JF1531: Why Commercial Real Estate Investing Is More Lucrative For Him with Ash Patel
Ash is a returning guest and a friend of Joe’s. He has a ton of experience and real estate knowledge, especially on the commercial side of the business. Hear why he laid low for a while when the market was hot and how to have more fun with real estate investing. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Ash Patel Real Estate Background:
- First property was a mixed use property and saw both residential and commercial real estate pros/cons
- Previously had a 15 year career in IT but left to pursue startups and IT consulting
- Total value of properties he owns is $6,000,000 and owns 7 properties
- Listen to his previous episode: JF477: You Should Have Bought This Mixed-Use Property!
- Based in Cincinnati, Ohio
- Say hi to him at email@example.com
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Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.
I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him firstname.lastname@example.org
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Ash Patel. If you recognize Ash’s name, that’s because you’re a loyal listener and you’ve been listening since episode 477 at least; that’s where I interviewed him. The episode is titled “You should have bought this mixed-use property.”
Ash is a good friend of mine. I got to know him actually by — I believe I reached out to you on Bigger Pockets to interview you, and that’s how we initially got connected. Ash is a successful commercial real estate investor. His first property was a mixed-use property, so he’s seen both residential and commercial. He is adamantly for commercial real estate versus residential.
He previously was in IT for 15 years, and now he’s a full-time commercial real estate investor. He owns property with a total value of over six million dollars, and he has seven commercial properties that that comprises of. Based in Cincinnati, Ohio. With that being said, Ash, do you wanna give the Best Ever listeners a little bit more about your background, just to catch everyone up? It’s been a little over a thousand days since we’ve talked on the show… And then also, that will lead into our topic today.
Ash Patel: So it’s been a thousand podcasts since we last spoke?
Joe Fairless: That’s right, yeah. A little over a thousand.
Ash Patel: I’m from New Jersey originally. I went to school in Indiana. I got an IT job in Cincinnati after college. I had a 15 or so year career in IT. I got into real estate because I thought there were some good tax benefits. I didn’t really know what I was doing, I got into it, I fell in love with it… The first building, like you said, was a mixed-use building, and I was able to see the residential side and the commercial side of real estate.
I fell even more in love with the commercial side, and since then, I focused on becoming a commercial real estate investor. So it’s been about six years now since I’ve been doing that.
Joe Fairless: And real quick, why did you gravitate towards commercial, versus residential?
Ash Patel: My first property was an apartment building over a grocery store, and I was able to see issues and benefits of residential and commercial. Residential tenants require a lot more effort; toilets clogging in the middle of the night… Just normal residential issues. The commercial tenant I would never hear from, and even when there were issues, they would resolve them on their own. They would call in their own plumber, they’d call in their own HVAC guys, and it was just a lot more effortless in managing commercial tenants. Subsequently, I acquired additional residential and commercial properties, but in the end I gravitated towards probably 90% commercial.
Joe Fairless: On that first deal, were the residential rents that you were receiving more than the commercial rent to make up for the extra time that it took you to manage?
Ash Patel: They were not. It was all market rents, but the commercial rents were a lot higher. The commercial side of it was just more profitable.
Joe Fairless: Got it. And with our conversation today – you’re one of my good friends, so we obviously talk a lot outside of the interview, and one of the things that you’ve mentioned to me a couple years ago is that you saw the market being really hot, so you kind of went on the sidelines a little bit. Can you talk a little bit more about that?
Ash Patel: Yes. My first deal was in 2012. It was when the economy was still rebounding. From 2012 through 2016 it was relatively easy compared to today to find deals. In 2016, things were getting a little bit more competitive, so I assumed we were near a market peak, and I started selling a number of properties and putting the profits into multifamily syndications through a company called Ashcroft. I’m sure you know them.
Joe Fairless: I know them, yes. I’m familiar with Ashcroft Capital. [laughs]
Ash Patel: So I assumed the economy was somewhere near a peak, and really I was just making excuses, because it became harder to find deals, and I wasn’t putting in more effort compared to ’12 through ’16. I just figured I’d lay back, go passive, and wait for the next downturn in the economy before I got back in the game. Then things were kind of on autopilot, and I realized it’s not as much fun just maintaining properties as it is chasing deals, buying some properties, acquiring tenants, and just hustling and getting out there.
So I started marketing myself a little bit, letting people know what I do; I started networking a lot more than other real estate professionals, and not surprisingly, the deals started flowing again. And it was all just letting people know what I do, Facebook posts, lunches with other people… And today, just a year after I started marketing, I’ve got a handful of investors that wanna partner on deal, I’ve got other real estate professionals bringing deals to me, or wanting to joint venture on deals. I’ve got a couple great brokers that see me being active and start throwing me a lot more deals, and the result is I’m closing and buying more properties.
So I got back in the game, stopped making excuses when things got difficult; just got out there, hustled, and got back after it.
Joe Fairless: So 2012 to 2016 – it was more challenging to find deals… I guess when you look at new deals now, compared to 2012, 2013, 2014 and 2015 when you were finding deals more regularly or easier, are the deals similar to what you were finding then?
Ash Patel: They are not. ’12 through ’16 – I often acquired property that was either vacant or partially vacant, so there was a lot of value-add upside in stabilizing the properties. Today I’m finding mostly fully-rented spaces. Maybe the rents are below market. Or I’m still finding a few partially vacant buildings where you can still add value, but the returns are not as high; the upside is not as high, but the returns are still adequate to keep doing this.
Joe Fairless: And what type of returns do you look for?
Ash Patel: In the past I wouldn’t have done anything without at least being a 20% cash-on-cash annualized return, and today 16%-18% with no capital appreciation, so just pure cashflow; 16%-18% cash-on-cash returns.
Joe Fairless: And does that include when you sell the property, annualizing it, or after stabilization, or…?
Ash Patel: It does not. After stabilization yes.
Joe Fairless: Okay.
Ash Patel: Sometimes stabilization may be getting rents closer to market, or filling vacant spots, but it does not take into account the sale, or any property appreciation.
Joe Fairless: Since you had this new concerted effort in 2016, you’ve closed on one deal and you’ve got another closing tomorrow, right?
Ash Patel: As far as commercial properties, yes. I’ve done a few joint ventures with residential folks, but yes, commercial – I had a broker… This was an interesting story; one of the things that I put out there on Facebook was willing to mentor people that want to transition from residential to commercial, willing to mentor people that just wanna learn more about what I do, or willing to talk to somebody who wants to partner on a deal… Anything. Just get out there and network. If you have any interest in doing something or learning something, I’ll sit with you; we’ll figure out if there’s something we can do together.
I had a very successful residential flipper who had been doing residential flips for over ten years reach out to me because he wanted to learn more about commercial real estate. When I have these meetings, I’m often more interested in what they’re doing than sharing what I’m doing. So most of our lunch was spent learning about his business, and in the end we touched on some commercial. But it turns out he was looking for investors to continue flipping. I’ve gotten in on one of his deals, which — he should be listing it soon. When that sells, we’ll do another one and we’ll keep going.
That same person introduced me to a commercial broker, who was relatively new and hungry to find buyers, sellers, deals. Him and I got together… He presented a deal, and it ended up being a great property. We closed on it two months ago. The person I had lunch with got a nice finder’s fee for the introduction, and this broker subsequently has brought me several more deals, one of which we’re closing on tomorrow.
Joe Fairless: Wow. The deal that you closed on – what is it, what was the purchase price, business plan, that sort of thing?
Ash Patel: Sure. The first deal was a building that had been vacant for two years. It’s a bar on the first floor that’s empty. It was a salon that’s been rented for a number of years, and the second floor is vacant. It’s connected to the bar. The broker also had a friend of his who operated a coffee shop/bookstore, and they were looking to expand. So not only did he present the building to me, he presented a potential tenant, and before the closing we were able to sign the tenant to a lease. They’re going to convert the bar and the second floor to a coffee shop/bookstore/craft cocktails. So it should be a really neat concept… They’ve signed a 10-year lease, so a total win/win.
Interesting also about this deal was — just before the due diligence period was up, I was triple-checking my numbers and I realized the property taxes went from $7,000/year to $16,000/year, and I couldn’t figure why that happened, but that was gonna throw this deal out. There was no way to make these numbers work.
I did some more research, I found out that there was a tax abatement that was expiring. I called the broker and I said “Listen, there’s no way these numbers are gonna work.” He came back and said “Listen, we’ve gotta find a way to make this deal work” so we both got back in the trenches, brainstormed, arranged a meeting with the city council and told them where our dilemma was, and that this deal was not gonna happen… And they came back and offered a partial rebate on taxes.
We called the bank and told them the same thing – “Listen, the numbers don’t work on this.” The bank, who I’ve been exclusively banking with since my very first deal, they came back and modified the loan significantly to make this deal work, and finally all the pieces came together. We got a tax abatement, a tax rebate, and my loan is heavy-handed on the back-end, interest-only for the first year…
Joe Fairless: Okay. Is that what they did that they didn’t have before, interest-only?
Ash Patel: They did. Interest-only for the first year. I think they extended the amortization period. 20% down, instead of the typical 30%. Everything fell into place and we got it to work.
Joe Fairless: And what are the high-level numbers on the deal?
Ash Patel: Sorry, $550,000 was the purchase price, and this was attractive because this was the same price that the building sold for in 2013 to the previous owner. The lease numbers – I think the total revenue will be around $5,500; both commercial leases. So roughly a 16%-17% cash-on-cash return, but the tenant who’s gonna operate the coffee shop has an option to purchase the building in year three or in year five. So if he ends up executing either of those options, the annualized cash-on-cash return goes up to 25%.
Joe Fairless: Would you be able to 1031 if that happens?
Ash Patel: I would. It’d be a fair market sale, so to speak.
Joe Fairless: Okay. And would you plan on doing that?
Ash Patel: Depending on the market. I see a lot of people out there that get in 1031’s and they end up settling for properties just to avoid the taxes… And I think I’m still young enough in my career where I can afford to pay some taxes now, and maybe the next ten years the 1031 will be more important to can down the road… But as of now, rather than jumping into a mediocre deal, I’d rather pay the taxes.
Joe Fairless: You mentioned the tenant is doing a coffee shop/bookstore; you said earlier the second floor was vacant… Who pays for the bookstore and the coffee shop, to get it up and ready?
Ash Patel: Part of the deal was I would give them a $50,000 tenant improvement allowance, and the bank will essentially [unintelligible [00:16:40].04] So I’m putting in $50,000 to building improvements, and the tenant is putting in $80,000 of his own money into operating costs and further improvements. So it’s another win… There’s roughly $100,000 of improvements going into this building.
Joe Fairless: And then the deal that you are closing on tomorrow – how did you find that one?
Ash Patel: The same broker presented a deal; it didn’t look all that appealing on paper. We went to the location… It’s a small strip center, just three retail businesses operating out of there, and the place was just immaculate. It’s a block away from the other building that I bought. This is in a downtown suburb that’s got a lot of positive momentum. There’s some great businesses coming into this area.
The numbers on this one were a 6,8% cash-on-cash return as it is now. The leases are all expiring at the end of this year, so if we bring them up closer to market, the cash-on-cash return will be around 17%.
Joe Fairless: And is this deal a buy and hold long-term? Because the last one you gave the tenants an option to buy it.
Ash Patel: I gave the tenant the option to buy on that building just to make it more attractive for him. It’s one of those things where if he’s gonna put a bunch of money into this building and it’s somebody else’s building, you don’t get a great feeling about sinking a bunch of your own money into someone else’s property… So if he has that option to purchase, he would feel better about making improvements to the building, knowing he could potentially buy in the future.
Now, the purchase price is set with a nice return for me. He will definitely be purchasing it above market value. But he now has a building that he no longer pays rent on, and collects rent from the neighboring business that’s also in the building. So the exit would be a win/win on that.
To your question on this property – yeah, the tenants have been there for a number of years, they all plan on staying, so this is a simple, low-maintenance, low-overhead deal where I just resigned the tenants to slightly higher leases, and there’s very little landlord responsibility.
Joe Fairless: What’s the biggest challenge when managing a commercial building like a small strip center?
Ash Patel: Vacancies. If a tenant leaves and the space was specifically set up for them, you either have to find a tenant that can move into a space and take it as is, or you’re paying for tenant improvements, which will eat into your profits for a couple years.
I had a strip mall on the West side of Cincinnati where it was the corporate headquarters of a local eye care company, and it was very specific to them; there was retail in the front, and 80% of the space was office cubicles. Well, if they had left, it would be very difficult to find somebody to take over that footprint… So you wanna make sure that they’re stable, they’re happy, they’re willing to sign a long-term lease… So the turnover is the biggest challenge.
Joe Fairless: Do you have a property from your portfolio – or maybe it used to be in your portfolio – where the tenant left and it just wiped out all the profits if you were to do the tenant improvement, so you just decided to sell and you didn’t make nearly as much as what you thought you would because of that vacancy?
Ash Patel: No. And I think one of the ways that I avoid that is I’m a very hands-on landlord.
Joe Fairless: Yes, you are. I can attest to that.
Ash Patel: A tenant, whether it’s commercial or residential, has my cell phone number. I’m their first point of contact if there’s ever any issues. I’m on site quite often, just to see how everything’s going. I host happy hours, either at my house, or out somewhere, for all of my commercial tenants. It’s a meet-and-greet, networking, and kind of a business improvement type event, where I try to get our commercial tenants together and see if we can share ideas in improving businesses, share marketing ideas, gain economies of scale by sharing vendors… So they’re productive meetings, but they’re also very social, fun events.
I think every interaction that you have is an opportunity to make a positive impression. If your tenants know that you’re always there for them, willing to go the extra mile, take care of all their requests, they’re more likely to renew their lease.
Joe Fairless: What’s an example of when you did all of that, but then the relationship went sour? And maybe it hasn’t happened. You don’t have to get into specifics of who did this, but just as much detail as you can, if that happened, why did that happen? Because I know you are very hands-on.
Ash Patel: Yes. So on the East side of Cincinnati I had a 12,000 square foot single-tenant retail building. I had a tenant that signed a five-year lease. I believe in year three of his lease started slow-paying rent, and gave me the typical sob story – “I promise next month I’ll have it, next month I’ll have it”, and finally I show up one day to pick up rent that he told me he was gonna have, and the entire 12,000 square foot store was empty. My jaw just dropped.
He thought he was doing me a favor by clearing out all his inventory and giving me the building back in spotless condition. So when I asked him what happened, he said “Listen, you’ve been very good to me. I wanted to make sure that I gave you this place back better than you gave it to me.” In hindsight, that was a huge disservice, because now I had to market an empty 12,000 square foot building for lease or sale.
Had he stayed there and just told me his business wasn’t working, “I can’t make it work. I can’t pay you rent”, I would have let him stay there for free, as long as he lets me market it to another tenant or market it for sale. An empty building just is not very appealing.
Joe Fairless: It makes that big of a difference if he’s got his stuff in this box, versus just being the box?
Ash Patel: It makes a huge difference, yeah.
Joe Fairless: Why?
Ash Patel: If you walk into an empty space, especially a 12,000 square foot box, it’s hard to envision what the space could be… But when he had isles and isles of merchandise, and clothes, and racks, and things mounted on the walls, signs everywhere, people in there, a good energy in the building, people can see what that building could be. They can envision their own business in that spot. But a vast empty space is just not very appealing.
Joe Fairless: Ash, how can the Best Ever listeners learn more about what you’ve got going on?
Ash Patel: Facebook, Ash Patel Cincinnati, Bigger Pockets, Ash Patel.
Joe Fairless: Ash, thanks so much for telling me these stories, and many others outside of this conversation, because I learn a whole lot from you… And then I also wanted to jump on this call and have this interview so that the Best Ever listeners can learn more about the commercial real estate strategies and just the overall approach that we talked about at the very beginning of the conversation, where there were deals that were easier to find… But then your mindset shifted and now you’re closing on deals, but marketing yourself more to get those deals and seeing results.
Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Ash Patel: Thanks, Joe. This was fun.