Hanna Azar started investing in real estate in 2012 and quickly moved from residential to commercial real estate, focusing on mixed use properties. Currently he manage a family portfolio of approximately 91 units, of which he co-owns about 50.

Tell us about you.

I grew up in the Bay Area, in South of San Francisco, I am the son of immigrants. My father was a small business owner, we did cell phone retail stores, which we still do. I started working at a young age with my father, so I always had the business background, retail, sales, etc. Retail, investing and the stock market have always been a big interest of mine, I give a large amount of credit to my father who taught me about these things at a very young age. During holiday parties, Christmas parties, Thanksgiving, my family would always talk about those things. That gave me a background, I did more research along the way in college and high school.

For those of us who don't have or haven't had family members as mentors. What was your first deal like, and how did you transition to value add properties?
Luckily for me I was in college in 2008 during the recession, and decided to buy a single family home in Palo Alto. I was a senior in college, I was 20, 21 years old, and that was my first investment in real estate. I bought it mainly for cashflow purposes when I underwrote the deal and I thought of appreciation as a bonus. But I quickly realized that appreciation in real estate is really what drives most of the value and most of the investment. And that's where I started shifting gears. I read a book by Manny Khoshbin, who is also a value investor developer, called How to Build Your Hundred Million Dollar Real Estate Portfolio.

It definitely changed my mindset of what real estate is, what you can do with it, and how you should focus your investments and time.

Did you get help for that first property's down payment?
No, I did not. I saved, I was a very frugal. I've been working since I was 12 during the summers at least, and some weekends at the family business. I was very frugal and saved. By the time I was 21, I had the downpayment money for that first initial investment, which was about 25 percent down.

What drove you to move from residential properties into mixed use?
I did that single family home, I refinanced out once after a year or two, and used the proceeds of that to do a very value add duplex, which was almost like a ground up development, except that we kept existing walls. That took a couple years of construction.

I then sold my East Palo Alto house and did a 1031 exchange to a 8 unit mixed use building in San Francisco which I have my father as a partner on. And I also exchanged the duplex that we actually converted from our church to a duplex in Oakland. And also to another mixed use property in San Francisco. I basically got the idea from the book, a lot of it just looking at the market, looking at where people were moving in the city and knowing that the scalability will eventually be the best strategy in the long run.

One door versus eight, or one door versus five. It's a natural way of scaling, and generating more income over time. I really like the idea of getting my hands dirty with construction and negotiations and all of those things. So it was natural for us at that point.

What do you look for in a value add, mixed use property here in Silicon Valley?
I primarily focus in San Francisco at this point, but we look all over. In San Francisco I typically look for old owners who are, for the lack of a better word, a little lazy. Lot of times in commercial, there are tenants that do not have leases, that are paying significantly below market rents. The properties need to be spruced up and sometimes they need to have significant construction, which we've done about four times now.

We've done about three or four seismic retrofits, which consists of reinforcing the entire building. What that does is it creates value naturally. There's capital improvement, the spaces look better eventually for the commercial tenants. So you're able to improve their business, improve the looks of the business in the building. We always do an exterior paint job after acquiring a new building. And I've used a man named Dr Color who is a color consultant. He did thousands of buildings in the city, most famously the Painted Ladies in San Francisco, which most people know. They're these four buildings in Alamo Square Park. they're always on the postcards. He consulted on those and has done, I think, thousands of projects in the San Francisco Bay Area.

I look at it like kind of an art piece, we want to add value and make it look good for the neighborhood, the businesses, the tenants. We want everyone to feel good in the process. And given that we come from a retail background, we feel like we have that connection and obligation to improve the building and businesses as much as we can.

So you look for properties that you are going to add a nice touch and they're going to look better and you're going to retrofit. Is there anything else that you look for in properties in an already overpriced market?
We also did two conversions. We converted residential garages, which were in commercial zones, into commercial spaces. So we essentially added units that way. And I know ADU laws are pretty big in California now. It's much easier to add ADU's in garages, which we have not done, but we have converted at least two spaces from residential garages to retail spaces.

How much does a retrofit typically cost?
It depends on the size of the building. But a typical two to three story building in San Francisco I would say it's about $250,000-300,000 dollars.

Can you elaborate how you negotiate when you are looking at purchasing a property, on the retrofitting side of it?
A couple of them are mandatory by the city because the city has a soft story list where any building that is on brick foundation that are over three stories or above need to be retrofitted. So at that point, you essentially have to do it. Negotiations on the buy side, that's always a negotiation tactic. We have recently used the listing agents to represent ourselves because they have an obviously much better relationship with the seller, and that usually helps with either making the deal happen or sometimes getting some price reductions through discovery.

Do you typically put an offer close to list price and then after you find some things that need to be done to the building, you renegotiate it?
Not always. Only if something actually comes up. We were negotiating on a property that we recently acquired about five months ago that needed the seismic retrofit and the Phase I came back and there was a laundromat eighty years ago. So the seller offered us a price credit of $100,000 of the close. So we took that risk. We took the deduction and we proceeded with that. And we beat out two other offers by using the listing agent and giving a compelling story of family/son business, having other units in the area and being very serious operators.

Was the property contaminated, or you didn't know if he was contaminated?
No, it was not contaminated. It turned out to not be contaminated.

So you got a price reduction before finding out if it was contaminated? You were really taking that risk?
We were taking the risk. We had a couple of consultants who said that the risk was a maximum of around $50,000 based on their experience in the area. We took a calculated risk, if you will.

Given that you are dealing with probably a very difficult city, one of the most difficult cities in the country. What are some tips to deal with entitlements here in California?
We have never done ground up development or entitlement to get ground up development done. That's something I hope to do in the near future. The two conversions that we did were from garages to retail, or over-the-counter because they were already in commercial zone.

Was the conversion for the garage fairly easy?
It took some time. It took some planning from the architect, the construction engineer, but it didn't require any neighborhood notice or approval. It wasn't conditional use. It was permitted use already. That was an over-the-counter, dealing with the city planner, but not dealing with the neighborhood objections, or going back and forth, or meeting with the supervisors, or a board. It was permitted use already, so it was much easier to do.

How long did that take?
The actual plans took between four to six months and the construction took about a year after that.

Do you have any particular tips for people that are getting into real estate or that are beginners? What should they be doing and looking at?
I think everyone's path in real estate is definitely different. I would say, all else being equal, I would start small, get your hands dirty, assess risks as much as you can before jumping into a deal. Go to meetups, listen to podcasts like yours as well, and try digging deep as much as you can before pulling the trigger. I would read as many books as possible look into ways that you could add value and find a niche.

And I think that's sort of what we created in San Francisco with the properties that we've been buying, which most of them are in the Mission District. So we kind of felt like we have local knowledge. We know the buildings better, we know ways of adding value that works for our business model. I would say just try adding value, locate niches as much as possible, and try to force appreciation as much as you can, which is something I hope I illustrated. You should never wait to buy real estate, and just hope something will go up and buying it at risky prices.

I would say look for properties, try to force appreciation through some kind of value add mechanism which in commercial real estate is obviously increasing NOI and look for scalability as much as possible. There are a lot of inefficiencies in real estate, which is the reason why I like it so much. There's all kinds of information gaps. There are ways that you can locate a seller before it hits the market. The pricing on the real estate is not efficient as well like the stock market, a broker might price something high on because he is out of the area, or he might price it too low, and it might be during the holiday season like it is now. And not too many buyers show up because they're out in the East Coast or whatever they came from, and going back home for the holidays. If you dig deeper, you'll definitely be able to find the inefficiencies.

It sounds like you have grown so fast. It has been interesting to see how you took the path of moving pretty fast from residential to mixed use so you can scale. And it seems like this book was pretty helpful on that, would you agree with it?
Yes, that book was helpful. It talked about how you should basically add value and how he transitioned as well, actually from residential to apartments and then finally into office/commercial. I also recommend Confessions of a Real Estate Entrepreneur, which is also very much a value add, in the trenches kind of book where he talks about his various deals as case studies and how he added value in every single deal through whether it was conversion, entitlements, just cosmetic things. And it's also very much commercial real estate centric. I definitely recommend those two.

I also recommend local meetups a lot. They helped me tremendously, whether it's just to have a better increase in mindset, more positivity. You meet a lot of like minded people in real estate which you may have not have the option to meet because most investors are doing full time at least, they're independent and they don't go to a cubicle and meet other people on the field. So it's nice to have that community of meeting other like minded people, you share tips, you learn and it's a great way to add value to each other's lives.

How to Build Your $100M Real Estate Portfolio https://www.amazon.com/Manny-Khoshbins-Contrarian-PlayBook-Khoshbin-ebook/dp/B008Z44XYW

Confessions of a Real Estate Entrepreneur: https://www.amazon.com/Confessions-Real-Estate-Entrepreneur-High-Stakes-ebook/dp/B001FWIJB4

Hanna Azar
(415) 875-0177