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How to Scale Commercial Real Estate


Apr 29, 2022

If you’re still unsure whether to go residential or commercial, listen in and this episode’s guest will help you decide!

Ash Patel talks about starting out and buying a property for all the wrong reasons until a pivotal moment made him cross over to CRE and never looked back. Since then, he has purchased multiple value-add properties in different asset classes and has continuously advocated for expanding your horizons when it comes to investing.

 

[00:01 - 10:10] Commercial Real Estate is the Game

  • Ash tells us about his first property buy and the moment that changed his mind
  • Here’s the difference between residential and commercial tenants
  • Finding partnerships and “making deals with friends”
  • How to drive a high cash-on-cash return?
  • This is what he does to find the best deals
    •  Listen to his best tip

 

[10:11 - 12:24] Managing his CRE Business

  • From going on-site to working remotely
    • Ash shares the secret of how he makes it work
  • The importance of building relationships with contractors and lenders



[12:25 - 16:06] On Financing and Equity

  • The benefits of using a local lender
  • Raising capital can be a way to teach
    • How Ash educates his investors about tax



[16:07 - 19:13] Closing Segment

  • Here’s what Ash is curious about right now
  • Ash recommends these books
  • Reach out to Ash! 
    • Links Below
  • Final Words



Tweetable Quotes

“Residential tenants add wear and tear to the properties. Commercial tenants actually improve it on their own dime.” - Ash Patel

“Spend more time looking for deals than anybody else…  Look for mismanaged or mismarketed deals.” - Ash Patel

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Connect with Ash! Find him on Facebook, LinkedIn, and Bigger Pockets, and email him at ashbpatel@gmail.com.

 

Resources Mentioned:

 

Connect with me:

 

I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.  

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Like, subscribe, and leave us a review on Apple Podcasts, Spotify, Google Podcasts, or whatever platform you listen on.  Thank you for tuning in!

 

Email me → sam@brickeninvestmentgroup.com



Want to read the full show notes of the episode? Check it out below:

 

Ash Patel  00:00

Really,  just having income coming in with negative K-1s  to match that. It's a game-changer, right? There's so few people that understand that this is out there, especially business owners, high-net-worth doctors, lawyers, they're too busy in their own world, being successful at what they do to have the time to look for alternative investments. Nonetheless, some of these people that I've mentored over the years have gone on to do their own deals. And when they do their own deals, they asked me to come in. I never force myself into the deal, but they want the 10 plus years of expertise on their side, helping them manage. 

 

Intro  00:39

Welcome to the How to Scale Commercial Real Estate Show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big.

 

Sam Wilson  00:51

Ash Patel is a full-time CRE investor for 10 years buying value add properties. He's purchased everything from medical to industrial warehouse, retail, land, office, mixed-use. I'm not sure what you haven't invested in Ash, welcome to the show.

 

Ash Patel  01:05

Hey, Sam, thanks for having me, man. I'm excited to be here.

 

Sam Wilson  01:08

The pleasure is mine. Same three questions I ask every guest who comes on the show: in 90 seconds or less.: can you tell me where did you start? Where are you now? And how did you get there?

 

Ash Patel  01:15

Yeah, I left a 15-year corporate IT career back in 2009. I heard real estate was a great way to offset taxes, decided to take the plunge. My first property was a mixed-use building bought for all the wrong reasons. I bought it because there was a grocery store on the first floor, a college kids’ apartments above the retail section. And I thought to myself, man, instead of just having real estate, I can take over managing the store as well and have multiple streams of income. Really bad mindset, in hindsight, but that property showed me the difference between residential tenants and commercial tenants. And I was able to see that residential tenants add wear and tear to the properties. Commercial tenants actually improve it on their own dime. And that changed the trajectory of my life. I dropped everything that I was doing and became a full-time commercial real estate investor.

 

Sam Wilson  02:08

That is impressive. Now you say you bought it for all the wrong reasons. Can you explain more of that to us?

 

Ash Patel  02:16

Yeah, you know, I heard depreciation was the key to getting your taxable liabilities reduced. I didn't even know how that was calculated. And again, Sam, I went in there thinking I would run the store or put somebody in place to manage that store. My mindset was be a store owner, like not a real estate investor. And again, the story, the pivotal moment that I had was I was unclogging, the tenants toilet, and I look out the window. And on the roof, there's an HVAC company replacing all of the rooftop units to the store. And I go downstairs and I'm like, hey, help me, what's going on? Tell me. And they're like, yeah, our AC is not working, so o we're replacing the entire system. And I was blown away that they didn't even have to get approval. They just spent the money and did it, on my way out. They're like, hey, by the way, do you mind if we remodel our bathroom? And I'm like, have at it. So that was an epiphany. So then I realized commercial real estate is the game not being a store owner, or even a residential landlord?

 

Sam Wilson  03:20

Yeah, absolutely. And when you say residential landlord, you include multifamily in that?

 

Ash Patel  03:25

That's correct. So I have a decent-sized portfolio of commercial properties. And I'm able to manage all of them myself, without property managers, without leasing people, without maintenance people. It's much easier to manage a $10 million retail strip mall than it is a $10 million or a $3 million multifamily portfolio.

 

Sam Wilson  03:49

Right. Yes, I would absolutely agree with that. So you're the only you're the sole member of your team.

 

Ash Patel  03:56

You know, for 10 years, I was. And I just hired an operations person. And I am starting to partner up with other people in the space to help me find deals, help me manage deals, do joint ventures. It's just a lot more fun instead of me being cooped up in my office by myself.

 

Sam Wilson  04:15

Fun is not generally the reason that people scale. But I'm glad for you it is.

 

Ash Patel  04:20

You know, it truly is I am an extreme extrovert, and I need to be around people. So you know, if I could bring more people into my world, to share deals with others. I've done a number of deals with friends of mine. And it's been great. It's a lot of fun. 

 

Sam Wilson  04:36

How do you structure when you say that word deals with friends of mine? What does a deal look like that makes sense that fits inside of your kind of buy box.

 

Ash Patel  04:45

A deal that makes sense is different than a partnership that makes sense. But I'll get into both of them in terms of the partnerships, Sam, you know, I've mentored a lot of people over the years, especially residential guys, the fix and flip guys and girls. I've tried to convince them to go into commercial. I've been a huge advocate for people to open their horizons a little bit and look at different types of asset classes. And no better time than now, because cap rates and multifamily are so compressed. Nonetheless, some of these people that I've mentored over the years have gone on to do their own deals. And when they do their own deals, they asked me to come in. I never force myself into the deal, but they want the 10 plus years of expertise on their side, helping them manage. So we just do a straight 50-50 joint venture.I put in half the money, they put in half the money. And I teach them how to manage whatever asset we have. Now, in terms of what types of deals that make sense. My minimum cash on cash upon closing is 20%. And much higher upon exit. But there has to be a massive upside, a lot of value add, in addition to that 20% cash on cash. At times we'll go a little bit lower, 17-18% is probably the highest we've ever gone. And that's not IRR, that straight day of closing 17% cash on cash.

 

Sam Wilson  06:05

That's a pretty astounding cash-on-cash return compared to a lot of what we're seeing across. I mean, every asset class, what are you doing to drive that high of a cash-on-cash return?

 

Ash Patel  06:18

Spend more time looking for deals than anybody else. And then we look for mismanaged or mismarketed deals. Great example is our last acquisition. It was a strip mall listed by two commercial brokers, one of them being a second-generation commercial broker, they decided to list this property on their own website, and nowhere else not on LoopNet, not on Crexi. And it was a $5 million strip mall. And the broker literally, you know, I knew of the guy, we had talked, we had mutual friends never did a deal together. But he took my call because he recognized my number. And he's like, gosh, we've had so many people call in wanting to make offers on this property. We just haven't had time to return their calls. Mindblown, right? Like mismarketed, mismanaged all in one. So because I knew the guy and we put the offer in, we got the deal done.

 

Sam Wilson  07:13

That's wild to find that there are I mean, especially second-generation commercial real estate brokers making those sorts of elementary mistakes.

 

Ash Patel  07:22

Well, Sam, one of my best pieces of advice and great tip for your listeners is if you're looking into commercial, often look at residential realtors posting commercial deals. It's amazing when, you know, this story, I've gotten some of my best deals from that, where somebody's moving out of town, out of state, hey, can you sell my house? And by the way, I've got this commercial building, can you sell that too? Oh, sure, no problem. And often residential realtors aren't trained and don't have the experience to properly price the assets, right? So you get steals on them. But you have to have first-mover advantage. Because as soon as that hits the market, the first person that sees that Mispriced deal is going to jump on it. So that's where those hours and hours of just looking through deals comes in.

 

Sam Wilson  08:09

What are you doing? I mean, I love the tip. But practically, there's got to be a practical way to isolate those types of opportunities. Otherwise, you're just looking through an enormous amount of data out there going, well, and each deal, you'd have to then search, search, and find out is this also a residential broker? I mean, that kind of sounds inefficient and almost beyond needle in a haystack.

 

Ash Patel  08:30

Yeah, unfortunately, it's very inefficient. And I agree with you, there's got to be a better way. But I've literally talked to people that have been in commercial real estate for 25 years. And every day, they spent hours and hours searching for deals, maybe not on residential real estate sites, but, you know, hours interacting with brokers and even at their level, they don't need to work, they have all their systems in place to find those deals you got to put the time in. What I do is when I find a residential website that has commercial listings above market, right, and then I open up 200 bookmarks at a time and literally just spend hours searching for deals. And I've done it long enough now to where I can just flip pages pretty quickly. Spend a few seconds per picture and move on. 

 

Sam Wilson  09:18

Right? Yeah, you get an idea pretty quick. You know, something that just came to mind, as you're talking about this is just spitballing here, if you will, is that, you know, I hold my license here in Tennessee. And because of that, I have access to all of our local MLS and all the agents on that list. And I could send an email to all of them and say, Hey, do you have any commercial real estate listing? So if you're listening and you have access to that, that's probably a great way to start because you might get turned up some leads just from your own network of residential brokers saying oh yeah, I've got this building over here that they may be listing you didn't know anything about.

 

Ash Patel  09:50

Right and so I don't look at the individual realtors as much as I look at the MLS for a region. So here in Cincinnati, we've got a company called Sibcy Cline that covers multiple states, so I can look for all commercial deals and their realtors are predominantly residential. So it's easy to parse through those. 

 

Sam Wilson  10:11

How have you figured out the management side of this? Like, what have you done to streamline this or make it to where, for a decade, you can run, you know, I don't know how many assets under management you have but more than the average investor I'll say,  have you figured how to do that on your own?

 

Ash Patel  10:24

It was really COVID. And it was teaching others how to do the same. So, you know, when I partnered with people that were out of state, I had to teach them how to manage their assets. And I had to do that remotely. And you know, my local assets, I love going on-site, and interacting with my commercial tenants, because they're business owners, right? If I can add value to them, it's such a fun conversation. And again, there's a crazy extreme extrovert in me that just wants to hang out with people. So during COVID, we actually moved to a summer home that was an hour away. And I forced myself not to go on-site, because we're living at a lake. I mean, why am I going to drive back to Cincinnati, so I basically put systems in place to remotely manage all of my properties for an entire year, never showed up on site. And the biggest secret to that is have a tenant, probably no different than multifamily. That's your eyes and ears, on the ground, your boots on the ground, so to speak, and just have a great network of contractors. You know, a mistake that I see a lot of residential people making is they treat their contractors as commodities. I've had the same electrician, plumber, a roofer HVAC guy for over 10 years. Wow. And you know, when now when you can't find somebody to do a plumbing job, I have no problem calling these guys and they're there. So build that loyalty and build those relationships, and treat them as partners. And that goes for lenders as well.

 

Sam Wilson  11:54

Yeah. And that's true. I mean, I think people overlook that your service providers, not just your HVAC guys, but your lenders, your insurance people, like those are relationships as much as they are transactions each time. So it's keeping them close to the vest, if you can,

 

Ash Patel  12:09

Yeah, it seems so important with commercial properties. Because our loans don't get sold to Fannie and Freddie, they don't get sold on a secondary market. Typically, whichever lender does your loan, keeps it on their books. So over time, they're betting on you more, so they are on the property,

 

Sam Wilson  12:25

Right. Tell me about that. Talk to us about the financing side of your business,

 

Ash Patel  12:29

It's always been a local lender. I've tried big banks, matter of fact, I've had big banks reach out to me and say, hey, you know, we'd love to refinance your entire portfolio. And I'm thinking, wow, I'd probably get a much better interest rate, and they'll nitpick my portfolio, and anything that's not fully leased, and stabilized for three plus years, they don't want. So I'm not going to take away the good properties from my lender, just to get a point lower on interest, right? So that loyalty, I've always been with the same local lender, I've reached their legal lending limit, they're not allowed to lend me any more money, unless they get partners involved. So now we've got additional lenders in the mix, that we've gotten down to 15% down payments. I thought I was winning at 20%, but we found a bank that's willing to do 15%.

 

Sam Wilson  13:19

That's fantastic. And then what about the equity side of things? Are you raising capital from other investors? Are you all self-funded?

 

Ash Patel  13:27

Yeah, until this year, I never raised capital, it was just all my own money. But again, I have a lot of friends that have wanted to invest with me over the years, never needed their money and never really wanted it. But you know, it's a way to reward people that have led me into their deals. And it's a way to teach. So my high-net-worth friends to stop buying cars and houses and buy assets that produce, right? And then you know, I do want to scale at some point, I'm continuing to scale and at some point, I know I'm gonna run out of money. So good time to start raising money. Plus, our returns are way better than your typical eight in was 815-817. Right, eight pref, 17 IRR. Yeah. So again, the returns right now in commercial just much higher.

 

Sam Wilson  14:16

Yeah, absolutely. Not only higher, but as you've already, you know, alluded to it, you know, much more scalable, and I think it's really cool that up until now, you haven't had to bring in outside capital. But this is the next iteration of business. And for a lot of us, we run out of capital maybe earlier than you did, which kind of forced us into that, Hey, I gotta go out. And initially when I got into real estate, I was kind of ashamed of the fact, this is 10 years ago, and I didn't know what I was doing, but ashamed of the fact that I couldn't sell fund all my deals like, man, that's bad. Like I don't have enough money to get this done. I didn't understand how this actually works when you go out and raise capital, talk to us about the taxes side of things. This is a conversation I was having with someone last night when they're like man and their high-net-worth individual like I just don't understand the tax benefits. We're talking over dinner of commercial real estate. How are you educating your investors on on the tax side of things?

 

Ash Patel  15:01

it's amazing how few people have heard about their real estate professional tax status, if you can take advantage of that great. But really just having income coming in with negative K-1s  to match that. It's a game-changer, right? There's so few people that understand that this is out there, especially business owners, high-net-worth doctors, lawyers, they're too busy in their own world, being successful at what they do to have the time to look for alternative investments. And a lot of times you ask them, you know, who manages your money? I got a guy, I gotta guy. How's your guy doing? Yeah, I think he's doing pretty well, like no clue. They have no clue, right? And it's unfortunate that they're so well educated. But when it comes to managing their finances, they're behind the eight ball.

 

Sam Wilson  15:51

Yep, absolutely. Yeah. And that's something obviously, with things such as bonus depreciation, all of that stuff. You know, beginning it's phased out after this year, though, I think it's always an intriguing conversation and time to really educate your investors and let them know what the possibilities are out there. I was telling you this, what's one thing that you are currently curious about?

 

Ash Patel  16:11

The future of our financial markets, obviously. You know, that's a good question. That's a tough question. Just curious to see how things pan out. There's a lot going on in the world right now and be very interesting on what opportunities are presented in the future.

 

Sam Wilson  16:25

That's a great way to put that, what opportunity, there's always opportunity in volatility and figuring out what opportunity is always interesting line to walk. What are you doing right now inside of your portfolio to protect yourself against downside risk?

 

Ash Patel  16:38

You know, so I always boast about the benefits of commercial real estate versus residential. One of the places where you guys have us beat is you can raise rents every year because you do single-year leases, right? With us. A lot of our leases are five years, 10 years long, with renewals built-in at preset amounts. So our, any new lease that I do, I do a three to 6% year over year rent increase. And any renewals are going to be at market rates. It's not the steady 5% renewal after five years, let's look at the market rates and see where things are at.

 

Sam Wilson  17:15

What is market rate? How do you define that?

 

Ash Patel  17:17

You could do, one way to do it is you get one appraisal. If the other party doesn't agree with the appraisal, they get their own. If you still can't agree, you get a third party and average all three.

 

Sam Wilson  17:29

No appraisal is one thing but I was thinking on lease renewals. How does appraisal tie into what's the correlation when appraisal and lease renewal?

 

Ash Patel  17:36

You can get an appraisal on the lease price per square foot. So you know if you have a strip mall or an office building, the appraisal will tell you what that should rent out for.

 

Sam Wilson  17:46

Right. Okay, got it. Okay, very, very cool. I love that. What's the book you're currently reading?

 

Ash Patel  17:50

I just finished The E-Myth Revisited. The book that I really want to recommend, there's two: Rocket Fuel and Who Not How. And Rocket Fuel, I think, is important for a lot of us people in real estate. Because a lot of us are a bit scatterbrained. We don't always focus we don't always follow through. And a lot of us thought that that was a detriment. And Rocket Fuel teaches us that you are a visionary. And that's why you have to pair yourself with an integrator that can stay focused for your job, continue doing what you're doing.

 

Sam Wilson  18:23

Absolutely love it. Ash, if our listeners want to get in touch with you or learn more about you, what is the best way to do that?

 

Ash Patel  18:28

You could find me on Facebook, LinkedIn, my email address is ash, A-S-H, b as is in boy, patel, P-A-T-E-L@gmail.com. I'm on Bigger Pockets as well. Pretty easy to find Ash Patel, Cincinnati.

 

Sam Wilson  18:42

Awesome. Awesome. Thank you for your time today. I certainly appreciate it.

 

Ash Patel  18:44

And this was a lot of fun. Thanks, Sam. Great conversation.

 

Sam Wilson  18:47

Cool man. Hey, thanks for listening to the How to Scale Commercial Real Estate Podcast. If you can do me a favor and subscribe and leave us a review on Apple Podcasts, Spotify, Google Podcasts, whatever platform it is you use to listen, if you can do that for us, that would be a fantastic help to the show. It helps us both attract new listeners as well as rank higher on those directories so appreciate you listening. Thanks so much and hope to catch you on the next episode.