Commercial real estate experts Slocomb Reed, Ash Patel, and Joe Cornwell share their best and worst experiences in real estate investing. They offer valuable insights, lessons, and strategies that every investor should consider.
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Transcript
Narrator:
Quick disclaimer, the views and opinions expressed in this podcast are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to bestevershow.com.
Joe Cornwell:
If you're dealing with a small town, kind of the secondary markets, you really want to be careful. And before you close on the deal, make sure you understand who is really in charge for permits, talk to the right people, hopefully build those relationships before you close because if you try to do it during the process like I did, it can go sideways quickly.
Narrator:
Welcome to the best ever show, the world's longest running daily commercial real estate podcast. Our hosts interview commercial real estate experts every day to get you the best advice ever with none of the fluffy stuff.
Slocomb Reed:
Best ever listeners. Welcome to the best real estate investing advice ever show. I'm Slocomb Reed. And today I am joined by Ash Patel and Joe Cornwell for a roundtable episode. We want to share with you today, some of the details and the stories from our best and worst deals thus far in our real estate investing, we're going to start with our worst deals. And since Ash has the seniority both in hosting this podcast, and in starting investing earlier than Joe and I did, I'm going to let you roll first Ash with the worst deal. Give us some details. Tell us the story.
Ash Patel:
Yeah. Good one, Slocomb. Hey, best ever listeners. You know, I probably deserve to go first because I'm confident I'll have the worst deal. So just a couple years into my real estate investing career, it was after the 2008 recession, everything I bought turned to gold.
I would buy half finished buildings that the developers, their loan got pulled or they ran out of money in 2008. It sat vacant until 2010, 11, 12. And I would buy those buildings that were completely vacant, buildings that nobody wanted. And I would work my tail off to get them turned around, rented. And people started saying, everything you touch turns to gold.
I would buy vacant buildings. I would buy half finished buildings that the developers, Uh, their loan got pulled or they ran out of money in 2008. It sat vacant until 2010, 11, 12. And I would buy those buildings that were completely vacant buildings that nobody wanted. And, you know, I would work my tail off to get them turned around rented. And people started saying, man, everything you touch turns the gold.
And I always prided myself on being a fairly humble individual. I don't want you guys laughing, but I always thought I was fairly humble. And this auction came up in Ripley, Ohio. You guys know where Ripley is, right? Yeah, I do. Yes. It's a drug ravaged town that suffered endless job losses and economic decline. Well, we were used to turning buildings around, not we, me. So this auction came up in Ripley.
I had owned one property in Ripley that was doing fine and found out about the auction. Turns out I was in Atlanta visiting some family the day of the auction. So I have my tenant go to the auction on my behalf. I registered, I sent him there, and I'm in Atlanta. The tenant is on the phone with me and we're bidding on buildings. I can't even hear him. And every so often, I hear, Ash, do you want to keep going? And I'm like, yeah, man, go, go. And I can't hear the auctioneer. I just hear a big crowd. It was indoors. And at the end of the day, I ended up buying a half a dozen properties at auction. And I have no idea what I bought.
I come back to town and I'm confident. I'm actually excited because I just bought six properties. And with my history of turning things around, this will be a gold mine. Come back to town, sign all the paperwork and I go to visit these properties. Guys, one of the buildings that I bought look like it was out of Beirut. It was half torn down. Literally the front of it was missing. It was just a pit in my stomach. I'm like, what did I buy? And I think I paid six grand for that one. Bought a single family house, which later on the tenant, I think I paid 30 grand for it, put some money into it, ended up selling it for 15,000. Cause I had a professional tenant in there that just totally destroyed it. Milked me.
And this is another reason I don't do residential is I get taken advantage of a lot because I listened to every sob story and I want to believe it. I just bought the worst buildings ever. And at the end of the day, people found out that I won the auction. And again, here they go.
Don't worry. He'll turn it around into something. Everything he touches turns to gold, and I'm like maybe not on this one. So long story short, it took me the better part of five years to offload those properties and it took a ridiculous amount of headspace, squatters living in my buildings and each one of them had to be unloaded piece by piece, some on land contracts and it was just an insane amount of headspace that it took up because my ego made decisions for me on buying this property.
So lesson learned, I'm glad I learned it early. And at the end of the day, I don't know what the total loss of dollars was, but it was fairly insignificant. And it was just a lesson that I needed to learn. Not everything I touch turns to gold. And I think a lot of people are learning that lesson today with rates going up. We've had such a great bull run. But I think people just like me are getting smacked around. So thanks for letting me go first, Slocomb. I hope you guys don't top my story.
Joe Cornwell:
Well, what was the last year you unloaded the last property there?
Ash Patel:
I want to say last year 22.
Joe Cornwell:
And you, this auction was what year? You said 09?
Ash Patel:
No, I don't know. I'm going to guess 13. Okay. 14.
Joe Cornwell:
Okay. So it was nine years or so it took you to dig out of that headache. Yeah. Okay. Gotcha.
Ash Patel:
Yeah. And the property that I just offloaded was on a land contract. So it's not even gone yet, right? I'm still tied to it.
Joe Cornwell:
Oh, okay. You're holding the note. Okay. Yeah. Interesting. Awesome. Slocomb, you want to go next or you want me to?
Slocomb Reed:
Well, I have a follow up question for Ash. I think he wants to poke a little bit. Yes. I have my poker out and don't take that the wrong way, Ash. I want to put a frame of reference on this for our best ever listeners who are not from the greater Cincinnati area.
Ripley, I'm familiar because my parents used to have a little vacation house right there on the river. Ripley, Ohio is a small Midwestern Rust Belt town that happens to be right on the Ohio River with some gorgeous views. And it can be deceptive because you have a highway right along the river that runs right through it. And you have I-68, I want to say, that cuts down from the Dayton, Ohio area and cuts through some other cities in Ohio on the way. So you would expect that there could be commerce, but it's a very economically depressed, small Midwestern Rust Belt town.
Looking back on it now, Ash, how much of the struggle you had performing on value add business plans, turning these buildings around, how much of it would you tie more so to the location than anything else?
Ash Patel:
It was 100% the local economics and the local government.
We did what we always did. We went into the city council, met with the mayor. Look, we just bought half a dozen buildings in this town. I got the other guy at the auction who bought a couple more buildings. And our plan was to revive this entire town. And the mayor was on board. Half the city council was on board. And historically, back in the day, this town was thriving. It was a hotspot, but that was probably in the seventies. So our plan was to try to bring tourism back.
And at the end of the day, the city council was too busy infighting. The mayor just wanted to be my handyman and nobody cared about bringing jobs back or bringing tourism back. I would call the mayor and ask him to send the local cops to get the squatters out of my building, or at least just do some drive-bys. Never heard back from him, never texted me, nothing. Every so often when he needed money, he would call me and say, Hey, can I clean out your apartment or can I do some odd jobs for you? And that's the only time I'd hear from him. It was a mayor.
So just the backwards town, the mayor, the, it was a backwards town, backwards city council. They cared more about their political power than they did reviving that town.
Slocomb Reed:
Yeah, that doesn't surprise me. Joe, are you ready to share your worst deal story in details?
Joe Cornwell:
Yeah, sure. I'll go next. Best ever listeners is Joe Cornwell. Appreciate you guys having me on the roundtable here today.
So my worst deal in terms of headaches and Ash's term he used, I like headspace. The numbers on this deal were not bad. It didn't end up being a financial loser, but this deal was an eight unit in Bethel, Ohio, which is east of Cincinnati, about 40 minutes. Another small rural town, similar to Ripley, just a little bit north of the river, not on the river.
It was a eight unit building that had been a farmhouse at one point. It was built in 1900. It had a stone foundation and crawl space. At some point it was chopped into a four unit. And then at some point it was chopped into an eight unit. So when I bought this building, I think it was listed at 50k had been on the market for almost a year. So that should have probably been a red flag, but I went ahead and bought it. At the time I'm thinking, wow, 50k for eight units. That's gotta be a home run, right?
Well, the biggest challenge on this deal was it needed a full gut renovation and to get the permits for this deal, I had met with the village of Bethel building department, they actually had their own building inspector. I attempted to get permits through them. As I started the construction process, I found out that the county, which is Claremont County, had the ultimate jurisdiction over those building permits. And it actually became a little bit of a war between the two building departments.
The result of that war was we didn't know who to turn what into, who to pay. We ended up paying both of them and the entire permitting process took almost a year. So from the time I submitted my initial application until we had a final approved permit was almost 12 months of hold time. So we had done some of the renovation during that time, but ultimately it was almost 14 months from close until we placed our first tenant.
It was just a nightmare deal. I bought this in 2020. We closed right when the lockdowns happened in COVID. And that added a ton of extra issues. Obviously everyone can remember where the hardware stores were only allowing 50 people in at a time. If, if you guys recall that. So my employees and the construction team were literally standing outside of Lowe's for two hours every morning, waiting to get in to go pick up a handful of two by fours for framing. They weren't doing any deliveries because of the COVID regulations.
So it was an absolute nightmare to get anything done. We started having the material shortages and again, by the numbers, it wasn't a bad deal. I think at the end of the day, we were all in about 200k it's probably worth 400, 450 and a cash flow is pretty strong. So it was mainly just the headaches and all of the time and stress fighting with the building departments and trying to do a heavy value add renovation during the COVID lockdown.
Ash Patel:
I'll comment that I am a 50% partner in this deal. Joe and I went in on it together. I'm just a silent investor. And hearing Joe's frustration for a year, it was one thing after another. They made an example out of him because the local municipality was fighting with the county. He wanted to put up exterior lighting and they made him do a lumen study on how much light would leave his property. Is that right, Joe?
Joe Cornwell:
Yeah, yep, yep. And I had never heard of that before or after that deal. Yep, it was very challenging.
Ash Patel:
I've been doing commercial for 15 years. I've never once gotten a permit to put up exterior lighting. And one of the things that we always do is redo all the exterior lighting with super bright LEDs and we light up the place. I've never done a lumen study, never heard of a lumen study. So they were literally using you as a pawn.
Joe Cornwell:
Yeah, definitely. I was being bounced back and forth between the two building departments. I, like I said, ended up having to pay both of them and all they did was make it as big of a nightmare as possible for us. So again, that was the most challenging and part of the issue with that deal is it's six studio apartments. It's about 40 minutes East of Cincinnati. And then we were able to add a third floor, dormer addition, which allowed the upper two apartments to be one beds. So we were able to add some increased value there, but the issue with the six studios is there's a ton of turnover. So even today, while we still hold this property and it performs well financially, it is a time suck because there's so much turnover. I self-manage my entire portfolio.
And I was mentioning to Ash before we started recording, it's about 20, 25% of the time and it only accounts for 6% of the portfolio. So that kind of shows you some of the challenges that came with this deal. And I could talk for an hour on the lessons learned from this deal. But to summarize, I would say if you're dealing with a small town, kind of those secondary markets, you really want to be careful. And before you close on the deal, make sure you understand who is really in charge for permits. Talk to the right people, hopefully build those relationships before you close, because if you try to do it during the process like I did, it can go sideways quickly. So that was probably my biggest lesson learned on that deal.
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Slocomb Reed:
There's an interesting similarity between your two deals in that they both involve smaller localities. We're talking about the very outskirts of the greater Cincinnati area with both of those deals, which means that working with your local municipalities is just that much more complicated and that much more grassroots. That makes a lot of sense. I think there's a through line through all three of our deals. I'll share mine in just a moment. That all of them happened during a big bull run. If we look bigger picture at the market cycle, but also they all happened after we already had some experience. So each of us had the ability to execute on the deals that we're sharing here, our worst deals. We also ran into other complications.
So for my deal in my nine years of real estate investing, call it nine and a half. There have been four times that I closed on a property, not really knowing what I was getting myself into. Again, almost all of those nine and a half years were a serious bull run in the real estate space in general. So one of those properties sold for a profit. The other three are cash flowing nicely still in the portfolio, but there are things that I could have done differently, certainly during due diligence and also in operations.
Three of those properties, I simply didn't know what I was getting myself into from renovations perspective, because I wasn't thorough enough upfront, not only in my physical inspections, but in understanding the business plan and the outcome that I wanted, and then shifting the business plan to one that was going to be more expensive to execute after I had closed again, never lost anyone's capital on any of those. And two of them are cash flowing now. One sold for a profit afterwards, just because we bought really well off market.
But the third deal was and is a 26 unit in a Cincinnati neighborhood. So I don't get to blame a small town municipality or anything like that. But the day before closing, which was in the middle of October two years ago, talking like the 15th to the 16th of the month, the day before closing, the previous property manager delivered the current rent, and there were two vacant units. There were only 10 rents collected, meaning that there were 12 delinquent rents on the 15th of the month that were still delinquent, of course, on the 16th. Meaning that we had a lot more delinquency and we had a lot more late paying tenants than we expected.
The only concession we got out of that was that any rent we collected from those delinquent tenants didn't have to be prorated back to the seller. We should have asked for more than that, but the position that put us in was that we had a lower caliber tenant base inherited than we expected. So call it a 25 unit for simple math here. Each unit is 4% of your occupancy. So when you have five vacancies, you're running at 80%. When you have seven vacancies, you're running at 72%.
Part of the issue here was that we funded the deal. I was in this with joint venture partners. We funded the deal with some reserves, primarily though, that was for major capital expenditures, a new monument sign, expanding and resurfacing the parking lot, new exterior lighting, did not need a permit. The issue was the capital for renovating the apartments was going to come from cash flows because we were anticipating that if we delayed long enough and getting rents up to market, increasing them an average of a hundred bucks a month, we would have the cash flows to be able to get the apartments turned.
The renovation wasn't that significant and we had a two year interest only period on our debt. The issue was it wasn't two or three vacancies at a time. There were times when we had six, seven, eight vacancies, which means there was no cash flow to renovate from that put me in a position where at the start of that, I didn't run my own rehab crew yet.
This experience is one of the experiences that showed me the value of having my own crew and knowing that I can put them wherever I need them to go and know that they'll do quality work. But I think the best way to put this would be to say that I compromised on the contractors that I was willing to work with because I wanted to go with the people who were fast instead of the people who I had vetted, who I knew did high quality work that was inevitably going to be more expensive. So not only did we have high vacancy, but I was hiring contractors, some of their work had to be redone, which meant that some of their work had to be repaid for.
Not trying to dive into the moral of the don't pay your contractor until the work is complete and done right story, but the cash flows struggled. The property went negative on cash flow for a while and it took almost all of the two year interest only period to get the property fully stabilized, get occupancy up, increase rents to market.
For the few remaining inherited tenants, we turned 16 of the 26 units in the first 12 months that we own the property. So the moral of the story, I'm not sure what it is exactly that I could do. We have a sophisticated listener base. You can grab some of the lessons out of this on your own, but I would have in hindsight raised more reserves just in case something like this could happen with a C-class tenant base in Cincinnati, Ohio, and then hoped to return those reserves in the event that things actually went according to plan.
Under contract to buy a property now, and that's how we're planning to do our raise, we're going to overfund it in the hopes of just returning some of those reserves to the capital contributing partners in the joint venture, but we need to know that we have that money in the event that vacancy increases that occupancy decreases drastically early on because the tenant base we're inheriting is not what we were expecting.
Joe Cornwell:
Yeah. I think that strategy you mentioned is applicable to almost any deal today. I think it's important to have reserves. It's important to overestimate a little bit on vacancy and renovation costs because when you're doing any sort of value add and residential, there's so many variables that can quickly go, arrive from your business plan.
So, I think that applies to almost any deal that is out there today. Ash, you got any questions follow up for Slocomb?
Ash Patel:
No, these are all good lessons learned. And for the most part, we got off kind of easily. None of us lost investor capital, and we learned some of these hard lessons early in our career. So we got lucky. I'm glad my ego got into check on a couple hundred thousand versus a couple million.
And I'm very paranoid about deals. I'm very paranoid about the market. And that may mean that I leave deals on the table, but I don't want to lose anyone's money, including my own. So I think it's the reason we're all still here. The reason that we're heading into a downturn and the three of us are still thriving.
Joe Cornwell:
Yeah, I think that is probably one of my biggest struggles today. I'm at a point in my investing journey where it's two things. I want to scale and I want to grow my portfolio as an investor, so that's a motivation. I don't necessarily do it or need to do it for the money, but I want to do it because I enjoy it. And something I struggle with is almost an addiction, so to speak, and I've mentioned this to people. It's like, my model is BRRRR, so when I recapitalize and I get capital back out of deals and I'm sitting on capital and there's money in the bank, I feel a need to go out and find deals. And I don't know if you guys struggle with that, but that's certainly something I do. And it can be to the detriment of being impatient and taking deals that I probably otherwise wouldn't because I feel the need to stay busy and I want to stay busy. And it's something I have to constantly remind myself to be patient. You don't have to take every deal that comes across your desk or go after every deal that comes across your desk.
But yeah, I think ego is a big part of it. I think we all feel good as investors when we take down a deal and things go well and we conquer the deal, so to speak, I think it's just kind of an instinctual thing, we get that dopamine hit and it can be addictive and I'm certainly not above that.
Ash Patel:
Joe, I heard a couple of things here. One, you have money that burns a hole in your pocket, and this is for the best ever listeners too. Get comfortable sitting on large amounts of idle cash. The lack of money that you have at your disposal should not determine whether you do a deal or not. If you are experienced and as Joe Fairless says, if you are a master at your craft, you should be looking for good deals regardless of what your capital balance is.
If you need to raise money for it, awesome. If you find a three, four, $5 million deal, and you don't have the money in the bank to take it down. Awesome, partner with people. Can't find partners, can't raise capital for it? Sell the deal and make $50,000, $100,000 finders fee. But the amount of cash that you have should never be a factor in your next deal.
And then the other thing that I heard is your why. You're not doing it for the money. I think just like the three of us. We all do it for love of the game. And I think we would all agree that if we won the lottery, we would still be doing this. So we love what we're doing. I would spend some time thinking about your why, Joe, because I've struggled with that a lot over the years. And once you have whatever the why is at the moment, it kind of re-centers you. And you know what your purpose is and why you're doing this.
Joe Cornwell:
Yeah, I agree with you completely. And when I mentioned the cash thing, it's like when you're a BRRRR investor, and I know Slocomb can probably relate to this as well. I know he does a lot of value add. It's ebb and flows. So you got hundreds of thousands of dollars going out, hundreds of thousands of dollars going in at any given time. And then this inflationary market we've been in the last couple of years, that is what is difficult to have the patience. You know, you have money in the bank, you know, it is growing at a lower rate than the bank than it is being eaten away by inflation. So it's hard to keep that still hand.
And sometimes I find myself doing deals just for the sake of doing deals. But yeah Slocomb, I know you had something you were trying to say.
Slocomb Reed:
Yeah, I get where you're coming from. And especially with the BRRRR investing, you finally get that cash out refinance and five or sometimes six figures shows back up in the bank.
And also you've executed on the plan. You've got the not necessarily set it and forget it, but stabilized cash flow at the end. And if you don't have a new deal, you start to get bored and you have money in the bank. I get where you're coming from, but absolutely need to stay disciplined. And I have over acquired before all good deals, but I've stretched myself too thin and caused myself to take too much time and too much money executing because I got that same itch that you're talking about.
Repeating a previous thought and transitioning this conversation. Real estate investing, if you're going to get in the ring, you're going to get punched at some point. Thankfully, a couple of things. One is the vast majority of our investing has been during a bullish run in the real estate market, but also all three of us had done some training and some boxing before we got to these worst deals that we're talking about. So the first time we properly got punched in the mouth, it hurt, but we had prepared. We knew how to execute on business plans. So we were able to stay in the ring and eventually get to that point of cash or that point of sale.
Best ever listeners, it turns out we're going to have to turn this into a two-part series. Hopefully just talking about the worst deals we've done has added enough value to you all. If you did gain value from this episode, please do subscribe to our show. Leave us a five-star review. Share this episode with a friend, and stay tuned for part two of this roundtable, the best and worst deals of our best ever podcast host. Thank you and have a best ever day.
Narrator:
Hi, best ever listeners, Joe Fairless is here again. And one last thing before you go, would you like to receive a short weekly email with proven tips from experienced investors, free tools and resources, and a roundup of the week's most relevant news and best ever content? Well, if so, join the community of nearly 15,000 commercial real estate passive and active investors who receive the best ever newsletter. Just go to bestevercre.com forward slash access and you'll get the very next one. I hope you enjoyed this episode and as always, thank you for listening and have a best ever day.