Ep 38 - The Numbas!

Just like Ben Mallah says, THE NUMBAS!!!!!

Going over some quick updates on both buildings, but mainly spend time going over the numbers on Grand.  I've yet to really break everything down in reality, mostly theory in the past.  But now that we have most of the place leased up, I broke down the revenue, expenses, cash flow, and value of the building.  

I had a blast recording this podcast, not sure why, but it was great, I guess I like The NUMBAS!!!

Transcript

SPEAKER_00 0:01

Boys and girls, welcome back to the commercial real estate starting from scratch podcast with me, your host, John Kleisch, on episode number 38. Wow, that went fast. 38 episodes. If uh guys, this is your first time tuning in, really appreciate you doing so. Would love to hear how you found out about it. And to give you an idea of what we have going on here, uh, just like the title says, commercial real estate starting from scratch. I am documenting my journey from not knowing really much about commercial real estate um up until today, which has been about uh shoot, it's almost been a year. I think it's been about 10 months now. Started with no commercial buildings, and now I am 50% owner in two buildings in the Greater Phoenix Metro area. One is an industrial building that has mostly automotive tenants, and then the other one is an office in Sun City, which has uh financial service tenant, and the rest is vacant at the very moment. So um, we're just tracking the journey, raw, unfiltered, giving you all the good stuff, all the bad stuff, giving it uh or showing you exactly what is going on behind the scenes. Every time I listen to a podcast, they're always talking about how much money they make and how great everything is and how good they are and all of that. And I want to do something different here, so I'm just giving it to you how it really is on the inside of the machine, the ugly, ugly machine of commercial real estate. So this episode may not be the best one to listen to. Um, maybe, maybe not. I don't know. You can do what you want, but uh, I will go back. Um, these are all in uh chronological order, starting from when I first started. So it's kind of cool to see that progression all the way up until the point of where we are at right now. So uh quick updates on everything. Thunderbird, no real update. Still waiting for my friend to come to the building and see what he thinks and tour his facilities to see exactly what we have going on with the co-working space and how to run it and the numbers to expect from that before we do anything. After this podcast, I am going to start leasing or putting up ads at least for that space to see what kind of interest we can drum up without committing to anything. It's a good way to test the market. And that's pretty much it for Thunderbird. Pretty stale update on that one. But grand, guys, oh, we're so close to getting a lease. I am supposed to meet the tenant at grand tomorrow and collect payment and sign the lease. We already went over the details, we've been in touch. He filled out the background check, uh, application type of deal, and he passed with flying colors. Everything looked really good to me. So uh no criminal history. He's missed like two credit card payments his entire life, which was awesome. No evictions, everything like that. So great tenant. I've checked out his bank statements. There is money coming in and going out of his bank account in a volume that makes sense for him to afford the rent. So that is awesome. Very stoked on that. Was really hoping you would get done today so we could celebrate on the podcast with you now. However, that'll have to be until next week. Fingers crossed, all goes well. The swamp cooler install is just getting worse and worse by the minute, which is, I mean, to be expected, this building really hasn't been touched by any professional service business or uh service worker, if you want to say it, in uh a decade. So everything is kind of foobar on it, but we're working through everything. The every day I get a call, there's gonna be this much now, this much now, this much now, but it is what it is. Uh, to be expected, silly me for not anticipating those repairs. However, um, you know, not fun spending extra thousands of dollars on stuff that you didn't think you had to do. So, you know, it is kind of what it is at this point. I'm not really upset about it. Uh I have to get an electrician over there because the electric, I mean, those swamp coolers were so bad, the power's probably just been eaten alive. Those guys are not electricians, they're swamp cooler guys. They basically couldn't find out what was going on with the wires. They traced them back to a couple junction boxes, and it's like a bird's nest, is what they said. So they're not trained in that area to go diagnose electrical problems. Good thing is, one of my best friends out here is a fantastic electrician. Shout out, Tyler Baumgartner, even though I know you will never ever listen to it. That's okay. So meeting him up there tomorrow uh to help him with that, and then also meeting the tenant there to get that paperwork signed and locking the deal. So I thought this would be a really good episode to go over the numbers and details. I know I've kind of been throwing out numbers here and there randomly, and honest to God, sometimes I pull them out of my ass. So uh I spent a little bit of time before the podcast and took some notes. I went through the bank statements to find out exactly what things cost and exactly what we are bringing in, and to give you a really good rundown on what the numbers look like on something like this. And uh, please, guys, this is not like educational. I still barely know what I'm doing. Take this with a grain of salt. I am probably going to uh say some wrong terms. I am probably gonna calculate some things incorrectly, but I'm just doing the best that I can with what I have, uh with the knowledge that I have and everything. I'm not a commercial real estate expert. When I hear these guys talking on the podcast, I'm like, my God, you guys just sound like you're freaking playing a different game. So I like to make it very, very simple, easy, and I think that the way I'll break it down here is very, very simple. So um basically, I like to think of these buildings as a business, right? These buildings produce revenue in the form of rents. Tenants show up to work or their business, they operate it, and then every month they cut me a check. So that's the revenue that like the business, quote unquote business, brings in. And then, of course, like every other business on earth, there are expenses, right? So you have different types of expenses, and then you have your revenue, you have your expenses, and then you have your profit. And then based on that profit, you can figure out how much your business is worth. Well, in commercial real estate, the uh big factor on the value of these buildings is cap rate. Now, I'm not gonna go into it, but that can vary widely from the type of asset, the age of the asset, the condition of the asset, the location of the asset, right? All of those things can affect the cap rate. The market will decide what the cap rate is. And a good way to think of that, how I think of it is if if I bought this building cash, what is my return going to be? Right. Um, that's the way I like to think about it that way because it just makes it a lot more sense, right? So, for this example, we'll play with the cap rate a little bit because I can't say without a doubt what I think it is, but I know right now the building we're gonna talk about is Grand Avenue, which is my industrial building, um, which I mentioned in the beginning of this podcast, is catered towards automotive folks. Everyone in that complex is automotive, body shop, custom cars, and a car dealer, a wholesaler, rather, if you will, is the new tenant. So that's basically uh a bird's eye view of how I like to look at that. So, talking about numbers here, if let's pretend that I do have this lease signed with this with this new tenant here. So, right now I would have three tenants in place. Tenant one is bringing in seven thousand five hundred dollars, tenant two is bringing in four thousand dollars, and then tenant three, which is renting an outdoor bay and a lot, is bringing in two thousand dollars. So that totals thirteen thousand five hundred dollars a month on the dot. And at the end of the year, the revenue with this current lease rate would be $162,000 on the dot. And then we have our expenses, which uh taxes run us um and then I don't know exactly what the taxes are gonna be at since we haven't had the tax bill yet, but we know they're gonna go up from the prior tenant, so we're planning on it being about uh $1,250 a month, which is about $15,000 a year, if I remember correctly. Um, our insurance is four hundred and ninety-nine dollars a month, and then we have CapEx at $1,000 a month, which is really cheap for a building like this. However, we um set up our leases to they're not triple net leases, they're something called a modified gross. So, what that means is um honest to God, I'm not gonna lie, I don't really know, but um, I know there's like full service leases where the landlord pays for everything, it pays for utilities, it pays for repairs, it pays for the taxes, insurance, blah, blah, blah, blah, blah, blah. Okay, we're not even close to that. And then there's triple net, which is where the tenant pays for everything, meaning everything taxes, insurance, repairs, all of that. Um, the only thing that they would not be responsible for in a triple net lease would be the roof and the exterior. So we have something in the middle of those called a modified gross lease. Um, my business partner, also named John, likes to call those country triple net leases. And I really like that phrase too, because it makes a lot of sense that way. So we, as the landlords, are responsible for the insurance and the taxes, the roof and the exterior, and that is it. Since I am the one managing these buildings, I want to make it as easy as possible for me. I do not want to be getting calls about toilets and light switches and electrical problems and AC issues and swamp cooler issues and this leak and that leak. Don't want to deal with it. So, in return for that, we offer a cheaper rent, and they get to have all of those problems and issues on their plate and not mine. Now, if the building is falling apart, that's on me. If there's a roof leak, that's on me. And I'm cool with that because we just got a brand new roof and we got a smoking deal on it too. So that's great. Comes with a 10-year warranty, and after that we got to recode the thing, and then it comes with another 10-year warranty. Um I was almost gonna talk about the roof and get carried away, but we're not talking about the roof here today. We'll do that on another deal. I think that might be important for some folks that are uh maybe interested in learning about commercial roofs. So we have um, and then so the other thing, like I mentioned in the beginning, the um, or maybe I didn't even. So there are the expenses of the building that actually cost you to operate that building. Now, you would think that the mortgage gets included in those expenses, and that's not really true. That's not a true expense because the cap rate is based on if you said or you paid cash on that building, what your return would be. So the mortgage is not included in that. So the annual expenses on this Grand Avenue building, and to give you context, it's um gee whiz, I think 11,200 square feet of uh building. There are some outdoor shaded areas that are not included in that, and the whole uh facility is sitting on 1.15 acres, so it's not like an overly large building, it's not overly small. I feel like it's right in the in the middle there. So, expenses on this building again, really cheap. $32,998. I went through all of the uh individual expenses, and to give you an idea, uh, we'll talk about cash flow too, because for cash flow, you need to incorporate that that mortgage in there. Um, the mortgage that we pay on this on a $1.5 million building, we put right around 10% down, I think just shy of 10% down. So our mortgage on this at um a 30-year amortization and an eight-year balloon, which doesn't affect the payment, but um we're paying seven thousand two hundred and forty-five dollars a month. So grand total of the money that comes out of our bank account every single month in the form of expenses is uh nine thousand nine hundred and ninety-four dollars, basically ten G's a month, which in turn annually comes out to one hundred and nineteen thousand nine hundred and twenty-eight dollars, so basically a hundred and twenty G's. And now we went over the the the revenue. So the revenue thirteen thousand five hundred dollars a month. Did we go over the revenue? You know what? I forget. Also, side note, I just played golf with my son Lucas, who is uh just getting started, and and this is why I'm so fired up right now. Um, he's getting really good at golf. Uh he's 12 years old, he's been playing for about a year. I unfortunately have been playing for like a very long time, like 25 plus years. I still suck. And he beat me today. I played a really, really, really terrible nine holes, just really blew up, and he uh played the best that he's ever ever played. I'm not gonna mention my score because it's embarrassing. I don't even want to put that out in the universe and let people know how bad I actually shot today because you may unsubscribe from this podcast and never respect me again. So we'll leave that for another day. However, he did beat me, so my mind is like still going back to that moment when he beat me, and it like makes me upset. Could really happy for him though. But all right, back to the book. Here we are. So overall, uh, let's bring it down $7,500 a month, tenant one, four thousand tenant two, two thousand tenant three, bringing me a total of thirteen thousand five hundred dollars a month. Annually, we're bringing in a hundred and sixty-two thousand dollars. So we are bringing in a hundred and sixty-two thousand dollars, and we are spending about a hundred and twenty thousand dollars. So if you minus those, what you get is a profit of forty-two thousand seventy-two dollars, which is a not bad at all things considered. You're bringing in three thousand five hundred and six dollars per month of straight profit to your bank, which I like that. That's that's really cool. So, another thing we could talk about is cash on cash. I didn't prepare for that number. I have an idea, so let's go ahead and do that. We both put about eighty thousand dollars into the deal, so that's one sixty. Roof is forty. We spent about 10 on the swamp coolers, so we're into this thing about $210,000 cash, and then we are bringing in $42,072, which a grand total of let's see here, $42.072 divided by $210,000. 20% cash on cash return, boys and girls. That sounds pretty dang good to me. Where else can you go out and get a 20% cash on cash return on an annual basis and get the tax benefits and get the appreciation, which we'll talk about uh and the valuation in a little bit. But 20%, are you kidding me? Uh that's fantastic. I mean, that's a deal I would do 10 times over again and again and again and again and again and again and again, and then one more time after that. So not bad, not bad. And then, guys, this is year one, right? Year one in year two, we have major bumps in rent. I would say major, I moderate bumps in rent, one major bump and the rest moderate. And this is based on if we do not go out and rent out any more spaces, which there's about two thousand dollars more that that we can play with at the at the end of the day. Uh when I mean play with, there's about two thousand dollars of rent that's sitting in our lot that we could get if we if we rented that out, which we'll we'll talk about uh later. But I'm not even talking about that, I'm talking about the current leases that we have set up right now. So June 2027, so one year basically from today, tenant one gets a bump, it gets 8,200, and I think it's like 8245, but I just calculated it at 8200 because lazy me did not want to go pull out those leases for you guys. My apologies, you can sue me on that one. Um, tenant two gets bumped up to four thousand one hundred and twenty, and then tenant three is going up to thirty five hundred, so considerable rent increase for them, and uh we're getting bumps along the way, but basically what I'm talking about June 1, 2027, that's what we were bringing in fifteen thousand eight hundred and twenty dollars per month, that's like two thousand three hundred and twenty dollars more coming in than or sorry, two thousand three hundred and twenty dollars more than we're bringing in now. So that brings the annual revenue to $189,840. So that's like really dang close to that's actually more than sixty thousand dollars. Um, that's not true. That's not true at all. That is um twenty-seven more thousand dollars. Is my math right? Yeah, that's close enough. All right, guys, I got a calculator. Let's use it. We're at $189,840, and then we're bringing in $162,000 here, $27,840 more. That's just pure profit right into the bank. Our expenses on that really won't change. Maybe taxes go up a little bit here and there, probably not. Uh, even if it's a couple thousand bucks, it's not gonna change drastically. So uh that's pretty good now. Or let's see what that's gonna be bringing in, actually. So $189,840 expenses of $119,928. We're bringing in $69,000 of profit at the end of the year. That brings a grand total of $5,826 per month of straight profit. That's insane. What's the cash on cash return on that? Let's see here. $33. Oh, that's insane. That's asinine. You can get very, very, very wealthy if you can get 33% cash on cash return, in my opinion. Now I know businesses you can get 10x, 12x, whatever, blah blah blah blah blah blah. That's fine. That's cool. We're not talking about that. I like 33. I will do that deal 10 times over and then twice on Sunday. Now, the valuation of these buildings, this is where it gets really crazy and can get really out of hand. So we talked about how you find out the net operating income of this building, the NOI, and then you divide that by the cap rate, which is what we talked about earlier, the basically how to value these buildings. So, year one, we've got a NOI of $129,000. So that's your revenue minus your expenses, not including your mortgage. Cap rates. Um, right now, this type of building commands like a 7% cap rate, and you can maybe go up to a seven and a half if you wanted to be conservative, but uh at a seven cap this building with the current tenants is worth one point eight four two million dollars. Not bad, not bad. We bought it for 1.5. Say we put that $210,000 into it. So we're in for a $1.71. It's a valuation of $1.842. So nothing to write home about, nothing to be you know crazy, and you're not gonna get rich off of that. That cash flow is pretty nice though, but the real magic happens that next year when you get that bump in rent, and we're just talking about year two. We have a eight-year balloon on this note payment. So I can't even imagine. I don't even want to figure out what those numbers are. I could gather and make some estimates, but I don't want to get too carried away because why? That's way too far in the future. So the current leases we have right now, next year, those things we talked about what they're bringing in is bringing in $189,840 in revenue, which would be an NOI of $156,842 divided by a seven cap. That is $2.24 million. That's not bad, minus the $171 that we paid for the building plus the repairs. That gets you a five hundred and thirty thousand dollar difference in equity, meaning we created five hundred and thirty thousand dollars worth of equity by year two. That's cool, that's awesome. That makes me feel very, very good. Now, does that mean the building is worth that today? No, but the second those that bump hits, bada boom, bada bing. And honestly, I'm sure there's a way that you could sell the building for a little bit more than that 1.7 whatever that we talked about, or the 1.8 that Talked about earlier because those leases are in place. I don't have experience in that, I have no idea how that works, so I'm not even gonna talk about that. Let's just call it whenever these leases hit 2027, bada boom, those puppies are rocking and rolling. 2.2 million dollar valuation. So that is what gets me very, very excited. That uh that cash flow of 70 G's basically, and that bump in uh equity, that $530,000. That is exactly why I am doing these commercial deals like that. It's so funny, people always talk about single family homes and whatnot. You just can't do that type of stuff. You just cannot do these types of numbers in that single family. Uh, I mean, you would have to do 10, probably burrs, you know, buying them wholesale, fixing flipping them, and then finding renters to pull out that kind of equity. Uh, maybe more, you know, hard to say. I don't know. I feel like a lot of those guys are kind of hurting right now and fighting over deals and barely things are barely moving and whatnot, but that's a whole nother story. So stay on track, John. Come on, we got this. We're almost done. So, guys, that's basically the numbers here. And then imagine, let's just add, say, say I do rent out another spot and say it's only 1,500 bucks a month that I get. That's an extra $18,000. So we can add that $18,000 to that NOI, bringing it to $174,000. That puts the building at $2.497 million dollars, basically $2.5 million, which is that's crazy. That's like an $800,000 bump in equity. I mean, these numbers are so out of line that it's it's hard to fathom. Um, could it not happen? Yeah, of course. But just actually calculating it out and seeing it and seeing how very realistic that is, that just means that if I go out there and find another person that I could stick in an outdoor bay and give them some lot space for $1,500, if they're there, if they sign a year lease, that bumps up the value. Like, I mean, let's do the math here. The beautiful thing is that's easy to find how much that's going to be. So, say, you know, $1,500 times $12 is $18,000. You just divide that by 0.07, and that gets you a $257,000 bump in equity just based off of that alone. So that's that true power of commercial real estate, and that's why this deal worked out so well for us because we saw the opportunity to add more tenants. There was not just a two-tenant building, and we're proving that right now. We're already at a three-tenant building and could very easily be four, potentially even five. And there's another idea that I had too where I could rent out that not that whole back lot, but we could do storage for uh for cars at say a hundred bucks a month, and we had four or five people doing that. Say you had four hundred or you had four people at a hundred bucks a month at the end of the year. That's four thousand eight hundred dollars in extra income that you can bring in. I'm not gonna count any expenses towards that, so that's not gonna increase the expenses um at all. So that that's but uh that increases the value of the building by sixty-eight thousand five hundred and seventy-one dollars just by bringing in four hundred dollars a month. So when we're prepping to sell this thing, you better believe I'm gonna start jamming everything in there. And realistically, I don't know why I wouldn't do that now. Um kind of many reasons, but uh again, that's those little numbers turn into very, very big numbers very quickly. Now, again, we've talked about it, guys. If you've been following me now since the beginning, or not even since the beginning, if you've been following along at all, you know how painful it's been. It's been very, very, very slow. We actually we closed on this building September 18th. So that's one, two, three, that's nine months ago, and the building has been sustaining itself, but we haven't pulled any profits out at all. In fact, I shouldn't say that it's sustaining itself because that's not entirely true. We had to put in money for the roof, for the swamp coolers. Uh, we had some other things happen. We had some underground pipe leak. We had to fix some things, we had to evict some people. So uh it has been a long process, it's been a moderately painful process, and it's been a slow process overall. So, those are the downsides to it, and mostly what I've been talking about on this podcast is the downsides because that's what we've been living through, that's what we've been dealing with. Now, this is the first time where I can finally feel our heads poking above that water. The light is at the end of the tunnel, right? Like we just went over the values of these buildings, the cash flows that we're gonna currently get the second that we sign this lease, barring any other issues and non-payments and evictions. But I think we're gonna be good. I got a really good tenant lined up. I have a really good current tenant, two really good current tenants in here that pay on time and are good and take care of the place. So these numbers are very, very, very, very realistic. And if anything, I feel like there is gonna be room for improvement upon those numbers overall. Now, before I'm out of breath here, I gotta go. I got a pork shop sitting that I gotta get grilled up and I can eat before I pass out and die. I'm still uh it was a hundred and something degrees outside, and I was getting my ass kicked on that golf course for the last two, three hours. So uh your boy's exhausted. But this was a fun one to do for sure, seeing the numbers. I hope you guys really enjoyed me breaking that down. And if you guys like videos like this, I could do more uh number-based podcasts and and and things like that. Um, speaking of which, here gonna we're gonna get out of here shortly. But uh in the show notes, there's a send me a message button if you have any questions, concerns, suggestions, let me know. I will uh I get an email notice when people uh message me and news flash. I've had two people, uh one of my best friends, Danny, and then uh my brother message me. So uh, guys, do me a favor, just message me for shits and giggles. You can just say hi, whatever. You can talk shit to me. Uh tell me I'm disgusting, tell me I'm stupid, whatever it may be. Just send me a message. I want to get some more messages in here. Um follow me on Instagram, john.cleich. I post up more pictures and videos and stuff like that. I'm thinking about maybe even doing some YouTube series on the leaseup of Thunderbird. I think that's gonna be really cool because that's a big uh it's a big office building that's vacant, and I think we're gonna have a pretty cool strategy on how we lease it up. So, again, starting from scratch um overall, and then starting from scratch in that building on leasing it up, I think that would be really entertaining and interesting. If you guys liked this podcast, this episode, or the podcast as a whole, do me a favor, uh, leave a five-star review, write a cool note, say how awesome it was and how much fun you have here. And especially if uh you know somebody, uh friend, a coworker, an associate that would enjoy a podcast like this, send it to them and have them listen to it. That would be uh the most, how do you say, um I'm lost for words here. Uh, it would be uh flattering something. Is that what it would it be flattering? It would be awesome. I would love that if you could send it. That would mean a lot to me. You can also let them know that the podcast you're gonna send them is officially worldwide, meaning this podcast has been downloaded on every single continent except Antarctica, because that is not an option. And I don't know if that's a continent, is it? I don't know, maybe still, it's been a while since I've been in school. They changed things so many times. Who knows? However, we are officially worldwide, so you can send them this podcast and say, hey, this is a commercial real estate podcast where the guy started from squat and he's buying buildings, and he's worldwide. Join the party. You gotta do it, send it, boom, done. We're out of here. Boys and girls, thank you very much for listening. Really appreciate it. I gotta go. This was fun. And on that note, take her easy.