fbpx
Global Investors Podcast
GI90: How To Lose Money in Commercial Real Estate with Paul Moore
March 10, 2021
0

Today we have Paul Moore. Paul has been investing in real estate since 2000. Starting off with single-family and then narrowing his concentration to commercial in 2010. He now focuses on raising money for his funds at his firm Wellings Capital.

Watch The Episode Here:

Listen To The Podcast Here:

Transcript:

Announcer:
Welcome to the Global Investors Podcast, a show that focuses on helping foreign investors enter the lucrative US real estate market. Host, Charles Carillo, combined decades of real estate investing experience with a professional background in international banking to interview experts in all areas of US real estate investing. Now here’s your host, Charles Carillo.

Charles:
Welcome to another episode of the Global Investors Podcast. I’m your host Charles Carillo. Today we have Paul Moore. Paul has been investing in real estate since 2000, starting off with single family and then narrowing his concentration to commercial in 2010. He now focuses on raising money for his funds and his firm Wellings capital. So thank you so much for being on the show. Paul, it’s great to be here, Charles. Thank you. So I touched a little bit on your background, but can you go into a little bit more in depth of what you did be prior to starting in real estate investing?

Paul:
Yeah, So I had a, an engineering degree and then an MBA and I worked at Ford motor company in their headquarters in Dearborn, Michigan. And then I had a staffing firm with a partner. We sold it to a publicly traded company in 97 and I found myself at 34 years old as a high energy entrepreneur. We moved to the blue Ridge mountains of Virginia. And I started a nonprofit organization to reach out to internationals who were studying in the United States. And we set up a farm with, you know, a hundred acres of trails and horseback riding and a Lake and all kinds of things. And that was really fun, but I started flipping houses on the side and then I started flipping waterfront lots at a resort area. Then I started building homes ground up and Charles, I wondered over the years how to get into commercial and I wasn’t sure. And I ended up by building a multi-family facility in North Dakota and then another one we owned and operated that for years. And that led me to eventually writing a book on multifamily and I had planned to stay in multifamily for the rest of my career, but actually ended up making a shift a couple of years ago. So that’s a little more about my background.

Charles:
Nice. So why did you choose real estate initially? When you got into it after coming out of your, a mini retirement there?

Paul:
Well, you know, I thought that when I, when I had a lot of money actually for a 34 year old I I thought I’m a full-time investor now and you know what, I wasn’t, I was a full-time speculator. I didn’t know the difference between investing and speculating, you know, investing is when your principal’s generally safe and you’ve got a chance to make a return and speculating is when your principal is not at all safe and you’ve got a chance to make a return. And I was speculating and I became pretty good at that. And I became pretty good at losing money speculating. And in real estate I found something that was a hard asset, something I could, you know, that was never going to go to zero, hopefully. And I found a different type of investing and so that’s what I wanted to do. And a buddy of mine and I started flipping houses. So that’s, that’s how we got into it.

Charles:
Nice. So when you were flipping houses before making the transition to commercial, what kind of lessons did you kind of take away from your initial single-family speculation as you, as you coined it that you brought to commercial in 2010?

Paul:
Yeah. So one lesson was, it’s never as easy as it looks, the first house we actually bought and we just throw a paint, a paint job on the main floor, put it back on the market in three weeks and sold it for full price with a, for sale by owner sign in the yard for four hours. And we thought, well, we can do a house a week or a house every other week. And then we lost money on two of the next four houses. And so that was one lesson. Another lesson was stick to your lane. My buddy really wanted to stay with flipping houses and I thought, well, we can make more money building ground up houses. And of course I did my first stick built house. I’d done a bunch of modular that went okay, but I did a stick belt. I should’ve made a hundred thousand profit on, I lost 40. And so I really realized, you know, it’s really important to stay with what, you know, and of course I didn’t know much of anything. And so that made it hard. But at any rate, no, I learned a lot of lessons about that. I learned I was better in marketing than I was the construction side that’s for sure.

Charles:
So what types of commercial assets is your firm focusing on acquiring currently?

Paul:
Yeah, so I wrote a book called the perfect investment about multifamily and it’s still selling quite well five years later, but I found that multifamily for me without a great acquisition team to find off-market deals was quite difficult. And so we decided to expand, we still love multifamily, but we decided to expand into mobile home parks and self storage. And what we found was a fragmented market, a market that had a very significant difference between intrinsic value and extrinsic value. And what I mean by that is the sale price. The price we could get it for from a mom and pop operator was X, but it had a lot of built in potential that wasn’t realized by a small time operator. And so we began to realize, wow, there’s a lot of upside, a lot of value add you can do in mobile home parks and self storage. That’s hard to do in multifamily right now. And we can dive back into that in a minute. But at any rate, we found that there was a lot of profit potential in this difference, and there was a lot less people chasing these asset types. And so we decided to partner with the very best operators we could find to do the heavy lifting. Again, going back to the lesson, I learned 20 years earlier in staying in your lane and we decided to partner with these very best in class operators. And we created diversified funds that allow our investors to give us, let’s say a hundred thousand dollars. And then we spread it across, you know, maybe 75 assets for operators and say 20 geographies. And so we’re giving our investors diversification and we’re giving them access to these professionals that have been thoroughly vetted by a six-month process on our side.

Charles:
I think a lot of people know the multifamily value adds kind of criteria and strategy. Can you give us a little bit behind the curtain of how you would do value add on self storage and a mobile home park, mobile home parks, probably more in line with multi-family but like, how do you, how would what’s the value add business plan look like for self?

Paul:
I had a friend named Chris and Chris was mentioned value add in self storage. And I think I burst out laughing because I thought, wait a minute, four pieces of sheet metal, a door and a floor. How are you going to do value? Add on that? What are you going to do? Sweep it out when somebody leaves and, you know, multifamily of course has door is lighting and cabinets and countertops and paint and fixtures and flooring, all kinds of things you can do to make a prettier, you know, multifamily unit. And I found out self storage had just as many, but in a funny way, they have more because there are 53,000 self storage facilities in the U S that’s the same as subways McDonald’s and Starbucks combined. But about half of them are owned by mom and pop operators who don’t have the resources, the desire, or the knowledge to upgrade them. So what are the upgrades you can do? Well, here’s a big one. You haul. If you’re in a location where you can have a commissioned sales agreement with you, Holland park, those trucks outside your facility, you can literally make three to 5,000 a month. You could also make a thousand or less, you know, but there a place across on the other coast of Florida from you, Charles, that makes that I know that makes $5,000 a month in commission and they have to clean the, you haul trucks and they have to, you know, hand the keys to the people that come. But imagine adding 5,000 to your bottom line. Now the value add a formula. Let’s just say it’s 3000, that’s $36,000 a year. The value formula says that the net operating income divided by the cap rate defines the value. Well, 36,000 a year divided by let’s say a 6% cap rate. That’s about a five or $600,000 increase in the value of the facility. Well, if you bought a $3 million facility with a million down and you could add 600,000 to the value by signing a contract and setting up you hall, you just added 60% to the value of your equity from one simple change. Other changes would include raising rates to market level. They’re often below market adding marketing to compliment that adding a showroom with selling locks, boxes, tape, and scissors growing your occupancy, you know, that doesn’t sound like a value add so much, but when you have a mom and pop who’s 70% occupied and just barely has any open hours and you can increase to 90% through marketing, that’s a pretty big deal. Another thing is self storage often has vacant land with it. So you can either pave it or put gravel down to do boat and RV parking, or you can set up, you know, let’s say it’s a 1980s tired facility. Sometimes you can build a climate controlled, beautiful self storage on the vacant land and really expand your income that way. So there are a lot of value adds and self storage. Mobile home parks is a narrower window, but some mobile home parks, like one we acquired through investing a year ago. Last week had a 311 pads. 50 pads were vacant, very hard, very heavy lift to fill 50 vacant pads, but it is possible for a professional operator to do that. A second one would be the rates were 25 to 35% below market. And so raising those over time, not immediately to market level is another value. Add the big one though, is passing back utilities to tenants. If the company eats the utilities still like that one did they could pass. They were able to pass back a hundred to 150,000 a year in utilities to tenants. Now again, do the value add formula a hundred thousand a year divided by let’s say a 5% cap rate in that case added $2 million in value to that facility. And that’s exactly what happened by the way, because that property is already been sold for a large profit. Other value adds are adding you know sounds funny, but renting decks renting sheds renting car ports, and I’m talking for a tiny amount of money a month, but they can actually add value to your mobile home park.

Charles:
Yeah, that’s great. I never thought that cause with self storage, usually there is a lot of land. I love the U-Haul one because that doesn’t take any really, any upfront capital from your investors. You’re not raising like a cap CapEx budget for renovating anything you’re just adding on. And hopefully if you have that parking lot already and say it’s fenced in or safe you don’t have to do anything. You’re just

Paul:
A mobile home park can do that. Mobile home park can add storage out front. And I know one that added 10,000 a month to their net operating income. That’s 120,000 a year. That was a $2 million value add at 6% cap rate.

Charles:
Interesting. So your firm only creates funds now, not individual syndications. W why do you, why do you do that? I imagine you started off with multi-family individuals indications, is that correct?

Paul:
Yeah. We had one in in Kentucky that actually didn’t go that well. And we made some major mistakes with the acquisition and we just were not happy with it. We had another individual syndication in storage right down the road from you right down 75 from where you live. And it’s not going as well as we plan. And we thought, you know, wouldn’t it be better to be diversified? And of course we could laugh and say, why have a bunch of mediocre projects together, but seriously we thought, you know, we’re going to have to weigh upgrade our intake criteria, our operator criteria. And those were good lessons, you know, we had years ago and now we work with world-class operators and we you know, spreading the risk across 40 or 50 or in our case right now, 74 properties in a fund has really, really helped. And so we just liked that diversification, Charles.

Charles:
So when you’re raising money, you’re educating your investors on the benefits and risks of real estate investing. What are tax benefits available to commercial real estate investors, both active or passive? Yeah.

Paul:
You know, other than oil and gas, real estate investing provides some of the, or the best tax benefits of anything. I know, I know of a friend of mine did an analysis. He had been in commercial real estate for a lot of years, working with family offices and he can show a family office, a big investor or an offshore investor, you know, how to take $20 million, invest it for 10 years, reinvest all the profits on growth along the way at the end of 10 years, start distributing for the next 10 years, throw off $131 million in total income over the second 10 years and have a portfolio of $210 million. That includes debt and equity at the end of 20 years without paying a dollar in taxes. Now that has to be maneuvered very carefully to do right. But the tax law allows us to do that. And there are things like 10 31 exchanges. And of course the concept of swap till you drop with the 10 31 exchange, there are other mechanisms in place like charitable trusts and deferred sales trust, et cetera, Delaware, statutory trust, things like that. And we, we use that one. But the big one is, you know, based in depreciation, mobile home parks have the highest depreciation of any asset type I know. And you would think multifamily would, but mobile home parks have bonus depreciation. That is staggering right now. And the, and the bottom line on that is accessing bonus depreciation through a cost segregation study allows investors to have gains in their bank account every year from cashflow, but actually losses on paper for a lot of years when they buy a property. And so by maneuvering the tax laws legally correctly, especially with bonus depreciation that we can access right now to taxpayers are able to save a whole lot of money in taxes.

Charles:
Interesting. So all of the 20 years of investing real, what are common mistakes you see other real estate investors make?

Paul:
Yeah. So one big one is of course what I said earlier, and that’s mistaking speculating versus investing. Speculating is more fun. Speculating is exciting. It looks like, Hey, I can hit a grand slam. And I, you know, make my retirement right here. I had a friend who had six different companies he’s sold over 15 years. He took all that money and he put it into his grand slam property, a Hyatt hotel. He built from the ground up and I helped him build this hotel. And actually it went South, made a ton of mistakes, had a general contractor that stole money from him. I mean, I’m talking a couple million and lots of things went wrong with that. And he lost his retirement. He had to start over at age 50. And so I’m hitting it, trying to hit a grand slam is a big one. You know, we think that speculating so much fun, but Paul Samuelson is the first economist to win the Nobel peace prize from the U S he said, real investing should be boring. It should be like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas. And I think that quote’s important for investors to remember other mistakes people make are jumping into quickly with the wrong syndicator. There’s a book here by Brian Burke. He’s a multifamily syndicator called the hands-off investor. And I highly recommend this book because investors can use these criteria in this book to pick a syndicator, you know, by picking a syndicator who has skin in the game years or decades of experience, a cohesive team, great character. Those are really, really important things to do. Another mistake is getting the wrong kind of debt, you know, getting debt that exposes people to a lot of risk. Another one would be a syndicator who over raises too much on the front end to pay their early distributions. I talked to a syndicator once I said, how are you paying investors? Like 8% starting in the first month after they joined? I said, it seems like you’re paying a lot for these multifamily properties. He said, I just over raise. I raise an extra million dollars and I pay him out of that. And hopefully the rents will catch up. Well, I don’t think that’s wrong. It’s not like it’s illegal. It just doesn’t seem like a great business plan. If things go South. And you know, I know builders developers do that all the time. They over raised to pay their interest on the loan, and everybody knows that to pay their interest on the loan while they’re building a property and while they’re filling it up, it sometimes takes three to four years for a ground up property to fill up and become profitable. And that makes sense. But again, those investors know that they’re getting in a risky development deal. I wouldn’t think that’s the best for a syndicated value add, you know, 1980s property. What do you think?

Charles:
I always think the difference between investing and speculating is in, you know, when you’re really investing, you have a exit strategy or you have a plan that will work in an up down sideways market. And I think when speculating, you only have one there’s, it only can go up. Right. And when we went through, like I had S multifamily you know, Oh, seven Oh eight Oh nine. And we got through it. There wasn’t any major issues there, but you know, we were able to pay all of our debt and keep the place rented. And we weren’t raising rents as much as we were in Oh six, let’s say, but the thing though, is that it’s that you, you have a business plan that works in all different portions of the market cycle, I think, and speculating. I just, you know, if there’s, if there’s a pullback or if something changes you just can’t make money. I mean, if you’re speculating and all the liquidity or lending dries up well, and you’re trying to sell this house that you were flipping well, that’s an issue, right? It’s a major issue. What are you supposed to do with that? You built the house or you renovated a house for sale, not for rental, so maybe you’d be able to rent it, but that wasn’t really the business plan of what you’re doing. But the thing though, is that when we’re doing it with these assets with you know, a hundred, 200 units in each property, and if there’s a little bit of a pullback, you might still like we have with COVID. I mean, you have a few percent of people that not paying probably higher than last year, but you still have 90 plus percent people paying their rent and you’re able to fulfill the business plan. Obviously you can put some of the renovations on hold a little bit, but everything else, seniors still making distributions. And you know, you’re still paying debt and everything’s kind of moving along. So I think that’s the difference.

Paul:
Yeah, that’s good. I liked that, Charles, thank you for sharing that.

Charles:
So what do you think are the main factors that have contribute to your successful?

Paul:
Hmm, well you know, I made a lot of failures along the way. I mean, after all, I have a podcast called how to lose money and so I think realizing, you know, humility, realizing where I fail and being able to admit that and, and outsource that there’s a book that we all know about by Gary Keller and Jay Papasan called the one thing and learning to focus on my one thing and outsource everything else has really certainly helped. Another thing is just having faith I believe in God and I believe that he has helped me a whole lot and rescue me from a lot of bad situations over the years. And then finding the right people. I mean, I made a lot of mistakes in this area, as most of us have in business. You know, I made some mistakes getting the wrong people, but over the years in the most successful businesses, we’ve had really good management teams to do the management and administration stuff that I’m not good at. And so I think those would be three of the big things I would say in my life.

Charles:
Yeah, it’s awesome. Those are some very powerful points to take. The focus is power, right? I think it’s Tony Robbins or something that said that. And that’s that’s what I live by as well. It’s really important to end with that one thing, the time blocking of what your most important thing is every day makes a huge difference. And I started doing that a couple of years ago and it’s been a huge difference in my business when I look back on it. And because it’s something that you can actually every week you actually, you know, Friday comes along and you can actually measure that and say, Oh, you know, I’ve actually made progress. And it was cause I was spending time and no matter what else happens, I get this done every day or every week. Awesome. So let’s talk about your out your podcast, how to lose money, tell us about where it came from and what you guys talk about on it.

Paul:
You know, for, for years, Charles, I would go to these conferences of different kinds and I would see the speakers on stage trumpeting, their successes. And that made sense. I mean, I want to hear about their successes, but the people in the audience, especially beginners would just, I could see them kind of shrugging their shoulders and kind of hunched over. And I would talk to these people on breakouts and at lunch, and they’d say stuff like I’ll never have that success. I’ll never have those connections. That guy just got all the luck. And I just don’t think I can make it. And I realized, you know, these people on stage probably had pain failures losses. And if I was talking to them, I’d ask them about that. Well, one day at a conference, somebody got up and asked that question, boldly of a panel and the panel had a deer in the headlights look like they didn’t even want to say what they’d failed at. And I knew one of the guys on that panel and I got to know his family later. Actually my daughters got to know their daughters found out they had the same pain, failures, successes, and losses and things along the way that everybody else had. And I thought, you know, what would encourage somebody? It would encourage people to know that there’s pain and difficulty on the way to the top. And so I decided to do that, to interview people about their pain and losses on the way to success. And we’ve interviewed 238 people about their pain, their loss, their fears, their insecurities. And they’ve opened up about these things. And it’s been a great process learning about this. And I think it gives people hope to know, Hey, this person had the same problems I did along the way, and that gives people hope that they can make it too.

Charles:
That’s awesome. That’s definitely a unique platform where you don’t hear on other shows people bringing out the mistakes they’ve made or what’s kind of what what’s not front and center that you would see kind of let’s say on social media where someone’s posting, I just closed 200 units in Austin and everything’s fantastic. Right?

Paul:
That’s true. So how

Charles:
Can our listeners learn more about you and your business, Paul?

Paul:
I’m pretty involved on bigger pockets you know, blogging and video and such, but the main way to reach me is wellingscapital.com. That’s wellingscapital.com. I’ve got a free course there on how to get involved in commercial real estate. They can also go on Amazon and get my book, the perfect investment.

Charles:
Awesome. I will put those links into the show notes and thank you so much for coming on today.

Paul:
Thanks Charles. It’s been a real pleasure.

Charles:
Look forward to connecting with you in the future. Have a great rest of your day.

Paul:
You too.

Charles:
Hi guys! It’s Charles from the Global Investors Podcast. I hope you enjoyed the show. If you’re interested in get involved with real estate, but you don’t know where to begin, set up a free 30 minute strategy call with me at schedulecharles.com. That’s schedulecharles.com. Thank you.

Announcer:
Thank you for listening to the Global Investors Podcast. If you’d like to show, be sure to subscribe on iTunes or Google play to get new weekly episodes. For more resources and to receive our newsletter, please visit global investor podcast.com and don’t forget to join us next week for another episode.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar incorporated exclusively.

Links and Contact Information Mentioned In The Episode:

About Paul Moore

Paul Moore is the Founder and Managing Partner of Wellings Capital. After graduating with an engineering degree and then an MBA from Ohio State, Paul entered the management development track at Ford Motor Company in Detroit. After five years, he departed to start a staffing company with a partner. They scaled and sold the company to a publicly traded firm five years later. After a brief “retirement”, Paul began investing in real estate in 2000 to protect and grow his own wealth.

He completed over 85 real estate investments and exits, appeared on HGTV’s House Hunters, rehabbed and managed dozens of rental properties, and developed a subdivision. After completing three successful real estate developments, including assisting with the development of a Hyatt hotel and a very successful multifamily project, Paul narrowed his focus on commercial real estate in 2010. Paul is married with four children and lives in Central Virginia.

0

About author

Admin

Related items

Youtube Thumbnail

GI95: Transitioning from Engineer to Real Estate Investor with Lane Kawaoka

Read more
Youtube Thumbnail

SS17: Understanding the Basics of Real Estate Syndication

Read more
Youtube Thumbnail

GI94: From Apartment Investing to Mobile Home Investing with Dylan Marma

Read more

There are 0 comments

%d bloggers like this: