What are the top lessons learned from moving from residential real estate investing to commercial real estate investing? What are the top 3 ideas on how to make the transition even faster? Amy Johnson, commercial real estate investor and principal at Y Street Capital and Infinite Real Estate Group shares her knowledge after being in residential for six years and moving to a successful career in the commercial space.
Tell us a little about you.
I’m a mom of five kids, I run two different businesses,: a residential real estate team, and a development and investor side. I love to ski, I love to do the mountains, I am based out of Utah and blessed that we have these incredible mountains around us.
How did you make the move from residential real estate investing and what made you think of moving to commercial real estate?
I think that’s a normal transition for people to start in residential and move over to commercial. I started out as an investor, I was a school teacher way back in the day and we wanted to get out of debt, we wanted to change our life. We grew up the idea of you go to school, you get a four year degree, and then you work forever, and maybe you have enough money to retire, maybe, in your 401k. I grew up very poor in a trailer so it was a milestone for me to even go to school.
We started in residential and went through that journey of house hacking our way through. What made that transition was really a lack of time. We got comfortable in the real estate world and we realized that doing these single units was too difficult to really scale and make it bigger. We felt like we needed to open our world up into commercial opportunities and that’s when we made that switch from residential to commercial.
How long did it take from purchasing your first residential to making the transition and how did you do it? Did you start looking at mastermind groups and what was that next step?
That journey was about a six-year journey of just one house a year. We had no formal training and just had started. It took us six years to get to that point of even just being comfortable or even having the amount of capital to place into a larger deal. I used to think you had to have millions of dollars to go into commercial and I realized that that really isn’t the case, that was a great lesson that I’ve learned. If I could have talked to myself 10 years back, that you could be part of a commercial deal, you could be part of a syndication, you could be part of some of these bigger opportunities, and you don’t have to wait to have a huge amount of money to be able to go into it. That was a big lesson that I’ve learned that I wish somebody had taught me ahead of time.
Somebody came and said that they were building some storage units and they needed some money. I said we could bring some money and I also said, Could we do a JV if I brought my friend that also had money? Could we do a joint venture? And they said let’s do that. That was our first step into a storage unit project. It was a joint venture, we had three people, they brought the storage project, and I brought the money. That was our first entry into that.
We then started looking at other different types of assets, we dabbled into assisted living. I’ll admit, I had some life learning lessons there. It can be an incredible asset. And I know people that have had some huge successes, but for me, I didn’t. We had a lot of tears, and things happened. I didn’t actually lose any money, but I lost a lot of sleep. When looking at a type of asset, think about what are you comfortable with? What resonates with you? What aligns with your life and your purpose? It’s important to work through it. So we found what we don’t like, and then we moved and found what we do like, and then we just went high gear into that.
Would it be fair to say that you didn’t like all the moving parts in the assisted living world?
I had a really hard time, we had a smaller assisted living and I felt like I adopted 15 Grandmas and Grandpas and I had a hard time when they would pass, or how family members would treat them. I had a hard time separating myself from it. It was like a whole other job for me. I couldn’t have an asset manager to completely remove myself. There are ways to make it work, but I just did not do those in the right ways.
Can you share maybe your cash on cash on that first self storage deal for us to compare with your residential properties? Was it a much better use of your time?
Yes, absolutely. The fact that I was the passive person on it. I’m not running it, I’m not operating it, so I really didn’t worry about that. Now, that one was a little unusual because it was a new construction so we had to wait a little bit for it to build. It’s difficult
to get the exact cash on cash, I won’t give you a percentage there but, in general, some of our self storage generate around $30,000 of cash flow a month. Now compare that to a residential home, when we were looking at our residential homes back then the things were a little bit more affordable in the Utah market. The Utah market is getting very expensive right now. We were lucky to have a $500 cash flow per house. Timing that $500 by that large amount on the self storage was a game changer for me.
And one must go through these steps to really get it, it’s great in theory, but sometimes you really have to go through the steps.
Yes, some people will say, Why didn’t you jump straight to commercial? The reality is I think I needed the fundamentals from somewhere, I needed to get the confidence and the fundamental knowledge of real estate in general to be able to feel confident and comfortable to be able to go into that larger asset. With a larger asset, if you’re not careful, with all those extra zeros that you have on the cash flow, it could also be extra zeros on the negative side if you don’t do it well.
What would be your top three lessons learned that you wish you knew before making the transition?
1. Shadowing a professional. Go in, don’t expect to be the professional on your first deal. Partner, or work with, or shadow somebody that has already done it. They’ve already gone through that, they already found the life lesson of XYZ and I’m never going to do that again. Go off of their learning curve for that. The easiest way to do that is you can usually be part of a syndication or something like that, or I’ve had people come and say, Hey, can I shadow you, and we can I work with you there. I’m careful with my time, but if you bring the right amount of value, maybe you bring the deal to them. We’ve done that with other people, they’ve brought us a deal, they said, I have this piece of dirt or I have this opportunity, I don’t know what to do with it, but can I be part of your deal and learn from you, if I bring this to you, that’s always been a win win. That will probably be my top one, shadow a professional to start.
2. Selecting individuals that have other strengths than you. We all have different strengths and different superpowers. You need to surround yourself with other people that have different skills than you. For example, I’m terrible at Excel, it sucks the life out of me, but I love having conversations, I love networking, I can do that part. So I try to align myself with other people that are really good at the other parts. And we make a really powerful team.
3. This one is specific for commercial. Try not to be a generalist, it’s okay to have more than one type of asset that you’re in. But if you’re just chasing deals because you feel like it’s a deal, and you’re not mastering any of them. Maybe you’re in flex industrial, then you go to storage, and then you go to retail and supermarkets or Dollar Generals, or you go to assisted living, or development. Those are all different things. They all have a very large learning curve in each of them. If somebody comes to me for retail, I’m sorry, I’m not a retail person. I don’t do that. We try to stick to a bread and butter and keep to those specific things so that I’m not a generalist. And we know those problems, so we know what to expect. It allows us to turn things over faster, and with less errors.
Do you wish you had done commercial sooner than residential, from the beginning?
I wish I would have been able to listen to more podcasts or open myself to the opportunity before. I’m happy that I started with residential, I remember how much my hand was shaking when I was asked to put a person in my house as a renter. I was doing a house hack. The fact that I’ve gone from that to this last month we raised over $6 million in one month from a webinar, that’s a big transition. Also, the type of deals that we’re working on, before I was really freaked out that I put a second house under contract for $100,000. And now I’ll sign a note for a $3 million piece of dirt every day. I’m comfortable with it, and I’m excited about it. I would have never been able to do that. It’s almost like when you’re working with a baby or an infant, you never feed them steak to start out with. Commercial is a little bit of a steak. But the best way to get into that is to join into a syndication, look at it, overview it, go with them, and know what you’re doing. In today’s market, the amount that can go into a syndication or a bigger deal like that is about the exact same amount that you would buy a single family home, it has gone up so much.
Can you share a couple of horror stories that you went through and how did you overcame them?
The biggest one was not having the right amount of reserves. The second one was, everything takes longer than you expect it to happen. And that goes back to longer reserves. The third one is to not always rely on people’s opinions of things, do your own research as well and not to just say, Okay, I was taught X, so it’s got to happen. They might not know your market. They might not know all those other parts for it. If you go to a conference and get pitched an idea, it doesn’t mean that it’s like a slam dunk. You’ve to make sure to ask yourself, Does that work in my market?
The other one is that I’m never going to rely on $12-$14 an hour employees. That’s probably the biggest horror story. Way back in college, I was offered a position for a food manager person and they said, Hey, you should quit school and just manage these for us. I just remember managing those employees and I’m not that patient. I have five kids, so I have a little, but apparently my five kids take all my patience. I can’t manage those types of employees. I wasn’t very good at that.
Pick the right asset class that you can afford to pay professionals.
Yes, I won’t buy a smaller multifamily anymore. I don’t love to be the asset manager, and I want an asset that I can pay a professional, a high octane professional management company to manage it. So I don’t have to stress about, are they doing their job, because they far exceed it.
Is there anything else that we haven’t covered that you think is important for our audience to know?
If you’re starting out, the best way is to start listening to podcasts, start networking. The biggest part though, when you’re networking is, don’t come up to other people that are doing big deals and say, I just want to take information from you. Try to give them some value first, and you’ll get a lot more value back. Instead of, Hey, let me suck all the information out of you. I had an instance like that, and it was a waste of time. And then I’ve had it the other way, where they’re like, Hey, I brought this deal, I really want to learn, what else can I do for you, and then come up with value that way.