How a 3-Suite Retail Building and a Storage Hybrid Strengthened My Portfolio | Ep 108

James: I just bought two properties. A set of retail offices, kind of, and a storage slash apartment slash warehouse. So we're gonna talk about these two properties. They're awesome. I think it's pretty cool. I think we'll learn a lot from them as well On the Furlo Capital Real Estate Podcast, where we dive into the intricacies of passive real estate investing and our mission is to equip.

Investors to invest wisely in both people and properties so that together we can build wealth while improving housing. I'm James, and this is my wife, Jessi.

Jessi: That reminds me of our son a little bit. Oh, how he, okay. A, a, a picture popped up, uh, you know, in my photo reminders or whatever, and it was a few years ago and he had this outfit on.

I was just like. I don't, I can't remember who he was pretending to be, but it was multiple characters. Ah, yes. Yes. And he was, he was like, he had the gloves. He had like a hood, but it wasn't just

James: any hood. Right. It was like the bear hoodie, or are we thinking the picture? No. Oh, that's a different one. Okay.

That,

Jessi: yes, that's a different one. I mean, we did see that one. This was a different one that popped up today. So he, he had like a, it was al almost like he was a climber. I think it was his gecko phase, like PJ Masks. Oh, was his kid show? Yeah. Yeah. And he was gecko for like a few months. Mm-hmm. And would climb everything.

'cause he could have sticky hands and like do the things. Makes sense. But he's, he's constantly like multiple characters and layered up on, layered and has the outfit and, oh yeah. That's just, you were listing off all those things. I was just like, wow. Okay. Dang. Multi-use. Multi-use. That's what that is. Yeah.

Mixed use. A

James: hundred percent. Yeah. Um. That very much is so funny is what's going on there. Yeah. So we purchased two properties. Okay. And, um, by we, I mean it is us even though you were like, all right. Not that I do with it. I did not. Yeah. So there was kind of the, an interesting situation arose where there was a family who, um, they needed to raise some money to take care of the dad and the family.

Jessi: Mm-hmm.

James: And they have a, they have multiple properties, but mm-hmm. Um. Uh, they decided to sell these ones quickly, like within two weeks. Whoa. So they could get the cash in order to. Pay off some debt. Mm-hmm. And then ideally generate enough from the sale of those proceeds to then fix up a few of the other properties.

Mm-hmm. And then sell those at, uh, like, you know, at the regular market. Sure. Rates and amounts. And, and that's actually where they'll make the majority of their funds. Mm-hmm. Okay. Um, this was really just to, to get them to that point. Mm-hmm. Um, 'cause they weren't gonna be able to fix these up and refinance them in in two weeks.

It just wasn't feasible. Yeah. So, um, so I stepped it and I stepped in and, um, made. Um, competitive offers. Mm-hmm. And, and won it. And part of it was like, no contingencies close in two weeks. Yeah. And, um, and so I just wanna share some of the numbers of what I saw from it. Um, so we'll start with, uh, the, the one, it's, it's only 1600 square feet.

Okay. It's, um, but it's three like retail spaces, storefronts. Mm-hmm. Maybe that's, I, I keep trying to figure out, maybe help me brainstorm this. We'll do this live, what do I call this thing? Because I've, it's not like I kept saying like the office building, but yeah, it's not really offices, it's not office building.

Jessi: It's like a, it's a, it's a, it's like a commercial front,

James: like commercial, retail, retail spaces. I was trying to be more specific than commercial. Sure. Oh, I do like storefronts. It's like three storefronts. There's not really stores though. They're not store.

Jessi: Yeah. They're smaller

James: because they're, so there's um, three businesses that operate outta there.

Mm-hmm. I would love this in the comments. Let me know like, what should I call this place because I can't, uh, one's a salon. Mm-hmm. Which is more of a storefront tea type of thing. Sure. One is pet acupuncture, and then the other one is like a, this is fascinating by the way. Physical therapy. Yeah. Um, or like whole health, I think is what it's called, but um, yeah, essentially it's phy, it's physical therapy.

If you didn't know it was for pets, you'd walk and be like, oh, it's a PT office. Yeah. Um, so it's PPT

Jessi: and PPT.

James: Yeah. So, uh, PowerPoint, what? No, um, pet physical therapy. So, um, so that's like what they are. So they're kind of off, I guess, like you say, doctor's office. Guess, and these are doctors for pets, so maybe it is an office building.

Ah,

Jessi: geez. Doctor for hair.

James: A doctor for hair. The hair doctor isn't, it Sounds like

Jessi: something from a soap opera. Oh, a hundred percent. I actually, that was, I was just thinking in my head.

James: Um,

Jessi: yeah, so Offices storefronts, I know.

James: Yeah, they're kind of, they're, they're all close in size, like one's 400, the other one's 500.

The other one's 700. Okay. Hopefully that math, maths. Yeah. And, um, and so, yeah, uh, that's, that's what it is. Mm. Um, super simple building. And, um, it's currently bringing in, uh, a little over 2,600. $26,000 a year.

Jessi: Okay.

James: Um, a couple grand each month. Mm-hmm. And so I built into it a vacancy rate of 3%, which got me a gross rent.

Oh. I also did a comparison analysis for what other rents, uh, other people are charging in the area. Mm-hmm. By the way, all of these people are. Their lease agreements have expired and they're just kind of on this month to month on written thing. So part of the process is interesting. Yeah. Getting them back on written leases.

So part of what I'm going to attempt to do is like, Hey guys, let's talk about a dollar more per square foot to get it in in line. And the very least, like, let's have this like on a regular ratchet thing. Mm-hmm. For it. That's what I'd like to do. Hmm. Um, we got taxes, um, insurance. I was actually surprised by this.

Um, it's only a thousand dollars a year for insurance. Really? Yeah. Uh, homes are cheaper. Cheaper that 'cause people Oh yeah. 'cause normally I pay a hundred dollars a month for a home when we're flipping it and which would be 1200. Yeah. And so, yeah, this is only a thousand.

Jessi: Oh.

James: So I was kind of, I was pleasantly surprised by that.

I guess it's just less stuff to break inside or something. Uh, I management fee there, um, 9%, uh, maintenance and CapEx expense of 10%. Utilities, it's about $1,500. 'cause paying for water. Mm. No garbage, if I remember correctly. And, um, yeah, so it gives a net operating income of $16,800. So here's something that I did, which was super cool.

So, um, you can then, uh, you can take that net operating income, like there's a lot of what people do is they'll say, okay, now there's a cap rate, which is like, what's, what are people willing to pay for assets like this? Mm-hmm. Honestly, there's no comps in the area, so, right. I made up a number seven. It's kind unique.

7% called building Good. Yeah. It put the value of the property at about 240,000. Okay. Once it was rented at that higher rate. Mm-hmm. Um, before then, it's like two 15, I guess. Um, but what I did was I took that, 'cause I'm gonna, 'cause the plan is I bought it fast, I use some short-term financing, like some bridge debt.

Mm-hmm. And then I eventually will refinance it until longer term debt. Mm-hmm. Like that's the plan. Mm-hmm. So what I said was, okay. Yeah, given my net operating income, banks have what they call A-D-S-C-R ratio, a debt coverage service ratio. Mm-hmm. Ratio. So, um, so they can tell you, um, how do I say it? They want your net operating income.

It's like, yeah, it's a ratio. If they want your net operating income to be at least 25% higher than whatever you make for your mortgage payments.

Jessi: Mm-hmm.

James: So you have some buffer. Yeah. Makes sense. Yeah, totally fair. Seems smart. But what that means is you can do the math. What that means is that if my net operating income is a little over 16,000, it means the maximum payment I can make on a mortgage is 13,400.

Jessi: Mm-hmm.

James: And so you can kind of back into this, well, now we can make some assumptions. Okay. It's a 70% loan to value a 20 year amortization schedule at 6.5%. That means that the maximum loan I could get is $150,000. And if you assume that again, that's a 70% LTV. I can do the math on that to say, well, if I divide that by 70, that means my down payment must be 64,000, which means the bank would value this property at $215,000.

Hmm.

Jessi: Alright. Yeah.

James: And I offer 200

Jessi: backwards math.

James: Yeah.

Jessi: Huh.

James: Kind of cool, right?

Jessi: Yeah.

James: Yeah. I actually hadn't ever explicitly done the math.

Jessi: Yeah. Done it that direction. That,

James: yeah. Yeah.

Jessi: Usually it's the other, usually it's the other direction.

James: Usually it's more like it's a solve for type of thing. Sure. Um, but I was like, eh, I was just trying to figure out like, yeah, how would a bank see this and am I, am I in the reasonable ballpark?

Huh. Um, so I felt good about that particular one.

Jessi: Yeah.

James: So, uh, so that was the main street one all kinda cool. Um, again, my plan with this one is to re, there's some repairs that need to happen on the south side of the building. Mm-hmm. Which is where the weather hits it, and then probably repaint the entire building.

There's probably, there's an AC unit that also needs to be repaired, replaced, something like that. Mm-hmm. That's gonna be it. Go

Jessi: fixes, refinance. Refinance it, then hold onto it.

James: Yeah, hold onto it. That's the, that's the plan. Cool. For as long as I can.

Jessi: It was kind of fun to say you rent out to a pet acupuncture and pet physical therapist.

James: Yeah. Right. Yeah. Uh, the problem. Potentially here is that the, I, I put $0 into this, so I invested 200,000. Mm-hmm. So that means if I do get a loan for 150,000, 50,000 has to come from somewhere. Mm-hmm. So, um, so getting the long term financing is going to be tricky. Does that make sense? Nope. So, uh, so when I bought the property, um, I essentially got a hundred percent financing.

Jessi: From who?

James: From two different sources. Um, from two different lenders essentially. Okay. One of the lenders provided 80%, the other lender provided 20% mm-hmm. Of it. So I You put zero down, borrowed. Yep. $200,000. Mm-hmm. So if all that works out perfectly and a bank does come back to me and says, yeah. We do think that 70% LTV makes sense and the value of the property is two 15, so we're willing to give you $150,000.

That means I have to come up with $50,000 somewhere somehow in order to, uh, in order to properly refinance it.

Jessi: Like a, uh, post down payment

James: kind of. Yeah.

Jessi: Seems kind of weird, but that's

James: just how it works. Yeah.

Jessi: Why wouldn't you just keep, uh.

James: The current debt I have on it,

Jessi: uh, some of the current debt you have on it?

James: I could, but it's like 12%. Oh, it's expensive. Expensive. I might potentially ask them if they're interested in converting it to like a lower debt amount, but they get paid monthly. Mm-hmm. Maybe, maybe they would take like an 8% or something like that. Sure. And just be like, yeah, a hundred percent. That's an option.

The other thing I want to do is look at the other building instead. Okay. And see what that one looks like. Yes. So that one currently right now is not making much. Uh, it is doing, I think the last I checked, uh, 450 bucks a month on it. Um, so, oh, I should back up a step. So this other property is cool. It has an, uh, one bedroom apartment building on it with like's like

Jessi: apartment unit.

James: Yes. Apartment unit. But it's weird. It has like a living room and a family room, or like a really big kitchen with a dining area. It's like, it's a weird, it's a layout. It's like two stories. And so you have the, you go in and there's like a, a living room thing on the bottom, on the first floor. Mm-hmm. And the bathroom, and then you go some stairs.

Mm-hmm. And then there's the kitchen, which is. Tied to another bigger room. Mm-hmm. And then the bedroom.

Jessi: Hmm.

James: So it's like, it's technically one bedroom, but I have a hunch if you do it right, you could treat it like two bedrooms. Hmm. Where if it was me, I would probably get like one of those like, um. Like some of those Japanese wall things.

Oh yeah. And section off, divide part of it and be like, yep. Like this is like, like a

Jessi: hallway or something.

James: Yeah. And on that first floor. Mm-hmm. And then just kind of section. I think that's what I would do personally, but um, or whatever. And then there's the 11 storage units. Mm-hmm. Which is where the majority of the money actually all of a hundred percent of the money's coming in.

Yeah. Right now. And, um, well, there's 11 of them. Mm-hmm. These are 11 by 29 square feet. Like units. Mm. They're big. They're big. Yeah. Um, quick math, they should rent for somewhere between 200 and 300 bucks a month. Okay. Um, just given there's like, but there's not a fence and there's lacking some other features, so I would go on the lower end of that.

Mm-hmm. Um, but, uh, oh, and so this one unit apartment should rent for, uh, what'd I say? Like 1500 bucks a month.

Jessi: Okay.

James: The storage unit should rent for 2200

Jessi: mm-hmm.

James: A month. It probably like some of the existing folks, I'm not quite gonna jump 'em up to 200. Mm-hmm. Um, but like, we're gonna get that up. And then there is a 3000 square foot shop with a bathroom attached to it, which the current sellers are using it and they have 60 days to remove their stuff.

Mm-hmm. Or I guess start renting it. Mm-hmm. And that will rent for somewhere in the, what I write down. Yeah. Uh, somewhere in the 70 cents to a dollar per square foot. Hmm. Which puts it in like that, two to $3,000 a month range. Yeah. Which again, I went with the $2,000 'cause I'm not an idiot. I um Sure. Be conservative.

I got conservative on all that stuff. Yeah. So instead of the current $450 a month? Yes. That's a significant difference. It has the potential. I'm like adding it up in my brain here. It has the potential to be $5,700 a month. Yeah. Now, having said that, vacancy rates for storage is significantly higher.

Mm-hmm. So instead of it being a 3%, I did 10% for it. Mm-hmm. Sense. So that gets the gross rent when you take into account vacancy about $61,000 a year. Okay. Which is awesome. Yeah. Um, there are taxes. Uh, insurance is also like six grand a month, uh, or a year, sorry. So it's significantly more. There is a management fee.

You're still gonna have CapEx, which I also put at 10%, which feels a little high. Mm-hmm. But I don't care. Um, it does need to be repainted, so there definitely are gonna be some expenses upfront. Mm-hmm. Um, and then there are some utilities that, um, that I'll pay for that are shared for it. Mm-hmm. So that makes a potential net operating income of $38,000.

Mm-hmm. Again, right now. It's not that. Yeah, it's negative, it's fine. Um, and then I gave it, uh, again, I kinda did the cap rate math and I was like, I don't know, higher cap rate. 'cause it's kind of the storage warehouse thing. Um, but more importantly I went and I did the mortgage math mm-hmm. On it. Um, so the mortgage math is, if you do that DSCR number again.

Mm-hmm. Um, the maximum payment I could do would be $30,000. So NOI 38. Max payments would be 30,000, which means a max loan and all the same terms and stuff would be $340,000.

Jessi: Hmm.

James: Which is nice. Mm-hmm. Um, which means a bank value of 4 85.

Jessi: Mm-hmm.

James: I bought it for three 20. Oh. So quick math on this one. Right.

Um, in theory, if I do all these things mm-hmm. And I get it refinanced, I can then. Get a bank loan for $340,000, which means for, 'cause I did the same thing. Mm-hmm. I paid zero down for it. I got loans on all of it. I can fully pay all those off. Mm-hmm. Plus have an extra $10,000. Set aside, that doesn't quite get me to helping with that other property.

That's what I was thinking

Jessi: was like, well, but a puts it like one,

James: okay, maybe I do have a $40,000 note. Mm-hmm. Um, that's, that's, that's sitting on it. Mm-hmm. And I do talk to, um, my, my lender. Mm-hmm. Um, and say, Hey, do you wanna just camp your money here for a bit and make some more sure for it? And just kinda lock 'em into a long-term rate, very much possibility.

Um, or do another deal somewhere and flip a property. Which is easier said than done, but, uh, do something like that, um, and, uh, you know, and, and refinance it that way. Um, but yeah, that's, uh,

Jessi: are there actually people who would rent a warehouse place? Like what would, what would you rent that for?

James: Yeah, a hundred percent.

Um, it's an industrial building is how you think about it. So, and having the bathroom is, oh, so it's kind

Jessi: of like our other. The other place that we have Yes. In Jefferson businesses will rent it to do, yes. Yep. A hundred percent Whatever manufacturing type stuff. Yeah. It's got, its

James: got two car doors on it.

Okay. It's got some man doors. Like it's, it has a little office area with a bathroom. Oh, hundred percent. Okay. Yeah. Apparently, I didn't know this, but way back in the day, HP actually rented out this spot. I don't know why, but they did. And they, at the time, this was like many years ago, again like. 20, 30 years ago.

Yeah. They were paying a buck per square foot for it. Oh. So, okay. So it's valuable. Yeah. The dollar per square foot, honestly is, it's low. It, I like it could, wow. I could potentially, um, be worth more, I gotta like really go through and do the, do the numbers than the math. Mm-hmm. I think the very fact that they have to share it with a storage unit kind of reduces some of the value.

Sure.

Jessi: Yeah. '

James: cause you might have other randos walking by, they can't just take over the parking lot. Right. Um, which is why I think it's gonna be worth less.

Jessi: Um,

James: but no, I feel like, I feel like getting a dollar per square foot's not so interesting. That's what I'm gonna go out, out the gate trying to get.

Yeah, no, a hundred percent. Um, apparently, like there's a Les Schwab across the street and at one point in time they were interested in renting out that entire building. To store stuff. Yeah. Supplies and, yeah. Yeah. Tires. Tires and whatever tools Sure. Whatever other stuff there. Yeah. And so, um, so yeah, no, it could totally be a, yeah.

No, I think it's a cool building, which, that's the, if I actually, if I do rent it for, if know, if I do get that dollar increase, and here's the math. Right. If I increase it by, instead of renting it for 2000 a month, rent it for 3000 mm-hmm.

Jessi: A

James: month. That is an extra $12,000 towards the NOI. Mm-hmm. Which again, you do the math for it, you go, oh no.

That's like, that's almost another what, eight grand towards, like, towards, um. Towards the whatever, um, getting cash back. Yeah. Um, to pay with that other loan. So no, it's, that's potential to be really good. So there's a, which again, I'm, I'm flirting with some perfect math here, but

Jessi: yes,

James: I feel really good with these conservative estimates that, um, I'll be able to refinance this storage, which I am going to call James Storage Works.

Because, um, it's a, it's a bit of an homage to the, the name of the seller. Mm-hmm. Um, 'cause his name happened to also be James. And, um, and it's not just storage, there's some other stuff and mm-hmm. So according to chat, GBTs James Storage works. Sounds cool. So I got it. And, um, yeah, so that's, uh, where's it going with this?

Um, yeah. So that's the plan, um, with it. And, uh, I think, yeah, like I was saying with the conservative numbers. I think my plan's gonna work out really, really well there. Yeah. I knew for those retail spaces, I knew looking at the numbers, that it was less interesting. And there was gonna come a point in time where I was like, Hmm, I'm gonna have to figure this out.

Jessi: Sure.

James: But they were kind of a package deal and so, uh, so I was like, yeah, whatever. I don't,

Jessi: well, and there's some interesting things you can, you can do with that building too, and marketing and getting different clients or doing fixes or whatever.

James: Yeah. Maybe,

Jessi: I don't know.

James: Um, I know there are some banks, um, that will do like an 80% t Sure.

Which case, if that's the case that that would solve. And I, the goal would be to do 'em both at the same time. Yeah. And if I do get an 80% T on both of them, then uh, then definitely the warehouse would Cover Cover, yeah. Cover for that one. And off the races we're good to go. Yep. So, I mean, if you can

Jessi: prove that they're profitable, then.

Bank, Mike give it to you.

James: Well see that's the nice part about a lot of the commercial stuff, right? Like I'll have long-term leases locked in for that. Right? So that part's easy.

Jessi: Yep.

James: Same with the warehouse. Mm-hmm. Uh, the tenant one might be a little bit more difficult, but if I do, like if I show that they're on a, if I do an annual lease instead of a month.

A month mm-hmm. I can show that and then the storage is gonna be the one where I'm like,

Jessi: eh,

James: maybe. Yeah. But again, there's 11 of 'em, so. Mm-hmm. The vacancy, um, risk gets significantly mitigated 'cause it's not, 'cause there's 11 of them. Sure. And so, uh, so yeah, so it's, it could be fine. Like I think a bank would look at it and be like, no, no, we totally get it.

All right. So, yeah. But pretty fun, pretty exciting. But anyways, that's some of the numbers behind it and some of my, my thinking and logic on how I, and how I underwrote this one. Mm-hmm. Um, it was honestly, it was one of those pretty simple, almost back of the napkin types of things. 'cause I went, well, if I get these numbers right mm-hmm.

Um. Like, I don't have to necessarily do the super sophisticated spreadsheet to prove it all out. Mm-hmm. Like, no, I can keep it pretty straightforward, as you saw. Mm-hmm. Like pretty easy numbers And part of it too, um, I, I knew these properties and how to manage 'em and what they were potential was, which also helps.

Mitigate a lot of the risks. That's true. So anyways, kind of fun. Uh, if you would ever be interested in being one of those lenders on a deal like this, um, 'cause I got investors that are making 12% on this deal, which is great. Um, lemme know. Let's absolutely talk 'cause I am continually looking at other deals and um, yeah, would love to talk about what that means to be it.

So with that, thanks for listening. Have a great day.