Do you want to achieve success in real estate? Then you need to build your thesis. Sam Wilson’s guest today is Ron Rohde, a commercial real estate attorney with his own firm who actively invests in industrial/warehouse commercial real estate. Ron shares with Sam how his best clients build a thesis for themselves that’s narrow. That’s the key to being successful. To find your narrow thesis, you need to identify your unique advantage when bidding on properties. Are you better at closing deals with fewer contingencies? How many deals are you aiming to complete this year? If you want more tips on building your thesis, you’d love to listen to this episode.
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Practical Tips On How To Build Your Thesis For Real Estate Success With Ron Rohde
Ron Rohde is a commercial real estate attorney with his own firm who also actively invests in industrial warehouse commercial real estate. He owns or is a sponsor of 75,000 square feet of fully occupied triple net property in DFW. He published his first book on how to start investing in industrial property. Ron, welcome to the show.
Thank you, Sam. I’m excited to be here.
The pleasure is mine. It’s the same three questions I ask everybody who comes to the show. Can you tell us where did you start? Where are you now? How did you get there?
I started at a pretty early age. My family has always been in real estate on the investment side and doing those things. I love to tell the story. When I turned sixteen, my parents said, “You can have a car.” I was super excited but then the first Saturday, they handed me some keys. I had some closing documents. They said, “You got to drive this to this tenant. You got to drop off these documents at that mortgage company. You got to meet this contractor at one of our houses and sit in a vacant house for three hours.” I said, “This wasn’t quite what I expected for my first Saturday with my car.”
This is pre-cell-phone days. You go to the house. I don’t know if anybody has ever sat with a plumber but those are chatty guys. I sat there and listened to him talk. He said, “Your parents are great landlords. They always pay me. They don’t dispute. These tenants are horrible or these tenants are good. They’re clogging up the drain.” It’s all sorts of interesting handyman or plumber stories.
That’s what started my interest in real estate. I always viewed commercial and residential investment as a natural investment path for me. I went to college and law school. Now, I have my own practice and I’ve always worked in real estate. Over many years of practicing, I’ve always been involved in some form of real estate and real estate investing.
Kudos to your parents for taking that time. They’re not throwing you in the deep end but they’re making you earn it out of the gate. You’re fortunate to have that. That’s fantastic. Mostly on the single-family side is that right when you were growing up and that’s where you cut your teeth?
My parents had everything from office to land but a lot of single-family was the bulk of the portfolio and I started that way too. There’s nothing wrong with it. For starting off, if you have a W-2 or a full-time job, you can start with that. At some point, myself, my brother and my partner had five properties and an Airbnb. It’s too much to manage. I’m married. We’ve got two young kids. Managing six doors is too much when they’re spread out as well. Luckily, it was good timing in Dallas. I sold everything for appreciation plus the cashflow and then I recommitted all that equity into the commercial stuff.
You sold that stuff and you moved into commercial. What was that first commercial acquisition?
The first one was a warehouse right outside of DFW Airport. It’s a 42,000 square foot building and a single-tenant, net lease. That’s a great tenant. They’re a national company with $3 billion or $4 billion in revenue. They signed a five-year lease with a 5 and a 5 extension. To me, buying an occupied property with what I thought was a strong tenant is the best way to dip your toe in because what I hear a lot from investors is, “Single-tenant, it’s feast or famine. It’s a lot of risks.” I say, “On the flip side, you do your due diligence. You liked the building, location and tenant. You could do no work at all.” That’s fortunately been our experience.
I liked that aspect. If you’re going to do all this research and dig into those tenants, believe, commit and partner with that tenant as opposed to saying, “Let’s hedge and get a small bay or 8 multi-tenants and then 6 of them are occupied.” It’s a very different mindset. Starting off in commercial and industrial, I like the single tenant. You got 100% occupancy and a long lease, hopefully. It goes on autopilot. You can acquire it, cash the checks and pay the mortgage. It’s pretty straightforward.
It seemed like it solved the problem that you were having before with the five units and Airbnb going, “This is too much to manage.” You’ve gone the full opposite direction of the triple net like, “Don’t call me,” other than when the building is on fire.
Industrial is where users are probably the least needy in terms of a spectrum. You’ve got the office. It’s way up there. Multifamily, depending on your class is up there. For industrial users, as long as the roof is not leaking and the trucks can drive, they’re not calling you for things and paint chipping off the corner.
What are some of the downsides of investing in a triple net property like this?
The biggest downside is having confidence in your underwriting process and being able to evaluate that tenant or tenants, as well as having the cash reserves that if the building does go dark, it’s not a zero probability. You don’t get to take this graduated decrease or decline in cashflow. If that tenant goes dark, you got zero cashflow. You probably have bills to pay while you’re looking for a new tenant and you’ve got your mortgage. If you’ve got a $15,000 to $18,000 a month mortgage, your cashflow goes to zero. Beyond the initial equity, you need to have reserves for that type of eventuality and then the leasing.
Finding a strong tenant is the best way to dip your toe in single-tenant investments.
Triple net leasing is not standard. There is no such thing as a standard triple net lease. Even brokers that will pitch you a property and say, “Sam, this is a great property. It’s triple net,” and then you look at the lease and it says, “Except for the roof, wall and fencing.” You’re saying, “I have to maintain a certain amount. That’s not what I expected.” The brokers will love to pitch absolute triple net and I’ll ask, “What does that mean?”
A lot of times, how it’s presented to you, you won’t know until you’ve read the lease or hired an attorney to do a lease abstract and to give you their opinion, “Is this a triple net lease or not?” That’s probably the two biggest challenges to dipping in. A lot of people like multifamily because it doesn’t have some of those risks.
Walk us through that. From the legal side of things, what is a lease abstract?
A lease abstract is a document created by a lawyer or law firm. They have some third parties now. It’s a 2 to 3-page document that summarizes all of the critical terms. We’re calling your lease basic terms, rent per square foot, length of the lease, any personal guarantees, approved uses, exclusivity clauses, maybe within an industrial park or retail is more common. It hits the highlights.
It skips maybe boilerplate language about condemnation or casualty loss, “What happens if the building gets damaged during the lease term?” We have a lot of language because defining damage, “How much damage? Who caused the damage? Is there a third-party insurance claim?” That can take up a page or two of a lease. We skip some of those details. They’re still important but not as critical in the lease abstract.
It sounds like they leave out the things that are maybe important but don’t summarize the bottom line upfront for things that could potentially kill the deal. How did you find this initial deal? Why was the seller selling?
I’m a little bit lazy in my acquisitions process but I know people that bring deals that are too small for their real estate firm. There will be private equity shops and they’re kind enough to say, “Ron, do you want this?” Deals under $6 million don’t move the needle for them but it’s a good deal and it’s a nice product. The acquisition so far is these castoffs but in my defense, you have to make it very well-known that you are looking for these types of deals. These are your parameters. This is your purchase price. These are your lenders.
You have to tell everybody constantly, “Sam, I’m buying a warehouse. I’m buying in DFW. This is what I’m looking for, lease terms of at least three years plus.” That way, the real estate who do come across a deal off-market will say, “This one isn’t a fit for Sam but Ron keeps telling me he is buying this stuff. Let me email him and maybe I can help him out.” That’s how we’ve done our deals. It’s not always scalable.
It’s a free source of leads. People are shipping you stuff. Why was the other seller selling it? Was it already occupied?
The building was vacant. This seller bought the vacant building. They probably put $200,000 to $300,000 in CapEx to make it suitable on a spec play. They brought the tenant in, signed up the tenant and then exited. That was their payday but they definitely earned it. I feel like in commercial real estate, people are a lot less sensitive to what the seller paid because they’ve added value. They’ve even held it for nine months and the market has changed. If you’re willing to buy it at this price, I don’t care if the guy bought it six months ago and paid half. The value is now and that’s luck to the seller. If you’re in the game long enough, you’ll get that to happen to you on the other side.
Let’s talk a little bit about the size of the deals that you’re buying. Industrial is a hot topic now. I know you’ve closed more than this 42,000-square-foot property. What is the opportunity in industrial?
There’s opportunity everywhere in every market. For me, personally, the macro-thesis that I believe in is Texas population is shifting. Remote work is definitely a trend that’s going to continue. The thesis is to buy these occupied properties. They’re smaller buildings. No building is above, say, 100,000 square feet because they’re not building a replacement product of sub-100. It’s not cost-effective and then they’re not doing it. What happens is if there’s no new supply coming online in the next 3 to 5 years, our rents are going to go up if the demand goes up for this type of property. That’s the macro-thesis.
Location is more important. Deal size, I call it the under $6 million because it’s a lot of due diligence and work to chase down. On a $10 million deal, you could do it and make money but if you’re doing it on $5 million, it’s a small loan size. You got to deal with all the same vendors and issues to close. That’s why you’re big enough to where you’re avoiding some of the doctors and lawyers, buying it single for themselves or maybe some 1031. 1031 people sometimes don’t like the tenant and dirty buildings. They want something new and clean and theoretically easier to manage. That’s a conversation for another day. Their perception is something that maybe doesn’t match reality but that’s the sweet spot.
To me, it has to be big enough to scare off some of the individuals. Sam says, “I want to put $1 million or $2 million down.” They’re not going to want to lever up and buy a $6 million building. I’m not a full-time syndicator. I’m not out raising funds every single day but I can play in that space and build a portfolio that is going to appreciate in five years. That’s what I want, to re-sign the rent in five years.
To summarize, it sounds like you’re leaving some of the mom-and-pop competition behind but yet you’re not going out and duking it out with institutional players either. There is opportunity in that smaller space. It’s interesting that you point out that there is no new inventory coming online in that smaller space.
The market could crash, but if your deal has good tenants and they’re an essential business, you’re going to keep making money.
We look for inland fill locations. For example, you could fit my metrics out in West Texas or East Texas but when you’re looking at those warehouses, they have vacant land 10 miles and 5 miles down the road this way. To me, I don’t see any barriers to entry of, “If I want to raise my rent when this tenant leaves, what’s to stop the next tenant from building their own building next door to you because there are tons of land.”
What we look for is space-constrained and not surrounded by abandoned or vacant uses like big parking lots. Those could easily be repurposed if I try to push my rents to some crazy $7 a foot. The guy is like, “I could buy this dirt, build something and have a brand-new product,” but we’re all space-constrained so you can’t do that close by. You could do that 30 minutes away but that’s 10 miles away and an hour in traffic.
Thanks for pulling back the curtain on how you analyze and view those properties. How are you funding these opportunities?
Mostly, it’s just self. I save money and do it that way. I have a few friends too. I mentioned my ideal client is the 2 or 3 guys that come together and put $250,000 each and then buy something. That’s how I do it too. I’ll get a deal, put it under contract and ask around my network, “Is anybody interested? I’ll manage it. This is my track record. I know what I’m doing.” Usually, I will take fees but not promote because I’m not trying to grow aggressively. It’s more opportunistic. If somebody doesn’t like that then they don’t have to invest.
Let’s talk about the legal side of things. You’re an attorney. You do this every day. Talk to us about what you’re seeing in the market and maybe how things are shifting because you get to see a lot of transactions and volumes. Tell us what your state of the union is on the commercial real estate side.
Commercial real estate is booming. It’s getting more interest from non-traditional investors. It’s an alternative asset class in general in terms of the financial world. Everybody is still seeking yield that hasn’t changed. Industrial and warehousing are hot but my best clients that do well build a thesis for themselves that’s narrow. That’s the key to being successful.
It’s maybe not multifamily because you have to be unique. You have to figure out, “What’s your unique advantage when you’re bidding on these properties? When you’re underwriting, are you able to pay more than other people? Are you able to close faster? Are you able to close with fewer contingencies? Are you offering all cash?” Multifamily is very hot and still is hot. Industrial is hot.
What I’m seeing and I have a YouTube video about this but the office is still an opportunity. People are getting back to work. Even a hybrid remote scenario for most companies, they’re going to reduce the size of their footprint. As these leases come up, tenants are willing to leave their building. They’re willing to relocate either out of one main headquarters and doing a couple of satellite or reducing their footprint in general.
That means, to me, there’s an opportunity to re-sign tenants in a new building. If you could buy this office building at 50% occupancy, maybe put in some CapEx but more so understanding that you need to be aggressive in marketing. Tenants are making changes and that’s an opportunity for the office owners. I have a couple of clients that are taking that bet in their own way. That’s exciting.
It’s the same for retail. We’ve had a full eighteen months to look at, “What has been COVID-proof and Amazon-proof?” The retail centers that are in demand, we’re signing leases and the landlords aren’t getting any concessions. We say, “COVID,” and they’re like, “We don’t care. We’re completely full. We’re building out our second phase.” It’s this feast or famine mentality on the retail side. The grocery store anchors, the high-end stuff has proven resilient and is in demand.
If you’re a Class C, a rough tenant mix, you’re struggling to fill those doors where you used to have a nail salon and a donut shop. Now, nobody is patronizing those businesses. Retail is an opportunity as well. That’s what we’re seeing. Prices are going to keep continuing to stay strong until interest rates change because there’s too much money.
People are very comfortable with this pricing now. If you tell them, “You’re buying this at a 5% cap,” they shrug their shoulders and say, “I’ll buy it.” Previously, people would be shocked and say, “There’s no way. You’re in Dallas. That is not a tier-one city. I’m not paying a 5% cap for that.” Now, people are saying, “That’s reality.”
That’s intriguing. Thanks for coming to give us the background on that. Before we jump here into the final four questions, are there any parting thoughts or advice that you would give to our readers?
Understand what tools are available at your disposal.
I would advise people to build their own thesis. Think about that and how your thesis is different than other people. It’s perfectly okay that you’re not different but you should also understand what you’re giving up in terms of your goals of the number of deals per year. If you’re picky and you only want this Class B or Class C value-add multifamily and you have financing contingencies and all this, you might not do a deal for another twelve months. Are you okay with that or could you go to another market? Could you go to Waco, Texas? Could you compromise somehow while still maintaining your thesis?
That’s the big thing because a lot of people hear the high-level stuff but in macroeconomics, it doesn’t matter. Unless you’re deploying $500 million or $1 billion into a region, macroeconomics is great. You’re going to make more money on a specific deal and make sure that that deal fits your investment thesis. The market could crash but if your deal has good tenants and they’re an essential business, you’re going to keep making money and say, “I don’t care that hotels are failing left and right. My hotel is fine.” That’s my advice. Focus on your individual deal.
The final four questions are this. If I gave you $20,000 to invest in real estate, what would you do with it? Why?
I would try to buy a duplex, live on one side and rent out the other while I renovate the side I’m in. I never had that opportunity or inclination when I was younger. I wish I could go back and live a rough life, no flooring, no counters and sacrificing like that. Once I renovate that unit, I’ll try to switch with the other tenant or raise their rate. Maybe they move out and then I move into the other unit to rent out at a higher rent.
You have a fully cashflowing, fully renovated house that you’ve done with your own two hands. You can still buy another property to live in and then that duplex will pay your mortgage on the place that you live in by yourself. As a home base, you’ll be miles ahead of everybody else. You won’t have nearly as much pressure from cashflow and you’ll have a good understanding of how to do all those things. With $20,000, I probably can’t buy a fourplex but I’ll buy a duplex, tough it out and go camping.
Question number two, if you could help our readers avoid one mistake in real estate, what would it be? How would you avoid it?
The advice to avoid a mistake is not understanding what tools are available at your disposal. I mean that for vendors, professionals, lawyers, accountants, advisors and anybody. There’s this wealth of tools in people’s toolbox now and they don’t understand what they can do with them and what they can’t do. It’s intimidating. You’re trying to build a house and you walk into Home Depot. You’ve got aisles and aisles of these tools and it’s option overload.
If your budget is limited or you’re starting out, go to that Swiss Army knife and pick up that one tool because you’re not putting in 1,000 drywall screws an hour. You don’t need a heavy-duty power drill but you also maybe don’t even need a full set of dedicated screwdrivers. You just need the Swiss Army tool to be cost-effective and for you to know how to use that screwdriver well. That’s a mistake. People overpay for certain things and underpay for other things. That’s frustrating to me because I see it all and then they’re complaining but I’m saying it’s your fault.
Question number three, when it comes to investing in the world, what’s one thing you’re doing now to make the world a better place?
Some of my clients are build-to-rent and in this residential space, where there are a lot of political discussions about, “What is the role of landlords? What is the rent? Who should bear that brunt?” I take it on myself to say, “Let’s be good landlords. We don’t have to change other people’s behavior but we can control our interactions with city commercial tenants.” Improving relationships one at a time can change the perception or stereotype where somebody says, “All landlords are greedy corporations.” I don’t think that’s true. If you have a tenant that has had a positive experience, they can hopefully have a counterpoint.
Last question, if our readers want to get in touch with you, learn more about you or your law firm, what is the best way to do that?
The best way is my YouTube channel. I put out a lot of content to help people start on the journey or I try to do it detailed. Find me on YouTube and then I have all my contact information. You can reach out to the law firm, Ronald Rohde Law.
Ron, thank you so much for your time. This has been fantastic. I do appreciate it. Have a great rest of your day.
Thanks, Sam.
Important Links:
- Ron Rohde
- Book – Investing In Industrial Real Estate: A Practical Guide By A Qualified Attorney
- YouTube video – Google Invests $7 Billion in Office and What This Means for Your Investment
- YouTube – Ronald Rohde Law
About Ron Rohde
Ron Rohde (Road-ee) is a commercial real estate attorney with his own firm who also actively invests in industrial/warehouse commercial real estate. He currently owns or is a sponsor of 75,000 sq ft of fully occupied, NNN property in DFW. He just published his first book on how to start investing in industrial property.
