Todd Nepola 0:00
The main thing I’m looking for is a way that I feel my team and I could add value. And that doesn’t mean I’m gonna steal the property. Because the last property I bought, it probably got at around the six cap or six and a half cap. But I know this Outparcels that I could try and do some work on add value. I also look for properties that have been owned by the same family same owner for a long time. Because a lot of times what I found is that people I don’t want to say they get lazy, they get comfortable in their rent increases and they build a relationship with the tenants. So a lot of times you’ll find those tenants are far below market. So we just bought a property in April. And I have tenants that are paying nine $10 a foot and a 15 $20 foot market, just because they’ve been there for so long. So I like that risk arbitrage because if the market comes down and 2023 or even 24. If the market comes down and rents come down, those rents where I’m buying it at are still far below the market. If the market stays neutral to where it is today, I have a lot of room to move them up. I wouldn’t dare move them to market but I have a lot of flexibility. But if a tenant leaves it’s actually a good day for me. So I’m trying to judge the risk on the downside more so than even the upside.
Announcer 1:07
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J Darrin Gross 1:27
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.
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Today, my guest is Todd Nepola. Todd is a commercial real estate investor manager there excuse me, investor and manager. He deals in retail and industrial properties, class B and C properties. And they own and operate and lease and manage several million square feet in of these properties. And in just a minute, we’re going speak with Todd about how to get started investing in commercial 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. I’d love to hear from our listeners. Also, if you want to sell 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, please subscribe. With that on welcome my guest, Todd Nepola, Welcome to CRE PN Radio.
Todd Nepola 3:12
Thank you, Darrin, appreciate you having me.
J Darrin Gross 3:15
I’m grateful you’re here. And I’m looking forward to our conversation today. Before we get started, if you could take just a minute and share with the listeners a little bit about your background.
Todd Nepola 3:25
Absolutely, thanks. So we started the company current capital management just over 20 years ago, and we’re a full service management and leasing company, we don’t really do much brokerage. I started that company because in the mid to late 1990s, I started buying commercial real estate for myself. And right around 2000 2001 I realized that was paying property managers more than I was earning in my own job. So I took over managing my properties. And that led into people asking me to help them with their so I wound up rolling into a company which over two decades later, I really still enjoy and love every day.
J Darrin Gross 4:01
I love that. I am curious on that. Just that that notion and how you get started there? Do you find that that’s a common predicament that that investors find themselves in is that the numbers seem to to pay better to the manager than they do to the owner.
Todd Nepola 4:21
I don’t want to say that too much, because we’re also a property management company. But you are right in the sense that the property manager has no risk no skin in the game and they just get paid a fee. So you’re not an investor when you just a manager you’re just fee based. So you know it’s it’s definitely a nice plus. And it definitely can move the you know, the investment return of a deal having a manager and not.
J Darrin Gross 4:44
Sure. No, and I get that you guys are in that. But I would expect that there’s a level of service that you can differentiate yourself and make it worth a fee as opposed to somebody that’s just getting the fee kind of thing and So let’s back up. You’re sorry, I didn’t mean to jump right into that. But if I if I read kind of the the information about you while I did a little bit of research before this, correct? Did I understand that your family has been in real estate? Or did you get your grandfather was who How did you get into real estate before? Or was there a connection? A family connection?
Todd Nepola 5:27
Absolutely correct. So I’m trying to make this as quick as possible, because now we’re going back many, many, many decades. So my grandfather was a doctor and a surgeon. And that was going back long gone back into the 50s, and 60s, and he started investing in commercial real estate. He never did any of the management because he was a full time doctor. And then my father when he graduated college, became an engineer. And he watched his father recognize how much money he made in commercial real estate more so than even being a surgeon. And I think it was probably the late 1970s, maybe the early 80s. It was a recession, my father got laid off. And he realized he’s better off working in real estate than it is an engineer. And he shifted into commercial real estate himself. And I followed the same pattern when I graduated college in 1994. Everybody wants to be an investment banker. So I went down that road was working 80 hours a week and said, Wait a second, my dad owns properties and doesn’t work at all, and has all this money. So something is wrong. So like I said, in 2000 2001, I shifted myself right into commercial real estate and never looked back. So I am following three lines of real estate tracking.
J Darrin Gross 6:34
Well I’m curious, you know, the the description there, it sounds like everybody did well, in real estate, was there a lot of interaction? I mean, were you Were you conscious and aware of that being the case as far as your family being invested in real estate when you’re growing up?
Todd Nepola 6:52
Well, to be fair, I didn’t really know much about my grandfather’s investment in real estate, I knew more about his investing in stocks, because that’s what he would talk about, and his being a doctor because he practiced that up to the last years of his life when he was in his late 80s. So I knew about that. But the investments he owned were similar to today’s triple net deals, he wanted no headaches, just wanted a park some money and clip a coupon back then they used to even have, you know, bonds that were bearer bonds, where you’d actually get a coupon. And that’s where everybody invested. So these weren’t the kinds of deals that I partake in today, because they don’t have the accelerated returns, there’s no value add. So he didn’t really need management. My father got more creative and started getting more into warehouses and land. And for me, from the get go, it was always cashflow. I only want the deals that had cashflow. So we had it a little bit differently. But I’m the only one who’s actually made a full time career ever since.
J Darrin Gross 7:41
And was there any kind of conversation? Or was it just more of like, it was in the background? As you were growing up? Did you with your dad? Did you? Were you aware of it? It sounds like he was he shifted from being an engineer to a more of a full time investor. But was that? I mean, how wherever were you, I guess I was trying to think, for attention.
Todd Nepola 8:05
Sure. With my father I was very well aware of it, because he had his engineering background. So he was always creative in the way he would buy same old building, if he could figure out angles to cut the building, change the building, you know, he would take a one story building and cut off half of it and add a second story in the back, we seek to figure out the loads and the weight calculations back then. So he was more creative. And he would bring my brother and I to the sites and we would get very involved, whether it was playing on tractors, you know, young or actually putting us to work we got a little older. So I was very, very well aware of it, then. Yes.
J Darrin Gross 8:36
Got it. And so you mentioned in college, the investment banking route was kind of your, your first thought. Was that like, a sense of just to follow the kind of the career path that everybody was chasing? Or was that more like, was it rebelling? Or was there a, you know, not wanting to do real estate or was was the real estate, not even a thought?
Todd Nepola 9:01
For the real estate for me, we weren’t doing my dad had, it wasn’t really a thought or it wasn’t even welcome. Because he didn’t have a business per se. He just owned real estate assets. So there was really no place for me to fit in there. At that time, I think everybody probably saw the movie Wall Street with Michael Douglas and said, Boy, be nice to wear those suits and make all that money, but they didn’t show us how hard you actually have to work. But uh, so I went down that road. And you know, if you remember the 1990s, I mean, it was you pick a stock, and it just went up. So we were all geniuses, right? That was that you were only a genius when you did a trade. And you only got paid when you did a trade. So if I took a week long vacation, I made zero. And that’s when I started looking back at my dad and other people back then there was a lot of infomercials on TV. And you saw these people whether it was selling payphones for cash flow or real estate, I realized something’s got to give wrong and you work 80 hours a week for the rest of my entire life. And I don’t want to do that. So that’s why I started to say I wanted to get into real estate. So I started my first transaction. I think it was 9098 June 98 and I bought a way house back then nobody wants to own real estate. You can just pick it up anywhere. So I was pretty lucky in my timing that I wanted to own it. I knew I wanted to own it, and nobody else did. So what’s the opposite of today?
J Darrin Gross 10:12
No, that’s awesome. So you mentioned your first was a your first property was a warehouse. Was it local to where you were living? Or where was it? Where was it located?
Todd Nepola 10:25
Yeah, so it’s very close to where I was living, I would say it’s probably about three and a half, four miles from my home. And I like to tell the story, because I’ll tell it quickly, but I tell it because so many new investors get hit with this hurdle and the spot. So when I went to buy this property, I said, I was working for years as a stockbroker, an investment bank, and I saved all my money. And I went around look for properties for sale. Back then there was obviously no internet sales or you know, loop nets and costars. So you would drive around and you’d find the sign or you find that local paper. This property had a sign “for sale”, and it was a foreclosure that was being sold by the bank. I had agreed to buy it, I agreed the purchase price was 575. And because there wasn’t a lot of loans at the time, the bank said, if you come up with 50% of the money, they were the owners as well, will finance 50%. And I scratched and clawed and did everything I could to get every penny I had. I had $50 left in my bank account, and everybody and I mean, everybody told me I was crazy to buy this property. They told me that I was going to lose my money, it was never going to work. Nobody wants to own real estate. It’s a bad investment. But I was determined to not just prove them wrong, but also to make some money. So I bought it in June of 1998. It had seven tenants, it’s 13,000 feet. And between June and December, I had four vacancies to fill, which I did. I personally went with my friends because we were all in our 20s at the time, I got cheap labor, we painted the building, we cleaned out the empty bays, we through downside sealcoating we did everything ourselves. And in December of 1998, I refinanced the asset for $600,000 that all my money back paid all the closing costs. And from that moment on, it was $5,000 a month cashflow positive. So everybody, including the lawyers that told me I was crazy, all of a sudden, maybe you’re not crazy. Now, I was just lucky. And I just kept on rolling. And here we are 24 years later, I guess the luck is still continuing not quite what
J Darrin Gross 12:15
I love, and I love here in the how you get started story there. So you get the first one and you make it however you fill it in you do a lot of the work yourself there in the beginning, refinance, get your cash back, and now you’ve got a cash flow. I mean, you know, who doesn’t love cash flow? So, at that point, did you? Did you continue to work as a investment banker? Or were you like leaning towards doing the real estate or what was your?
Todd Nepola 12:50
Yeah, I was still working as a stockbroker and a banker because it was a great time plus, I was a young guy in my mid to late 20s. At this I was 26, 27 years old. So I was having a great time. So you know, I was a single guy hanging out with groups of guys going out at night, but I was doing my real estate business late at night or on the weekends. And sometimes I would work till two three in the morning in the property, you know, being at home, figuring things out, or putting ads in a newspaper. And then I would just roll with that. But I knew I wanted to do more. And once I had my money back, I started hunting for the next one, which I found about a year later. And it was on the same street and it was the same thing. It was a sign out front I called I bought my second one for 475,000. And this one had seller financing. And I put $100,000 down he financed the rest of the loan. I remember his name George Zartolus, that was that many years ago, great guy. And I bought this property did the same thing move some tenants around, recreated it reposition the back lots that were vacant. And this one I didn’t refinance because I had seller financing, but I still had more cash in hand. So then I went and started buying an office building. And it was around 2001 I would say that the market for stocks and bonds, everything just imploded and nobody wants to touch it. Like I said, I now had people helping me I was paying so much money to I said I just do it full time, I don’t need to do it now focus on the real estate. And it was from that point that I just stayed with real estate. But I always missed the broker. And I watched the stocks all day long, I still enjoy it but there’s nothing better than real estate.
J Darrin Gross 14:20
I just love the creating the cash flow to me that that’s the appeal, I can remember, you know, years and years ago, the network marketing kind of the you know, that the appeal was you know, you can make money in your sleep kind of thing, you know, and the reality is, is really that I mean real estate is that kind of tried and true. You know, very traditional time tested path to cashflow. And it’s I mean you’re you’re you know singing the song and everybody else I know is want to join in, you know so. So let’s talk about you mentioned A couple of things there about financing. The first one was a bank owned property in it sounds like to get started, you had to come up with 50%. But was it less than a year it sounded like that you were able to refinance and get your money back out at that point, were you? What was the percentage of of your equity in that property when you refinanced it?
Todd Nepola 15:27
Alright, so when I bought it, it was we got it for 575,000. And like I said, four units out of seven were vacant. And I had never done a deal before. So getting a conventional loan was going to be tough. So this would have been a very tough deal if I didn’t have some money. So like I said, I took every penny I had, I borrowed money from friends from family, everything I could get to get the 50% down. And by doing that the bank that actually had the property because they foreclosed on it, it was called Gentry bank out of Canada, they agreed to lend me 50% If I had 50%. And it was just six months later that the property was full stabilized. And proof of income was there that I got a local lender, I forget that one which bank that was, but a local lender came in it appraised the Property Appraised for 800,000. They let me 600,000. And from there, I just got the bug and realize that I’m off to something here. Got it.
J Darrin Gross 16:17
And as far as the the the terms there. Do you remember the interest rates you were getting back then and late 90s?
Todd Nepola 16:25
I remember it’s funny, because everybody talks about interest rates today. The first deal I did when Gentry gave me the loan, they gave me the loan at 10%. And when I refinanced that I was so excited because I got 9% interest that I thought I would this is great going at 9%. And I’ve been on a lucky trend for the last 20 years, because it’s been nothing but down interest rates. But now people here 6% They think it’s the end of the world. I mean, and I remember before that even before I was involved were 13, 14 15% was an interest rate, you could see. So I don’t think we’re going back to that neighborhood anymore. But certainly was an interesting time. But nine 10% was a great loan.
J Darrin Gross 16:58
Yeah, no, it is if you’ve got you’ve been in the game or been borrow money for any length of time, you’ve had a chance to see those higher interest rates. I know. The first mortgage I had for a house was like seven and three eighths and we were doing cartwheels because we thought that was such a great rate compared to what it was, you know what the market had been? And now people freak out, like said four or 5% on a on a home loan. And so it’ll be alright. But anyway, so is the you know, so you started out, you started acquiring properties. You decided to make it a full time thing, you started managing your properties. When you started managing your properties, and others started coming to you, were you still acting? Or were you operating solo? Or did you have a firm? or at what point did you who formally going to become a firm and manage for others?
Todd Nepola 17:55
Well, like I said, I kind of stumbled onto an accident, because I was managing a leasing my properties. And back then it’s not like today where everything was full, at least in South Florida, everything is full back, you had to get work and I would go door to door I would make flyers and go door to door, whatever I had to do to lease the properties. So I remember the first person that came to me was a dentist, there was someone I knew wasn’t my dentist, but a dentist I knew. And he said, How come your properties are always full? And mine’s not? I said, Because you’re a dentist all day. And I’m not. And I go door to door and he said, Would you lease my stuff and help me with mine? And I said, Sure. Now, I guess the statute of limitations is up, I didn’t even know you needed to be licensed to do this. I said, Sure, I’ll help because I do it for myself. And I charged him $500, which probably would have turned into 10s of 1000s of dollars if I knew what I was doing. But it led to that and I realized, wait, I could help this guy and then I fill his center. Then he referred me to his cousin. And then I got another property. And that’s why I said oh, I should get my broker’s license and do all this. So I went and took all my tests and got licensed. And that’s where I learned Wait a second, the Commission’s aren’t $500 they’re much higher. So then it rolled into that. So between managing mine and managing others, you know, believe it or not, people don’t know this. But when things are really hard, it’s actually the best time to be a property manager or leasing agent because there’s some philosophy and people need help. Right now everything is full, and tenants have the money to pay the rent, so there’s not a lot of product available for rent. So I was able to do very well at that point by leasing other people’s products. And then I was using all my cash flow to go out and buy more properties or renovate my properties and do little things to mine. So it worked out very well.
J Darrin Gross 19:26
Now it’s great. As you were were acquiring properties. Was there a point where you felt like because it sounds like when you first started I mean the $5,000 a month was coming in. But you know as you own properties and stuff, there’s little things that come up whether it be a capital improvement or or taxes or insurance or whatever it might be. When you when you made the I guess you said that when the stock market kind of in 2001 when nobody was wanting to do stocks that was it. Out of the jumping point to go do this full time. Was there a sense of risk in your mind? Or was it a sense of more like the things work? And we’re gonna make it really work?
Todd Nepola 20:14
Yeah, I mean, I figured out that it was working. And this pattern is could be replicated time and time again, I’ve always been a very big reader. So I started reading everything I could from guys who have been doing this for 30 or 40 years. And I said, they’re doing the exact same thing I’m doing, they’re just doing it bigger and better. But we’re all doing the same thing. And it’s worked for them for decades and generations. So I knew it would work. Just the question is the deals, where I will tell everybody, and I’m always very honest about this is where I made my biggest mistake was I started to live off of some of the money from the properties too. And while everything was fantastic, and going great, and I started getting myself a bigger house, and a toy car and a boat, and I started to feel wealthy, all of a sudden, well, the real estate market decided to change course in 2007, and eight, and none of the properties were at risk, because I didn’t have too much debt. But a tenant who was paying 2000 was now paying 1500, the one that was paying 1500 was now paying 1000. So I always covered the debt service, I could always pay the bills, but I had just gotten used to a lifestyle where I needed that money to pay my bills. So I started watching my personal savings account go down very rapidly, so I had to course correct very quickly. And then, like I said, I kind of got a little lucky there too, because a lot of people really needed help. And that’s when I really built the management company up very, very strong, I’d say from 2008 to 2000, probably 1213, we had some great, great years in development here. And that’s when we shifted over to a lot, a lot of third party work. I got a little too greedy living on the money.
J Darrin Gross 21:40
Well, I think that’s, that’s a good lesson right there for the listeners, and anybody in real estate as it is easy to kind of think the trendline only goes up. And, you know, when when you have some sort of an economic change that happened, whether it be a recession or interest rates, or just times get tough. Everybody looks to try and cut expenses, and including tenants. And, you know, it sounded like you were able to negotiate with your tenants as opposed to have them leave based on the rent reduction kind of thing and like said you were able to continue to cover your debt. But not so that’s a huge lesson. Because I think that a lot of times I My concern is when I talk to people, I haven’t been in this very long, they got in, you know, post await, all they know is a market has been going up. Right, and, you know, bought at the bottom, and it’s not, it’s not really, you know, you don’t have to be a genius to buy something for zero and, and let the market rise. But to really have to kind of, you know, tighten the belt, and, you know, recognize that, that there’s other variables in play. And if you have something that’s coming up for a refinance or something like that, all sudden your rates are going up and and that cash out refinance your your account on or, or whatever, it can change your, your outlook, it can change the way you have to operate, in order to continue to operate. And I love hearing somebody that’s been in a long enough that understands and has weathered the storm and, and right in the ship going to things I love, thanks for sharing that. So let’s talk a little bit about you know, the first time people are trying to get into real estate. As far as the the when you’re working with people or talking with people are looking to get in? Do you have any kind of rule or recommendation as to like the location where they start or the the asset class or, you know, to go solo? Or to try and join with others? Is there any kind of a path that you that you recommend?
Todd Nepola 23:54
Yeah, I always say it depends on the investor and what they really want to do. So some people are very hands on. And some people are control freaks, in which case, they should not partner with anybody. They should buy a smaller property and own it and control it themselves. Some people say you’re an architect or dentist or surgeon per se, has no time to deal with a leaking roof or a tenant issue. So they should partner up in a GPL B structure and invest in someone else’s deal, which is just as good. But if you really want to get in the game and get your hands dirty, you got to buy your own property. But you got to be honest with yourself if you have the time. I like I said when I got started, I was 25 years old. I was a single guide and have a wife for kids. So I really had the time there was no reason why I couldn’t come home from work and work on my deals. today. You know I’m married. I have two kids, I have two stepkids I wouldn’t be able to stay up at night working till two in the morning, my wife would like get up on the computer wondering what I was doing there. So things change. So you got to be honest with yourself what you could get. And I also should add, you have to be honest with the returns. So I got very, very lucky because of the first deal I did worked out so well. But the second deal I did Like I said, I put $100,000 into it. But I knew my return on that deal, which isn’t horrible, was only going to be around seven or $800 a month. And you’re right, which you mentioned before, what if an AC BLU, what if something happened? So I didn’t think that far ahead. And things like that did happen. But when I told people I put $100,000 down on a property, and I expected to get $700 a month, they thought I was crazy. They said, Would you do that leave the money in the bank or buy stocks, buy bonds, that property I bought for 475,000, I wouldn’t sell it today for 3 million. But I had to have the patience to hold it for 20 years. And that’s it people don’t understand. Now, it pays me quite a bit more than $800 a month. But you have to be patient going in and realize that the return the number won’t be so big, like you said you have to save for that rainy day. But you have to be patient and you have to know what you’re going to be good at. So that’s the key whether you invest in someone else’s deal or yours. It’s a great personal situation.
J Darrin Gross 25:57
No, I love you know, just the kind of the perspective you’ve got of having done and and you know, what you said there I think is something that people want homes, don’t realize or don’t think through is just the need to invest and wait kind of thing. You know, you mentioned you paid 400 and some for that one, and you wouldn’t sell it for 3 million today. I’m assuming that even if you take inflation into consideration that you’ve you’ve far exceeded the you know, the returns of what what you could get in like in the market? Do you have any kind of sense of that?
Todd Nepola 26:40
Absolutely. I mean, I don’t know the actual number that percentage return is, but South Florida has done extremely well. And I would say the whole state’s done very well very, very well. But my catch is when I would go in and buy properties like this one I bought, like I said, the gentleman’s name was are told us when I bought it from him, he lived out of state he lived in Connecticut, and he let the property get rundown. So from the moment I bought it, and I repositioned the tenants which were in the wrong places, and I move things around, and I fixed the buildings up. And I used every bit of cash flow that I had coming in to paint the building, I did some stucco work, even little things back then like changing the lights and adding some sod or I took out some areas where it was nothing and put some extra parking spaces, I rented it to a guy with a boat, I got very creative. So very quickly, the property was worth a lot more than I paid. But he had me locked in with a prepayment penalty on his loan. That’s how I got the deal. So I just left that one alone for probably about 10 years, I didn’t really refinance that. But you have to get creative what your deal is, if you’re going to be hands on, it’s very, very tough to make a lot of money if you just say well buy a Starbucks, because Starbucks is in place, the lease is in place. So what you’re going to get is what you’re going to have. So I prefer properties when maybe Starbucks used to be and it’s empty, and I gotta get creative and refill this asset. Got it?
J Darrin Gross 27:53
You mentioned, are we talking primarily kind of warehouse flex space. And you mentioned you also you purchase an office building is that primarily the the the asset classes that you invest in or that you manage?
Todd Nepola 28:08
We only focus on retail properties and industrial properties. And I did say I did an office, I did buy two office buildings. And I have to tell you, for me, I know that they work very well for some people. For me, I hated it. Because every time a tenant wanted to move out, the next tenant would come in and well this off this wall has to come down this door is not facing the right way this is and it became so expensive to turn the units and then you’d have tenant state now today, it’s easy to monitor stuff like a CS, but back then I would have a tenant go in the hallway and pop the little thing off the wall and lower the AC down to 65 and stay all night. And I couldn’t control the expenses. So I was very happy to sell these office buildings and get out and I’ve never gotten back into office again. But it’s still a good asset class. It’s just not for me.
J Darrin Gross 28:53
Ya know, I think with COVID reset, there’s going to be some opportunities if you’re looking to get into that. That aspect last time for sure. So as far as location, are you you primarily Florida based with your your operation and the assets that you own and manage?
Todd Nepola 29:15
That’s correct. So my belief, my philosophy, whichever one you refer to it as is that I want my properties to be a driving distance within a day. So I like to buy properties that if I got in my car in the morning, it’s no more than, say a four hour car drive to get there. So I could drive to my properties, see what I need to see deal with what I need to deal with and drive home and be home for dinner, maybe a late dinner but be home for dinner. So everything we have is in the state of Florida on the East Coast.
J Darrin Gross 29:40
Tasha, gotcha. And as far as your management, do you have staff that does all of the operations or do you subcontract out a lot of the services?
Todd Nepola 29:52
When I first started it was a team of one me and I remember I got my first employee that was going back many years ago, and after that we grew so that was 30 people I’m in house, but we only do the management work and the leasing work. So if there’s roof work paving, or landscaper, everything is subbed out, and we sub it out in different areas, because you know, some landscapers are great and say Port St. Lucie, which is 100 miles away, but we’re too far in Broward County where I am right now, which is, like I said, 100 miles. So we sub everything out. And I also find that keeps the vendors on their toes if they know you have multiple people. So everyone’s always hustle a little harder.
J Darrin Gross 30:27
Yeah. So when when leasing a commercial actually when acquiring a property and is managing it too. Can you talk a little bit about some of the the aspects of like a commercial retail space? As far as is it rent on the square footage? Or is there do you do? What’s the other when net or whatever it were you it’s based on their receipts for? What’s the standard that are which primarily the way you guys go on, on leases,
Todd Nepola 30:59
we do any lease, that’s just going to be we’ll do short term leases. So for leases one year or two years, we can do a gross lease, which is just a flat branch of pay this, you know, your increase the next year. And that’s the end of it. Most leases we do a call triple net, which means the tenant will pay his rent, and his pro rata share of all the commentary expenses for the properties. And those have to be the way for a longer term leases, and we haven’t they’re fixed increases, and or CPI. And a lot of people got used to the fixed increases being 3%, or even 4%. Until last year when CPI was 9%. And all of a sudden, they saw a 9% increase. But if we hadn’t had that in our leases, we would be in a bad place today, because the leases wouldn’t have appreciated as much as inflation. So you have to have stuff like that in place. But we’re happy to do leases on one year, two year five year 10 year just depends on the tenant to credit and what the tenant really wants.
J Darrin Gross 31:52
So when you’re looking for a kind of a two part question, or if you’re looking for an investment right now, for you personally, what what are some primary things that you would be, you know, looking for, what are some key things you would be paying attention to?
Todd Nepola 32:13
I look for a lot of things, that’s a long answer. But the main thing I’m looking for is a way that I feel my team and I can add value. And that doesn’t mean I’m gonna steal the property. Because the last property I bought, it probably got at around the six cap or six and a half cap. But I know this out parcels that I could try and do some work on and add value. I also look for properties that have been owned by the same family same owner for a long time. Because a lot of times what I found is that people I don’t want to say they get lazy, they get comfortable in their rent increases, and they build a relationship with the tenants. So a lot of times you’ll find those tenants are far below market. So we just bought a property in April. And I have tenants that are paying nine $10 a foot and a 15 $20 foot market, just because they’ve been there for so long. So I like that risk arbitrage. Because if the market comes down and 2023 or even 24, if the market comes down and rents come down, those rents where I’m buying it at are still far below the market. If the market stays neutral to where it is today, I have a lot of room to move them up. I wouldn’t dare move them to market, but I have a lot of flexibility. But if a tenant leaves, it’s actually a good day for me. So I’m trying to judge the risk on the downside more so than even the upside.
J Darrin Gross 33:26
Yeah, no, I think that’s that’s, I love your philosophy they’re looking for where you can add value and and, you know, finding something that that you can make more valuable. I’m curious when when you bring on new, new properties to manage? Is that kind of a similar philosophy there? Is it? I mean, do you find that some of the people that you’re you’re bringing on, kind of we’re, we’re not paying attention to the market rents, and that kind of thing?
Todd Nepola 33:52
Yeah, what generally happens is when people come to us for help, is when they have a few vacancies because nothing annoys a landlord more than a vacancy, because you’ll never recover that rent. So that’s when they really want to come. And when they see what the market rent is, they weren’t even aware because if the tenant they had Mary’s rent in the restaurant was $2,000 a month that they became friendly with Marian, they just raised over $100 Every year on the rent. So now it’s 2100 2200 for the market might be $3,000 a month. And they didn’t realize that because this is what they’re getting. And they’re making a lot of money because they’ve owned the asset for a long time. So they’re okay with it. But then when they realize the value they could be getting, someone usually chimes in and says, Hey, we need to fix this. So that’s when they bring on a management company. So we’re the bad guy. And we’re the ones who are brought in to reposition the property. So now Mary’s rent instead of being 3000 may go from 2200 to 2650, a 2700. And the owner never wanted to have that conversation, and the vacancies will go to market rate rents. And that’s when they realized that it’s important to have a manager because we lose track of our own stuff just like our own house, you know, we’ve always said we move into our house the day we move in, we want to paint the change the cabinets, change the bathrooms, and then we’re looking at 10 years later, we haven’t even painted. So you get excited when you get started. But then you get a little bit too comfortable.
J Darrin Gross 35:12
Right, right. Where the bad guy, right? Well, I’m assuming if if, you know, there’s been a hesitation on the property owner to have that conversation and increase rents. And maybe there was even a reluctance to pay a management fee. I’m assuming that when they see the returns are getting having management that does keep the rents up and keep the property filled. They’re, they’re fans of yours forever. Do you find that to be I mean, are most of them, like, wow, I would think there’s some excitement.
Todd Nepola 35:47
I tell you real quick. We have a client, I love her. And she actually her son came to me, I think that she’s now probably well into her 80s. But her sons run the property and their marriage during the 50s. And she came to me, she had a warehouse that her husband used for many, many years, and it was 15,000 feet. And they rented the warehouse to one woman who was a car dealer. And it was actually five units. But she took the whole thing. And she was getting $2,500 a month. And it was the most ridiculous price ever heard. But she didn’t know. So she rented it. And the tenant actually wasn’t even paying the rent. So they called me and I met and they said, you know, we don’t have to do my mom can’t pay the bills. And when I heard this, I said, I will, I don’t even know what you’re doing, because you’re getting over 2000 a month per day. So we went in, and we made the hard decision that we were just going to throw the tenant out, the tenant was mean and nasty on the way out, you did a lot of damage, but I had to put my arm around them and ensure the missing please just give me a chance. Luckily, the first month we rented two bays for over $4,000 a month. And right now that unit I think would get like 15 $16,000 a month in rent this many years later for the whole warehouse. And every time I talk, he’s like, my mother loves you. It’s all she had was one warehouse, she wasn’t really a real estate investor, it was the family thing. But they just didn’t realize the market and never went over there. Neither did the sons. So when they brought on the management, we more than pay for ourselves. And guess what we now collect the rents, we pay the sales tax, we pay the bills, we deal with the headaches, they don’t think about anything, but they’re making five, six times the money they were making.
J Darrin Gross 37:15
Now, that’s I gotta confess, I self managed, or kind of habitational stuff. For years, just, that’s kind of what I did, and kind of talking about hands on kind of thing, but I am a fan of management, I have realized I’m a better asset manager than I am a property manager. And and that’s important to realize, you know, where you fit in the picture kind of thing. And there’s the skill set. I mean, you know, if you don’t have that skill, and you’re not in that in the business on a regular basis, you’re not going to do as well as you can with a property manager that that’s in the business. Right. And, and can, you know, knows what the market is, and is, you know, they’re adept at having those conversations, and they have the contracts, and they keep it working like a clock, so big fan management. But hey, Todd, if we could, I’d like to shift gears here for a second. By damn an insurance broker. And I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider, we first look to see if we can avoid the risk. When that’s not an option, we look to see if there’s a way we can minimize the risk. And when we cannot avoid nor minimize the risk, then we look to see if we can transfer the risk. And that’s what an insurance policy is. It’s a risk risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation. It could be your your clients investors, the market, tenant laws, political interest rates, however you would like to frame the question. But if you could take a look at your situation, and consider what is the biggest risk? And again, for clarification, while I am 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 know, Paula, what is the biggest risk?
Todd Nepola 39:18
Well, I know you said you don’t want an insurance that needed insurance answer, but I’m gonna tell you as a real estate owner, the biggest risk is not knowing working with a good insurance broker. So I’ll give you a real quick story again that the second building I bought one of the guys I rented space to restore tires, and the tires caught on fire. And when I was told that I got that there was a fire first I thought someone was kidding me. I drove there. So the whole street shut down. And it was burning 50 feet to discard for just a few tires. I mean, maybe 50 100 tires. I want to ask the firefighters when they’re doing this that there’s really nothing we could do. It’s just gonna burn out. And I was like, Oh my God, my whole building burned down. And it did. And when I went and called the insurance company, I was my neck Call first thing in the morning, I got a hard lesson in insurance about being underinsured and not devalues, we’re off. And I realized that I was on the hook for a lot of this damage that was going to really eat it. And I said, this is terrible. Nobody ever explained this to me, I just assumed you buy insurance if there’s a problem, but save me is that it was a total loss. And by being a total loss, if there was I had to pay the maximum insurance policy, then they gave me money for demolition and cleanup. So I was safe. But had it only been a fire that was contained to one room, I was really going to pay the price because I wasn’t properly insured. So that went back to probably around 2005, or six that fire. And ever since then I said you really really must work with a good insurance agent, especially in Florida, as we’re talking now it’s storming outside, if you’re not aware of your liabilities on hurricane insurance, wind insurance, fire slip and falls, if people don’t know things like you know, it won’t be your fault. Someone could fall on your property, and you will do nothing wrong, not even have a pothole, but you’re going to get sued. So what do you expose for? And I find every time I take on a property management account, and I asked owners this question, they simply don’t know. And that’s why it’s really, really important you work with a good insurance agent, that’s more important than tenant risk. Because if a tenant leaves, I can replace it, that’s more important than a problem with the vendor because I could get a new vendor. But if you’re not probably insured, something happens and you’re going to share this liability, you’re not ready for it. It could bankrupt you.
J Darrin Gross 41:30
Know, I love your answer. And it’s always it’s always nice to hear it back from somebody that’s been through it. As opposed to somebody that’s, you know, I think a lot of times, it’s really easy to get into the limit, limit, limit limit, price, price, low price winds kind of thing, as opposed to understanding what coverages Yeah. And so I appreciate you taking the, the, you know, sharing that because it does I mean, you you are lucky that he was a total as opposed to partially, you know, so coinsurance lesson there. So
Todd Nepola 42:03
you’re you really have to know your exposures because everyone’s looking over here, but something like that, that we say may never happen, and then we complain how much insurance goes out. But when you need that insurance, it’s like health insurance. You don’t want to go to a hospital without having health insurance. So you need that insurance and someone has to explain to you what you’re covered for. So you No,
J Darrin Gross 42:21
no, no, I love it. He taught where can listeners go if they’d like to learn more connect with you?
Todd Nepola 42:28
All right, well, a couple of places, you could certainly see our website, it’s Current Capital Group.com. And if you want to see me personally, I’m on Instagram at life, according to Todd and I talk about real estate quite a bit as well. But the last thing I’m just going to pitch here, if I may, is, I’ve always wanted to give back. So what I did is I decided a year ago, I was going to write a book. But to show him my intentions were I said people come up to me all the time and asked me about buying real estate. But they’re asking the wrong questions, just like we said, they’re not thinking about insurance or the rainy days. So they asked me questions. And then I answered them, and then they walk away. And I said, they really didn’t ask me the right question. So I said, I would like to write a book that I could give to people where I would answer the questions that are really, truly important. And they could take this home and read. But I didn’t want people to think that I had a vested interest in this because I truly wanted to give back. So I wrote a book, I wrote it myself. It’s published now. And 100% of the proceeds are going to charity. There’ll be real estate related, but 100% is going to charity. So the book I wrote is right here, Keeping It Real On Commercial Real Estate by Todd and Nepola. And it’s a nice book, it’s 200 pages, I give you pictures about real estate deals I’ve done to give you everything. But I wrote this book for charity. And the truth is, it’s got a lot of great data, almost 30 years of experience put into this book, of all the pitfalls I’ve experienced, and all the prosperity of experience is right here. So if somebody wants to learn more about real estate, they should buy the book is for a good cause. And they should continue watching podcasts like yours, because that’s how you learn. This wasn’t available 30 years ago when I got started. And that’s why I agreed to do podcasts like this because it’s such a great business. And I hear so many kids coming out of college now we have interns here every year and they don’t know really what they want to do. I think there’s no better asset class to invest in, in real estate. You want to be a doctor, you want to be a Bitcoin trader, I don’t care what you want to do. But you should invest in real estate, especially when you’re in your 20s 30s and 40s. Because you have time. So that’s why I wrote the book. So hopefully your your fans will take a look at that book and see it on Amazon and give it a buy this for a good cause.
J Darrin Gross 44:29
I appreciate that I’ll be ordered in mine today. Hey, Todd, I can’t say thanks enough for taking the time to talk today. I have enjoyed it thoroughly. Learned a lot and I look forward to doing it again soon.
Todd Nepola 44:44
Thank you so much. I really appreciate you having me.
J Darrin Gross 44:47
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.
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