Ep 33 - Getting Closer

Interesting podcast with some good updates, moving closer in the right direction.  Feels good to be moving forward instead of backwards, and being this close to signing very valuable leases that will completely change the pace of this building and my life.  These 2 leases will increase the value of the building by 600k, which would increase my net worth by 300k, which is just hard to fathom.  

Stupid silly problems dominated my day today, but such is life.  

Roof is getting closer to being done by the day, and my pool business is closing in a few days!!! CMON BABY!!!!  

Lets keep this momentum going!

Transcript

SPEAKER_00 0:01

Boys and girls, welcome back to the Commercial Real Estate Starting from Scratch podcast on episode number 33 with me, your host, John Kleisch. If this is your first time tuning in, thank you very much. I really appreciate you stopping by. If you're wondering what we are doing here and what this podcast is all about, I am documenting my journey starting from scratch, i.e., the name of this podcast, from no commercial real estate experience, no commercial real estate assets owned. Uh, up until today, I own two different buildings in the Phoenix metro area, valued at around two and a half million dollars-ish. That number changes almost by the day, but not really by the day. But the next coming months, that number will increase here quite drastically, and we'll explain why. Um, just documenting my journey of unfiltered, pretty raw, the good, the bad, the ugly, behind the scenes, kind of uncovering the back end of what these real estate deals look like. I always get tired of all these guys on Instagram posting all these big numbers, these big checks and whatnot, and half of it's fugazi, and uh the other half is just not even real. They're uh showing off checks that are maybe refi checks and whatnot, and yada yada yada yada. So always tired of seeing all the success stories. So I'm kind of focusing, not necessarily focusing on the bad, but I'm highlighting the bad, the ugly, and what happens, what most people don't hear about on social media. So really appreciate you tuning in. Thank you very much. What has been going on? I know last week was a pretty positive, upbeat podcast. I was hoping to have a lease signed already. I went into the weekend pretty much hellbent on getting a lease, and then radio silence for two and a half days. And I was like, Oh, I know this, this isn't good. And then uh I get a text message from the tenant or the potential tenant, oh, I'm out of town at some wedding, and I'm like, Okay, great, you know, I'm just hearing all these excuses, and then Monday morning rolls around, and it's like, hey, I'm sick. And then I'm really like, okay. Once we went from Thursday, the last conversation we had was, hey, uh, you know, I got the lease, I'm gonna read through this thing. I am going to propose some changes on it, and then even mentioned some things already that he was wanting to change, all reasonable stuff, no problem, no factor. Let's touch base, uh, you know, tomorrow and go from there. Nothing, nothing, nothing. So then on Monday, especially after I get those two text messages, then I'm like, okay, what's going on here? How do we go from hot and heavy to ice cold, ice cold water here? And from my experience, and maybe this was my expectation, was that we were supposed to move very quickly, but maybe his expectation was different. However, I have had these warning signs before. I have seen it in buyers and sellers, in business deals, in people in general. Now I'm like, okay. In my head, this guy was hot and heavy. I was telling other potential tenants that the place is already leased and ignoring other posts. So now I'm like, okay, with this hanging over my head, do I think that this is a deal breaker? No. Do I think that this guy is done and he's not gonna sign the lease? No, I didn't. However, I have seen enough to know that I'm not gonna waste any more time. I am gonna continue to reach out to prospective tenants. I am going to follow up with people that have seen the place. I am going to continue to negotiate with one guy that I really put on ice, like straight up ignored and delayed for as long as I could, pretty much awkwardly. And he was like, I'm ready to go, I'm ready to go. And I was just literally ignoring him, making up excuses to buy time. And then on Monday, I started entertaining that conversation again. So there was a lot hanging in the balance on that end, but I am glad that I was proactive about it because I always want to be aggressive. I am not going to lose any deals or lose anything by not being aggressive enough. That's just the way I'm built. That's just the way it is. I'm sure there have been times where I was pity pattering around and I lost a deal or didn't get what I wanted, something to that effect. I'm sure that's happened here and there. And that's just not like losing because you're too timid, do not like. 10 out of 10, do not like does not sit well with me. I would much rather lose a deal because I am default aggressive versus versus timid. So back on the offensive, talking to all these people. The other guy was ready to sign a lease, ready to go. I met him, I liked him. Younger dude, more immature business, you would call it immature, meaning it's just not as well uh solidified. Uh it's newer for him, and he wanted a much cheaper lease rate, which previously would I have been willing to do potentially. We tossed it around, tossed it around enough to where I called my partner and told him what was going on on my end. This is what this guy's offer was, and we were considering taking it because at the end of the day, again, we were doing that math. I forget how many episodes ago, but I was talking about the difference of you have a guy ready to go at a lower rent rate versus waiting to get that spot leased up at a higher rent rate, potentially in the future, and how from a cash flow perspective, it's much better to get that tenant in there, even though he is let uh paying less or under market for cash flow purposes. Now, the major downside to that is if you're talking about a thousand, let's just call it a thousand bucks a month, right? Which is a pretty big difference, but it's not out of the question, right? Like this this was about under uh over a thousand dollars less difference. So that's twelve thousand dollars a year, and at that point that's just pure profit, you're not having any extra expenses from that divided by 0.07 at a seven cap, that's like a pretty standard deal for my type of building. That's a hundred and seventy-one thousand dollars, wow, in difference in value of that building. So that's really where that hurts you. But from a cash flow perspective, you know, let's let's do the math. Say you're gonna get 12 months at $4,000, so that's forty-eight thousand dollars you get, but say the other guy's gonna pay five grand, but you got to wait three more months to get them, it's nine months at five thousand. That's forty-five thousand, three thousand dollars less that you are going to get in your pocket at that year. So cash flow, you're making more cash flow. However, you are taking a hundred and seventy-one thousand dollar haircut on the value of that building. So, depending on your situation, right? And that's what I've been learning about commercial real estate, is that it all depends on your situation, right? What goal are you trying to accomplish right now? Is it purely a cash flow play? Am I really wanting to stack cash flow, or is cash flow not a concern? Is it your net worth or the equity that you want to improve upon? So that will lead you to your answer. There is no right or wrong answer to this question, from what we've talked about and determined. It all depends on what you want to do. And the other thing that you the unknown is say if you do pass up on this tenant, and you might go three months without finding another tenant and then still take a guy that's under market rent, right? Like if you go six months, you're like, I can't wait any longer. Here we go. Let's get this guy in here. Then my goodness, then you're only cash flowing $24,000, right? That costs you a lot of money if you had to wait an extra six months, and you still got him at that same rate, and your building's gonna be worth the same. So there's that whole conundrum, if you will. Now, in this instance, since our primary tenant had signs of life, I forget already, god damn it, if I even mentioned it. He hit me up this morning, Wednesday, and was like, hey, I'm on it, I'm back in the office, I got the team on it, ready to go. He sent me his request of terms that he would like to change in the contract or in the lease. Nothing is out of line. He was asking for very basic stuff. One, he doesn't want to cover the AC, which I get. Um, we might work out a deal on that, something to the tune of maybe if he's signing a yearly or three-year lease with us, maybe in the first year of the AC breaks, we cover 75% of it. Year two, we'll cover 50% of it. And then in year three, if the AC breaks, we'll cover 25% of it. That way he feels a little bit more comfortable. Uh, we briefly talked about that on the phone last week, and he wasn't opposed to that. I like that deal. I am trying to pay for the least amount of things possible because what does that do? Increases NOI. And more importantly, I shouldn't say more importantly, equally as important, it alleviates brain power, effort, work, phone calls to my phone, which you can imagine if the AC goes out, I'm gonna be hearing about it, I'm gonna be getting it. And you know, I got a great AC guy. Shout out Clint Backis. If anyone needs an AC guy in Phoenix, holler at me, let me know. Got the best one. And uh, that's just stuff that I don't need. I don't want that on my plate. If I could push that off, it's gonna you know save my brain power, effort, and energy. Pocketbook, right? You don't gotta pay for that expense. And in the future moving forward, maybe we do get a new AC out of it, and it just increases the NOI, which we just did the math, a thousand dollars a month is worth $171,000. And let's do this, let's just say it's not even let's just call it a seven and a half cap, 160 G's. That's a poop ton of money. So that's the goal. I have been a triple net, and we're not even doing a true triple net, we're doing like what I call a country, I guess, country triple net, where we still pay for the taxes and the insurance, and we cover the roof and the exterior, but everything else we're pushing on the tenants, and I really, really, really like that that play. It's like a good mix of both. Now, you might be like, oh, John, you're an asshole. You want your tenant to pay for your AC. Well, I was in a true triple net lease, and I would venture to say, I forget exactly, uh first or second year the AC goes out, and this was the 2000s. This was probably 2010, 2011. And uh, you know, AC goes out, super broke, terrible business, barely making any money, losing money most months. And I get on the roof and I'm looking at this thing, I'm like, dude, this thing is from fucking 1980 something. And I'm like, I gotta replace a 30-year thing, and I call my land, I'm like, heck no, that's crazy. And they're like, no, you signed a lease, and when you signed the lease, the air conditioning was in working order, so it's your responsibility. Then I'm like, all right, I didn't said some choice words. All right, I'm gonna go out and take this AC when I'm done. Uh, you can't do that because you leased it with an existing AC, and so when you leave, it has to have an existing AC. So that was my big conundrum. That sucks and it blows, right? But that is the nature of the beast. That's what a triple net lease is, and I have no problem pushing that onto my tenants. Now, if that was a deal breaker, am I willing to fix the AC? Yeah, sure. No problem, whatever. At that point, a new AC unit, 12 grand, whatever. They lost they last 10 years. What is that? 800 bucks a year to save up for a new one? Cool, I'll do it. And anyways, we are sending my AC guy, shout out Clint Backis, to check it out on Saturday to see kind of what he thinks, how much trouble that thing is actually in. I do know it works. Um, I guess I do know it worked previously. I don't know if it works now. It has not been hot enough for the guys to run it, and they have not been running it. So we'll see. That'll give us a big idea. As opposed to other things, he wanted a lesser late fee, which I'm totally fine with. We went extremely aggressive on the late fees because if you're uh listening to this podcast for maybe the last eight week eight episodes now, we just did an eviction um beginning of March, and that experience was pretty dang awful. So we are implementing very, very, very heavy late fees to help make sure that people are paying their rent on time, and if they're not, that it's worth it for us. So I'm cool with cutting those. I think it's something to the tune of a hundred dollars a day after after the fifth. So if you're five days late, boom, day six, you pay, it's an extra hundred bucks, and every day moving forward is an extra hundred dollars. I think that's pretty reasonable. And I believe that's it. There was not anything else, or maybe there was one more thing that was very agreeable. So those are changes that we can make, and then I am ready to send that lease off for signing, which is great. So that's good. That's where we're at right now. Waiting to make some changes on our proposed lease to our potential tenant, get that out, sign CO delivered, done. Another story here. Today was crazy. Today was just absolutely fucking nuts, and not in a good way. Not in a good way. I'm trying to get work done here, I'm trying to acquire some of those messy deeds and messy titles and stuff like that. And that is a job where you need to be very locked in, you need to be focused, you cannot be distracted. There are so many little things that you can pick up from phone calls, from research, and talking to relatives and just reading through the notes that you it takes about an hour to work through a file, really, to make all the calls, to do all the research, to look into it, and that's not even talking to people, that's just kind of what it takes. So having your brain power switched back and forth does not work with that, with that at all. You need to really sit there, I mean, two, three hours minimum, focus, turn the phone off, get to work. And that's what I wanted to do today, and the universe just did not let me do it. Uh let's see what started. I guess the prospective tenant reached out to me in the very early morning, wanted to see what's up, told him, hey, we need this, this, this. He worked on it, got that back to me. My roofer uh got locked out of the gate. Long story short, uh, this is the stupid shit. That just is stupid and dumb. There are two locks on the gate. There's an old one, and then there's a new one. Some people, tenants, still have the key to the old gate. I don't know why or even how. And we installed a brand new one, and I gave everybody a key. And I gave my roofer the key, and I told everyone, hey, don't even use the bottom lock anymore. Kaput. And it's it's like welded in, it's like got a plate, so it's not like easily removable. It's this big to-do to remove it. So that's why you're like, oh John, why don't you just remove the lock? Well, I I can, but it's gonna cost me like hundreds of dollars to get somebody out there with a torch or a grinder and grind out that lock. So I'm just putting a piece of tape over it for now. But he's sitting there six o'clock, uh 6 30, locked out of the gate, can't access the building because this stupid lock. And mind you, this is the second time now that that that has happened. I'm texting all my tenants, WTF. What are you guys doing? So that started. Uh, and then he called me a few hours later. He likes to send me update videos, got me a bunch of update videos. Um, let me let's talk about this. This will be a little bit more. So, this guy, uh, great roofer, worked for a company for a long time, 20 plus years, just branched off on his own. So, kind of doing all of the work that's required to do roofing, not the roofing part itself, but the billing, the estimating, the payment of your guys, the extra runoffs or the extra overages, overages on extra materials and blah blah blah blah blah. Right. There's running a business and then there's operating a business. They're two totally different things, and it seems that obviously the operating the business part is not his strong suit. And I here's the concerning part is that I gave him 50% down for uh for the first job, which was $7,500, and then we decided to after he got work, and we really liked what he had going on, so we had him do the second part of the roof, which was 12 grand, and then we are having him clean and recoat the rest of the roof, and there's some extra work, uh, and that's 12 grand. So I gave him 50% for the first part of the roof, and then I gave him 50% for those other three sections. I visited the site on Monday, the first part was done, so I snapped him off the rest of the check, which was $7,500, and then I've sent him a total of $27,000. And I'm just doing the quick math, going, okay, there's plenty of room here. I imagine that first portion of the roost roof cost him maybe $10,000, maybe $11,000. So we profited four grand, cool. And then the next section, uh, you know, I gave him six grand. He probably spent that in materials and labor so far because that was kind of more intensive than the other portion, had to hire some framers and things like that. But then the other portion, uh, six grand was for a record, which is basically power washing and then splaying spraying down elastomeric, which is the cover for the foam roof, the waterproofing portion of it. So that hasn't gotten even touched yet, which I'm totally fine with. But my whole point being that there is six thousand dollars of extra money floating around there plus the $7,500. So I paid him $27,000, and he asked me for three extra thousand dollars. And in my opinion, once contractors are asking for more money, that's a problem. I don't like it. I think that's a recipe to set yourself up to get screwed. And even if it's his fault and he messed up and he just underestimated and everything, uh, like really, I don't care. I don't really care. I am getting to the point where I feel uncomfortable. I don't like it. And I asked him why, and he was like, Oh, I just pay my guys every day. I want to make sure that I can pay him. That's all great, that's a good answer. But I asked him, what about the other money that I gave you? Like, you really blew through 27 grand already. I have a hard time believing that. So I basically I need to get back to him um on what I want to do, and the answer is probably no. But I basically I don't know what I don't know. Um, I feel bad as a human being. Generally, I'm a nice guy. I really want to make sure that I take care of everybody and I do right by them, and I don't want him to be hurting and to be in a spot, but also him I'm even kind of a little bit upset that he even asked me, to be honest. That that that I don't like. So um I don't know. I go back and forth. I was thinking of maybe just sending him a thousand bucks instead or something and say, hey, never ask me for money again. Do I think he's gonna run away with the money? No, of course not, right? I don't think that. However, imagine if I sent him three thousand dollars and then the next day he asks for two grand or fifteen hundred, and then the next day he asks for for more money, right? It can get out of hand. So I don't know if he's just testing me and wanting to see if he can get some early money or or what. But I just the math doesn't add up to me, and I don't I don't really like that part. So that was happening.

unknown 21:17

Oh God.

SPEAKER_00 21:18

Here's another story. Normally, this is stuff that I a landlord shouldn't even have to have to deal with. So let's let's break it down. And I don't want to take too long ascribing this. I can't believe we've been going for 21 minutes or it feels like we just started. Last week's episode was 16 minutes, and I thought that was gonna be a 45 minute, and here we are thinking this was gonna be a short one, and now we're already 21 minutes deep. So, long story. There was a former tenant that was there before I bought the place. The power was in his name. New guy came in, scam artist. Fuck that guy. I hate you. You are a piece of shit, and you are going to hell. For sure. Fuck that guy. God damn it. He sucks so bad. He, this guy's an old guy, the old tenant was like, he's 80 years old. Very nice guy. Scam artist, Gilbert Gonzalez. I'm gonna call you out. I don't care. Gilbert, Gilbert Gonzalez, you are a scam artist. I dislike you very much, and you hurt a lot of people in this world. Shame on you. Not keeping your name silent anymore. I don't care. He kept the power in his name, saying, Oh, hey, I don't even know what story he gave the poor old man, but he gave him some kind of story. And meanwhile, there are other tenants there. So the whole power bill for the whole building is in his name. Gilbert then goes to the other tenants and says, Hey, I'm paying the power bill, it's in my name. You pay me every month. And he was collecting money from these tenants, and guess what? You guessed it. Not paying the power bill. Was not paying the power bill because it's not in his name. He has nothing to worry about. So not only was he not paying it, but he was also collecting money from the other tenants. Now, didn't even find this out until after the fact. So now, all of a sudden, this poor old guy, 80-year-old guy, gets a bill for, you know, over six grand. And honestly, it's totally his fault for not shutting off that power. I get it. But knowing who Gilbert Gonzalez is and knowing how he talks to people, he is a professional scam artist. You would have no idea. I have had friends that I've shown the building to that have met him and gone, wow, what a great guy. Right? And I thought so too. So he got me too. He got everybody. He rolled through everybody. Hundreds of thousands of dollars he scammed in the six-month period he was in our building. So to give you the depth of this guy, professional, top-notch, world-class, straight-up scam artist will take the last dollar out of your bank account and not even care about it and sleep just fine at night. So now the problem is that everybody there, all the tenants, are friends with him or know him, and they feel bad. So they're like starting to pay down that power bill. And now eventually it got to the point where I told my current tenant, I was like, hey, this sucks, but it's not my problem. I can't get involved. I already lost a shit ton of money because of Gilbert Gonzalez, professional scam artist, worst guy I've ever met in my entire life. I already lost a ton of money. You already lost a ton of money, customers already lost a ton of money. All the other tenants got scammed by him. We can't keep paying his way. That's a shame for the older gentleman. I feel sorry for him, but just hey, I would just cancel or just set up new power in your name. So here's the other problem. This guy is a tenant in about a third of the building. He is moving to the front part of the building, which is about two-thirds of the building. However, he uses a paint booth and the air compressor that's on the front side. So basically, he needs to get signed up for all three meters in his name to operate his business for the next month. And then after that, he can cancel his current section and get that out of his name and then just have the front two spots. Now, the problem is that the power company sees this long paid overdue bill and they're like, Yeah, we're getting a fat deposit on this one. So the deposit, just the deposit alone to get power turned on is $4,400. So my current tenant, who is a great tenant and moving into the tenant number one situation, now has to pay $4,400 just to get the power turned on. And mind you, APS, the power company, is turning off the power today. So he's calling me, hey, what do I do? I'm like, dude, I don't know. Don't ask me for money. It's not my fucking problem, dude. I got the other subleasing tenant. Hey, we're gonna lose power. Can I not pay you rent of $2,000 and just give that to Josh for the power? I'm like, no, dude, I'm not. That's me paying for it. I'm not paying for his deposit. Like, this should have been done a six months ago, and nothing would have been of a factor. And the reason that this guy's getting so upset, and now I understand his perspective is that he's like, so what the fuck? I have to pay this deposit for everybody to continue to get power. And the answer is, yeah, dude. If there were no sub tenants or subleasing tenants there, you wouldn't have to, or you would still have to pay that money. So therefore, it is kind of what it is. So going back and forth with him, getting calls. I got like 15 calls all day about this power situation. And uh eventually he's talking to APS, blah blah blah. Good thing is that his old lease doesn't count because they're gonna make him pay that old power because he was there before. They said, Hey, you got to get a new lease, and then that way we can start the power, which he has not signed his new lease yet, which is great because we want him to sign that lease, even though I know he's gonna uh take it, he's already moved moving in slowly. But good for us, I guess. I guess that's called a forcing function, right? So bad news turns into good news, forcing him into a lease, which is great, which had to happen anyways. And out of the goodness of my heart, what I am doing is um I'm offering to pay some of the electric because I do have my own sub-leasing tenants that are using his power. I'm going to give him money for that power monthly. We haven't figured out how much yet, but what I'm gonna do is just I'm gonna give him 400 bucks as a credit, say, hey, future credit for power. That way it makes his life a little bit easier to get that power taken care of, and I get him off my back and I don't leave him kind of in a bad spot. That's my solution. Is it good? Is it bad? I don't know. I think it's plenty, plenty good. I understand his concern, but for my position, and I told him, like, hey, uh, I've never talked to a landlord ever about electric anything, electric deposits, electric thing, like kind of deal with it, and that's that's your type of problem. So at the end of the day, that's all that I can do. I try to keep everybody happy, and I feel like that is money that I'm gonna pay out anyways. It's 400 bucks, whatever. If that makes them a little bit happier, I'm cool with that, so be it. And what else happened today? I gotta get this wrapped up. We're at the 28 minute mark. So been waiting to sell my pool business. You guys know I made a joke that hey, next week we're gonna for sure be selling it potentially, maybe, possibly, maybe there's a slim chance. I hit my guy up, my buyer, two days ago, and nothing. I was like, all right, uh, this is not a good sign. Fully preparing to list this for sale, find a new buyer. He hits me up today. Hey, let's let's exchange money on Friday or Saturday. I'm ready to go. So, what does that mean? I'm I'm I'm good this time, guys. I'm I'm ready to go. Friday, Saturday. This business is gonna be sold by next week's podcast. It is gonna be named something. See a pool business, sold pool business, money in my pocket, baby. Either way, that's happening. I feel super confident about that. Let's get this puppy wrapped up. I feel like that should not have taken 30 minutes to explain my day today. However, those are the updates. That's what we have going on. Things are moving forward. I like it. Next week, pool business gone, front lease signed, back lease signed. Hopefully, these 10 and 3 guys, I can push them into a bigger spot and get some more money that way. Boom, boom, boom. We're already at $15,500 of gross revenue on that building, which is putting about $6,500 of cash flow in our pocket. Actually, that's not true. $5,500 of cash flow straight in our pocket the way that unit sits today. I like that. Real quick, gosh, I gotta say it. With that cash flow, with that gross revenue coming in, and with our current expenses, the way everything is lined up, that puts that valuation at a uh seven cap at two one two point one eight million dollars. We bought it for $1.5 million. We are putting in about $80,000 of money into that, so $1.58 into this deal and turning it into $2.185 million dollars in eight months from purchase, nine months from purchase, and going through an eviction. Are you kidding me? That's what basically a six hundred thousand dollar increase in equity, which I'm 50% owner in that building, so that puts my net worth up by $300,000. You know how long it would take me to increase my net worth by $300,000 the other way without doing this? Years, years, years, years, years, years, years, years, years for sure. Maybe a year, maybe two and a half, something like that. Way more than a year, no doubt about it. And that happened with two signings of pieces of paper, boom, six hundred thousand dollars. That's crazy. That's the powerful uh the power of commercial real estate, and damn, it feels good. Now, hasn't happened yet, boys and girls. I know how this works, hasn't happened yet. I am refusing to celebrate early, however, I can taste it, I can smell it, boys and girls. It's right there, and I cannot wait to get uh to make that happen when that happens. As you know, I've mentioned this in the past. I have a very, very difficult time celebrating when I get both of those leases signed. I definitely will be celebrating. I don't know how, but I will definitely allow myself to get happy, to be proud of myself, and uh really enjoy that moment because victories like that, as you know, don't come by very often, especially in this game. So, what a way to end it. Really appreciate you guys tuning in. If you guys like this podcast, thought it was cool, leave me a review. If you have a friend that would enjoy this, a colleague or somebody that you know that would enjoy a podcast like this wants to get into commercial real estate, isn't commercial real estate, uh, shoot this to them, tell them to download some episodes, listen, and please have them leave me a review too. I'm terrible at advertising. I'm terrifying, I have not done any advertising. I still have friends that don't know that I do this, so I'm doing this all organically. It means the world. Um, and also, gosh, I gotta add this to the entrance. We are worldwide, officially worldwide. Maybe you're listening to the commercial real estate starting from scratch podcast, which has been listened to in every single continent on this earth. Whoo! Feels good to say that. I have forgotten that, to be honest. Shame on me for that. And golly, it's been four minutes since I said I'm wrapping this thing up. Before it gets any longer, let's get out of here. Boys and girls, really appreciate you. Thank you very much, and take her easy.