Jake Harris 0:00
When you’re having to convert and do heavy value add is like bring in new plumbing, bring in a kitchen, bring in that electrical load those, you know, it’s like the amount of construction work, the heavy value add component of it doesn’t make sense. And the only reason in the areas that it does is you’ve had such an uptick in values you can go buy those at $20,000 A key when everything else is trading at $100,000 $1 or $200,000. You’re you have enough margin to effectively get in there.
Welcome to CRE PN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant we are here to learn from the experts.
J Darrin Gross 0:55
Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.
Today, my guest is Jake Harris. Jake is a best selling author on distressed commercial real estate with over 18 years of experience in real estate, construction and investment management, and has been featured as a national speaker on his expertise. Over the past six years, he has managed and developed and acquired over $200 million in projects and over 250 million in the development, or he has over 250 million in his development pipeline. In just a minute, we’re gonna speak with Jake about what to do before investing in distressed real estate. But first a quick reminder, if you like our show CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment, we’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, we encourage you to subscribe. With that, I want to welcome my guest. Jake, welcome to CRE PN Radio.
Jake Harris 2:30
Thank you, Darrin, I appreciate that.
J Darrin Gross 2:32
I’m looking forward to our conversation. Before we get started, though, if you could take just a minute and share with the listeners a little bit about your background.
Jake Harris 2:43
Yeah, so a question I get asked often, where do I get started? And there’s a couple of different versions of that, that I’ve kind of reflected upon over my life. And you read that bio 18 years experience? You know, yes, but the reality is, is like when I was a kid, my parents had bought an old farmhouse it built in the late 1800s in the Central Valley of California. And it was the farmhouse of 1000 acre orchard. And by the time we bought it, it had been parceled down to I don’t know, I think an acre and there are some other, you know, multiple acre kind of parcels around our property. And we lived in a 16 foot camp trailer, a family of five. And we read, built or remodeled this house that was built in the 1800s didn’t even have a foundation, it sat on rocks. And we had to jack up the house and pour foundation and set the house back down. And so when I was at my mom’s the other day, I saw a picture of my brother and I carrying a sheet of plywood. And we were probably like seven, I was seven he was five or nine and seven were a couple years apart.
And so I looked at that. And then I looked at some other photos as we were taking like a bath and a wheelbarrow. Again, we’re on a 16 foot camp trailer. And so now I look at that as like how did I get my start? How did I get started? And I was like really I kind of feel like I grew up on a construction site. And it was that that epiphany of like, I’ve kind of been doing this my whole life led by my parents for the relevant in the last 20 years. I’ve gone off to the army. Somebody handed me a book 20 something years ago of Rich Dad Poor Dad, that purple and gold book and I read that and it was like a light bulb. And I think maybe I reconnected with that time of being that kid you know fixing up houses and I was like yeah, this is what I want to do. It took me a few years until I started getting an investing Myself, I after the army, because I didn’t know how to do this, I didn’t know how to get started, like the concepts were not, you know, too crazy and Rich Dad, Poor Dad is a pretty basic, you know, information, buy assets, not liabilities.
But it was like I didn’t know how to buy assets, I didn’t know how to even ask anyone. And so I got a job bartending at a country club, after I got out of the army. So I thought being a bartender and hanging around rich people, and I would ask them advice. And then they gave me some advice of getting into commercial real estate. You know, I illustrate this is because a contractor is involved in everything, real estate, I don’t care if you’re moving dirt in a subdivision, you’re remodeling your kitchen, you’re building a high rise, a contractor is involved. And so he said that the the people that come from the trades that know how things are put together, and it’s this interesting relationship between a contractor and an investor is you’re after the same dollars, what the material costs, what the labor costs, then you’re kind of after that, and so it’s a dance and your partner’s, but you’re also trying to get known keeping each other’s you know, honest and out of each other’s pockets, you know, as far as like, I want more as a contractor wants as much money as they want, the investors want as much money as they want as the owners. And so you have to balance that out. And so getting that foundational knowledge of going into commercial construction, was really what became my foundational experiences 20 years ago, of understanding how buildings were fixed up kitchens, baths, you know, building out an office building. And so my first projects were building industrial centers, doing tilt up concrete buildings, and then I got into doing some stuff for equity office properties. And that was how I cut my teeth 20 years ago.
J Darrin Gross 6:57
Well, it certainly sounds like you have been in real estate from the very beginning. And love the story about the, the farmhouse there and in California, that’s awesome. So if we can, if we can back up just one second here. And I wonder if you could define or give some definition to what you consider to be her what is a distressed property? Or how do you define distressed real estate.
Jake Harris 7:30
So distressed, and obviously, I wrote the book in 2020, I was anticipating a lot more distress, the government went out and printed $20 trillion dollars, and all real estate values tripled. So I was wrong. The distress that I thought was coming down the pipeline was that they kick the can down the road. But the principles in the book are still, you know, foundational, in really, your fundamentals of investing in distressed real estate have to be a lot more robust than when they are in a, you know, economy that is booming.
And so the reason being is you’re not going to be able to get all the information in a distressed property situation. And so when I say distressed is there’s lots of versions of distress, there’s distress, say a tenant has moved out, there’s distress economic factors like Detroit when the auto industry left an entire market, and then all the jobs got sucked out of there. And it may be such a negative distressed environment that is not even worth investing into, in distress in buying real estate and oh nine and 10 and 11 was even though there’s systemic job loss and values were falling, by the day, there was such a steep discount on what you could buy real estate for it was beneficial to buy and oh nine and 10. And so what you’re not trying to do is time the market and say, Wow, we’re in a recession or the values are going down, what you really need to do is have a fundamental understanding of how you’re going to manage this investment.
And where we would underwrite a declining value. So if we said hey, it’s going to take us six months to fix up this property or reposition it or do something to it because it has some functional obsolescence. So whether it was deferred maintenance or whatever it was, we could take it this and say today, it’s worth this and then in six months is going to be worked down here. We would only be willing to buy it if it was way down here on the price point so that we still have a profit margin leftover once we’re finished fixing it up. So that distress can come in a lot of different ways. In even in a booming economy. There can be distress, there’s death, there’s divorce, there’s you know, mortgages that are maturing commercial loans. You talked about this on your show that there are certain factors of risk is a lot of people that maybe took on bridge loans with very low interest rates, and then were anticipating that they could exit at even cheaper permanent rates.
And now all of a sudden, the rates have gone up 200 bips, you know, and now all of a sudden, they’re like, Oh, crap, what do I do, those things are causing distress. And so someone may be willing to get out of a property sooner, you know, do something along those lines. And where, obviously, I enjoy the title of the book, here’s his catching knives, is the the the, you know, economic saying is to avoid catching falling knives. While I was like, actually, in commercial real estate, a lot of these assets, trade once a generation. And so you have to be prepared for when they do trade, because it might be 10 or 20 years, the next time that asset actually does trade. And so if you have an understanding of a business plan, and how you’re going to structure that, and you understand the information of the, you know, interest intrinsic value of the sticks and bricks, you have the opportunity to invest into something. So lots of different ways in which distress can occur. And what you’re looking for is an understanding of that discount and providing a margin of safety when you’re investing.
J Darrin Gross 11:32
No, I appreciate you kind of going through that, because I think that, you know, when people say distressed you know, I think everybody has a frame of reference or a thought that comes to mind, you know, like you mentioned, whether it be it’s the property is all dilapidated, or, or like you said that the financing is coming due or the, you know, the plans didn’t go as, as they had originally planned. I think probably a lot of people think back to the, you know, the crash, oh 708 had a crash and just how much distress there was in the whole market, but not recognizing that in all markets. There there are properties and investors that are in distress and need need an exit. And so that’s, that’s good. So let me ask you so in just having said that, that the do you find that there are times when they’re when there are greater distress? I mean, like, as we’re looking, we’re facing a, you know, rise in interest rates? Do you would you expect there to be more opportunity as the as the change in the marketplace occurs?
Jake Harris 12:45
Yes, I think we’re already starting to see a little bit that some repricing in especially the secondary and tertiary markets, where people were, you know, really compressing down cap rates, meaning speculating on continued, you know, low interest rates, you know, profitability being there, I see that expenses are going to continue to go up, interest expenses are going to also go up and you hope that you’re also getting the rent appreciation or cashflow appreciation in excess of that as well. So when I look at that is there was a whole lot of buyers, and there still is a lot of dry powder liquidity in the market, you know, and so I don’t actually see a lot of massive market distress happening.
You know, I think the fundamentals of real estate are actually very, very strong, especially in an inflationary environment is you know, it goes up in value and all solid assets go up in value. Specifically, you know, some some conditions that you mentioned, I think there’s asset types and asset classes that are going to experience more discount and more opportunity to buy I am especially bullish right now in hospitality. We’re actually getting ready you know, we’ve been submitting some offers, acquiring some hotels, looking at roadside motels and hotels, in leisure oriented and markets. I have an investment thesis that that leisure drive to market is going to see an uptick, especially as let’s call it the work from home or remote work or a hybrid work environment. Once that, you know tube, you know that toothpaste is squeezed out of the tube it doesn’t go back in. I think office is going to be distressed a little bit more discounted more, depending on the market type and What, you know, the clientele is service there? I’m not really quite a buyer on office right now, because I haven’t quite seen this play out as far as how some of these hybrid work environments Connect.
But when I’m looking at it is we’ve already seen a significant uptick in road trips, RV sales, people are willing to drive more even though that the gas prices are more expensive. I think people are going to be more willing to revisit national parks, there’s been a big migration reshuffling on the country over the West Coast, California, Washington, Oregon have done a fantastic job of driving people out of the west coast, and they’ve gone in reshuffle do. You know, Idaho, Nevada, Arizona, Texas, Tennessee has seen a significant uptick, as people have relocated from other parts of the country also think that they’re going to check out the parts of the world that they move to, you know, the Smoky Mountains, and you know, the hot springs of wherever, they’re going to go to places that they haven’t historically gone.
So when I look at that those higher interest rates, the fluctuation of the pandemic, up and down, there may be some opportunities to acquire some of these if you have a strategy and a plan to get on the other side of this office, I continue to see as is some, some headwinds, some challenges, especially as interest rates go up, and vacancies are looking, you know, people just aren’t signing the long term leases, as much as they were, if you’re more pragmatic and willing to accept shorter term leases, or do some more, you know, co working environments make the environment, the office building, more engaging, there is possibilities to extract some some higher returns out of those. But, you know, again, every market is different, every sub market, you know, even in nuances of Portland, there’s areas that are doing really, really well and other areas that you’re you’re stocking and you probably wouldn’t want to buy at what the currently traded prices are.
J Darrin Gross 17:16
Now, no doubt who I wanted to ask you you commented on hospitality how you’re bullish on that. And if you’ve got some opportunities you’re looking at? Are those are you looking at those as hospitality in the you know, more of the temporary housing like Hotel Motel kind of thing? Are you looking at those as an opportunity to convert to multifamily or what’s your, your,
Jake Harris 17:47
I think hospitality as hospitality, I, so I see. So a combination is more of these hotels are being taken offline, because they’re being converted to apartments. And actually, very few I’ve seen makes sense from an economic standpoint, because oftentimes, you’re talking, let’s give you an example, a hotel room is typically about 250 300 square feet. That’s a little bit difficult for a lot of secondary and tertiary markets to make that as a viable unit. So what happens is, you oftentimes need to take two of those units and convert them. And so now you have a 500 square foot apartment, you can put a kitchen in there. If it’s already like a suites, and it’s already got a kitchenette, then it’s easier and the plumbing is already there. Those are the ones that kind of make a little bit more sense to convert that to kind of a micro unit, because the plumbing, when you’re having to convert and do heavy value add is like bring in new plumbing, bring in a kitchen, bring in that electrical load. Those, you know, it’s like the amount of construction work, the heavy value add component of it doesn’t make sense.
And the only reason in the areas that it does is you’ve had such an uptick in values, you can go buy those at $20,000. That key when everything else is trading at $100,000 $1 or $200,000, you’re you have enough margin to effectively get in there. Some of those are being converted to affordable housing or homeless shelters or other things. And so we’re seeing a decline. And that motel hotel class that the kind of roadside, nobody’s building that nobody’s building a new product of that there’s no you can’t build a $50,000 key hotel like it doesn’t exist. The sticks and bricks cost you $100,000 to build so like as they take more of these offline. I see that environment in those category of hotels and motels. actually be coming more profitable over time.
And actually I do my thing is to deep flag them, get rid of the Super Eight get rid of the Days Inn, get rid of the Motel Six, because they have a declining valuation, they you get charged 10 to 20% and franchise fees to have a Super Eight and be $59 a night, you know, and it was like your entire profit margins, you know, $8 what happens is you need to decouple from that $59 A night room, right, you need to do a remodel, but in the location becomes very, very critical to this is you have to have some top end ability to now rent those out for 139 a night or 159 a night and that’s going to be and you know, like Cannon Beach, you know, it’s going to be you know, in Morro Bay, it’s going to be in, you know, Yosemite or Santa Fe, New Mexico where some of these markets where you have a little bit more of fluency, major metropolitan areas that somebody will pay that.
And what I believe is as the rich are getting richer, as this inflationary and the money is flowing down from the government, people have a little bit more disposable income, they’re not willing to stay at the $59 a night hotel, they want to stay at the 139 or 159, especially as they’re doing kind of a road trip. So hospitality for the hospitality stake. There are people that are doing those heavy conversions. I’ve done some where I’ve converted office buildings and multifamily right now I’m a little bit I’m gonna say not shell shocked. But you know, construction sucks right now is like supply chain sucks, like every single day, it’s like a new problem of what material you can’t get. So for the fast low hanging fruit is doing cosmetic remodels of an existing hotel to a hotel is a lot easier than converting it to something else.
J Darrin Gross 21:58
Makes a lot of sense. And again, kind of your your thesis there about how you know as the the market loses some of this hospitality product because of the conversion that’s going on. And then you have the uptick of available, you know, renters or lodging or people seeking lodging based on you know, the the demand. It seems like that’s a that’s a good good spot to be in for a well placed property kind of thing in like your thesis you’ve talked about around leisure and drivability, the thing that makes it makes a lot of sense. I’m curious if you have any kind of a sense of what the possible outcome will be with Office. Can you come in and on some headwinds are facing Do you see any kind of a play or an opportunity for conversion to a different use? Or you have any sense of what what might look like?
Jake Harris 23:05
Yeah, I’m actually just finishing up a project right now I bought a 10 story office building in downtown San Antonio on the Riverwalk, and it was an opportunity zone. I know Portland has quite a few. There’s a lot of other cities that have opportunity zones. So you need to do a significant remodel to qualify for an opportunity zone investment. And so I think converting office to multifamily makes sense or converting it to a hotel or converting it to one of these other uses, but especially multifamily, it makes a lot of sense. Because the existing infrastructure of the building, I particularly like historic buildings, they have some inherent challenges with them, but they’re aesthetically a lot more pleasing. There’s some story in history to them, that you can take advantage of, versus like a 90s office building, that’s just one of those, you know, glass, you know, you know, got beige tinted glass curtain wall, those I think are going to be a little bit more challenging to convert to a multifamily than it is to a 1929 office building that has traditional type windows that you can configure in the right layout.
The reason I also like historic buildings is it opens up the possibility of financing them with like historic tax credits or renewable like we use PACE financing. We use some other mechanisms to create some structured finance or kind of almost like financial gymnastics to create, we’re gonna go buy this for 12 $15 million dollars, we’re gonna do a $15 million remodel on it, but when it’s done, it’s going to be worth 50 million. You know, it’s like that is the math that you need it to be able to get through and then again also that kind of margin of of safety. So it’s like most investors are looking for the multifamily sugarcoated, paint carpet clean up bumper and 50 bucks a month, and then we’ll just hope and move along. I’m not very good at those. Because a lot of speculation is in the future rent gross throw, when we’re doing those heavy value ads, we are looking at it, we’re buying the building for 75 bucks a foot, we’re gonna put $150 A foot into it, well, that’s still under what it would cost to build brand new. And so if it’s still under, it’s called 200 $300 a foot, you know, build cost, that makes sense. And we have some additional tools like the historic tax credits, or new market tax credits or low income housing tax credits or PACE financing or these other toggles that we can pull to make it financially beneficial to investors.
That’s where you can do that. Not a lot of these properties make sense to do that. But I also see that’s how you were going to also take some of the Office product. In some markets, it’s maybe been overbuilt, I haven’t quite figured out how to do that with the, you know, 80s, you know, REIT, office boom, you know, towers and Dallas and Atlanta and everywhere else, they got built during the REIT, you know, kind of boom days. But I’m sure, given enough money, or enough opportunity, someone will figure it out.
J Darrin Gross 26:32
Ya know, I appreciate you kind of given some examples there. Couple of questions that that wanted to ask you on that. You mentioned, PACE financing, and I’ve talked with a couple of different people that have used that. And other financing tools that you’ve been using? How important do you feel like those financing options are to the success of your project? Are those really kind of do they push it over the edge? Or is it is it profitable? If you just went to conventional financing, but this just sweetens it or how integral are those options to the success of a project like that?
Jake Harris 27:15
Yeah, so I’d say so PACE financing is, I think a good vehicle for or an alternative to like EB five money or mezzanine financing. So, you know, if you’re trying to use, you know, mezzanine financing, you’re, you know, typically going to be paying, you know, double digit interest rates, EB five, had a, you know, kind of a boom, and then it kind of pulled back as they tightened, you know, some of that, and then they added more, you know, hurdles that you needed to jump through. So the PACE financing, I think, is really looking at that as that alternative to pref equity mezzanine or EB five, and it creates and becomes a little bit of a sleeve in your capital stack that is in replacement of one of those. And I think any one of those could be interchangeable. I haven’t seen a whole lot of them where they’re, you know, senior pays and mez.
But again, from a return, you know, matrix is when you can secure long term kind of financing at a fixed rate. That is always beneficial because you understand what you’re going to be paying. Some of those are amortized, you know, 2025 years, it’s oftentimes married up to the life expectancy of the equipment or the energy savings that you’re putting in there a new roof, new windows, HVAC, something along those lines, and they’re trying to amortize them during the life of that particular equipment. So it creates, you know, can we lock in 5% interest on 5 million bucks for 25 years, okay? That’s less than mezzanine, that’s less than preferred equity at an eight preffer, something like that, plus some upside, it’s less than, not less than EB five, EB five, you know, has some advantages to it, but maybe you just get the deal done. And it’s an underwriting department. It’s not open to investors, you know, collectively interested in your project.
So, it is just one of those additional tools in which you can make a deal. Make sense? You know, there’s also ways just to come in and protect your downside by bringing in more money, you know, lowering your debt structure overall. And so if you have more money, you know, you may not need pace, you know, but when we see things, we’ve had some of those in particular, we’ve had some project cost overruns. stuff that, you know, two years ago when we signed this contract, and now they’re just like, sorry, your appliances are double, you know, sorry, your windows are delayed 689 months more. And so then it’s like, well, that additional carry cost, what is that do from replacing those? Well, now we can use those, you know, buckets of money, you know, to say to help cover those costs and not have to do a capital call or bring in more investors capital?
J Darrin Gross 30:31
Yeah, no, definitely. Interesting times we’re in now with I mean, it’s always a challenge whenever you have, especially a rehab project, where you’ve got, you know, your opening walls, and whatever you might find kind of thing, but definitely some some interesting times with supply chain demand, and interest, inflation, etc. going on right now. Just curious. So you mentioned kind of bringing in capital? Are you for the projects you’re doing? Are you typically syndicating? Are you doing these? Joint Venture? Are you buying hold? What, what’s your basic investment strategy?
Jake Harris 31:17
Yeah, so as a private equity company, we kind of do all of them. We and it really is we’re oftentimes structuring deals for clients, you know, high net worth, high net worth individuals that want access to alternative investments that want to be in real estate, sometimes that has been in a fund, so you’re going to get multiple property, you know, diversification and locations, some of those are going to be syndicated, or, you know, a single purpose entity, you know, fund or, you know, investing into, some of that is going to be, you know, maybe we’ve structured some jayvees In the past, because, you know, they really liked that deal. Or we said, hey, this is more than we can take on or our bandwidth of our team, it’s kind of outside of our expertise. So we’ve placed some capital with somebody else, and then created some JV mechanisms.
Again, what we’re typically, you know, seeing is, you know, kind of mid teen IRR is bumping up into mid 20 IRR, returns to investors, depending on what we say is the risk profile development projects have higher risks. So we want you know, higher returns and those typically start for us at like a 20% kind of IRR hurdle that we’re trying to get to because there’s going to be some ups and downs in that are unknownst. I mean, deals I think, you know, that are just coming finishing up right now we did three, four years ago, I had no pandemics, no epidemics and our underwriting like literally none of that. And so then just like, well, let’s figure out what we’re gonna do with this. And those are kind of a little bit. Of course, that’s a black swan type event, but I was like there is and almost with 100% certainty, I will say, no pro forma has been 100% accurate that I’ve ever done on any project and 20 years.
J Darrin Gross 33:15
Yeah. That’s always kind of a frustration you do the best you can with a budget. And try and get through it as quick as you can, so you can get the next one. Jake, I’m curious, how would you encourage investors to prepare for him? We talked a little bit about it, maybe this is kind of the answer to but you know, prepare to take advantage of a distressed situation. He mentioned, like, you know, just absolutely knowing the market is that is that kind of the fundamental kind of the cornerstone of, you know, putting yourself in position to be able to take advantage of, of a distressed property.
Jake Harris 34:08
So I think the, the number one thing is I have a lot of, you know, because people I’m on podcast, I do these, I have people reach out like, Hey, I’m looking for a good deal. I’m looking to get started in commercial real estate, like, what do I do? And I was like, you know, when somebody comes to me and says, I want a good deal. Or hey, can you look at this deal and help me underwrite it? Is it a good deal? And so when I say this, and I’m going to give you kind of an unpack this a little bit these because I don’t know, because it really, really depends on the person. And so something that’s a good deal for me, may actually be a terrible deal for you, Darrin, it may be because what it’s trying to do is offset this and fortunately, I’ve been had an opportunity so I went I went back to grad school as a lot of understanding of portfolio kind of management is, you know, because it was an international real estate degree in finance and knows, like, how REITs balance out their portfolios, how are you diversifying yourself so that you know, especially even this podcast, in general, mitigate risk.
So then when so something that may be a good deal for me, could be a terrible deal for you, because it is already over, you’re already overweighted in that in your individual category. So what I talked to people about first is figure out what you want to do. Who are you? What’s your, what’s your like? Mo? Like, what is it that fires you up? What excites you and stop looking necessarily for the good deal. And then what you can do is you can understand, like, what is it that you want to do in life? So for me, I was talking to somebody the other day, they’re doing rentals, and they’re renting out every single bedroom by to an individual tenant. And so they have, like, I got all these things I got, like, I don’t know, 60 different people that they’re renting out and all these individual rooms, and he’s like, look, I’m crushing it and making their turn, I look at that. And I like cringe, I’m like, like, that sounds like the worst version of hell for me. And I was like, There’s no way I could maintain that for a very long period of time, like, because that just does not interest me at all, like the returns could be double all the other deals that I’m doing, but it’s not sustainable for who I am.
And so that’s why I say figuring out yourself, and what interests you first, I like hospitality, because I like the interaction and the toggles of creating community and how that impacts people and creates a very dynamic ripple effect in social media and Instagram and driving direct booking and that, you know, bumps, your food and beverage and other things. Where there’s some people that are like, I don’t want to do that at all I’ve done manage Airbnb is no interest, I want an industrial tenant that signs a 10 year lease that I never talked to them. So they’re like, that’s more exciting to me. And so then again, what we can start doing is figuring out like who they are first. So then when you understand who you are and what you’re trying to achieve, because you have to have a goal that you’re aiming at a good deal. What does that mean? That’s a completely subjective to what a good deal means to you. And I also think words are very ambiguous. So what someone says is, I’m aggressive, I’m an aggressive investor, well, what does that mean? Does that mean, you’re willing to go put a million dollars into Dogecoin? And you’re waiting for it to go up to 10 million, or maybe zero? Or are you like, I’m aggressive, I’m looking for a 12, or 15%, return on a multifamily in the urban core of a major city, that, so aggressive is a ambiguous term.
And so like when we can start aiming at is I’m trying to achieve $200,000 A year passive income, because that’s going to allow me to quit my w two job and start traveling more. And let’s be honest, everybody wants three things, they want more money, they want more sex, and they want more power. Really, when you break it down, is all the things that we’re trying to do is achieve that is we want more free time, so that we can, you know, take care of our partner, so that we can, you know, have more power, we can have more sex, we can have more travel, we can enjoy those things. But what it is is like how and what those fundamentals are that get you to that point. And so like defining, okay, at $200,000 a year passive income is what I’m trying to achieve, then, and I don’t want to lose this, now we can start putting together a framework of this is the type of deal that works for you. And then that good deal, or that market, or that asset type is, is niche specifically for you. And now you can go in and invest into that. We see this a lot of times.
And I see this a lot of times as Dr. So and so this making a million dollars a year, they’re paying half a million dollars in taxes, and they want to start buying and owning real estate. And I look at it and be like No, you don’t you already work 80 100 hours a week, what you need to be as a passive investor, you need to invest in other people’s funds, you need to invest into their individual deals, or JV or do other things because you don’t have more time. You think because you’re super smart. You can figure it out and be like, but that’s actually a fool’s errand to go down and go buy a $2 million retail shopping center. What you need to do is throw some money into a $20 million fund have someone else that has already proved it out already has system already has models and maybe create some structure around what it is that you’re trying To achieve.
And so when I say that is that gives you some fundamental understandings of the things that you already are good at. And then you can start preparing in the areas that you lack. And sometimes that’s assembling a team. Sometimes that’s gathering information about a market that you’re interested in. And so when you have that information about a market, you’re ready to strike when that price hits, because, you know, hey, this is the return that I’m trying to get. This is the market I’m trying to be in this is the, you know, cash flow. And so like we’ve we some, oftentimes, like, identify like, this is our strike spot, it’s a 50 to 125 key in these markets at this price point, it does revenue, and then we get very, very specific, that Aim small, miss small, because then we know what is we’re good at and what we’re looking for. And then it also becomes a lot easier to say no to everything else. When you have that focus, and when you know what you’re aiming at, then you can actually start getting and diving into and creating good deals, I talked about some of these things in the catching knives, the book that I talked about, because it’s like assembling your team, I might have construction knowledge, but maybe you don’t have construction knowledge.
So you may be needing to develop relationships with a contractor, you may need to be developing relationships with a broker, you may need to be developing it with a lender, an insurance guy like whoever it is, like you need to understand the things that you’re already lacking. So if you’re going to be an owner, and that is your future aspiration of you is to be a real estate owner, then you can start putting out and I’ve been doing this for 20 years, I’ve read and I’m a broker, I’ve done hundreds of millions of dollars of transactions we’ve done, I don’t know 1400 transactions in 23 states. And I hire real estate attorneys, I hire inspectors, I hire contractors, I there’s so many people that collectively become part of a team that I go do and by thing, even though I have all this experience, the more that I realize and the more experienced that I look at these things, the less I actually realized I know. And it’s super easy to skip over very basic fundamentals. Did you get all the estoppels and all the tenants?
I don’t know. I mean, well, I checked the lease. Oh, we just looked at the leases extract. Did we review all the leases in totality? Like what? What is their out provisions? What if JC Penney’s leaves as an anchor tenant? Oh, wait, they’ve already left as an anchor tenant. So this tenant can cancel their lease whenever they want, if they want and walk away, but I’m investing into it based on that. That’s why like a real estate attorney, I’m not good at reading legal contracts. Like I kind of glossed over and hit the highlights and if it’s really somebody’s like, I don’t do that I hire a real estate attorney to review my loan docs review. My you know, Lee says to reveal those and then like give me the feedback and like protect my ass because I don’t like doing those things.
J Darrin Gross 43:10
That’s I appreciate you expanding on that because I think the the summary there is know what you want, I mean, know what you you’re looking for be specific, and you’re gonna be able to identify a good opportunity. When it when it does show up. I get that he Jake, if we could like shift gears here for a second by damn an insurance broker, and work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider. We we first look to see if there’s a way we can avoid the risk. If that’s not an option, then we look to see if there’s a way to minimize the risk. And when we cannot avoid or minimize the risk, then we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is. And so I like to ask my guests if they can look at their own situation. And frame the question however they choose, you could be referring to clients investors, the market interest rates, on the political climate. However you choose to do so. And and look at it and determine what is the biggest risk. And again, for clarification. Again, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Jake Harris, what is the biggest risk?
Jake Harris 44:42
So, I mean, I’m gonna give you kind of It depends, because depends on who who you are, as an investor, an LP investor investing into a deal. I think your sponsor Are as your biggest risk. And so because they’re the ones that’s kind of captaining the ship, I think if you’re someone that’s buying real estate, your biggest risk is the purchase, actually, because and maybe you’ve heard this or maybe you haven’t heard this is you make all your money on the purchase. And if you overpay for an asset, it’s very, very difficult to correct course, and trim out the expenses. And then you’re kind of, you know, writing this, you know, failed investment out. And sometimes it takes so much more energy to even get out of it, then, you know, and you’d be like, all I’m trying to do is get my money back. And I see a lot of that right now. And alas, and actually, this morning, I was talking with a buddy, I realized I did not buy a single property and 2021. And actually, so far in 2022, I haven’t this is the longest period of time that I have gone without buying a property. I think in the last 20 years, I think this might be one of the only years I have not actually bought real estate at all, any property, and over a year time period. And so I was looking back at that. And I was like, Wait, I didn’t even realize that happened?
Well, because I have a very disciplined, you know, like buy acquisition model that I’m looking at. Part of it is because I lost my ass in the subprime meltdown, I became a millionaire. And then I had a negative network. I remember sitting on the street corner in Tucson, I was crying. I was like, you know, a grown adult, crying, and sobbing and praying, dear Lord, can I be worth no money. And there are so many aspects of my life that I look back at that moment of that rock bottom. And the least important of it was the losing the money. The least important of it was going from a millionaire to a negative net worth and wanting to start over at zero, I was 7580 pounds overweight, my relationships sucked with my family, the girl I thought I was going to marry it dumped me. You know, there was so many other things. And so lots of people focus on the money risk of things, and they forget about them 80 or 90%, that is the real life. What is your relationships like, you can make more money, you can’t rekindle the time of your relationship with your spouse, your kids, they kind of go away that opportunity to live those those, you know, Bucket List adventures, you grind, grind, grind, grind, and all of a sudden you realize you’re 60 7080 years old, and you don’t have the health to go travel and do those other things. Those are important. And so it depends on the category.
As a human, I think the biggest risks that we’re currently facing, is not pursuing the things that excite us that we truly, really want and living a very fulfilled life. And so I’ll give you a Maslow’s Hierarchy of Needs of premises. When you get and you’re trying to figure out how to pay bills, you’re just in a survival mechanism, you get to a levels of and I’m assuming that your audience members are starting to elevate up into that, because they’re thinking about investing is they’ve gone beyond some of those levels. And they’re starting to get into the self actualization kind of topper end of the pyramid of Maslow’s hierarchy of needs. And so then they’re trying to figure out what they are or who they are, what’s their purpose in life. And myself, and this is a constant struggle. And I think everybody has it is like they need to give themselves that validation or approval. Sometimes it might be a millionaire, sometimes it might be making the New York Times bestseller list. But what happens is you stop thinking about what everybody else wants for your life, and you start leaning into the purpose of what you are put on this planet for.
And then, because money doesn’t equate to happiness, your success and making money is not what makes you happy, you’ve elevated up to that. And I think there should be an extra category on Maslow’s higher hierarchy of needs, is when you’re living your purpose and life in the service of others, is when you unlock true happiness is when you unlock the ability to then really impact the world. Because what you’re doing is you’re serving people that couldn’t give you back and just not about a transactional equation of how do I make more money or know how can I benefit them? And they give me $1 back? How can I do this and you’re elevated out of trading time for money into an investment that you have a certain free, you’re living your purpose, and you’re pouring it into the world in the service of others is when you will unlock true true value and I think that’s what we’re all really Seeking, we have to get through some of these levels of validation, we have to get through this of self actualization we have to get through this. And again, this is also part of my own journey. So to me, the risk and the biggest risks that we’re all facing is not pursuing that. However, that mechanism looks for you.
J Darrin Gross 50:18
I appreciate you sharing that. That’s That’s some real insight. Don’t lose sight of the what’s really what’s really important. Appreciate that. Jake, where can listeners go if they’d like to learn more connect with you.
Jake Harris 50:33
So the main website that we share a lot of this content is catchknives.com. That’s plural knives. So catch knives.com You can sign up for the news list. We have like an insider list. We do some due diligence courses on PPE, people looking to invest into commercial real estate, especially first time or early investors. You can buy the book there at Jake.realestate on Instagram is where I’m most active that I managed. But we also have you know, a YouTube channel. I don’t think we have a Twitter, I might have a Twitter. I don’t know, my team might put out the content on Twitter, but I don’t manage that. So catchknives.com Or at Jake.realestate. And if you just type in Jake Harris real estate, you can pull me up on YouTube and Google and other places. I’m usually you know, near the top of those or maybe that’s just specific to me, because I google myself and it keeps populating myself. I don’t know how
J Darrin Gross 51:30
You’re gotta look up yourself some time when Google and see what’s there, so that’s good. Hey, Jake, I can’t say thanks enough for taking the time to talk today. I learned a lot. I enjoyed it. And I look forward to doing it again soon.
Cheers. I appreciate it. Thanks, Darrin.
All right. For our listeners. If you liked this episode, don’t forget to like share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.
You’re listening to CRE PN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CRE PN Radio