In Episode 41, Frank and Ian laid out a plan to raise $4,000,000 in private capital to fund a commercial real estate portfolio. This deal closed in Q3 of 2021 and we talk about the progress made to date in realizing the full revenue potential of the assets.
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How To Maximize The Value Of A Real Estate Investment
In episode 41, we talked about raising $4 million in 60 days for a real estate venture. That deal went through. We did close on it and we’ve been working hard on it ever since. In this episode, we give an update on all of the amazing things that Frank’s team has been doing to raise the value of that property in a very short period of time. We update how the terms of that deal went with the investors, what we asked for from each investor in terms of minimum requirements, what the investors get in return and we talk about how to deal with inflation using real estate in a pretty crazy market.
We did an episode where we talked about putting together security for all intents and purposes with three commercial properties. We talked about how we were going to structure it. It was a fun episode because we weren’t completely sure how we were going to pull it off at the time. We thought through like, “Here are the three assets. Here are multiple ways that we could fund it either with debt or with private capital.” What came out of it was great.
We had an incredible raise and a number of people who invested with us on that deal were people who tune in to this show. They approached us and said, “Are you still looking for money on that deal you were talking about?” A couple in Richmond approached Frank and me and there were a number of them that are here in Vienna. I had a guy approach me in a dugout at a Little League game saying, “I tune in to your show. That sounds like a great real estate deal. Do you need money?” I was like, “Sure.” It was pretty neat. We raised $4 million. Was it $4 million?
It was $4.5 million in total.
We raised $4.5 million in private capital. When did we close on that?
The funding raise closed on October 1st, 2021 so it was easy to do paperwork. It closed right around the beginning of Q4.
I sent Frank a couple of Venmos to get some progress payments going. We raised the rest of the capital. That’s how Frank and I do business. We throw exorbitant amounts of money towards each other without contracts. One of these days, we should probably look into the orderliness of our affairs but it has worked so far for us.
Frankie has been busy at work. There are three properties. One is a church and we’ll get to that one but we haven’t started on the church. There are also two other deals. We call it the Westwood Deal because of the general neighborhood that we’re acquiring and Frank is acquiring other properties there but one of the properties Frank has put a good amount of money into looks fantastic. I got a chance to see it.
Frank, why don’t you talk about the Malvern building and what you’ve done? Talk a little bit about where you’ve invested money in it. Also, probably more than anything, talk about when you take a building like that, you can overspend very easily and not get a return. I think you’ve been smart about how you’ve spent investor’s capital so far so maybe talk about what that building is, what your vision of it was and how you’ve spent so far.
The Malvern building is at 2405 Westwood Avenue. It’s on the historical register. It’s a 1960s era building. It’s not super old for us but it’s also not new. With what we renovate, it’s in our sweet spot. It has three levels. It’s got a below grade level or a basement, a 1st floor and a 2nd floor. First and foremost, what we did was we fortified the basement. It had been vacant since the ‘80s because of water problems. We knew that we had a solution for this.
It took us a while to get a permit because we had to get through the city but we had to change the door height and do some different things to be able to make it accessible. Once we made it accessible, we had this pro forma at $14 per foot. It has been vacant for 30 years or more. We knew we could make money on this deal if we couldn’t rent it but we thought we would be pretty good at doing pro forma at $14 per foot. We’re getting interest at $16.50 per foot to put that in perspective for you.
I don’t have any lease to sign. What we’re going to be is ahead of where we hope to be or where we land. The first thing we did in the unit was we fortified the structure. We updated the exterior. We painted it and made it look nicer. We spent a bunch of money on windows. The windows that were in there were these ‘60s era windows that were hideous looking. Now, we have 21st-century windows. We then painted it and hired a local muralist to paint the side.When you take a building, you can overspend very easy and not get a return on it. Click To Tweet
There’s a picture of it that you can see. That’s what it looked like before. I’ll show you some afters in a minute but this is the area where we had the basement, which has had all the water problems and this is another view of that. What we did is first, fortify. Second, renovate the things that matter the most. The exterior look, the windows, get that stuff done. Now, we’re working with the city on the permit. The goal is to come bottom-up and then top-down.
Everything on the first floor is in fine shape. It just needed bathrooms. We already renovated those even though we didn’t have a permit. This is what we specialize in. We left the floor below open and the ceilings not finished. We put drywall up so we could renovate what was in place and if the county wants us to come back and inspect, we can but while we’re doing this, we are already raising the rents on the first floor. It is well ahead of schedule for what we’ve promised our investors.
Now that we have a permit, we got about five weeks of work to do in the basement. We’ll start signing leases and people will be moving in and then, the upstairs tenant will probably be moving in somewhere in the spring to early summer. If you attack it from both ways, first, you spend money on things that are going to get you stabilized. Second, have it rented. Third, get a nicer return. That’s what we’ve done.
It’s a nice, older building and what you see in it as an investor is you see there are three floors. The bottom floor, which is a basement is a shell. It has been making zero rent and largely, that has to do with permitting. It wasn’t permitted to be able to rent it out because of the flood zone area. We’ve since fixed that piece or are in the process of fixing that but if you see the basement now, Frank has chopped it up into a number of executive suites.
If someone wants to come in and say, “Give me the whole basement. I’m going to put my whole company here,” that’s probably unrealistic because a basement is not always the most desirable but you get someone like, “I’ve three different businesses that I’m involved in.” I have an executive suite. It’s not the biggest thing. It’s nice and gets the job done but a lot of people want a large office where they can put their things. We had something making $0 and now, we’re going to sell these little executive suites. Probably most of these executive suites are going to go for $750 to $1,200 depending on size.
It’s going to be very much dependent upon size. We’re going to have them as small as 40 square feet. It’s almost like a telephone booth where you can come and set things up but it gives you the flexibility if you need to have something to get away from the kids to do a Zoom call twice a week. You’re usually working at home. You could do that but on the upside, we’ve got it in bigger ways. We’re going to use the Airbnb model a little bit in the basement. We’re going to see what the market gives us. We’re going to build a shell, take it to market and then we can very easily disclose these things and have them ready.
It’s not exactly the WeWork model but it’s close. There are a lot of people that they work from home. I was this model. You work from home and have a home office but your kids are around. COVID starts, it gets too noisy, you’ve got a dog barking and it doesn’t feel professional when you’re on the phone. Some people just want a place to put their things. They’re like, “I need a desk. I need to go put my books, my files and my customer stuff there. I’d like to have a place where I can go talk on the phone without my kids yelling in the background. I need a place to go for a few hours because I think better if I’m in an individual place.” For us, what matters is you had 1/3 of this building getting zero rent. Whatever rent we get is an absolute bonus.
On the main floor that you walk in right off the street, we knew we could get the rents up to 30% or 35% by investing. It had an old, crappy carpet. Now, it’s a nice, new hardwood floor. It had an old crappy bathroom that people used. Frank has turned this into a really nice bathroom that looks modern. It looks like something he would put into one of the new homes that he builds. All of the offices got a fresh facelift. They got new paint. The front of the building looks a lot nicer. The parking lot is getting repaved. We’ve taken this from borderline C space that was old and neglected to not quite an A but a B-plus.
All we needed on the main floor was to do our job and it was going to go from $14 to $17 a square foot. For us, that’s a nice 25% increase in rent and that’s not even including the top floor, which we’re going to put an anchor tenant in but then you throw in the basement and the basement is all gravy. That was one of the most exciting pieces to me. Whatever you get out of that, as long as it’s not a big expense to have to manage it from people coming and going, that’s all gravy on top of the pro forma.
That’s how you buy an asset and how you turn an asset from what can be a nice base hit into a double, a triple or a home run. You have some things that you can do both value add and if you’re sophisticated, smart or can properly navigate, which is what we do, you turn something into currently collecting no rent to being able to collect big rent. Those things change the dynamic of a deal.
Something else that’s important about this is we have two properties. Frank is paying close attention to the neighborhood. He owns multiple assets in this neighborhood and even outside of the two Westwood properties that investors are invested in. He’s taking care to make sure that the aesthetics of the outside of these buildings look in because if you can acquire enough properties in a specific area, you can have an influence on how the neighborhood looks and how it’s perceived by potential tenants that are coming in. Frank, talk about the mural that you put up on the side of one of the Westwood buildings.
What I ended up doing with this is multifold. When you get into real estate development or any type of business that you might own, you get a chance to do things that you’re passionate about. For me, what I’ve always loved is street art. I’ve always been a big fan of it and Richmond has an incredible culture of street art. They’ve taken murals from something that people would not want or shied away from. Ian used the term lean in. Richmond leaned in. VCU was an Arts college. Most of the creativity comes from VCU. These kids used to move away. Now, they don’t move away anymore. They stay at Richmond, which is fabulous but this is in Henrico County. This is not in the city of Richmond. This is on the outskirts.
What happens in a lot of instances is you don’t see cool art in Henrico. You mostly see it in Richmond so what I wanted to do is I wanted to showcase that this is where we’re going to go. When you turn this corner, you’re before Topgolf and the highway. You’re getting into a new spot. On the other side of the highway is now a Carvana tower, which I knew before we bought this building. There are a bunch of apartments behind this and I wanted it to be edgy and hip.
Initially, what happened was I renovated a house in the Fan, which is the neighborhood I used to live in. It’s a walkable community. This house was three blocks behind where I lived and it was on the way to Starbucks. I remember I was either walking or driving and I was like, “Someone graffitied the side of this. They ruined the side of this house,” because the day I went by, it had all this green spray paint on it. I went by like two weeks later and there were these incredible hands and it was a spray paint bottle.
I ended up seeing who was the artist. I was like, “That guy is awesome.” In Richmond, there’s a way you can do this. I went around to see the graffiti artists that were the street art guys or ladies who are highly promoted. I kept coming back to this one artist so I reached out to the owner. I said, “Can you put me in touch with the artist? He was the guy who bought the house from us.” He did. Have you ever heard of The Awakening statue in Washington, DC? Have you ever seen it?
Over at Haynes Point? Yeah.
It was in Haynes Point and they moved it to a different part of the world when they did all that stuff in Maryland. When I was a little kid, I went to Washington, DC and saw this for the first time. I thought it was so wicked cool that I wanted to do something like this.
If you’re reading, it’s really neat. It’s like a giant hand coming out of the ground. It’s almost like an old God that’s either drowning or reaching out of the ground. It’s cool. It’s right at Haynes Point. There’s a 1-mile loop that’s South of DC that a lot of runners and bikers go to do a little bit of a lap. It’s at the very Southernmost point or at least that’s where it was when I lived in DC. It’s a cool landmark in DC.
It has been in a bunch of movies. I saw it when I was a little kid and it seared in my brain. What I talked to the artist about was I’d like to show something that shows this area’s awakening. I showed him a picture that I put up. He was like, “Give me about a week.” He came back to me and gave me something completely different. He’s an artist. This is what he does. He goes out and he creates. I don’t even think I’ve ever shown you this Ian but what he created was something that was very workmanlike.
You showed me. It was the worker with the hammer and the tool belt.
We ended up getting a different rendering from him and that was what we were going to go with. I spoke to him at the end and said, “This is cool. I really like it. Let me ask you a question.” I manage a big staff and I know how to give people autonomy. I realized I was controlling this process and I’m not an artist so I was like, “Before we go, if I was going to give you free rein to do whatever you wanted to do on the side of this building, what would you do?” He was like, “That’s interesting. I’ve never had a client ask me that before and I’ve done murals all over the world. Give me a couple of days.” I said, “Okay.”
He came back to me with a collaboration with this other artist. It was something where he was holding this cool flame up. We ended up putting the window where his hands are. He calls me up and goes, “Originally, we’re going to do a quarter of this wall. Do you care if we go further?” I go, “No.” He called me up again and goes, “Do you care if I do the whole wall?” I was like, “Is it going to affect my price?” He goes, “No,” so I answered, “Not at all.” He ended up doing the whole entire wall and even wrapped around a little bit to the front. The goal was to have a statement piece. I want people to know that this is different now. People stop and say, “I don’t want to rent anywhere else on the street. I want to rent here,” and that was what I wanted to accomplish.
The goal is to make the building more desirable. It’s one thing to say, “Here’s my address. I’m on Westwood. Here’s the number. We’re in suite 2B,” if you’ve got a client coming to see you in an office building. It’s another thing to say, “It’s the building with the graffiti art on the side of the guy with a beard and it’s raining. You won’t be able to miss it.” You say that and someone says, “I know exactly what you’re talking about because I’ve seen that five times going to Topgolf,” or whatever it is going over there. It plays to a little bit of ego. If you’re a business owner and you have an office, you can say like, “That’s my building. I’m in that building.”
All those little things with those aesthetic touches allow you to ask for $17.50, $18 or $18.50 a square foot. Ask for a little bit more. It’s a little bit of money upfront but this is an investment that we all knew going in could be ten years or more. Our goal is to make the neighborhood valuable and desirable so the people are happy to spend money to go into a neighborhood like that, especially a growing neighborhood.Nothing ever goes perfect. You have to think about the downside as much as you think about the upside. Click To Tweet
Two of our buildings are well along their lines. We raised $4.5 million of private capital. The investors that we had in this deal are investors that wanted some stability so they want to know if this is safe. There’s great cashflow in this. They get an 8% yield. There’s an 8% cap rate. We’ve already paid out the first payment. We paid it relatively quickly. It wasn’t a full three months but we paid it because we said we were going to pay quarterly on this schedule.
Our next payment’s going to be going out soon. They’re going to be getting the full 8% that’s coming out of it. As our rent starts to come in and it does better, the next goal is going to be that as we get more revenue, we refinance and take out some debt. We couldn’t take out debt when we raised capital because we weren’t getting rent from the third floor and the basement. It was certainly not the rent rolls that we’re getting now. As we get closer to the church, even more rent is going to start coming out. When I say church, Frank, give two minutes of what’s going on with the church.
2405 is the first piece of the puzzle. The second piece of the puzzle is 2323. It’s just up the street. We had a good anchor tenant upfront in 2323. They have a lease that goes for four more years. We’re not touching it. They’re a good tenant. They pay and they’re at $16 per foot, which is good. That building was empty from that point back. We leased the back part of the building above pro forma to somebody who’s using it as a storage facility, which is the perfect use for it. We did pro forma at $14 per foot. We leased it at $1,450 and we’re working through our second LOI now for someone in the middle. All of these things are starting to happen.
In only six months’ time, we’ve been able to renovate what we could stabilize and now we’re starting to drive towards something that’s starting to make sense for those two parts of the building or the asset basket. We’re in a different spot in the church. We are this close to getting a building permit. We’ve brought in a consultant who’s helping us get it through the finish line and we, as a company, are probably going to bring in our own project managers to run it some commercial folks. The reason is that the supply is insane. Prices have gone ballistic and because of these things, we want to be able to stabilize and get the asset improved for a better price.
What we’re working on is how do we do that and this is why I brought the deal. We have the ability to self-perform construction so we may end up doing a self-performing construction to take some of the price shocks out of this but these are things that happen. When we signed this deal up, we didn’t know the supply chain was going to be all condensed.
Those are the battles that we’re fighting. What we think will ultimately happen is we’re going to have fifteen units that are going to rent between $1,000 to $1,800 or $1,900 a month depending on the size and we are going to be at or if not above where we pro forma with this. This property will finish, if not late 2022 or early 2023. It’s perfectly in line with what we lined up from the timeframe with investors. That’s the goal and we’re already working with several banks in order to get in. When they see this thing stabilize, we’ll be able to take the investors out.
In short, it’s an old church. We’re gutting it. We’re turning a church. We’re getting it permitted so that you can put residential in it. We are permitting it for condos. We are going to put fifteen units in it. Now, that church makes no money. When we’re done with it, it’s going to make a bundle of money. For our investors, we’re still on track based on the three different assets, which are pretty well-diversified because you’ve got a mix of residential and commercial storage. We are on track to do what we said, which is to give them their capital back in 18 to 24 months while letting them keep a percentage stake of the deal. They get their money back. They are getting their 8% yield every quarter so they’re getting great cashflow out of this.
The minimum to get into this deal was $100,000. They’re getting their 8% and then we’re going to give them the capital back but even when they get their capital back, all their risk is off the table, they’re going to retain an ownership percentage and they’re going to continue to get quarterly payments. 5, 6, 7 or 8 years from now, when this neighborhood has realized its full potential, we’re going to sell it for a very big profit on top of what we bought it for and our investors are going to get a percentage of that big bang we get at the end.
In the meantime, in that 5, 6 or 7 years, they can do whatever the hell they want with their capital because all their risks are off the table. There is no longer any risk to them. They have equity on the upside. They do not have equity or risk in any downside once we give them their money back. We’re on track to take care of these investors like we said we were going to do. I have a quick question on this before we wrap it up. Inflation has been pretty crazy. When we pro forma this, are you seeing anything different in your costs where inflation is helping us on the rent side but that’s a double-edged sword when you get inflation because your expenses sometimes can rise more than what you can charge?
We’re okay with inflation on what we’ve seen with the 2405 Westwood Malvern building. Nothing has gotten crazy. We need to do things because it’s mostly a facelift is it’s not as prohibitive in cost as the church because the church is more of a down-to-the-stud full renovation that requires more. Initially, when I brought this deal to Ian, I said there is a lot of upside value in both of these buildings and there’s a lot of stability in the 2405 and 2323, the two buildings on Westwood.
The church is more of a variable but I do believe it’s a congruent relationship between inflation and the amount you’re going to get in rents. We built this thing on such a low basis. We’re still going to be fine but there are cost increases on the construction side. It’s really hard to find labor so those two things are the reason why we’re thinking about doing this in-house versus taking it to market, which will save some of that inflationary price increase.
I only bring it up because I don’t want to sit here on an episode and make it seem like every investment you do, everything goes perfectly to pro forma. The truth is we’re probably going to do better than pro forma on revenue and we’re probably going to spend more on expenses. It’s probably going to take a little longer to build some of these and we did because when we put this pro forma together, inflation was not this out of control the way it is.
No investment ever goes perfect the way you think it’s going to go. In everything that Frank and I have done so far together and I know all the things he does and he knows my investments, we’re always very conservative in thinking about the worst-case and about our floor. We’re not trying to pro forma with the hope that the market’s going to help. We normally pro forma thinking the market’s going to get worse and when it does get worse, we’re like, “What does this thing look like?”
Whereas a lot of novice folks that get into the business project a little too much. They look at maybe the last few years and it’s like someone buying a stock saying, “The stock market is up 25% this year. I’m going to load up on stocks. It’s going to do it again this year. Here’s how much I’ll make.” You’re not going to get two years in a row at 25% out of the S&P 500. You see a lot of people doing it in crypto too. In real estate, you’ve got to be conservative in all your estimates.
Whenever I go through these spreadsheets with Frankie, we normally have a whole line item that is slush that’s like, “This is the foobar line item.” We know for a fact something stupid is going to happen. It’s going to be expensive and we’re putting a chunk of money in here so when it does happen, we’re not apologizing to everyone that we didn’t see that coming. We don’t know what it is but it’s going to be something.”
Let’s talk about this. I was on a call with someone going over this exact thing. They asked me where I’m positioned for business, what’s going on and what I do. Most of the assets we own are backstopped by the US government and what I mean by that in English, the US government backs the rents because it’s subsidized in some way. We provide a product and then Section 8 comes in behind it. When Ian and I put a deal together and we raised a bunch of money a couple of years ago, the pandemic happened less than 90 days later. We’re both shitting biscuits because we were sure this thing was going to go in the parlance that we used tits up.
We were scared. We were on the phone multiple times a day. Ian and I’s money is in it and worst of all, our friend’s and family’s money are in it. We were panicking. We had a conversation and said, “This could be a slower return but what we did in this real estate deal is we have the ability to collect rents so we’re going to not panic. We’re going to take a deep breath. We’re going to let the world settle down. The US Government still paid their rents on April 1st, 2020, even though the pandemic had started. That was one of the first things that came out. The US Government said, “We’re paying our rents.” We took a deep breath and then waited about 60 days. The market then started to get incredibly hot and we readjusted again but we were backstopped with solid rents.
We waited and then said, “This is where we’re at. This is something unprecedented,” and that’s how we got through that one. With this one, we didn’t use the basements. We didn’t have to. We thought it could work. We were low on the numbers. If it didn’t work out, we thought we’d still be fine. The other thing is what Ian said a minute ago. This is probably a CD asset now.
In real estate, if you don’t know this, things are rated A to F. It’s probably a CD asset with the way it sits. I think this is a C-plus or B-minus type of an investment when it’s finished but we’re going to be charging C rates and we can do that because of how we built it and how we’re doing it. If the market goes crazy, we can rent for more but where we did pro forma was a nice C or C-plus. If we can get into the B or B-plus range, that’s winning for us but in a down economy, you want to think about can you rent this where it’s silly and stupid and people are going to say yes and that’s how we set this up.
The nice thing about this one too is you got three buildings. By the time the church is done, it could be an A building the way you’re designing that if we want to go crazy. One of the Westwoods could be a B-plus and the other one may be a B-minus or C-plus. You got a little bit of a mix of all that. You’ve got a mix of rates. In that way, you’re a little bit diversified on the people that are looking for space. We didn’t go all-in on A, B-plus and C-minus. We’re all over the markets. We’re hedged a little bit.
Nothing ever goes perfect on all these things so you have to think about the downside as much as you think about the upside. We thought through that. We were like, “What if inflation happens? What if the economy takes a big downturn? What if unemployment spikes? What if there’s a 30% drop in the stock market and people panic? What if COVID comes back in a major way and everything shuts down?” Before you go get people’s money, you have to answer these questions and you don’t have all the answers but you have to say, “What will we do if these things happen? How will we handle it? Are we sufficiently hedged in certain ways that we could do different things?” We’re not all in on burning the boats with one strategy.
This bears discussing that the RVA 75-19 deal closed at the end of 2019, my 11th year in business. This deal closed my 13th year in business. I wasn’t doing these deals in years 1 or 5. I had to have a staff. We had to have people who could perform and we have great people who make sure we can perform on the back end. When you start to look at the bigger stuff, you need to make sure you have the ability to perform. Some of it is knowing your abilities and limitations. When Ian and I get into these deals, our parents, siblings and friends are in these deals. The last thing we want to do is not to pay them back. We give them what we promised. Also, the type of deals we’ll do are ones where we think there’s a high level of certainty but even so, things can still go wrong.
The last thing I’ll say because inflation is all over the news and on everyone’s mind who owns any stock or thinks about the economy is, ultimately, if you own hard assets, you don’t worry about the price of bananas and milk. If people talk to me about, “Have you seen gas prices?” I’m like, “Yeah. I own a shitload of hard assets and they’re up a lot more than I’ve paid in bananas.” In life, your goal has to be that if you’re worried about inflation, how do you own enough things that are going to grow dramatically? If you do that with debt, your profits are even bigger when inflation starts to hit. If you can lock in low rates on a term and buy an asset that’s going to inflate while your rate stays steady, the amount of profit you can make on real estate in an inflationary market is insane.
You’re not going to make money in an inflationary market in stocks at the same pace unless that company can raise prices more than its expenses. They’re going to be in that world where their margins are getting eaten up by expenses so the things you buy have to be the things going up. A lot of the company’s profits are going to go down because their expenses on things like rent and people are going up. What do you want to own? You want to own the things that are going up.Inflation is one of those things that you don't think about it until it slaps you in the face. Click To Tweet
This bears repeating. There are two last things I want to say before we close this. The first one is this. It’s the advice I give every intern who works for me. This goes back a long time.
It’s a timeless advice. I listen to it too.
Whenever there’s an intern, I always sit down with them and say, “Would you be willing to take two pieces of advice from me?” I’m the owner of the company so they’re always like, “Sure. That’d be great pieces of advice.” I’m like, “One, buy hard assets.” They’re like, “What do you mean?” I go, “Real estate is the hard-ass asset. I believe in gold, silver, titanium and platinum but buy hard assets you can touch. Piece of advice number two is don’t get fat.”
Ian and I have talked about it. I don’t know if we can talk about it here but this time around someone put on Facebook, like, “What are you going to do to hedge inflation?” I called Ian up and said, “I’m going to buy 300 houses 10 years ago.” The time to do it, if you haven’t already done it is now. You never know when that next wave’s coming. Nobody talked about inflation because it hadn’t happened in many years but here it is and people who own assets like Ian and me were no smarter than we were before. This is a good hedge and it’s a good place to be. It’s a nice return. It gives you an opportunity to participate.
Inflation is one of those things that you don’t think about it until it slaps you in the face. Most people ignore it. One of the industrial properties that I own, in the least, I have those rent increases tied to CPI. At the time when I negotiated that in because this is an equipment rental company with a big publicly-traded company, it was surprisingly easy to get them to put it in.
I paid a little higher price for it. When we were negotiating on price, I said, “I wanted that,” and they were like, “Cool.” The reason why they said that is because there hadn’t been inflation since the ‘80s so they were like, “Look at this fool. Everyone else asks him for 3% straight. This guy’s asking for CPI.” For me, I was buying it for a different reason. I wanted an income that would protect me but now, it has made that property so much more valuable because I have a lease with eleven years left on it that is tied to CPI. All these old men that have millions of dollars and don’t know where to put it are fighting to get my property.
Define CPI for people who don’t know.
A CPI is the US index for inflationary products.
CPI is Consumer Price Index.
It’s a basket of goods that stays steady. They take a look at it every quarter and they go do price checks on it. Think about all your basic stuff like gas, milk and groceries. Think about all basic expenses for human living. That comes out with an index. That index goes up down or stays flat. Typically, inflation is 1.5% or 2% in the first two years of me owning this property. That’s what I got for rent every year. It was 2.4% or 2%. It was nothing exciting.
This 2022, I’m going to get close to a 7% increase in rent. The bigger thing though, for me is this is a 14-year or 15-year lease when it was signed. Anyone who wants to buy that property from me is going to get that lease assigned to them. They are buying into a property with a tenant who is contractually obligated to pay higher rent tied to inflation so if you’re someone who’s worried about inflation hitting you, my property is so much more valuable than it would have been if I would’ve done the standard 3% increases every year for rent.
You can do little things to think about those things but when I did it, no one was talking about inflation. No one had been talking about inflation for 20 to 30 years. Now, my tenant is probably looking at it, saying, “That’s a bad deal. I should have done 3%,” but at the time they were like, “This isn’t a risk. We don’t care. We’ll do that and we’ll sell the property for more.”
I’ll say two things. I work in a different business as a consultant. It’s way more expensive to buy insurance now than it was before the pandemic. You can’t buy it now. It’s impossible. The other thing with inflation, if you don’t understand it, it’s very hard to completely comprehend. It’s like a can of biscuits. Have you ever seen a can of biscuits that’s busted? It’s not going back in that can. It’s over. That’s what happens with inflation.
When inflation happens sometimes, it pulls back but it’s very modest in pulling back. Once that market has forged ahead like those biscuits, they are not going back in the can. What Ian’s talking about is there is a risk because it’s not a standard number. It’s a very mitigated risk and it’s something that gives him upside. His entire goal was living on a fixed income and he is worried if $1 is not worth $1, he wants to have it tied to something that’s going in line with his loss of dollar power.
We’ll wrap this up. In general, 4, 5 or 6 months into this security that we put together, it’s going well. It’s going to have its challenges but it was worth us unpacking to where it is now. It was great talking to you.
It was a pleasure.
- Episode 41 – Raising $4,000,000 in 60 Days