? And I think anybody that attempts that is going to get blackballed so quickly, no broker is ever going to talk to them. That's a tight knit community, not that I would do that anyway, but in my own self interest, I want that broker to get paid as much as possible, because who's the person they're going to call when they get a deal the next time? Hey, I know that guy, he closed, he did exactly what he said he was going to do. If your audience is out there thinking man, 6% broker commission or 5%, I can't pay that. You can't afford not to pay that, is my answer. If there's a broker involved, figure out how to keep them involved, and they will be your friend for many, many deals after that.
Darren Smith
darren@solidgrowthproperties.com