JF2419: The Benefits Of Looking For Opportunities Beyond Residential Real Estate With Dave Holman
In college, Dave took a class on building an eco house. That’s when he fell in love with architecture, engineering, energy efficiency, and building in general.
Dave’s life took many unexpected turns. He spent several years in Bolivia learning the ins and outs of entrepreneurship. After that, he worked for a nonprofit organization that introduced him to fundraising. Over time, he partnered with his friends and family to start his real estate business. Now he’s a triple threat – a commercial broker, a syndicator, and an owner of a property management company.
Dave Holman Real Estate Background:
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“A commercial broker might misprice a residential property just like a residential broker might misprice a commercial property ” – Dave Holman.
Joe Fairless: Best Ever listeners, how are you doing? Welcome to The Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any fluffy stuff. With us today, Dave Holman. How are you doing Dave?
Dave Holman: Doing great. Thanks for having me.
Joe Fairless: Well, I’m glad to hear that, and it’s my pleasure. A little bit about Dave, he’s a commercial real estate broker, he’s a syndicator, and owner of a property management company, triple threat. He’s got nine years of real estate experience. His portfolio consists of 94 units across 14 buildings, valued at approximately 11 million dollars. Based in Brunswick, Maine. With that being said, Dave, do you want to give the Best Ever listeners a little bit more about your background and your current focus?
Dave Holman: Sure. I used to describe what I do as a three-legged stool, but I like your term triple threat there. I’m going to take that and run with it.
Joe Fairless: Yeah. Because three-legged stools tend to fall over.
Dave Holman: Yeah. That is not exciting. A stool is not going to move anything around for you, it’s just something your butt goes on. So I’m excited, because I have a better tagline; this has been very helpful. [laughter] So I grew up in Maine…
Joe Fairless: Should we stop the interview now?
Dave Holman: [laughs] …a state that I love. I just went to a public school, grew up kind of middle class, didn’t know anything about real estate. In college, I took a class called Building the Eco-House with an architect who was our director of facilities out in Minnesota at Carleton College. That really turned me on to the built world, architecture, engineering, energy efficiency, things like that. I got to do some hands-on work, TA’ed that class for the next two years, and thought about even becoming an architect. But life led me down to Bolivia, where I was studying, and I met my then-girlfriend, now wife, and we have two kids.
I spent four years down there, and I started a chain of retail stores selling camping gear, things like that. That kind of got my business and entrepreneurial juices flowing. I always thought, “Man, we’re renting and all these retail storefronts and it’s just like burning money up every month. I wish I owned them.” And then the monthly payment, half of that or two-thirds of that would really be pennies in the piggy bank savings. That got me thinking.
I came back to the US in ’09. I got my MBA and went to work in nonprofits related to helping poverty in Latin America. I worked for a nonprofit called Safe Passage, which helps kids in Guatemala to go to school. I was their Director of Marketing and Communications in English and Spanish for three and a half years. I got into fundraising in that job and that took me to Bowden College, where I spent five years in fundraising, learning to work with major donors, got to meet really cool people. It was a great experience. But I started real estate investing on the side, once our first daughter was coming along. I was like, “Nonprofit work is not profitable. It lets me pay the bills, but I need to up my game a little bit.” And having been a stock investor, I knew that wasn’t going to move the needle in a reliable way for me.
So I just dove into real estate, and I found your show pretty early on so I’ve been a longtime listener. Thank you for all the great free guidance and wisdom you’ve been sharing with people, and your guests as well. I did a lot of reading and podcasting and then just started out. I had no capital on my own, so I partnered with friends and family that did, and did all the work essentially to help them and me split a really good return.
I started with single families, then went into three-unit mixed-use, which kind of opened my eyes to commercial, and since then, I’ve been partnering with people to buy bigger and bigger properties, multifamily apartments, and now a lot more mixed-use commercial, restaurant, and retail. So the 94-unit is a little deceptive. Some of those units are like a 9000 square foot floor of a building that a law office rents for 12 grand a month, so it’s not all created equal. But it’s been really entertaining, and I love what I do.
Joe Fairless: A lot to unpack. You’re the first person I believe I’ve met who’s lived in Bolivia, in Maine, and Minnesota. What brought you to Minnesota for college if you’re from Maine?
Dave Holman: I was excited to get out of a small state and see the broad world. My parents encouraged me to spread my wings, and I was choosing between Carleton and Middlebury. I loved the people out in the Midwest, they were just very genuine and authentic; there was none of this elitism and preppiness that we on the East Coast are all too familiar with. I just fell in love with the people there, and ended up now partnering with my best friend from Carleton, who’s a syndicator in Minneapolis… We’re excited to do deals together. So it was a neat process to get out to a different part of the country, and I encourage everyone to travel a little bit if you haven’t been far away from your home state. It’s a very eye-opening experience.
Joe Fairless: Tell us how you transfer your skills and what transfers over from raising money for nonprofits to raising money to put deals together?
Dave Holman: Yeah, it’s a great question. I joke with people that I’m in development, and I’m also in development. Because nonprofit development and fundraising – frankly Joe, it’s the exact same thing. It’s relationship building. Part of my job was being a relationship manager.
I got to escort Reed Hastings, the CEO of Netflix around his 35th reunion, and just really cool stuff like that that allows you to help people give back to causes they believe in and that are meaningful to them. Just like I’m now helping people invest for their future. And also to transform buildings and communities in a positive way.
It’s one thing if you just shotgun your money into the S&P 500; you’re not making the world a better place. Whereas when you invest in a deal that is a value-add and it’s going to make a building better for the tenants that live there, the neighborhood better, and it’s going to put their money to work, you’re earning a good return but also tangibly improving the world and that building. It’s awesome, and I like helping people. So you don’t want to think of fundraising for capital raising as asking people for money; you’re offering them an opportunity to invest in something that aligns with their values. It’s really very similar.
Joe Fairless: So tapping into the deeper meanings behind the event of the money transacting.
Dave Holman: Yeah, you can get a good return anywhere. You can invest in Bitcoin, you can do all kinds of different things that are kind of morally agnostic, or they’re not cool and tangible. Whereas I think with real estate and with syndication, especially, you’re offering people to be an owner of something real. You get to show them through your investor updates, newsletters, what have you, what their money is helping build and achieve. I think that’s really special and it’s something that investors that I work with enjoy. They enjoy getting the updates and the little personal stories of the tenants, and that sort of thing.
Joe Fairless: I’m going to have a contrarian thought process just for the sake of our conversation. I think it will make our conversation even more interesting for the listeners. When you were talking about value-add investors, you make the building better when you add value, so as passive investors who are investing in private placements that buy value-add deals, you were saying that a warm and fuzzy feeling? You didn’t say that exactly, but that’s what I believe you were implying, where you’re actually doing good. You’re doing good stuff.
Dave Holman: I am. Not everyone is.
Joe Fairless: Right. Fair enough.
Dave Holman: [laughs] Because you can. You have that opportunity.
Joe Fairless: Let’s talk about you then, so that way I won’t generalize it. With your deals — and again, I do the same business you do. I’m just thinking about it from a different perspective. Just for our conversation.
Dave Holman: Kick tenant’s out who have low rents.
Joe Fairless: Boom. How do you explain that? Yeah. How does increasing the value of the property which you need to increase the rent – how does that give the warm and fuzzies to a passive investor when they’re essentially displacing people who can’t afford to live at the place that you’re buying once you implement your business plan?
Dave Holman: That’s a great question. The basic answer is, I don’t displace everyone that can’t pay. With every building, there’s almost always someone that gets grandfathered in, where maybe we could earn a little more profit if we did bring them up to market and kick them out, but it’s just not something that’s going to let me sleep at night, and I think they’re often heartwarming stories for investors, that can actually generate goodwill, that may lead to more capital, more ability to do things, and you never know. So I don’t always want to transition people right to market right away.
For those that can pay, if you’re not a retiree on a fixed income, if you’re a couple both with incomes or those kinds of things, I like to explain it in very clear terms and make a plan that takes place either immediately or over the course of maybe even two years, that works for both sides. I might say “Your rent is 800. Now the market rate, if you look at Craigslist, and these comps, they are 1200. Could we get you up to 950 this year and then maybe 1125 next year?” Something like that, that’s a gradual step-up increase. It’s not, “Hey, you owe me $400 extra next month,” kind of thing. It often works for people. And then you avoid a transition. If they leave and stop paying, you’re losing 1200 a month time that it takes you to transition. Plus, you might have to put five or 10 grand into that unit to get it up to a better value.
So often, if you can keep a tenant and get them on a plan that gets them to bind to your 95% of the market, something where they’re not incentivized to move, but you can capture most of that value without really having to modify the unit, that can be a win-win.
Joe Fairless: Let’s switch gears a little bit and let’s talk about the different types of commercial real estate that you own. That certainly piqued my interest when you’re talking about you’ve got mixed-use restaurants and retail. Can you just high level what do you own right now?
Dave Holman: Sure. About two-thirds of my units are multifamily residential. We have two single-family houses, and that’s how I started. And then I have a lot of small office units, and some large offices. We have a sort of downtown main street building that has two restaurants and three retail stores in it. So a pretty wide range of different asset classes. I have basically everything except industrial. Not all of it was by design, especially in this climate. I wouldn’t buy restaurants; but the building, location, and all the other numbers were so compelling that it made sense. The restaurants were poised to survive COVID very well. They’re not asset classes in which I’m yet, I would say, even an expert in. It excites me to learn about them, and I had enough experience and track record to legitimately venture into new territory.
So they come with pros and cons. Multifamily is much easier, it’s more turnkey, it’s more obvious, but there’s a lot more competition for it. There are probably 10 times more people trying to buy multifamily than are trying to buy an office, for example. You can often get a better dollar rate per square foot in an office than you can in residential. So if you know what the market rents are, and how to make a building appealing, and how to manage it well, there’s a lot more upside managerially. Whereas in multifamily, it takes a pretty bad manager to get your rents to be half or 40% of the market. Whereas in office, that happens all the time. You often see office rents at 40% to 50% of the market and the owner has never studied or doesn’t care. They just “Yup, it’s 500 bucks or it’s 300 bucks for the small office.” They don’t really think about doing a lot of research and study into it, so there’s more ability to create value through just changing management, I think, in these other asset classes sometimes, than there is in multifamily.
Joe Fairless: That’s fascinating. I definitely see how that could be the case. I never thought about that, how in multifamily — you’ve got to be living in a cocoon if your rents are 50% of what they should be. But with office, you’ve just got one or two tenants, and someone just might not pay attention to those one or two units, and that provides some tremendous upside opportunity. Plus, there’s less competition going after that.
Dave Holman: Totally. We bought a mixed-use building… This was my first syndication, and it was only $820,000 at purchase. It just appraised for 1.2 million, and that was almost entirely because the seller who stayed on as a tenant didn’t want to pay market rent for his unit. It’s valued using the right numbers, because he wanted an artificially low thousand dollar rent for a beautiful office that would rent for 4000 in a market setting.
So things like that are very hard to find in residential, where there’s just much better market information out there and people study it more. So it has been intriguing to find value. I tell people, the way I find these buildings is often on the MLS. They languish there, because the numbers look awful. But when you go there, you dig into them, and if you know the market, you realize “Oh, the numbers are awful because they’re half of the market, and someone didn’t realize that.”
Joe Fairless: I have a good friend in Cincinnati, Ash Patel, and he buys office. He swears by buying small commercial properties, that’s his thing. And he does the same thing. He looks on the MLS and he finds properties where the numbers look horrible. Usually, what he told me, it’s because the property is listed by a residential real estate agent and not a commercial broker, because the residential real estate agent just happens to have a friendship with this person who owns one office building. So they just list it, but they don’t necessarily know the mechanics for how commercial real estate is valued and what it’s really worth it. Have you come across that?
Dave Holman: Every single office building I’ve bought has been with a residential broker, or directly from the owner in an off-market deal. But yeah, absolutely. Commercial brokers know what they’re doing in commercial, and if they try to sell a single-family home, they might misprice it, just like a residential broker might misprice a commercial property. But it’s much harder to really accurately value commercial, because you’re using the income model; comps really don’t apply. Not many residential brokers can use the income model to accurately price a building. They’ll kind of try to use comps and be like, “Oh, this building’s about 4000 square feet, so we’ll charge whatever the kind of going rate might be for that”, not realizing that that’s not how you value it. It’s actually worth 50% more than the price you put on it. So both sides can be very happy in all these transactions. I think both sides have felt like they got the price they wanted.
Joe Fairless: Well, that is a big step towards the overall buying a property; identifying the commercial real estate opportunity through this method is a big step in the success of the overall project. That’s what I was getting at. However, identifying the opportunity and then actually executing on it properly is a very important other step in terms of having the project be successful.
So once you identify that there’s a lot of value in this property, they don’t see that necessarily, or they’re choosing not to take advantage of it, and I’m going to maximize value by buying this property… But then you’ve got to find a tenant or multiple tenants to fill the building. So how do you go about finding those tenants?
Dave Holman: Yeah, that’s a great question. In several instances, a purchase that I’ve made has been dependent on me negotiating a lease with an anchor tenant. I write offers to basically market spaces during the contract period. Oftentimes, I’ll be able to lock in my profit and know that this will be a good investment before earnest money even goes hard, because I’ve talked with an anchor tenant and signed a new seven or 10-year lease with them, which will become valid on the day of closing.
That can be one way to mitigate your risk… And vice versa, if an anchor tenant says “No way, we’re [unintelligible [17:51] probably not to buy that building, because you’re buying an empty building that’s much harder to fill. Commercial vacancies can take six months to fill, whereas residential ones shouldn’t be more than six days or weeks at most.
The other ways to market are pretty similar to residential. It’s a little harder, because that many apartments.com kind of sites doesn’t really work for offices, nor does Facebook for that matter. So if Zuckerberg is listening, he should fix that. But Craigslist is still one of the best ways, or LoopNet, or other similar sites. We’ve got the New England property, Commercial Property Exchange is a good one for us in Maine… So different ways like that, and just networking. The bigger the space, the more it becomes about personal relationships. Who are the restauranteurs that we should contact to try to fill this restaurant vacancy, and that kind of thing.
Joe Fairless: Okay. You said it could take up to six months. Are you able to build that into your contract that I have the option to close on this property for up to six months? That seems like a tough sell.
Dave Holman: No, I have not tried to do that. I’ve been able to negotiate leases within about a month, because they’re with existing tenants. It’s not me putting it out on the market and trying to find someone new. It’s often these tenants that have been under market, negotiating a market lease so they can stay in their space. They’re often happy to have the security. Many times they’ve been month to month for years, and now they get a five-year or 10-year lease at a known price every year. That can be great for them. But it’s also great for me, because I’ve locked in many, many years of income. Whereas with residential, if you can keep a tenant for 18 months, you’re doing pretty well on average. So there’s less turnover in commercial, which is nice.
Joe Fairless: Have you purchased a building that has been vacant or at least had some vacancies and then had to fill them post-closing?
Dave Holman: Yes, this is a great story, and this is my best investment. I don’t want to steal from the lightning round here.
Joe Fairless: No, let’s talk about it. That way we have some time to hear the whole thing.
Dave Holman: Exactly. So this was a building that had been on the MLS for four years. It was a big class A office building, 18,000 square feet, that was occupied by a law firm. All the founding partners had retired, and they wanted to get out of being in the real estate business and sell. The current firm wanted to become a landlord, and they were only using the second floor, 46% of the space. I was brought in by the broker as a consultant, because she knew I did a lot of commercial, to get fresh eyes on it and help her market it. I came away after an hour thinking to myself, “I’ll buy this if the law firm was willing to stay and pay a market rent. I think it works just based on that.” And sure enough, I met with them, negotiated with them, and was able to have a long-term lease signed with them prior.
The closing was on March 3 of this year. COVID was just starting to become a real big problem. And I partnered with a broker to list the bottom floor, thinking it’d be great for a medical practice; it’s 9,000 square feet… And we just got crickets for months. No one’s renting big 9,000 square foot commercial spaces in April, March, or May of 2020.
So by the end of May, I was like, “You know, we’ve got much more familiarity with small office, and there are tons of private offices and this floor. I’m just going to take this listing back and just start putting these on Craigslist and seeing if I can rent them for 500 a pop. Because that would actually translate to about the same rent I would get from a whole floor triple net long-term tenant, and it would actually have a lot more diversity.” But I was pretty nervous, because we only had one tenant who was paying all of the mortgage and costs etc, luckily. But if they went bankrupt or something, you’d be in real trouble. So this is not a beginner-level investment necessarily. But very quickly…
Joe Fairless: What’s the mortgage every month?
Dave Holman: We negotiated a year of interest only. So it’s been in the 2,000s every month. We’re earning 12,000. So it’s been a huge [unintelligible [21:39].
Joe Fairless: [laughs] Those numbers work…
Dave Holman: It will soon go up to 5000 or so this coming March. But we’re still in a good position. We’re paying some significant taxes and utility bills as well. But we’ve been able to fill all but one of the offices downstairs, so we’re now actually building more in some of these open format, open workspaces that really just don’t really work for COVID, but that’s ending — the vaccine, I think, will bail us out within the next six to 12 months. But even so, private offices are just more valuable than open space.
I think it’s a good plan no matter what and they’re easier to rent out. So it’s now a multi-unit building, it’s got a lot more tenant diversity. The turnovers don’t hurt as much as when you’re 9000 square foot tenant turns over and you’re vacant for six months. Now it’s just filling office by office, room by room on most. Some of them have taken more than one office, but it’s been a great investment. We bought it for 1.1 million and we hope to refinance in the two and a half to three range next year.
Joe Fairless: Wow, bravo on that. Just getting resourceful and making it happen. So the flip side to renting it piece by piece at the bottom is obviously management. You have more management and more leases to keep track of. Can you tell us about that process?
Dave Holman: There’s a great video if you Google herding cats… That’s what management can be. But the nice thing is that commercial tenants, especially in a class A building like this, are not as high maintenance as a lot of residential tenants. They take pride in their places, they want them to look professional; they’re not going to be hanging the laundry out the window kind of stuff. So they’re a pleasure to work with, quite honestly. That’s kind of one of my rules of thumb, is I always want to rent to people that I enjoy interacting with if I possibly can, in a commercial space. Life’s too short to be dealing with unhappy people. So it’s a little more work. There’s certainly more management intensity when you have a lot of small tenants, versus one big tenant. But that was a risk I was happy to make, because I had investors on this ride that was not going well, for the first couple of months.
Joe Fairless: Right. Fair enough. It makes financial sense. So you make it happen on the administrative side in whatever way you need to make happen. You said you negotiated interest only for a year. Was that with the bank or is this some sort of seller financing deal?
Dave Holman: That was with the bank, and I’ve learned, over time — I used to not really pay much attention to my financing. I always did it with the same local community bank. My most recent deal, a $3.3 million mixed-use building, I think we shopped at over 12 banks, and that was a huge learning process. That one we got two years of interest only. So those are things that can really goose your returns, that are not taught in the single-family, or possible in the single-family realm, that I kind of love about commercial, and larger multifamily applies here too. But you can negotiate these sorts of things.
The financing for this office building we did with a credit union. It might have been on your podcast, actually, but I heard an interview where someone mentioned that credit unions are not allowed to charge prepayment penalties. I had just been frustrated by some prepayment penalties, trying to refinance with another deal, so I was like, “Oh, that sounds good to me.” So we ended up getting a pretty good market interest rate and no prepayment penalties, because e knew the plan here was to refinance pretty early. That was going to provide the capital return to investors in the first year or two, was the hope.
Joe Fairless: If you did hear that on my podcast, then I don’t remember it, but I’m glad that you heard it regardless, because that’s new information to me, too. Credit unions are not allowed to charge prepayment penalties. That’s interesting. I appreciate you educating me on that, or refreshing my memory on something I learned about maybe three or four years ago on a podcast in archives. I love talking about your deals, because I really enjoy learning about commercial real estate and the different nuances and some different asset classes that aren’t typical. That’s why I personally kind of steered our conversation towards the commercial real estate office and retail front. So thank you for humoring me, and I’m sure that a lot of Best Ever listeners got a lot of value from this too.
Before we wrap up, we got to do a lightning round and I obviously want to know what your Best Ever advice is. So based on your experience, taking a step back, what’s your best real estate investing advice ever?
Dave Holman: Be true to yourself, follow your passion, and give it your best shot.
Joe Fairless: We’re going to do a lightning round. Are you ready for the Best Ever lightning round?
Dave Holman: Let’s bring it on.
Joe Fairless: Alright. First, quick word from our Best Ever partners.
Joe Fairless: Best Ever book you’ve recently read.
Dave Holman: Investment Biker by Bill Rogers is a great combination of adventure where in the late ’80s he motorcycles with his girlfriend all across the world, through the Soviet Union, through Africa. But he was an investor and original partner of George Soros and Stanley Druckenmiller, and he was looking at each country with a kind of macroeconomic investing eye. I think a lot of it applies to real estate. A really fun read.
Joe Fairless: Best Ever way you like to give back to the community.
Dave Holman: I serve on two nonprofit boards right now, Healthy Homeworks and Passivhaus Maine. I’m giving my time back in that regard. I try to share what I know in podcasts; I encourage other people, and I always want to be giving with my time. And then I give money to different nonprofits I support as a recurring donor. So it’s just kind of set it and forget it, or a big lump sum, whatever it may be. Those are the three ways.
Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?
Dave Holman: They should give me a call on my personal cell phone at 207-517-5700, or they can hit up my website which is www.holmanhomes.com.
Joe Fairless: Dave, thanks so much for being on the show talking about your experience in commercial real estate and getting into the details of some transactions. I enjoyed that and hope you have a Best Ever day. We’ll talk to you again soon.
Dave Holman: Thanks a lot, Joe. Have a great day.
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