LMSM 47 | Industrial Property

 

In 2017, Ian worked long hours, traveled constantly, and no longer found his work interesting. But like most executives, he was locked in with golden handcuffs in the form of stock options. In this episode, we talk about how Ian decided to leave and replaced his salary and bonus with several industrial properties that require only a few hours of annual work.
In this episode:

● When the only thing keeping you at a company is money
● Resisting the temptation to spend and letting your money grow
● Giving up “more” and being happy with “enough”
● Where Ian got the inspiration for industrial property
● How I found my first deal
● Building a team to fill in your knowledge gaps
● How to raise money for an industrial property
● Deciding when to sell at a profit

Watch the episode here:

Listen to the podcast here:

How To Use Industrial Property To Replace Your Salary

We are talking about my journey from retiring from the corporate space to becoming an industrial landlord. Anyone who knows me knows that I can’t even change my own oil and I am the farthest thing from being a gearhead car guy, yet I own several collision centers in the South hundreds of miles away from where I live. How does a transition like this happen? You’re going to have to stick around and find out. To all of our loyal followers, thank you for tuning in every week. If you’ve not given us a five-star review on Apple Podcasts, we would appreciate it. If you are new, please hit the subscribe button wherever you listen to podcasts and turn on those notifications. Let’s ride.

Frankie.

Ian, you son of a bitch.

Congratulations on leaving the corporate world. Welcome to the rest of your life. Click To Tweet

We are some hard-working guys. We try to start this thing off and we’ll dabble a little in the show. Now we’re grinding. It’s our third episode in a week.

It’s incredible. Our dozens of loyal followers are fortunate that we work hard at this.

We are overwhelming people with incredible content, largely because you and I are about to go on vacation for weeks and we don’t feel like having a show while I’m in Greece or wherever the hell you’re going to be. You’re not going to have more fun because you have a baby. What the hell is the point of going somewhere fun with a baby?

I’m going with a family who thinks my child is insanely incredible.

That’s great because you can just give the baby.

LMSM 47 | Industrial Property

Industrial Property: You get stock options at a certain hip price. And then anything that the company does above that is what you make on it.

 

It’s not going to give. It’s a bounce pass. A bounce pass is delivered with some malice. When you deliver a baby to somebody, it’s like, “There it is. Coming in hot. My wife and I are heading to the bar alone.”

You’re out.

“You’re right, he’s adorable. We’ll see in four hours.”

Frank, what is important is that our overinflated sense of self-worth thinks that we need to do a third show in a week?

I got a haircut for the event but I didn’t think it was important that I should trim my beard. Your wife keeps texting me that your hair is gray and I’m trying to make you feel better by putting my beard out.

For the record, you’re showing me up, you son of a bitch. Every time Jenny sees Frank on Facebook, she’s like, “Why doesn’t Frank have gray hair? You’re almost all gray. You’ll look like a grandpa next to him. Is he coloring that?” I’m like, “I don’t think he’s coloring it. He’s Italian. Look at his beard. It’s gray everywhere. If he’s going to color his hair, he’d color his beard, too. You could see it.” She’s like, “Why are you gray?” I’m like, “I don’t know, Jenny. He had a good ten-year run out of the corporate world where I was living it hard. Maybe now I will catch up with him.”

Hereditary. I got two extra belt loops. We did a show about the deal that we’re putting into fruition now. We got a couple of documents we have to finish but we have verbally raised the $4.5 million that we were claiming we were going to raise for this syndication deal. It’s a bond offering, which is a little different than syndication but it’s in my local market in Richmond. Ian sold a collision shop in Georgia and we’re going to go through why he did it and got into it.

What I want to do is I want to set my recollection of what happened and how you got into this and then I’ll let you correct the story and tell it your way and then we’ll walk through it. I left NVR in 2009. I remember Ian and I were having conversations with each other in December of 2017. I remember Ian had a big thing happening. He wanted to resign and talk to his boss about it. He wanted to make sure that on paper, he was an employee at least past midnight on January 1st because it made a big difference in stock options and things like that.

I remember I was in California and Ian called me at 7:00 AM Eastern time. It was 4:00 AM and I was already awake. We talked quickly. He was in this meeting and I left him a cool message. Whenever anybody I know leaves corporate, I would leave some version of a message, “Congratulations on leaving that behind. Welcome to the rest of your life.” Ian had a problem. He had money and he needed to do something with it. Keeping it in a Wells Fargo account isn’t prudent.

As Ian started to look around in 2018 at where to put money, he started looking at different asset classes. He’s more invested in the stock market than I am and you were still active there. You landed on collision centers. My recollection is you picked the asset class because it was safe and it had A-plus tenants. It was in a sweet spot, if you will, of pricing. You were looking around that. I remember you and I talking a bit as you were driving through your first one with 1,000 questions and getting into it. You had to ask yourself, “Am I going to do it or not?” That’s my recollection. Where do you want to take it?

Stock options are like handcuffs. They're meant to keep an executive from leaving and going anywhere. Click To Tweet

All of that’s right. Prior to leaving NVR, my whole sum of real estate ownership was three different houses that Jenny and I bought, a condo in DC, a townhome in Chicago and then we were living out in Vienna. We had purchased a home. I have real estate experience in residential because I worked for a home builder for thirteen years but I never considered myself an investor. All of my assets to that point have always been in the stock market and all of my wealth has been tied to my executive stock options. Do you remember where you were when you became a millionaire?

Yeah. I used to track it. I was 27 years old. It was a combination of things. I worked hard to save money. NVR’s stock had gone bananas. My retirement account was right around $500,000 and I had enough equity in two real estate deals where, on paper, I was a millionaire.

A lot of it’s on paper. I was well over $1 million the first time I ever noticed it. I wasn’t actively tracking it and paying attention to it because you look at equity in your real estate and you look at equity in stock options. What’s interesting is the first time I noticed that I was $1 million net worth until when I was $5 million net worth was 3 years or 4 years. It was super fast. A big reason for that is the manner in which I worked. Being an executive in a company, that’s how I earn money.

I had stock options and I had a lot of them. I’d grown fast and the company in a five-year period to where every year, I was given another region to take over or another branch to take over. Every time that happened, I’d be given more stock options, 500, 1,000, 2,000 stock options. My last promotion was 5,000 stock options. The way they work in a big corporation, if you don’t know how stock options work, you get them at a certain hip price and then anything that the company does above that is what you make on it. I got a $600 share at NVR.

I dated a girl in college whose family had a bunch of money. I’m 21 years old. I showed up and her aunt was talking to her and me. She said something along the lines of, “That’s back when $1 million was a lot of money.” I was pissed broke. I had $1,700 in the bank and I drove a ten-year-old car. I was like, “It still is a lot of money.”

In 1998, I graduated from college and went to work for the same company. The stock was trading when I joined the company at $33 a share. This is relevant because it shows the whole roller coaster ride for the stock. Ian and I got on and off at different points. Everyone was shocked that it was $33 a share because most of the people had worked there through the last correction in the bankruptcy where the stock was trading at less than $1. There are people who own shares that were trading at sub $1 that then had it at $30.

What I did was in my first bonus check, I bought as many Ryan Homes stock and NVR stocks as I possibly could. I was invested through Aesop and everything else but I was like, “I want to do something with this.” I bought it for somewhere between $35 and $40 a share and I sold it at $850 a share. It was worth $80,000-something and that’s how I made a down payment to buy my first flip. From 1998 through when you joined the company and the stock had run from $33 a share to where was it when you started?

When I started, it was around $600. I think a little bit differently. Frank and I are the same age but when I started at NVR, Frank had been grinding his way up in the company. I came in at an executive level. On my first day in 2005, I had 1,000 stock options and then I got another 1,000 six months later. I had 2,000 stock options at a hip price of $600 right out of the gate. The way stock options work, you can’t just sell them. They’re called handcuffs for a reason. They’re meant to keep an executive from leaving and going anywhere.

The stock went up to $900 then it fell. It was crap for 3 or 4 years. I had good mentors at NVR who taught me, “Don’t sell these things as soon as they’re worth money. Hold them for ten years. That’s what you’re allowed to hold them for.” By the time they got to 2015, I had these at $600 and the price was maybe $1,600. That 2,000, you multiply by 1,000 in growth so you’ve got a couple of million dollars there. Along the lines, every year or two, I’d been given more stock options because of promotions, bigger titles, bigger jobs.

I was always getting these 1,000 and 2,000 options. Every 2 or 3 years, I would look and say, “I’m coming up on ten years so I have to sell these now.” That’s why my net worth rapidly went from $1 million to $5 million and then the last three years I was there, it more than doubled again. That’s because the NVR stock price went from $1,700 to $3,500. It doubled in almost a year. It felt like that happened in 2016 and 2017. I’m looking at how much money I could cash.

The way it works was stock options, you don’t have to wait for anyone to tell you you can take it. You can give yourself a bonus anytime you want. At any time, I could have sold 100 shares that were in the money $2,000 and taken myself a quick $200,000 bonus anytime I wanted. The money is like any other bonus, it’s taxed. Tax is taken out of it and then the money hits like a paid deposit.

I got to a place where I’m looking at it and I’m going, “Holy crap. I had all of this stuff vesting on the first that if you’d have told me thirteen years before when I started, I would have eight figures that I could take away, would I keep working?” I was 41 and I was like, “I would not keep working especially a job I wasn’t happy with.” The stock going up is partly what drove my behavior the last six months at NVR of not giving a shit anymore about anything that was happening there. I was like, “I don’t need to work in a company anymore. I can retire,” so I did.

Industrial Property: Don’t sell your stock options as soon as they’re worth money, hold them for 10 years or the amount you’re able to hold them for.

 

There are a lot of people who are in Ian’s position who didn’t retire or couldn’t retire. This is critical, the reason that Ian was able to do what he did is he didn’t sell the stock as soon as invested. There’s a vesting period and there’s an expiration period. Ian was humble enough to say, “I am not as good at managing my money as Paul Seville is.” He wrote the stock options out.

Ian and I will both joke. We know the vesting date of stocks and we know the bonus date that people get their bonus checks. People were buying beach houses or expensive cars but they’re not buying assets and they’re not letting that asset get the most of its possible value. What Ian did is he sacrificed immediate gain for long-term wealth by holding these things and allowing them to increase even more in value. He said it doubled in almost a year. Had he invested those, it would have been gone. Their value skyrocketed because of his patience.

Our CEO once told me that 80% of people with options sold within a month of their vesting date, which meant you sold after four years and didn’t hold them for six years where they could grow tax-free. At any given point after 2012, Frank, I could have sold 200 shares at any time, made myself a couple of hundred thousand dollars and ran out and bought a Lamborghini. At any point, I could have done something stupid like that. I could have gone and sold a bunch more and bought a bigger and better house.

In all those years, I was driving around in a Jeep Grand Cherokee that was 5 or 6 years old. I wasn’t spending any of that. I was holding it as long as I could because I never wanted to be the guy that worked until he was 60 in a corporation. I never wanted that. I wasn’t interested in it. I looked at it and I thought, “If I would hold this stuff, let it grow tax-free and lived more humbly over those ten years, I won’t have to keep working here.”

I had more than most. When I left, I was probably a top ten executive in the company, at least options-wise. I was in that mix. When options were given out, I was given much more. My last promotion getting 5,000 stock options when the price was around $2,000 was crazy. That’s a $10 million option package that I was given at that point. By far the smartest investment I ever did was being disciplined enough to not take a bonus whenever I felt the urge to go spend money and holding all of that stuff as long as I possibly could. When it was time to take a big bonus, I left with an exit that set me up for the rest of my life if I wanted it.

It’s funny now that Ian and I did this show together, the cat is out of the bag that we’re friends. There’s a bunch of people that would be like, “I didn’t even know you guys knew each other.” One of the questions I hear regularly is, “I can’t believe Ian left so much money on the table.” It depends on who says it to me. Usually, I dismiss it. If it’s a smarter person or somebody who deserves to hear it, I’ll always ask him, “Did you ever ask him why? Did you realize what he did? Did you understand that he didn’t cash them immediately? He didn’t get one set of options because he didn’t cash them in year 4 or year 5. He essentially got two sets of options and he wrote them. He didn’t need to wait for these other handcuffs to mature because he was patient enough to do it once.”

As an investor what you and I are good at collectively and we do it in individual ways most of the time is we realize you don’t make your money when you sell. You’re making money when you purchase. You realize it when you sell. What you realize is, “I’ve got these incredible options to purchase and I can realize it later,” when they were vested to you. It’s the same thing that we’re doing with the deal we’re doing in Richmond.

I get that a lot. I’ve had this conversation with David Moeller a number of times because he knows how much I left behind. Anyone who’s ever retired as a senior executive from a big corporation left a lot of money on the table. This is the nature of stock options. As long as you are working and doing a good job, the company keeps giving you options that are not vested and you have to wait several years.

My mentor, Bill Inman, retired when he was 60 or something like that. He’s the founder of the finance business for NVR. He’s probably worth $150 million to $200 million when he left. He left $50 million to $80 million of unvested options. Anyone who’s retired or left NVR left a lot of money on the table. Saying I did, okay, great, yes. If I waited until I’m 60, any time I would leave, I would be leaving more on the table. This game never ends.

The cycle never ends.

The golden handcuff never ends. Frank, if I would have waited five more years, I would have made a ton more money. I would have also had a ton more money unvested that people would be saying, “I can’t believe he left that much.” If I try to wait ten more years, it would be even bigger. It snowballs. I had to come to grips with, how much is enough? This was a hard question for me to answer because I’m young and my family’s young. I’m not 65. I’m not like, “Kids are out of college. I’m taking care of everything.”

The challenge for me was, “How does a family of four continue to live the way we do and have everything we want?” I might live 60 more years. If I’m leaving a corporation and leaving that much money, am I sure what I’m taking away is doing good? Yes, I could take eight figures away in that January of 2018. I left $20 million-some of the unvested options that I would have had to wait five years to get it. A lot of people looked at it and said, “You couldn’t grind it out for five more years?”

Frankie, to me, that will never end. I’m 46 and people are going to be like, “You can’t wait five more years to get that next $40 million?” When does that end? A decade is a long time. This is important, Frank. The ten years you’re talking about to get that money is the sweet spot of raising kids. You’re past all the diapers, the toddlers, the terrible threes. She’s a cool little kid to hang out with so is IJ. They’re both in prime sports years. I got to give up those ten years so I can say I have more money?

The question for me had to be, how much was enough to live comfortably? The irrational fear I had was, “This big nest egg is going to dwindle down to nothing by the time I’m 50 and I’m going to be putting a resume together and interviewing.” In hindsight, it was completely irrational and stupid. You had to tell me that multiple times but I was like, “I’m going to spend all my money,” and you’d be like, “Do you know how hard it is to spend all the money you have?” It would freak me out. That drove a lot of my decision.

Let’s calibrate this. Before you quit, the smart thing you did is you leveraged your GE career into an executives position with a company that valued you from day one and gave you an executive salary with some options. The second thing you did that was smart is you understood the options. I had options and I didn’t understand them nearly as well as you because I grinded from the bottom up, my option package was a fraction of your options package.

Number three, you waited and you were patient. Number four, you were deciding to make this exit and you weighed your options and your choices. I remember I was in California. While you were making this decision, I had my feet in the Pacific Ocean watching the sunset. You’re coming home from work. You’re on the highway. We were talking and you talked to Inman. Talk about that conversation you had with him and when you decided, “I’m letting this ship set sail.”

I wish I had the guts to talk to him before I quit but I didn’t have the guts. He’s my mentor but he’s also close friends with the chairman and CEO. I was nervous that he might talk to them or I wanted it to be wrapped up. He was the hardest conversation I had to have because he had taken a huge liking to me and he was a mentor. He didn’t leave at 41. He stayed until he was 60. I told him how much money it was and he was like, “That’s the smartest thing I’ve ever heard in my life.” He’s like, “I’m worth so and so. I don’t spend any of it. Most of it is in a checking account.”

He had $50 million in treasuries.

“I’m going to give it to my kids. I don’t want to buy another house. I don’t travel that much.” He went through and he goes, “The one thing I can’t have back is when we went through the bankruptcy, I never saw my girls.” He goes, “If you leave to go spend more time with your family, this is great but don’t let something else consume you. Go be with your family if you’re going to leave this because you’re not going to find a better corporate gig than NVR.”

You mentioned five things that I did. Number one, I traded a company whose stock did not have a great future for one that was going like a rocket ship. I decided if I’m going to be an executive and stock options is how I’m going to get paid, I need to go to a place that small, not GE which is a third world country that’s huge. I need to go to a small place that could blow up. They could triple, quadruple, 5X in 10 to 15 years because then my options will be worth so much. My options would have been worth zero for a decade at GE because GE stock went from 60 to 40 to 30 to 20. It’s still trading at thirteen. Those are worthless stock options. Great job you’re an executive. What the hell does that mean? You’re just making a salary and bonus but you’re not getting paid any equity.

In a land of the blind, the one-eyed man is king. Click To Tweet

What you did that was smart, which is different from how I did it is you rose up the ranks at GE. They weren’t going to reward you with the same options package that you got by coming to a place where that was one of the enticements. One of my favorite quotes from Gulliver’s Travels is, “In the land of the blind, the one-eyed man is king.” You found a place where you were valued. You got them and you wrote them. It’s an awesome story.

What’s different from most people is you maximize the value and then you said, “Enough is enough.” Let’s fast forward. It’s January 1st, 2018 you’re unemployed and you have a bank account with two commas worth of money in it. You’re telling everybody you’re retired where we’ve discussed on this show that that was a way to buy time. That’s when human nature creeps in, “I’m bored. I’m used to waking up early and having something to do,” and you don’t. You’re like, “I also have this money, which is a blessing but also a curse.” You start thinking about what to do with it. That is the year that you and I went to Omaha and we went to a couple of investor conferences together. You did it independently of me with some others. You started looking around a little bit. What led you to collision shops and industrial real estate?

After a week of everyone calling and saying, “I’m surprised. We’re going to miss you. Thanks.” A hundred phone calls like that happen when you leave a big company then you quit getting calls. In the first two weeks, you get lots of calls that come in layers. The people closest to you call first and then the mid-level and then the people that weren’t sure they knew you but they still want to say something nice so they call. That third week, you’re checking your email at 11:00 AM and you haven’t received one and you’re like, “Holy shit. Nothing is going on here.”

I start second-guessing myself for sure. “What did you do?” All the voices start coming into your head. All the people that said, “Why not wait five more years? You should have waited five more years.” “Is this enough money? What am I going to do with it?” I started getting phone calls from people I used to work with that wanted me to come back into an executive role, a corporate role, bigger positions. I was like, “No, I traded that. I’m not going back into that because I am not going to find something better than the options that I had somewhere else so I’m not doing that.”

Within days, I was already fretting that all my money was going to go away and I needed to find something to put it in. I didn’t want to put all that money into the stock market. To me, that felt like it was speculating our family’s future. I kept a chunk in the stock market but I didn’t want most of it in there. I needed cash. Since 1999, I have had a salary that hit twice a week. In NVR, it’s once a month. I had a monthly salary that my family lived off of and now I didn’t have one. I just had a bunch of money. For my own sanity, I needed to see a direct deposit hitting an account and I needed to figure out how I was going to make that happen.

My wife and I are having a conversation. I now have a personal trainer who meets me at the house every day at 6:15. In my 20s or my 30s, I would have had it at 5:00 or 5:30. I would have traveled somewhere and I never showed up. The reason is, I was like, “I’ll just pay for it. It’s too inconvenient.” What I’ve learned is how I work as a human being, I understand what works for me and what doesn’t and I have some boundaries. If I go to bed at 2:00 AM, I can get up at 6:00. 5:45 seems daunting. 6:00 doesn’t. Meaning at 6:15, I can always get up for it.

In addition to that, if the person’s parked in front of my house or on their way, I don’t want to cancel because those are going to work against the grain of who I am. I’ve set this up and for three months, I’ve not missed a day because I set it up to win for me. That might be the wrong reasoning for you but it’s the right reasoning for me. This is your personal trainer’s story, “As Ian, this gives me comfort and that’s important.”

What guides a lot of these decisions is being smart enough to understand what success or what feels comfortable that allows you to live. I have noticed in my life, few people have figured that out for themselves. A lot of people want to dictate to me terms and I look at them and bluntly, I’m like, “You’re less successful and financially wealthy. Frankly, I don’t want to follow that.” Having the stones to say, “This is how it’s going to need to be for me,” and then setting that up is crucial.

Long before I decided I was going to leave NVR, I knew I was coming into money. I knew I would need to do something with this money and I knew I didn’t want to just have a ton of money sitting in NVR. I needed to diversify and I wanted to have some extra. I knew the asset class I was excited about was the same as my father-in-law’s asset class, which was industrial real estate. I wanted a property in the industrial space somehow. There’s a couple of reasons for that. One, I had a good understanding of the industrial space because of my background starting with GE. I spent five years doing nothing but walking around steel mills, processing plants, automotive and paper mills.

Those big guys own the land because the land is worth a lot less than the equipment and the buildings that go on it. It’d be hard if a landlord kicked them out for them to just relocate a blast furnace and a kiln. I felt comfortable around that industrial space. I like the industrial world. My dad’s a steelworker so I’m comfortable around those properties, probably more even than those in your office. I didn’t want office space at all, even before COVID. I never loved the asset class. I felt like that’s always getting overbuilt. It’s always boom-bust. I’ve seen that happen multiple times.

I sensed that with technology, there’d be fewer people working in offices. I thought about residential. Frank and I talked about a number of different things that we could do together. At the time, I wanted to go after and do a deal as my father-in-law had done. He owns some equipment rental companies and a number of trucking yards. He’s a phenomenal guy. I’ve talked about him before on this. He’s a Polish immigrant, rode the boat, bootstrapped himself, didn’t even speak English and started his own company. He’s got stones like you wouldn’t believe.

Over the years, he built a successful trucking repair business. By opportunity, pieces of land would come available to him at a good price because he would know someone who was either moving out of town or selling it so he acquired some of it. I remember this was probably 2007. He took me to Chicago to a GE facility. It had a big meatball on it. He’s like, “Look at this.” I’m like, “Nice big GE trucking facility. It must be the capital business.” He said, “Yeah, that’s exactly who it is.” He’s like, “I own this.” I didn’t understand what that meant so I said, “What do you mean you own this? It says GE.” He goes, “GE is not in the land business. I’m their landlord. We have a lease.”

It wasn’t resonating because, Frankie, this was a six-acre plot, paved trucks coming in and out, electronic gate. It’s a GE trucking facility, a depot coming in and out. I’m like, “There’s no way you own this.” He’s like, “I did. At the bottom when it was just gravel, GE came to me and said, ‘We like the location. It’s on a frontage road. We need a trucking center.’ They contacted me and they said, ‘If you’ll build an office, pave it and put an electronic fence in, we’ll do a lease with you.’”

All this came out to $700,000 to $800,000 he had to spend on it. I was like, “How long is the lease?” He was like, “Thirty years.” I’m like, “What?” He told me the rent. I’m doing the math in my head on this deal. My father-in-law, who’s the most humble guy, never talks about these things. It was something like a $30,000 a month rent for 30 years. It’s like Bobby Bonilla’s contract with the Mets.

We’ve always wanted to squeeze that in.

I’m like, “How did you get this deal?” I’m asking him a million questions. I was fascinated. I’m like, “You have to tell me, how much work do you put into this?” I know my father-in-law works his ass off. He’s always in a shop. He works Monday through Saturday. Saturday he’s there all day. He’s run it for 50 years. I’m talking about him getting under trucks and fixing brakes.

He’s not checking emails.

His hands always had grease on them. He’s working with his 30 Polacks from the Southside that he’s always working with. I’m like, “How much work goes into this?” He’s like, “None.” I’m like, “What do you mean none?” He’s like, “You work for GE. How many Polacks did you have run around landlords and run around your office checking in on things?” I’m like, “That’s a good point.” He’s like, “The lease says they handle maintenance, taxes and insurance. I collect rent. That’s the deal we have.”

Industrial Property: Trade your company whose stock does not have a great future for one that’s going like a rocket ship. You need to go to a small place that could just blow up because then your options will be worth so much.

 

I remember that for a few weeks, I would call him and be like, “How many of these do you have? Why don’t you do more of this? Why don’t you sell your shop and just do this?” It was so striking to me that probably 80% of his income was from his real estate deals, even though it probably took up 1% of his time. He didn’t spend any time on this and yet all of his money was coming in. It wasn’t from a shop with all the other guys. It left this impression of, “One day, I’m doing that. I’m going to get a big property, one tenant and that’s it. I’m going to collect the rent.” I was sure that’s what I wanted to do one day. It accelerated when NVR stock went up and I decided to leave and retire.

Let’s jump into it. How’d you find your first deal?

I knew I wanted to go South and where it was warm. There’s a couple of reasons for that. I listened to hundreds of hours of podcasts on this world. I found a number of good industrial podcasts. I listened to as many real estate podcasts as I could. The more I dug into it, the more I realized that the one thing you’re responsible for in all of these leases is the roof. I didn’t want snow on my roof. I didn’t want harsh weather messing with the property. I want it to be warm. The other reason I liked the South is that’s where NVR was growing most aggressively and NVR is smart about how they acquire land.

I want to be where economic growth is. In the South, it’s much more friendly to be a landlord down there than places like Chicago or New York or, let’s be real, liberal states. They’re tough on landlords. The taxes are much higher in those places. Low taxes, great economies, growth of employment, growth of economic engines, low taxes and friendly laws for landlords. I knew I was going South. Initially, I went. This is three days after leaving NVR. I was so bored. I was driving Jenny crazy. If you’re ever going to leave a company, don’t leave in January because the weather sucks.

If you live in a place where it’s cold.

There was nowhere to go. There was nothing to do. I couldn’t be outside. I was kicking around the house, driving Jenny crazy. I built a list of 100 banks in the South and I spent a whole day where I did the research and got the name of the highest-level person I could find in these small community banks. I got that from you. You told me, “Don’t dick around with Wells Fargo and Bank of America. Don’t even bother calling them.”

For those of you reading, that’s how I did it. I found local banks that have a commercial division. You find that person, you can find it on the internet and you call them. Those are the people who ultimately lend.

I got that from you and I loved it. I’m like, “This is something I can control. This is something I can do. I’m going to make a list and I’m going to make phone calls.” I went to a coffee shop. I spent three days cold calling presidents of banks. My initial thought was, “I want to get to the distressed debt departments. I want to buy some bad debt and then own the land and see if I go fix it.”

Explain what that is.

Bad debt is I want to see if any of these banks had tenants in the industrial space that weren’t making their payments. If that’s the case, a lot of times these banks are looking to get those assets off their books.

You quit in January of 2018. Strong economy. These banks don’t have tons of bad stuff. If they do have some bad paper on their books, they’re going to sell it to somebody who already has a relationship with them. It was different in 2008 but in 2018, that’s not the place to be.

I talked to all these banks. I called all of them. I talked to as many. After 30 of them, I realized no one has distressed debt. These guys will ask me, “If it’s distressed, people just sell. Prices are going up.” When prices are going up, there is no distressed debt. It’s the old Warren Buffett, “You don’t know who’s swimming naked until the tide goes out.” The tide was high so no one was being exposed for being naked.

What I did learn from all these folks, I would then ask them questions about industrial. “Do you guys lend on industrial? How do you lend? What are the terms? If I find a deal in your yard, would you lend it to me?” That would keep them on the phone talking to me. I got some names of people that they knew that have been borrowing from them that were in the industrial space. One thing that kept coming up was collision centers when I was making these phone calls.

I was calling South Carolina, North Carolina, Georgia, Texas, Mississippi, Florida and anywhere in the South. I was open to wherever. I got some good leads in Florida and Georgia. One of them was a guy who had been working with Gerber Collision, which is a publicly traded collision center. They have probably 600 to 700 collision centers. You can buy their stock on the open market. It’s a big billion-plus dollar company.

This guy would go and convince owners of collision centers to sell out. Some guy who was 70 and started his collision center 50 years ago and wasn’t making the money you used to, they would convince him to sell then he would do what Ted did. He would go in, build a new paint shop, update the office, make it look nice and then do a deal with Gerber for a 10-year or 15-year lease.

I ended up talking with this guy and then I talked to the realtor he works with, which is Marcus & Millichap. They were selling a property in Hinesville, Georgia. That’s not the first one I found. I bid on a couple that I lost. One, I almost had. I was getting my ass kicked on a few of the bigger properties. One time, a New York firm came in and bid cash without doing any due diligence. They said, “Waive due diligence, which means we won’t do an environmental study.”

It’s too much risk for someone like us.

That could kill me. In New York, you can go do it. I found this Gerber one, bid on it and win it as aggressively as I could. In Hinesville, Georgia in the middle of nowhere a little bit, there’s a big Army base there but it’s about an hour away from Savannah, Georgia. I’d never been there. That’s when I talked to you. I drove down and looked at it. It’s a beautiful property close to the army base that’s there. I got to talk to the shop manager for two hours. He was the nicest guy. We went to lunch and I picked his brain about how fast they were growing and what was going on. I learned a lot about the economics of the collision center business.

I learned that when a big guy like Gerber comes in, they have relationships with insurance companies. When they come in, they can immediately become the preferred person. Let’s say, Frankie, you’re in the military and you get in a car accident. You probably have USAA. All the military has USAA or Navy Fed. You call the number on your insurance card and they say, “There’s Gerber a block away.” No one has a guy anymore. No one’s like, “I got a guy that does my collision work.” No, you don’t. You call your insurance company and they give you two places to go to. If you prefer, you go in there.

These big collision shops go and buy out the little mom and pops and they double or triple their revenue from cars just by their insurance carriers right away. I learned about how strong of a shop this was and how great of a location. This guy gave me stuff he shouldn’t have given me. He gave me the revenue, their sales growth, pace and expansion plans. I asked a million questions. “Would you ever move from this place? Would you ever outgrow this place?” He’s like, “There’s a car dealership across.” There were four car dealerships that I learned how important it is to have it near you for a collision center. I learned a lot about this business.

You’ve owned Apple stock. Did you have a similar conversation with Steve Jobs when he was alive about Apple stock?

I did not go to an Apple Store and talk to the manager to see how things were going.

You started to learn about the asset class and you realized there was safety. There’s making money and then there’s keeping money. We’re in the keeping money phase here because of where Ian is. Risking it, he can’t do that. Not that insider information is the wrong thing. We found a lot of incredibly valuable, pertinent, relevant information. He found an asset class that he could control. You glossed over the sweet spot. You were saying New York would come in and poach these huge deals. Talk to me a little bit about the pricing and where we landed on the numbers here.

The first deal I did was a $3 million property. What I learned was $2 million to $4 million range is a real sweet spot. The reason why it’s a sweet spot is it’s too expensive for just a retail investor to come in and scoop it up. The reason why it’s too expensive is they can’t get debt for a $3 million property unless you have a track record as an operator of industrial property. You can’t go in without a huge down payment.

To do a $3 million deal, if you were just a retail guy trying to grab it, you’d have to put 50% to 60% down without a track record. Most people don’t have $1.5 million to go put down on a deal. It’s also not big enough to draw the attention of a lot of New York REITs. Real estate investment trusts come in and gobble things up. They’re normally looking for $5 million to $10 million deals to make an impact on their overall portfolio.

A little shop in the middle of Hinesville, Georgia isn’t going to draw New York’s attention to go bid on it and bid the price up to where I didn’t want it anymore. By going through all this, Frankie, the beauty of this one is Gerber was publicly traded. There were gobs of information on the internet. I could go look up all of their investor presentations. I could read their annual reports from the last five years. There are many things they have to talk about and I was worried about, “What if there are autonomous cars?” That was probably my biggest worry. “Will these go away if Musk figures out how to put cars on the roads that never crash?” The more I research that, it felt like that’s 15, 20 years away. The average car on the road is eleven years old. I learned so much about automobiles, cars, the collision business and I loved it. I love the business.

What you did here is your risk evaluation. Because you had a publicly traded tenant on the back end, your risk evaluation got granular quickly about, “This is a publicly-traded company. That’s not a risk.” There are a lot of positives and then the risk came down to the cars themselves. Was there anything else you looked at on the risk side?

Yes. I needed to understand what kind of leases these were. I was looking for the model of, one, it’s in Hinesville. This is a 7 or 8 hours drive in the middle of nowhere Georgia. I couldn’t have a lease where I was getting a call from the shop manager at 9:00 AM saying, “Our plumbing is a mess. Get down here.” I needed at least that they would handle that themselves. That’s what they needed because I was not going to be able to get in my truck on a whim and drive down to Georgia. I was buying something far away from me.

My goal was to never visit the place and not see it. It’s an asset. I don’t go to Cupertino once a year because I own Apple stock. I just own Apple stock and they give me returns. It was important to me that the lease was a true triple net. They pay insurance, taxes and handle the maintenance aside from a couple of small carve-outs like the roof that I’ve felt comfortable with, given that this was a brand-new building that was just built there. That to me was a big one and then the economics of it.

When I left NVR, I had a salary of $235,000 and then my bonus was 100% of the salary so I could make another $235,000. In any given year, you’d make 50% to maybe some years a 100% of that. This deal was a $3 million property and it was a 7% cap rate. A 7% cap rate means on your cash, what is the rent as a percentage? 7% cap rate on a $3 million property was a $210,000 annual salary. I looked at that and thought, “This replaces my NVR salary.” It’s better than replacing it because, in a $235,000 salary, you’re paying 39% tax on that. This is real estate. My effective tax rate is in the teens.

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It’s relevant. That’s why most of the stuff that I own, I take most of my profits through capital gains, which means I avoid ordinary earnings, which is way higher. I then take cap gains earnings, which are protected and you pay a lower rate. It’s not how much you make, it’s how much you keep. The difference between those two numbers is important.

I keep a lot more of my $210,000 of real estate rental income than I kept from my $235,000 salary. For me, I was like, “This is amazing. I have a ten-year lease. I’m going to lock up a ten-year lease.” I also needed to know, Frank, how strong is Gerber as a company. They’re very strong. The beauty of them as a publicly traded, you don’t get this with every industrial. You can’t get financials that are that great. They’re audited from a private company.

I had a publicly traded company that I knew was rock solid financially because my main risk is they go bankrupt. If Gerber goes bankrupt, now my lease is void, I’m stuck with land in Hinesville and I can lose money on it. I looked at it and I thought, “This one deal replaces my salary. I’m going to give myself a salary that comes out of this. Now I just need to figure out how to evaluate the risk. That’s something that I needed to go find help for.”

Do you want to talk about your team? Is that where the team comes into play?

I have an amazing attorney and I got lucky that it was on the first one. She had worked for Peterson, which was a big land developer for NVR. She came highly recommended by a number of people I knew from the residential space as a contract person. She’s a brilliant one. Her name is Amelia Elze. She’s fantastic. She has her own firm and she’s had it for several years. She’s perfect for someone like me. She gives you a lot of personal time. She’s done so many leases for big companies that she’s well trained. She’s a little bit like you, Frank. She lived in the corporate space for a long time then went on her own and brought all that institutional knowledge with her so she’s solid.

I loved her from the get-go. A lot of attorneys are boring. She was amazing from the get-go. She made me laugh. She’s crash. She’s funny but she doesn’t try to run up the bill on you. She helped me like, “When you do an industrial deal, you have to do an environmental study. You have to go check permits.” She’s pulling plots. She’s making sure that I’m entitled to all the land that is there. We had some issues in the environmental report that came back with some tanks that were underground so she had to help me evaluate the risk and then you do a phase two. An environmental study costs $5,000. We had a good phase two.

She helped me evaluate all the risks because I didn’t know how to do that. I needed someone to say, “You have a clear title and your permits are fine. No one’s ever going to come to tell you that you can’t operate a collision center there because that would be on me. Environmentally, you have a sound piece of property that the state’s never going to shut down or do anything like that.” These are all things you have to think about when you get into industrial that you don’t think about in a residential property. I’m going to guess you’ve never done a soil sample on a residential property in the backyard checking for PCBs.

Not for a single-family. If you buy a parcel of ground, you do phase one. The more relevant thing to talk about here is you found an attorney. You have this massive team. You found someone with a little bit more knowledge than you had on the subject matter, someone who was a subject matter expert who could help you navigate pitfalls.

Ian’s got a bunch of money in the bank but at the same time, he’s spending time driving down there and looking at it. He’s coming out of pocket during his due diligence period with upwards of $10,000 or maybe even a little more, that if he doesn’t buy this, he is going to lose. It’s a hedge. It’s an insurance policy. It’s one of these things where if I’m going to plop down $3 million of my own money in this particular deal, the $10,000 is peanuts because what we’re trying to do here is create wealth for the Mathews family, some stability, a paycheck. $10,000 is less than one paycheck. If you lose it, you lose it.

What I’ve learned so many times is that people who don’t have money or are reaching get desperate. When you get desperate, you skip fundamental steps because you’re looking at, “Holy shit, it’s $10,000.” $10,000 to $3 million is nothing but $10,000 to someone who doesn’t have $10,000 is a lot. People make bad decisions upfront and then what happens is you don’t have a $10,000 problem. You have a couple of hundred thousand problems that you have to eradicate and you could have gotten rid of this for a smaller fee. You do all your due diligence and everything upfront. Let’s get into the lease. Was the lease in place? Did you have to negotiate the lease? How did all that work?

The guy I told you who already worked with Gerber and put the money into the property had collected maybe one month of rent already and he was looking to get rid of the property because he had done a good job. Given the cap rates in the market, he thinks he can make $700,00 or $800,000 on this deal. He buys it for $1 million, puts $1 million in. Let’s say it sells for $3 million, he nets $1 million. He was anxious to sell. I was fortunate to call around to enough banks and work with him and buy the property.

I bought it with a lease in place. I had all my studies done. This was a plug-and-play. I needed to close. My attorney was fantastic in helping me get through it. I formed Hinesville Collision LLC. Jenny and I are 50/50 owners on this thing and we funded it. That LLC started a bank account and everything else. We wired the money. This was an all-cash deal.

The first deal you do is Hinesville, Georgia. Where is the second deal?

We closed this in late February, Frank. I did all this in 60 days leaving NVR, not exactly retiring. It was a little bit of an overachiever. The realtor who had worked with the guy that I was put in touch with on the first deal, the Hinesville deal, had been involved with the seller on that. They called me two months later and said, “We have one that we think is even better.” I was like, “Wow. Really?” It was an industrial equipment rental company in Savannah.

We were in Spain at the time when they called us and I bid on it. I was like, “Screw it. I’m going to try to get that one, too because I liked it even more.” H&E is publicly traded. It’s a little bit different than collision centers and a little different type of deal. I verbally was negotiating from Madrid with them and he said, “Congratulations. You got it. You’re going to have to wire some money for the hand money.” I’m like, “That’s great.” The next day, he called and said, “I got outbid on it and they decided not to sell.” It fell apart and I was crushed. I was so pissed off.

Now I got the bug. I’ve got two months now where I’m getting this direct deposit of $17,500 hitting on the first of the month. I’m like, “I want more of those direct deposits. Those are great. It makes it feel more comfortable.” When that happened, the realtor felt bad. He said, “I’m sorry. I thought they were serious but they weren’t.” When we got back from Spain, he called me about another collision center in Orlando. This was a Caliber Collision so this is the main competitor for Gerber. This was a bigger property but a lot of the same things. The building wasn’t as nice but it was Orlando so it was a way better zip code in a growing Dr. Phillips neighborhood.

As soon as I got back, I told Jenny’s dad, “I’m going down to Orlando. I’m going to go look at another property.” He was like, “I’m coming.” He wants to hang out with me. He got on a flight to Chicago. We looked at the property and we both loved it. I left there thinking, “I’m going to make a bid on this. I’m going to try to get this second property.” This one was $3.5 million with the same cap rate, 7%. A little bit bigger property in a little bit more expensive zip code than where we were in Georgia but it was in the South and it was triple net. This one was a fifteen-year lease, which I loved. It’s an even bigger lease on it with rent increases every year like the first one.

I came back and I decided, “I’m going to bid on this property.” I was going to do this one myself again. I’m trying to figure out how to do this myself. Right around then, a good friend of mine who’d left NVR, who’s a little bit older than me, had told him that I bought this collision center because I told some people, “This is what I’m doing with my time.” Everyone from NVR wants to know, “What the hell Ian’s up to? What’s going on?” It was probably fascinating that Ian was in the collision center business because I don’t know shit about cars.

How to change your oil.

I don’t even know where to put the windshield wiper fluid but I own a collision center.

I got a call from a friend who had retired and he said, “Next deal you’re doing, can I get in on it?” I kind of said no. I’m like, “It’s not the way it works. I don’t think I could do that. Let me think about it.” I called him after the collision center, I’m like, “How would that work?” He’s like. “We’d go in on it on the LLC. Propose something to me.” He told me how much money he wanted to put in. It was $350,000 or something like that, which is 10% equity in it.

I jotted out some terms on an email of, “What if you get in and whatever your percentage of equity is, you’ll help with those closing costs? I will keep a certain percentage of the rent and give the rest to you. For managing it and finding it, I will keep a percentage of your percentage of the rent and that will be my management fee.” He said yes and then by the time the math worked out, it wasn’t great and then he started to get out. This was close to when we were closing so I remember talking to you about it. I was like, “Shit.” You’re like, “It’s your first one. If you’ve got to take less than you probably wanted to deal with the headache, just make it work.”

Explain that part of the conversation. This happens a lot. I don’t remember the exact conversation but when we were talking about this, I do remember the line I said to you. “As someone who’s had a tin cup in my hand for a decade begging people for money, what I realize is it’s hard to do it and it’s uncomfortable. If you are going to get a second allocation from somebody, you got to get a first.” There’s a moment that changes in the relationship of a business when you’re starting to put these things together that you start to realize, “I’m a capital raiser now. It’s a different business.” Talk about that conversation with me and then what you did to get it done.

I was making up as I went, trying to figure out how much of the income I would keep, how much I would give to him and how do the shares work. In conjunction, I had a separate attorney working on it because once you bring an investor in, Frank, it’s now become an SEC security so regulated security. I am now raising capital for something that’s a whole other side of regulation. There are carve-outs for friends and family. People need to be accredited and you need to prove that. You need to build an operating agreement, a subscription agreement and a joinder agreement that ties it all together. I had an attorney.

Industrial Property: It is possible that 80% of your income could come from real estate deals and it’ll just take up 1% of your time.

 

To do my first one, I probably spent $15,000 to $20,000 because I knew I wanted to do a little bit more of this. I needed one solid agreement on what it’s going to look like every time I do this because, in conjunction with the guy I’m talking about, I ended up getting two other investors to come in. It was getting to a place where I was going to be 50% owner in this deal and they would be 50%. Two of the investors were okay with the terms. The first one that I had, by the time he did the math he’s like, “The return is not what I want.” He’s the greatest guy. He’s like, “I know this is late in the deal. What if I gave it to you in debt?” He proposed a loan. I didn’t want to do any of that. I told you, “A sliver of my investors is falling apart last minute so I’m figuring out do I go sell something. What do I do?” You said, “Go make it work.”

Get on a plane and see him.

“Do whatever you need to do. Make this work. The next deal, you can always do better on it. Learn how to have investors in a deal and do a good job for them.” That was good advice. I called him and said, “What if we tweak it here?” The way the final deal is structured, Frankie, I keep 15% of the rent and they get 85% of the rent.

For their 50% portion. You own 50% so you get the rent for your 50%. What you’ve done is you’ve taken some of your capital off the table, you’ve levered it and then you’re getting a cash-free return on the money that they brought. You’re still getting 15% because you’re the one who structured the deal and put the deal together. If you want to get nerdy and granular on this, there are different levels. Ian’s the GP so he gets a little bit better returns because he’s the one that’s running the deal.

What I want to know is why the hell didn’t I learn this stuff until my 40s? These are standard deals that have been going on for probably a century or more. This is how people with money make money. This is where Ian brought a deal, found people who are interested in the deal and then still took some of the money that he invests in other stuff off the table. He still got a fairly nice return because he structured the deal. You’re allowed to do that. People who are getting these returns are like, “That seems fair.”

All the investors were like, “If we can get a 6% return, we’re happy with that.” We don’t want the stock market. We don’t want to be speculative. This is tied to a good tenant and a solid lease. It’s a good piece of land. We just want cashflow. The 15/85 split, that’s where that came from. It was a 7% cap rate. By the time I kept 15% of close to $2 million that I raised for that deal, they were at a 6% return. He told me that was the number he wanted to be at. I looked at it and I’m like, “It’s worth it for me.”

The math on that is a 7% cap rate of $1 million, that’s $70,000 of rent. That’s $70,000 of income a year. If I’m keeping 15% of that, that’s about $10,000 a year of management fees. I raised $2 million so in essence, every year, I made a $20,000 salary on this deal just on their capital. A lot of people ask me, “Why didn’t you just go get debt?” I could have gone to put $2 million of debt on it but I would have paid 5% interest. I would have paid someone for that money. In this case, I raised private capital and they paid me for giving me the rest of the money to come in. Instead of paying whatever that 5% would come out to, I was making $20,000 a year management fees on it.

I did a webinar in my learning series and what I talked about was finance. There’s a reason Warren Buffett’s one of the richest people in the world and there’s a reason banks are some of the richest companies in the world. It’s because they understand that the number after the decimal point matters. It’s like that scene in office space where they’re like, “I miscalculated.” It starts to add up to a point where people are getting real money that starts to matter.

What you figured out is that it’s easier than working with banks. These are people you want to do deals with. It gives you a reason to talk to them. After all those things, in the end, you added another $20,000 salary. If you take the first deal we talked about and the second deal we talked about, you’ve exceeded your NVR pay on two deals and you’ve not diluted yourself and all your money.

For the investors, they didn’t have to go find the deal. They didn’t have to do any of the diligence, the legal, environmental, title and permitting. They didn’t have to deal with all the attorneys to get into it. They didn’t have to do the accounting, finances and distribution every month that I had to do. Once a quarter, I sent them a check and a one-sheet spreadsheet of, “Here’s our rent. Here are our expenses. Here’s my management fee. Here’s your cut. Here’s the check you’re getting.” I would send it to all of them every quarter.

Once a quarter, you get a check for the money that you put in and that makes you feel like it’s safe and it’s a good deal. On my portion of the $3.5 million, I was making 7%. On their portion, I was making 1%. I was happy with it. For me, it was a great return. Three years later, I decided to sell because these assets are now in high demand and cap rates have compressed from 7% to 6%. Truthfully, I knew that with the deal that you and I were talking about, I could get a much better return on my own investment on that. It was at a place where I could sell this thing for 20% more than what we bought for it.

I talked to the same realtor and said, “If you can get that price, do it.” I was able to give all of the investors in the deal a cash-on-cash return from their dividends and everything else 21% after all of our expenses. The investor I was talking about who put $350,000 in the 10% owner, over three years, made over $51,000 in quarterly distributions. His total all-in return was close to $80,000. That’s a safe asset. He wanted something that was safe. That’s a good return. You wouldn’t get that from a treasury. If you bought AT&T because you like the fact that they had a 5% dividend, you’d be down 15% now. High dividend stocks usually suck. They usually fall.

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What we’ve uncovered and talked through here are a few things and it’s probably time to take stock of what we’ve accomplished and then summarize this thing. What I’ve learned in working with people with money is what they want are safety, margin and time. With people that have enough money who are looking at a 6% or 7% return, they’re usually fairly reasonable. They’re low maintenance and they’re people who want to make sure they’re going to get their money back and they’re going to get their return. It’s easy to work with them. Is that what you found?

I love all my investors. That goes for the investors that I raise capital for keep, I’ve raised capital for you and I’ve raised on these three industrial deals that are in those deals. I love all of them and I can say that I’m a little spoiled in that. I’ve only chosen people that I know and knew wouldn’t be freaking out. I don’t like to take money from people when I know it’s a big chunk of their net worth because they’ll be nervous and I don’t want someone to feel stressed or nervous.

I’ve not raised so much money to the point where I’m out taking money from people I don’t know too well or at least don’t know. I’ve only taken money from people that I know or they can vouch for someone that they can handle. That accredited investor thing is a big deal at least and it’s skimpy. Most people that are in these deals are blown away and accredited investors what the definition is. It’s good to have investors that aren’t stressing out about their money all the time and calling and bothering you about it.

I’m going to ask a couple of questions. To manage the property, how hard was it for you?

Almost no work.

To put this in perspective, I own 300 plus houses. It is insanely hard to manage these properties. Ian used to text me gloating. He’d be on his Peloton in his basement and he’s like, “I did my property management for the month. I opened the app on my phone for Bank of America and I got my wire.” That was his management. Picking what you want to pick is something that’s incredibly smart because you have to look at, “What am I going to get back to this?” If I make a better than a 7% return, I’ve got to break my ass to get it. Ian was like, “I want to coach baseball.” I quit a grinding job to not have to do that and it was purposeful. Talk to me about inflation.

The best way to fight inflation is to own hard assets. These leases are built. Two of my leases are built where the rent increases with CPI every year.

Define CPI.

Consumer Price Index. All that is a government measuring stick for how much the prices of a basket of goods that they’ve defined rose over the past year. That’s all inflation. Is milk more expensive? You put it all together and that’s CPI.

Let me explain it to people who don’t know what CPI is. It’s like a benchmark. There are benchmarks with mortgages. Most people are familiar with a floating mortgage. It’s tied to a LIBOR or some interest rate that has a float. That’s what it is but what it does for Ian is it helps him hedge against inflation because as the price of milk and bread goes up so too does his rent.

My rent goes up every year based on CPI. I got a spreadsheet with one of these properties. My rent went up 5% so it was $500. I get a raise every year. As long as inflation is going up, I’m protected with my income so it’s not like my cash is getting eaten away.

What I love about that is because his rent goes up every year, my rent goes up every year, too. Mine’s not as sophisticated so it’s tied to CPI but they go up year over year. If you take your money and you park it in something, if you buy a stock, it can go up or it can go down. When you buy real estate, you get depreciation and you get all kinds of other cool stuff. You get to go to Disney for free twice a year because you can travel and go see the property.

The other thing that starts to happen is hard assets appreciate. There’s appreciation in the actual unit. The building is worth more because the cost of materials and milk goes up. They all go with it and the rents go up. As Ian would have been at NVR and he would have gotten a 3% to 5% annual raise, he’s getting a 3% to 5% annual raise now through his rents. If his goal was to replace his income, he’s replacing his income and he’s also not feeling any poorer year over year because he’s also getting raises.

These big tax benefits and the whole thing. When you ask about how much time I’ve spent, I’ve not been to the H&E property since we closed. I’ve been to the Gerber property once since we’ve closed and that was to show IJ the property. We drove down somewhere in Georgia and I’ve been to Orlando a couple of times. The reason why is, I go to spring training with IJ. When we’re there, we go look at the collision center and make sure we go shake the hand of the landlord so I can make it a legit business expense that I was down in Orlando.

Do you listen to Charlie Daniels when you go to Georgia?

No.

The last question we ask is would you do this type of deal again?

All day long. Give you the economics of the Orlando deal personally because I keep a chunk of the management fee and also, I get 25% of all the investors, whatever equity they made on the equity on the sale or disposition. They keep 75% of the profits on the sale and I keep 25% of their profits. It’s the same way I keep 15% of their rent. Our investors made 21%. I made closer to 35%. On my investment of $1 million, 7%, I was close to $570,000. That includes rent, appreciation, management fees and hold back.

Industrial Property: The $2 to 4 million range is a real sweet spot because it’s too expensive for a retail investor to come in and scoop it up.

 

For me, it was an outrageously profitable deal for safety. If you think about it, I bought a boring collision center with a 7% cap rate and I still made a 35% return on that much cash. I would do this deal 1,000 times over because not many deals you can find can give you that safety with that upside. This was my first syndication. Syndication means you acquire an asset using some pool of other people’s money and yours. As a syndication, my first one, it couldn’t have gone better for investors and for myself. I would do it 100 times over.

I’m an old person but I’m a young dad. What I think about is what I’m going to teach my kids and all the fundamental stuff. I don’t know if I’ve mentioned it here but I mentioned it to Ian in private. I had this guy who’s like, “When are you going to teach your son real estate?” I’m like, “After I teach him how to ride a bike, hit a baseball, climb a tree and how to throw a water balloon. When he’s old enough.” The point of the matter is, for people who are on the inside, there are incredible deals like these that are hiding in plain sight all around you.

If this is something that’s intriguing for you, reach out to people in your market or people that you know who own real estate and talk to them about it. People are always looking for investors who have a little bit of money that would be interested in putting in a deal like this. Ultimately, it’s a learning experience. If you work with someone like Ian and me, which we’re working on our second deal now, we write a paragraph or two every quarter so you understand what’s happening. We give you information so you can learn off and you can be informed. This is a good way to grow your wealth as you save it.

Instead of sitting in a checking account doing nothing, you can find safe investments that give you depreciation benefits. They give you all kinds of benefits that owning a stock does not. If you do it right and you stock them over time, you do this for 20 or 30 years, your life is going to look insanely different. If you do it the right way, you get money from your business and you get that money and invest it the right way into the right assets.

From this perspective, Frank, having that you and I haven’t gone through the residential cycle with COVID, it’s important to note that I collected 100% of my rent through the entire COVID on all of my properties.

That was interesting. Let’s bring that up since you thought about it. You sent me an email that Gerber sent you an email. As soon as COVID had asked you for rent relief, essentially and you said no, you and your attorney went back and forth and ultimately. Gerber was well run and they said, “Here’s an opportunity to potentially make a little bit more money.” They asked you for a reduction.

Let me tell you how this went. Caliber was the first to reach out to me. This was probably in late April 2020. They send letters to everybody, all of their landlords across the whole country, saying, “It’s tough out here. People aren’t driving and not going to work. It’s fewer collisions. We’re struggling. We would like to propose to you that you could do some rent abatement. Could you accept less and we will pay it all back? For four months, get us through this and we will pay it all back next year.”

I went back and forth with my attorney and I thought, “That’s fair. This sucks. If I can help them, I don’t want to go out of business. I’m not going to miss a mortgage payment by collecting 25% less rent for the next four months and I’m going to get it all back next year.” H&E reached out to me and they proposed something even a little different. They asked if I could accept 10% less rent but they gave me an extra two years on my lease. To me, it was awesome. I was like, “I want to hold that forever. Let’s negotiate that.”

Gerber doesn’t reach out until July 2020. The economy’s already hot and they reach out right after they release their results. I’m on all their investor relations updates. I read every press release that Gerber does. They had announced this bonanza profit quarter and they sent me a letter saying, “Times are tough out here. We only collected 60% of our rent. We were hoping you could stand shoulder to shoulder with us.” That was the one where I was like, “Screw off. I saw your report.” They sent that to me and I was like, “I’m good. You can go ahead and pay based on your lease and that was it.”

This guy calls me from their corporate office. This was a good old boy from wherever he was down in Texas or something. He’s like, “I’m trying to understand your stance on this. We’ve got a lot of landlords who are trying to help us out here.” I’m like, “I read your report. You guys are swimming in profits.” He’s like, “We’re trying to get guys to stand shoulder to shoulder.” I’m like, “Quit saying that. I’m some guy in Vienna, Virginia. You’re a billion-dollar company. We are not standing shoulder to shoulder. I don’t come up to your ankle. Pay me.”

When prices are going up, there is no distress price. Click To Tweet

What was cool was, in the beginning, I was like, “What can I do? Are they going to begin to sue me?” I was so nervous but by the end of COVID, you and I have been through the REZI. I was a little more hardened, where I was like, “Screw you.” My attorney was great. She was like, “This is why we negotiate leases, Ian. This is why we don’t do deals or bad leases. Your lease says, ‘Show me you’re bankrupt and I’ll give you some money off.’ They owe you all of it. Tell them, ‘You owe me the money.’” I did and the guy argued with me a little on the phone and I never heard from him again. I didn’t give him any abatement. I didn’t drop my price and I didn’t do anything. I got all of it.

You got a phone call from Gerber’s Michael Clayton.

That’s what happened but he sucked and I crushed on him. What was great was he was trying to get me to negotiate down. He’s like, “We cannot do this for you because what will all the others think?” I go, “Based on your line of thinking there, I haven’t given this deal to all of my tenants. What am I going to tell them if I gave Gerber a sweetheart deal?” He paused and he didn’t know what to say. I’m like, “I’m using your same logic. I can’t do it because I didn’t do it for everyone else. That’s going to be your point here.” That was it. It went away. Caliber ended up paying me everything back by August 2020 so things got better. They were supposed to pay me all in 2021. With H&E, I ended up with two more years. I have a billboard with Clear Channel and I told them to go to hell. “It’s only $200 a month. I don’t have the time to talk to you.”

This is why a guy who can’t change his own oil buys collision shops.

That’s true.

Ian, this was a great show.

Thanks, Frank.

It was brief and succinct like all of ours. It’s time we let the loyal readers go on with their day.

Fantastic. It was great talking to you.

It’s always a pleasure.

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