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The Restaurant Realty in 10
The Restaurant Realty in 10
| Lessons From My First Commercial Real Estate Investment
On today's episode of The Restaurant Realty in 10 host, Michael Carro, dives into details about his first commercial real estate investment.
He shares the mistake that led to him needing to find his first commercial investment in a hurry, and the lessons he learned in developing this property to producing over a 300% return on investment (ROI).
For more information on The Restaurant Realty in 10 or to get the show notes from today's show head over to TheRestaurantRealty.com
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Welcome to The Restaurant Realty in 10. Ten minutes of uncensored straight talk for restaurant entrepreneurs twice weekly The Restaurant Realty in 10 dives into restaurant operations, facilities, real estate and investments.
Michael Carro :Welc ome to The Restaurant Realty in 10. And you know, they say you never forget your first and I'm going to tell you what, I still have fond memories of my first commercial investment. And that's what I want to share with you today.
Michael Carro :So it was back in 2003. I was renting a warehouse from a guy. I also learned a valuable lesson. It came up for renewal. He called me up and said, "Hey, listen, I understand you're going to be out in 30 days." I said, "No, I'd like to renew." He said "No, you missed that that was yesterday." And I'm like, "Uh Oh!", and he had already leased it up to a much better prospect. So I was off looking for my first commercial property and I was looking for about a 6000 square foot warehouse.
Michael Carro :So anyways, I stumbled across a 6000 square foot warehouse that I was able to purchase for $100,000. It was in an odd area, it was behind a building. It was subdivided off, it had no street frontage. But for me, it was exactly what I needed. I certainly didn't need something that was Main and Main or with visibility. And at the time, I knew very little about real estate. And so I crunched the numbers basically $100,000, 20% down. So I had to have $20,000 down the interest rates at that time were about six and a half percent. So my mortgage was going to be about $596.
Michael Carro :So I had a tenant already in place for half the building for $975 per month. So I figured I'm in good shape. So I moved on that bought the warehouse, put the other tenant in half the warehouse and then I use the other 3,000 square feet for myself. And I did this for about a year, year and a half and realize I now needed more space, but because it was a performing asset. I didn't want to get rid of the building.
Michael Carro :So I started looking for another location. But then I realized the property I had had enough land to build another 6000 square foot warehouse and a 3300 square foot warehouse. So I went back to my lender. Now if you think about it $100,000 for a 6000 square foot warehouse is about $16 and change per square foot, the going rate for warehouses at this point in time were about $40 a square foot. Now, the reason why I got such a good deal in the warehouse was a piece of crap. It served my needs, you know, perfectly, but I wasn't delusional, that it was this great property. It just met the needs that I had.
Michael Carro :So I went ahead and began designing these 6000 and 3300 square foot additional warehouses and I simply use one of those metal building companies. And had to do some site work had to put in a retention pond. And I'll tell you what, this was one of my best learning experiences ever because I was heavily involved in the day to day construction and design of this property. So when we're building a new property I had to do all the normal stuff include water retention, landscape plan, Ingress egress. And these other two warehouses had to be raised to a floodplain that was a little bit higher than the current one, which was no problem. But I'm gonna tell you what, during that process, I learned an extremely valuable lesson.
Michael Carro :You know, I had not worked with civil engineers and architects and electrical engineers and all that in the past. So it was my first foray into that world. Today, what I learned the civil engineer is the one trade that you better not skimp on, go out and find the best civil engineer you can. Because I can tell you the difference is I was out there one day and there's this guy named Gary who is on the backhoe who is shaping the property and doing the retention pond. And you know, you also put it in the stakes where your buildings are going the new buildings and things of that nature where the concrete is going to get poured. So anyways, Gary gets off the tractor and says, Hey, listen, you know, your civil engineer doesn't have a clue what he's doing and I'm thinking to myself, well, this guy's the professional, he went to school for this. But Gary in a very logical and systematic way pointed to where all of the mistakes were made me not having any experience knew that Gary was right. And so I told Gary to make all the changes. Let's do this, I went back to the civil engineer explained it all to him, he had to redraw a lot of his drawings. But the key to that story is listen to the guys on the ground with years and years of experience, because those that are actually doing the work make a lot of sense.
Michael Carro :So we get over that hurdle and begin constructing these two buildings. I didn't realize because I was not in real estate full time at this point. But I got offers to lease up those two buildings while they were under construction. One of those buildings that 3300 square foot building, because it was configured differently, was going to be my new home for my business. But the group was a big national company, and they said, you just let us know what you want, and we'll payit. Well, you know, I'm not a big gouger. So I just went to what I thought was the top of the market. I said if they want it great, and they said no problem, that's when I really got the real estate bug thinking that this is pretty darn easy. Well, keep in mind, it's all in the buy.
Michael Carro :But when I went to my lender for the additional two warehouses, I had enough equity because I bought the first warehouse so well, I did not need to put additional money into the next two warehouses in the next two warehouses. The cost for construction of these metal buildings was about $30 a square foot which included the site work, so that was them having restrooms. I mean, that's, that's turnkey. The nice thing about a metal building is there's not a lot to it, you put some restrooms in there, you have nice concrete floor, you get your parking, you get your retention pond, you have all this stuff. So the total cost was about $280,000 in addition to the original loan that I had, so I bought the buildings for $100,000. originally put $20,000 down had a mortgage for about $80,000 added about $280,000 to the loan. Now I've got 15,300 square feet of warehouse space, roughly $350,000 of loans, my new mortgage payment was probably about $2600 a month. Again, keeping everything low. But if you look at the price per square foot, on my new loan, I'm about $23 a square foot, which is why the bank was able to give me a full loan without any additional money.
Michael Carro :So now I lease up everything. I'm getting about $7,000 a month in rental income, the mortgage is about $2,600. So now I'm walking away with roughly $4,400 a month after I pay the mortgage. So we're flying like this for several years, I'm feeling pretty confident, feel really good about this project, you know, then we start to hit some rough patches, you know, the economy doesn't do as well. You know, I've got tenants defaulting on leases, which you know, it's going to happen so you don't have to look at these things as big negatives. I mean, this is the luxury of owning investment property, but because my cost basis was so low and my mortgage was so low, I really only needed to have one warehouse leased up just to cover my expenses.
Michael Carro :But I'm always motivated, I'm always willing to make deals. I got a tenant into the 3300 square foot building, he wanted an option to buy. And so I put up a higher price for him to buy per square foot, I think it was maybe $60 or $65 a square foot. So he leased out the space for a couple of years then said, You know, I would like to buy it, the property was not divided. And when I say buy, I'm talking about just the building that he was in not the entire property. So we went through and did what's called a condo and we condo these things out. Everybody's familiar with a condo of a high rise on a beach or something like that. But you can condo out just about anything. And so I had three warehouses on one property. And so what we did was we took each of the three warehouses would now be a separate property with common area meaning the driveways in the parking area would be common to the Condominium Association, he ended up buying that 3,300 square foot warehouse. I took that money paid off the loan, and now I own the other two warehouses free and clear of any debt. And so now these other two warehouses generate a monthly income of probably about $5,500 a month, it's turns out to be a great asset. Now, if you think about the cash on cash return on investment (ROI) going back to the very beginning, how much money did we put in $20,000. So now we've got the same $20,000 invested yielding over 300% ROI cash on cash per year. I'm a long term hold guy, I do not flip properties. Now I have flipped properties and we'll talk about some of those but that's only in very unique situations.
Michael Carro :Two philosophies that I have are, "Wealth is a process of accumulation." So I do not believe in "get rich quick" schemes. And I don't believe that we get lucky enough to win little lotteries. Can you have a great deal a great transaction with strong profitability? Absolutely. And we look for those. Most of the investments that I make personally are for the long term.
Michael Carro :And we will get into things like discounted cash flow analysis, and how I evaluate properties and what I look for, for my modeling. And I think that I've got onto a model that really works for me, it doesn't mean that it's the only way to achieve success. There's a lot of folks out there that I respect that do things very differently, that have phenomenal success. So there's more than one way to skin a cat. I'm going to share what has been very successful for me personally and let you know what I look for in evaluating property. What I look for in the returns that I expect.
Michael Carro :The property I have today started off at $100,000, it probably has a value today of $600,000 minus that 3300 square foot warehouse. So $20,000 initial investment 17 years later generating about $65,000 in cash flow. Over a 300% return on investment those are crazy numbers but things that you can achieve if you plan and hopefully you can have the same success.
Michael Carro :Thank you for listening to The Restaurant Realty in 10. If you're interested in restaurants, whether operations facilities buying leasing or investment, The Restaurant Realty in 10 is for you. Please subscribe to this podcast and you can also visit TheRestaurantRealty.com for show notes, topics and additional information.