Interview with Paul Moore – Commercial Real Estate Investing | 402

 

Chris Miles (00:00):
Hello my fellow Ripplers! This is Chris Miles. Your Cash Flow Expert and Anti-Financial Advisor. Welcome you out for a wonderful show. Show that’s for you and about you. Those of you that work so hard for your money, and you’re ready for your money to start working harder for you. Now! You want that freedom. That cash flow. That prosperity. Today! Not 30 or 40 bazillion years from now, but right now, so you can have that life that you love doing what you love be with those that you love. But on top of that, it’s not just the fact that you want to be prosperous yourself and that you want to live a comfortable, amazing life. But on top of that, you actually want to become a Rippler. In the sense that you want to create a ripple effect through other’s lives. Because as your blessed financially, you can bless the lives of those around you as well.

Chris Miles (00:46):
And that’s the thing I love. That you guys are creating a legacy that you’re creating real impact by blessing more lives. And I appreciate you guys following you’re bingeing. You’re doing everything. That’s awesome. I appreciate you guys sharing this with everybody else. I love watching the show grow and you guys are a big part of that. So thank you so much! As a reminder, check out our website MoneyRipples.com. There’s again, that ebook Beyond Rice & Beans. Seven Secrets. If you have cash today, you can check out and download for free. So go look at that.

Chris Miles (01:13):
So today I’ve got a special guest here and again, you guys know I don’t bring on guests lightly, right? I want to make sure that I bring on real deals, not just posers, but people that actually are walking the walk and talking the talk. And right now I know a lot of questions are coming out from both my clients and just others in general, or people saying, well, real estate is horrible right now, right? Like we should probably just be putting more money in the stock market. Cause it’s “Low”. You know, even though it’s way lower is, is the potential for what the market has to go. But people will say, Oh, don’t, don’t do real estate. That’s gotta be horrible right now. Well, I’ve got a guest here, Paul Moore, who’s been in the industry for a long time. Now Paul took a different path in the beginning. Kind of like a lot of us did, right? He graduated with an engineering degree and an MBA from Ohio State. And then he started on the management track at Ford Motor Company in Detroit. After five years, he decided to leave that job. And he started doing a staffing company, which he was able to sell for two point $9 million to a publicly traded company. Along the way, he was the finalist for the Ernst and Young’s Michigan entrepreneur of the year. For two years straight.

Chris Miles (02:18):
He also later into the real estate sector where he completed 85 real estate investments and exits. Appeared on an HGTV special. So some of you guys may have already seen him. Rehab to manage dozens of rental properties. Developed a waterfront division. And started two successful online real estate marketing firms with three successful developments, including assistant and development of a Hyatt hotel and multifamily housing project. This led him into the multifamily arena, right? Which is what we’re kind of talking about today. He also, co-hosts the wealth building podcasts that you guys might have checked out called, How To Lose Money. He’s also a contributor to Fox Business and Bigger Pockets, producing live video and blog content on a weekly basis. And he’s also the author of the Perfect Investment: Create Enduring Wealth from the Historic Shift to Multifamily Housing. And has a forthcoming book that we’re talking about today on self storage investing. So we’ll hear more about that. And also if that wasn’t enough, he’s also the managing director of two commercial real estate funds at Wellings Capital. So, dang Paul! Take a break!

Paul Moore (03:15):
I know, man. Hey, why, why I was…

Chris Miles (03:17):
I was hyperventilating trying to get this bio, you know,

Paul Moore (03:19):
I know I gotta shorten that donut, Chris. I’ve already got an edited version, but why would somebody who has a money show have somebody on who has a podcast that’s called, How To Lose Money? I’m just curious.

Chris Miles (03:33):
Probably cause the same reason I lost over a million bucks in the last recession, they taught me great lessons. So yeah, we’re probably in good company.

Paul Moore (03:39):
Yeah. Probably, Chris. You got to come on our show. That’s great. Yeah, man. It’s great to be here. Thanks for having me on.

Chris Miles (03:45):
Absolutely. Well, Paul, I mean, outside of what I just shared on the bio there, like tell us a little bit more about you.

Paul Moore (03:53):
Yeah. You know, I think that covers it pretty well. I’ll tell you this. I, when I sold my company at 33 years old in Detroit, I thought, I’m an investor now! But I actually became a speculator. You know, I became a certified, shiny object chaser because I really didn’t know anything about investing. I didn’t know anything about creating true wealth. The way I see things, Chris is, true wealth is owning assets that produce income. And speculating is the way to get there occasionally, but not on a consistent basis. You know, I think investing is when your principal is generally safe and it might produce and it should produce income and might grow in value. Speculating is when your principal is not at all safe and it has a chance to make a return. And I found myself speculating and making money occasionally, but losing a lot of money along the way. And so I finally, I did that even when I got into real estate 20 years ago. And finally had a wake up call after around 2011 or so. Got into commercial real estate. And have found that, that is a great path. I mean, most of the Forbes 400 wealthiest people in the world investing in commercial real estate. And now I found out why.

Chris Miles (05:17):
Yeah. You know, what you just said is a huge point. This show is all about creating more cash flow, passive income. But doing it in a way that’s predictable, right? Like predictability is way better than speculating. And people will say, well, Chris, why don’t people talk more about, you know, doing predictable cash flow versus all the speculation. I said, it’s easy. Speculation is sexy. Right? Think about it. Like you never see people. I remember this 15 years ago with a lot of the info marketing type of groups and education programs that were more popular until the recession. Right? But I would say things like, yeah, I made $50,000 on this flip or whatever. Right? I say, that’s a lot sexier sounding than saying, Hey, I’m earning $300 a month on this door here. You know. It just doesn’t sound as good, you know, as enticing for a sales job. And so yeah, I agree with you. Like it, predictability and wealth creation has gotta be hand-in-hand.

Paul Moore (06:09):
That’s true. You know, babe Ruth is still famous over a hundred years later because he’s swung for the fences, but he was also the Strike-out King. And you know, real estate developers and other people who do startups, you know, there’s some of the wealthiest people in the world when you hear about them and they’re legendary, but for all those, you know, hundred to one or a thousand to one you don’t hear about, they’re probably delivering pizzas.

Chris Miles (06:34):
That’s right. That’s so true. So what have you learned like as you got in this commercial space? Cause I know a lot of people are scared to death to be in the commercial space. And so I would love to hear what you’re seeing and what makes you so excited for the next three years, for example.

Paul Moore (06:50):
Absolutely. So I’ll get into a little bit about how I think the best way to buy commercial real estate is in a minute, but I want to talk about why the Forbes 400 invest in this I think. So residential real estate, we all kind of know how it’s valued. If your chip and Joanna Gaines junior, and you can rehab a house, take a $300,000 house and put in gold plated fixtures, I’m kind of kidding, you know, finished the attic, finished the basement, put on addition. And you know, you dump 500,000 and you’ve got 800,000 in this house. But if it’s in a $350,000 neighborhood, you’re probably not going to get your money out of that because residential real estate is based on comparables or comps. Commercial real estate is entirely different. It’s based on something that we love from school called math. Now the math works very simple. The value is the net operating income, divided by the rate of return, also known as the cap rate. And so if you can drive up the net operating income, you can sometimes, sometimes shrink the cap rate. But if you can drive up the NOI, you can actually increase the value of the asset by that same proportion. And if you’re using safe leverage, sometimes you can double or triple the value of your equity if you do it right. So the question is, how do we, you know, well, let’s, first of all, go through an example. Here’s a real simple example. Let’s say you bought a self storage facility for $2 million and let’s say you put a million dollars debt on it and you put a million dollars cash from your and your friends equity in other words. Now, if you go in on day one and you sign a contract with U-haul and actually start renting trucks at that facility, that will add three to $5,000 often a month to your income with no capital expense out of pocket. Now, if you add, let’s say they average $4,000 a month to your income, that’s $48,000 per year, right? Now, remember our value formula. Value is the income, divided by the cap rate. Divide that by a rate of return or a cap rate of 6%, you just added $800,000 to the value of that facility. And that’s, you know, you just added 80% to the value of your equity of a million dollars up to 1.8 cause the bankers don’t share in this. And so, that’s one of dozens of ways to add value. Now the question is how to do it in a predictable way. And you talked about predictability earlier and it’s really simple. Buy from mom and pop sellers. Or if it’s in multifamily, buy it from distress sellers. And we’re going to see some of those in the coming three years.

Chris Miles (09:45):
Absolutely!

Paul Moore (09:46):
If you buy from a mom and pop. They don’t have the resources, knowledge, or the desire to maximize income and grow the value. And therefore you can bolt on these value ads. Like the one I just described and dramatically increase income and value.

Chris Miles (10:02):
That’s right. And why do you see that there’s going to be such a big opportunity in the commercial space right now? Like why do you see that as being the place to be for you?

Paul Moore (10:09):
Yeah, so I think residential will as well. It’s just harder to scale. I mean, I just got off the phone with somebody trying to raise a hundred million dollar distressed debt fund. You know, it’s going to be pretty hard to do that in single family. Although there are ways to do it. Commercial real estate again, because of this predictable math formula. And because there are still mom and pops sellers in certain asset classes like self storage, mobile home parks, they have a large percentage of the assets owned by mom and pop operators. And you can go in and significantly increase the value of those. And that’s what I love about commercial.

Chris Miles (10:53):
And that was kind of thing I was leading down the road to is, the last few years, what have you seen with people buying these kinds of real estate deals? And it seems like everybody, they come, can come out of almost nowhere and they just go in and they say, Hey, I’m going to raise money from a bunch of strangers and or my friends and family and just go do a commercial deal because everybody makes money in real estate. Right? It’s almost like the last recession in some ways, but what, you know, what do you, where do you see that opportunity? Like what kind of people are the best people to buy them from? You know, you mentioned mom and pops. But what would you, what would be the signs that you see from those kind of buyers?

Paul Moore (11:26):
Yeah. Well, the first thing I would say back to what you said a moment ago, and that is Warren Buffett said, everything looks great now. Everybody is a genius when the market’s rising. But someday the tide’s going to go out and then we’ll see who is swimming without a bathing suit. And I think that’s about what we’re about to see. Unfortunately, multifamily just like single family, real estate got completely overheated and people were paying stupid money. I mean, know of, you know, deals should have gone for 5 million that went for 7 million. They’re already, some of those sellers are already starting to panic right now. But one great way to buy those would be, you know, going to a regional or even a community bank to see what debt they have. Let’s say somebody paid 4 million for a property. They got a $3 million loan. Well, let’s say that property, let’s say two years from now. Has dropped in value because let’s just say because the net operating income dropped and the cap rate expanded. Meaning that the property dropped in value from 4 million down to just below 3 million and it’s time to refinance. And the property is not performing. Well, you might be able to go get, buy that debt from the bank for that $3 million loan for say 1.3 million, then go to them, the seller and say, look, I’m going to give you six months to refinance. If you can refinance, you can, you know, I’ll let you out of this $3 million loan for 2.2 million. If you can’t refinance, I’ll have to foreclose. And then you’ve got the asset for whatever I said, 1.3 or 1.5 million, and then you can take it over, operate it well, and ride it back up through the next cycle. And maybe it’ll be worth four or 5 million again. So it’s a great way to go. That’s one seller. I would definitely look to mom and pops or another. There are 44,000 mobile home parks in the U.S. And it’s believed that almost 40,000 are owned by mom and pop small sellers. Only 4,000 by professionally run companies. So there’s a lot of runway ahead there in that area.

Chris Miles (13:36):
Sure. Now, I mean, obviously with the time it is right now where this is early summer of 2020, right? What, from what you seeing here, I mean, are there opportunities right now? Are you feeling like, no I’m going to wait a little bit and hold on my capital before I just jump in and start making these deals?

Paul Moore (13:52):
I have been talking about this on Bigger Pockets. And if you look at the last recession, it took, can you imagine this? Three to three and a half years to hit bottom.

Chris Miles (14:04):
Yeah.

Paul Moore (14:05):
And so Howard Marks talks about the wisdom of catching a falling knife. A lot of other people say, ah, maybe it’s better to wait until the knife hits the floor. And so it depends if you want to catch it on the way down or when it hits the floor, either one has some risks because you can’t really tell where the floor is, except in the rear view mirror.

Chris Miles (14:25):
That’s right. It’s always hindsight 2020, isn’t it?

Paul Moore (14:27):
Right.

Chris Miles (14:28):
Yeah. That’s interesting. That’s really interesting. Cause I know some people are like, okay, they’re coming, right? Like how long should I wait? It’s people say the same thing to the stock market, like I should jump in right now. It’s you think the market hits bottom in a recession or even a depression depending what we go into. Right. Do you think it actually hits bottom in one month? No. It’s never happened and it never will. It’s not something that just happens overnight.

Paul Moore (14:51):
Right. Yup. I agree. Yeah. It’s one of the great things about real estate is we’ve got time. You, even if you’re a newbie right now, you’ve got time to assemble a team, assemble your tribe, get to know bankers. You’ve got time to do this. A lot of time.

Chris Miles (15:08):
Now, what if somebody doesn’t really want to be the active investor here? Like I know some people are active investors that listen to the show, but there’s a lot of people say, Hey, between the job I work, if I’m working from home or, or whatever it might be, how do I really, you know, do something like this where I probably want to be more of a passive investor, but I want to be involved. I have money as want to know what to do with it. What would you recommend?

Paul Moore (15:29):
Yeah. So my new book on self storage, the last one third of it is dedicated to seven different paths to get into commercial real estate investing. And one of my favorite paths is being a passive investor, you can either be a passive, passive or professional passive investor. We have both best with my company. A passive passive still should probably buy Brian Burke’s new book called, The Hands Off Investor. It teaches you to vet a syndicator and goes through a lot of checklists and things like that. We have checklists that we use when we vet syndicators. So as a passive passive, you should probably do that. If you’re a professional passive, you should probably plan to do all that and jump on a plane, go meet the, you know, the syndicator in person at least do a couple zoom calls. See how they talk about their investors, their family, their staff. See how they treat the flight attendant or the waiter. You know, try to really get a gut feel and then go through your checklist and really make sure you know them. And like Brian Burke says in his new book, the most important thing is their morality and their integrity. Better to have a mediocre deal with a great operator than a mediocre operator and a great deal because a mediocre operator can mess up a great deal and a great operator can pull a mediocre deal into a great one.

Chris Miles (16:53):
That’s so true. I’ve seen a lot over the last, almost 20 years now. You see that, you see a lot there out there today. I think that’s a great idea to just to really get to know the syndicator. Cause one thing I tell people is that you can’t teach. I mean, you can teach competence, you can train people to be more competent and to be a better operator, but you can’t train character. Right? You can’t train someone to be a better person. Someone, you can’t train somebody to be have integrity. That’s just something either you do or you don’t do. Right?

Paul Moore (17:23):
That’s right. That’s absolutely true. And so who they are when they’re small and when they’re alone is who they are. And so try to catch him at times like that.

Chris Miles (17:32):
Yeah. Well, great. Well, tell us more about your book on self storage. Cause I know that’s something that’s been come a topic that people have started asking me more about lately too. Right. And I’ve had a few people on here about self storage already, but tell us about your book and how people going to get it.

Paul Moore (17:47):
Absolutely. So we happily surprised the last six weeks to see that self storage operators are reporting, increased traffic. A lot of it’s online, but a lot of people are renting online and self storage occupancies actually up, especially near college towns and your bigger cities. It’s not so doing so well in the mom and pop rural areas where you have to walk in to, to rent the unit. But, yeah, the new book’s called, Storing Up Profits. Capitalize on America’s obsession with stuff by investing in self storage. And it’s going to be published by Bigger Pockets Publishing sometime this summer. And so yeah, one of the things I love about self storage is, you know, generally speaking, not always. Generally, it does well in good times and bad. In good times people are filling up their carts with stuff and they need a place to store stuff. In bad times you know, there’s the 4D’s. I hope I can remember them all. Death, Dislocation, Downsizing, and Divorce. And people, when those things happen, sometimes they need a place to store their stuff. And for a relatively small amount of their total paycheck, they can store their stuff in self storage. You know, if I raise your rent on an apartment or a single family house by 6%, you might walk rather than pay an extra $60 or $80 a month. But if I raise yourself storage unit at a hundred dollars by 6%, you’re probably not going to spend a Saturday and move all your stuff down the street to save six bucks a month, especially since you’re on a month to month lease. And if you’re thinking like most people, you’re probably thinking I’m going to get that stuff out of there next month.

Chris Miles (19:32):
That’s right! Everyone always thinks that somehow they’re going to simplify and declutter and get their stuff out of reality is that takes many, many, many years if ever, you know, it might be death. Right. Which is one of those D’s.

Paul Moore (19:45):
That’s right!

Chris Miles (19:45):
So great. Yeah. We’ll make sure that we get a link to build a post on our podcast here on our episodes. People can go ahead and get that book. Cause that’s, that’s great. That sounds really intriguing. So well, Paul, I really appreciate your time today. Any final words for our guests or listeners here?

Paul Moore (20:01):
Yeah. I would just say that, you know, again, like you said, it’s the legends that sent, you know, that speculate. And they’re few and far between. And if you want to make consistent cash flow, whether it’s in real estate or something else, go for the safe fundamentals. Warren Buffett was asked by Mark Zuckerberg, Mark Zuckerberg said, Warren your strategy’s not that complicated. Why doesn’t everybody just replicate it? And Buffett said something like, well, no, no, no, no. Why, nobody wants to get rich that slow. Well, Buffett’s done pretty well for himself and I think it would be good to follow in his footsteps.

Chris Miles (20:43):
I agree. That’s a wise wise counsel. And so Paul, thank so much for your time today. I really appreciate it.

Paul Moore (20:49):
Absolutely, Chris. Great to be here.

Chris Miles (20:51):
Everybody else, make sure you go check out, check out his book. You know, we’ll have that link in the show notes for you guys, but you know, again, you know, the time, it’s good to be patient, but it’s also good to be proactive. Do what you can now to build your wealth in your mind first. So you can build your wealth in your pocket second. So everybody, I hope you make a wonderful and prosperous week and we’ll see you later.