Episode 9: Discussing Current Strategies for Investing in Commercial Real Estate with Paul Moore

After graduating with an engineering degree and then an MBA Paul Moore decided to enter the business world working at Ford Motor Company. After a few years, he departed to start working with a partner who was interested in real estate investing just as he himself was. Three successful developments, including assisting with the development of a Hyatt hotel and a very successful multifamily project, led him into the commercial multifamily arena. 

On this episode of Multifamily Real Estate Investments with Don and Eden, Paul shares his strategies behind the steps he took to develop and successfully execute his real estate projects, and his reasoning for what lead him to move into the self-storage development area after being in multi-family units. 

Highlights: 

  • Paul’s Beginnings in Real Estate 
  • Past Deals with Multi-Family and Commercial Real Estate 
  • Why Paul invests in Self-Storage and Mobile Home Parks 
  • Benefits of Self-Storage and Mobile Home Park Investing 
  • Current Projects

Connect with Paul

https://www.wellingscapital.com

Bigger Pockets- Paul Moore

---------------------------------------------------------------------------

TRANSCRIPTION: 

 

Hey, guys, this is Don your host and today my guest is Paul Moore. Paul is one of the people that influenced me the most as I heard him talk over a different podcast a few years back and that was when I decided to actually make the move from residential investing to commercial real estate and what I like about Paul is that it feels like he's always one step ahead of everybody else. And after finishing the interview with him I decided to record this intro a little differently because I was really blown away from the more practical things we've talked about towards the last third of this episode. So I don't want anybody to miss out on that. We're going to talk about amazing value eight strategies in different asset classes so stay tuned and I hope you guys are excited. Let's get started. 

Welcome to the real estate investing podcast with Don and Eden where we cover all aspects of real estate investing with special attention to multi-family apartment buildings and off-market strategies. 

Hey Paul, welcome to the show. Hey, it's great to be here. Thanks, Don. 

Ok, so I got to say personally that you're one of the guests that I am excited to have the most on my show. And that's because listening to you on a podcast I can't remember which one exactly because it was a long time ago was what actually made me decide to do the transition from residential real estate to commercial real estate. And the reason for that is because I heard you talk about commercial real estate and you were so passionate about it. Well yeah. You were so excited about it that I was like wow well this man talks about this as if this is the best thing ever so I got to check it out. And so I hope you know this makes you feel good that you have an impact on people. 

Absolutely I am really honored to hear you say that Don. Thank you so much. 

Of course, of course, well you deserve any kind word. And what I'm so excited about is that really when I heard you talk then I could hear that you're an expert. You're really somebody that knows what you're talking about. So how about you tell our audience a little bit about who you are, what you do and what's your what is your main focus right now. 

Okay great. Well I got an engineering degree which was a big mistake because I didn't know who I was, what I wanted to do and I went out and got an MBA back in the mid 80s and went to Ford Motor Company for five years and then I just really loved Ford- still do, but just had an entrepreneurial bug and so I quit Ford, my buddy, and I started our own company and we just hit the timing just perfect. You know Bill Gates said, “the problem with early success is it makes people feel like that they're smarter than they are.” And I think that's kind of what happened because we sold that company for several million dollars and I went out and started investing. And you know what? I wasn't really investing at all. I was speculating and calling it investing you know investing is when your principle is generally safe and you've got a chance to make a return. And speculating is when your principal is not at all safe and you've got a chance to make a return. And so I didn't know the difference. And so I actually had all kinds of issues and problems along the way I lost a lot of money along the way and eventually got involved in real estate. And when I did I was able to see over time what the difference between speculating and investing is. And at this point, I'm really excited to be doing what we're doing in commercial real estate. 

Wow, that's an amazing story and I'm going to tell you why I can totally relate to that. I recently read an amazing book by Napoleon Hill which I think is an outstanding book and it's called “Outwitting the Devil” and what he says in that book - you gotta check it out it's amazing so it kind of works on your mind it kind of changes your mind and the way you think mentally it makes you a more positive person whereas which kind of gives you the fundamentals for success. I got like a manuscript for success. This book is kind of different and so one of the things he says in the book that I could totally relate to is that there is no such thing as failure only temporary defeat. And for every failure or for every temporary defeat you have the same equivalent seed of success. And so when I hear you talk about how you were speculating and how you were actually kind of investing money in the chance of making a return that kind of makes me feel like you even if you've done mistakes you've learned from the mistakes am I right about that.  

Yeah absolutely and that's one of the reasons we have a podcast called “How to lose money.” You don't really want to teach people to lose money but we want to teach people what not to do because I think it's a lot easier sometimes to avoid other people's mistakes than it is to copy their successes. And if we can learn what to avoid what not to do which all of our guests on almost 200 episodes now have told us what they did wrong then you can be better positioned to be sure you're doing what's right. And so I've got to tell you I never heard of that book and I just looked it up. It kind of looks like it's a newer book. I wonder if it's just never been published before. 

Yes, so I'm happy to talk about this book because it is truly a life-changer in this podcast. I know it's about real estate but you know if you want to be good in real estate your competition is constantly acquiring knowledge. So you've got to acquire knowledge right. It was actually written in 1936. Right. I don't know maybe 1938 one of them got it was. Published in 1980. And so yes it was. It was hidden for 50 years. And the reason it was hidden is it was because of Napoleon's Hill's family, they were afraid. They were afraid of publishing this book because of the things that they talk about over there are just life-changing. And back in the day if you had published things like that to talk about you know our culture, schools, churches and the things they put into your mind when you were young then they were afraid that they would be there would be frowned upon. So that's why it wasn't published. And now a lot of people know about it. And but that's an amazing book. Yeah. I want to hear about your first successful deal. Tell me how you found it. What were the struggles in that specific deal? How did you come up with the money? I know you had money. So tell me a little bit about that. 

So the first successful deal in multi-family was actually something I would never do again. It just happened that the timing was right. And again going back to Bill Gates it made us think we were probably smarter than we were. What happened is in the year two thousand eight we had this little economic crisis in the US I'm sure nobody remembers it but I took some time off of real estate to learn to do marketing copyright and actually trained under some of the great copywriters in the US a couple of them and I really enjoyed that. But somehow in that process I stumbled into oil and gas investing, now I had a Petroleum Engineering Degree and like I said I never used it but I thought hey I can maybe put this to work and so I actually stumbled into this North Dakota oil and gas project and without explaining all the details I'll tell you that I convinced about six or seven friends to invest in this with me. One of those friends has a jet and he actually is a very successful entrepreneur. He's the guy who I started the company with when we both left Ford and we flew together to North Dakota once and he flew a couple of other times to talk to this oil and gas guy and we could never find a place to stay. 

Now we were both involved in real estate and had some commercial real estate background and well you know we looked at all these pickup trucks and cars and larger trucks you know parked along in the Wal-Mart parking lots alongside of the road because there wasn't enough housing and we said why don't we quickly build a multi-family facility to house these oil workers in this huge oil boom. There are 18000 job openings. So we built these little 300 square foot really nice cabins 300 square foot units. They were usually in two or four units per building. And we know that the average rent for an apartment around the US is more or less a dollar per square foot per month. So an eight hundred square foot apartment might rent for about eight hundred dollars in the heartland of America, not in places like Miami. But we were getting 13 times that average. We were actually getting almost 4000 dollars a month for this 300 square foot little unit. So I think it was thirteen dollars per square foot per month and they were staying full because the oil companies were I mean their choices were maybe if they could even find a motel room. Spending three or four hundred dollars a night and this was one hundred twenty-nine dollars a night. And so we did really well with that and sold it when oil prices were about one hundred dollars a barrel and we were really happy and we moved on to build a Hyatt Hotel which my business partner did almost all of but I supported him in that effort. 

Wonderful. Great. So you were actually you were lucky with that deal? 

We were because you know six months later oil was down to thirty dollars a barrel and the people who had man camps, apartments, hotels that had built they had built quickly all over the region of Williston and Watford City, North Dakota were going bankrupt left and right because they didn't have you know they didn't have enough oil workers to join them. And I tell you it what's crazy is we decided when we build ours to be the nicest one in town and ours generally did fine and is still doing fine even though like I said we sold it a long time ago back in 2013. It's still doing fine. And it makes me very happy that it is. 

Yeah definitely. So you know I kind of heard that you're moving from multi-family into self-storage facilities and I want to ask you why? What is it that you see? Because it looks like you have the Midas touch. To be honest, looks like you know what you're doing and you got some luck on your side. So why is it you decided to make that move?

Well you know I if I had to invest a million dollars right now and I couldn't touch it for 100 years in one asset class I would invest in multifamily. I really believe that the multifamily that's existing now and that's being built now will still be housing people as apartments. A hundred years from now I don't know if that's true for self-storage and mobile home parks. But I'll tell you this, right now there are opportunities in self-storage and mobile home parks that I can't find in multifamily. Let me first quickly review a couple of the reasons Multifamily is overheated. First of all, it's just very popular. It's very much “the thing” and people love the idea of making value, adding upgrades, adding countertops, paint, and colors and it's similar to what they see on HGTV and they think well you know this is something I can do. Well you know honestly it's often something that that can be done. I agree but ninety-three percent of the multifamily over 50 units are owned by professional corporations and they've already done most of those things. So it's hard to find a really good deal. There's international money, there's 10-31 exchange money, there's institutional money, there's dumb money all chasing multi-family right now. There are also new rules which are people you know it's fine if you weren't investing in multifamily and you know the 12 years ago before the recession. That's fine. But it's another thing to be called a guru calling yourself a guru just because you had a few successes along the way now and some of these gurus I call them “newrus” are actually telling people it's OK to overpay. 

Well, that's not real smart and people like Warren Buffett and Howard Marx and Charlie Munger and Ray Dalio they would tell you it's really really not smart to overpay for an asset just because it's popular. In fact, that's the time to sell. So multi-family is largely overheated. What I love about self-storage or mobile home parks is that they're largely fragmented in their ownership which means that the owners of these asset classes are often mom and pops perhaps 50 percent or more of the owners of self-storage are mom and pop operators, which means they don't know how or don't care or don't need to maximize income and raise the value. 

And they're so mean sorry for cutting you, it also means it's easier to get a good deal. 

It's much easier to get a good deal on what you can do is say you can pay them top dollar for what it is but there is still meat on the bone. There are still opportunities to do upgrades and that's the beauty of self-storage and mobile home parks in the path of growth because they have a lot of upsides but you can still pay a very fair price, in fact, one of the operators that we just invested with last week they're sellers know that they're selling below market yet they like this buyer, this operator so much that they're actually willing to turn around take the cash and often invest back with him. That's how much they like him even though they know he's going to take the value of that facility and perhaps double it. 

Ok. I want to give you know a small opinion of what you're saying as far as multifamily goes. Just like a small story that I had with clients, I was trying to move these two people into an apartment here in Pembroke Pines and then they went to see that apartment complex. The price was fourteen hundred bucks for a two/two which was good because that's what they were looking for. Then when they got over there the parking fee was one hundred and fifty dollars a month. Now you're thinking, you know as an investor I know exactly how it got inflated that that much. It's just you know they're trying to add value, trying to force appreciation again and again and again. But isn't there going be a time where that the tenants of the apartment buildings are going to understand that they are being forced appreciated? It's just going to happen. 

Yes, I think that's absolutely true. Now at the same time, they may not have a choice. I mean they like places like Miami. My friend lives in Miami, he spent months and months just looking for a room for like seven hundred bucks a month. And you know it's just a room in somebody's house. And so my understanding is that if you know if somebody needs to live there they're going to have to just accept that until they don't have to anymore in the time of a downturn. 

So that's what's going to happen in time a downturn. All this forced depreciation is just what's going to happen with it? So the complexes are going to offer a two/two unit where you don't have to pay parking. That's going to be that's got to be what's going to attract more clients their way. 

Yeah I mean it's very possible. I mean it's hard to tell. But you know Florida specifically has a history of pretty high swings between the up and down and so does California, Nevada, and Arizona. 

Ok, so let's talk about the opportunities you mentioned. There's a lot of opportunities in self-storage and mobile parks. Self-storage you mentioned that it's easier to get a good deal because you're dealing with 50 percent of your owners are mom and pop. And you also mentioned that there's a lot of meat on the bone. So there's a lot of value add. So what I want to ask you is first of all what is the value add-in in a self-storage facility. What are the main things that you're going to implement if you were to acquire one? And what are the opportunities in mobile parks? 

Yeah absolutely. So when I started thinking and hearing about these asset classes a couple of years ago I kind of chuckled when I thought about value ads for self-storage I could just picture the self-storage unit that I had in the past you know that I had rented. So it was four pieces of sheet metal a bunch of rivets a concrete floor and a roll-up door. That kind of rhymed and you know I just thought, “Where are you going to add value.” You can't paint it you can't upgrade. You can't stage it. What can you do? Well, there's a ton of value to be added in self-storage. And if you like I can run through a few examples and then I can actually give out some math if you'd like to try. Yeah. If you'd like me to try it on the fly at least so self-storage. There is a mom and pop typically doesn't have a web site and do a lot of marketing. Therefore their rates are often below the average rates of the other competitors in the area. 

So that's one thing, you can improve marketing that's not exactly a value add. That's just better operations but a real value add is U-Haul adding Hertz or Penske or U-Haul trucks by adding those you can add two to four thousand. I even saw a place in Florida that was getting 5000 a month and commission from their U-Haul rentals. Now let's do the math on just that one. Let's say it's five thousand dollars a month. That's sixty thousand dollars a year added to the bottom line with no cap-ex, it's just a change in policy and procedure. Now in residential real estate where you have been done in the past, you know that the value of any real estate is based on the comps you can improve a house to no end. And like you can add a million dollars in value to the house but you probably won't get that out of it if the neighborhood doesn't support it. 

Yeah, but in commercial real estate, the value is based on a formula. And if you're going to write anything down folks this is the value formula for commercial real estate is the income divided by the rate of return. In other words, the value is the net operating income not including debt service divided by the cap rate or the expected rate of return for that type of asset at that time in that condition in that geography. OK. So take five thousand dollars a month let's not take five thousand a month. Let's take four thousand dollars a month which is more realistic for adding you all and multiply it by twelve months. That's forty-eight thousand dollars. Now that's the income added and there's no cost to this. This is just the net added to the bottom line. Now divide that by the cap rate. Now cap rates used to run about 8 to 10 percent. Now they're typically running four to seven percent four percent in areas like California, Boston, New York or self-storage. Yeah, self-storage is unfortunately almost as bad as multifamily. No, not quite. But let's just apply a 6 percent cap rate so you take the forty-eight thousand a year divide by point zero six. Eight hundred thousand dollars to the value of your facility. 

Now, let's say you paid three million dollars for that facility and let's say you financed two- thirds of that. So that's two million in debt one million in equity. We just added from just adding U-Haul we added eight hundred thousand to our million in equity. Now it's worth one point eight million at least on paper and it should be in reality as well by the way. And you appreciated your equity by 80 percent increase. And that's before a lot of the other value adds like adding a showroom with locks, boxes, tape, scissors, adding late fees, adding admin fees, selling insurance, raising rates to market level and half a dozen to a dozen other things service lots of things that can be done and the value equation is really really powerful the most powerful that you can usually do by the way is convert some of those weeds out front or that perhaps RV parking area to an additional climate-controlled facility. You got the land paid for you've already got the marketing done. You've got the office done. Now you can add additional units at a lower cost and it's a very very powerful way to improve income and value. So that's an example if you like I can quickly do some mobile home park examples. 

Mobile home parks are the only asset class that has a shrinking supply and increasing demand with the affordable housing crisis. And we won't get into all the whys for that but it's very very hard for a tenant to leave. I mean tenants you know even if let's say the tenant has a dispute with the management they just don't like being there anymore. Are they really going to spend five thousand dollars or even ten thousand for a double-wide to move their unit down the street? Probably not and they usually abandon them before they would actually spend the money and have the risk of moving an older unit. So these tenants are really really sticky. One quick value add that I like and this is just an example that applies kind of broadly to all commercial real estate. If you have commercial real estate you have an asset that you can actually compound your returns from and without going into more detail on that I'll tell you about one we recently invested and now these numbers are rounded. They're not exact. And I'm just using this as easy math example. So let's say, this cost to this mobile home park was five million dollars, 60 percent debt and that would be 3 million and 40 percent equity and that would be of course 2 million in equity. Now, the owner of this mobile home park got in there and he said: “Man this place is a mess.” There's are RVs and there are boats and there are broken down cars. 

Some of these mobile homes have three, four, five and six cars parked out front. And we want to clean this place up and so we can raise rents and have a nicer place for everybody to live. And so what they did is they paved over an acre of weeds with a fence. They added a fence. They added a gate and they park our RVs and boats and extra cars and work trailers there now and they're even going out the community and having people bring their boats and RVs and they're charging them for this. Now when this is fully leased up this one acre will house ten thousand dollars worth of vehicles. Now ten thousand dollars a month in rent is a hundred twenty thousand dollars a year. They only paid one hundred thousand dollars to build this facility and they're getting one hundred twenty thousand dollars in total rent. That's 120 percent annual return. And so the value of that cash flow is great. But it's much better than that when you look at the value. But let's use a 6 percent cap rate again. 

So I'm not going to make it One hundred and twenty thousand. Yep. Let's ignore that the expense one hundred thousand for a minute. We can ignore that. 

That's right. Because that's just a capital expense. 

So two million more initiating. That's a hundred percent return on your equity. 

You got it. That's I mean you nailed it. So you just grew the equity by double. And that's only one change of dozens or let's say at least a dozen changes this upgrade will make it this park to increase rent and increase income. 

Ok, so the last question I have on that subject is if the opportunities are so unique and easy why isn't everybody going in that direction. 

You know Warren Buffett was asked that same question. They said you know if you've got such a great system why doesn't everybody just copy you exactly. And he said you know people don't like to get rich slowly. I think the parallel there is people don't want to take the time and take the effort and set up a marketing program to reach out to these owners. I only know one guy who's done it really really well. He's got a team. This is somebody we invested with just last week. He's got a team of four or five full-time employees who do nothing but call these self-storage and mobile home park mom and pop owners on their cell phones when possible and try to see if they are interested in selling. And that's what he's doing. It's a lot of work. It's hard. It's expensive but the rewards are incredible. 

Wow. Interesting. Very interesting. Honestly, I'm you know as a wholesaler in residential real estate. It is for me it's music to my ears because all I've been doing is doing marketing and getting to two sellers. 

So you know like the deal I told you about, that land we bought is from marketing that we do. So you know I think the way we market is we don't necessarily work with brokers as much as we do marketing to talk directly to sellers. So that is music to my ears and I want to thank you for that advice I'm definitely going to check that route. 

And yes I mean these are some amazing insights that you're giving us here. 

And so I want to thank you for participating, for dedicating your time to be on my show. It's just I'm truly grateful for that. And so what are the best ways to communicate with you? 

Yeah. You can find us. You can find me on bigger pockets. Again my name's Paul Moore My company is Wellingscapital.com - We'd love to hear from your listeners there. 

Of course, Paul so thank you very much for being on the show today and I really hope you’re going to have an amazing rest of your day. 

All right. Thank you. It's been an honor to be here. Thanks so much. 

All right. You have a great day. Bye-bye. 

Thanks for listening to the real estate investing podcast with Don and Eden. Stay tuned for more episodes. Till next time. 

 

Share | Download(Loading)