Buying Industrial Buildings – Without Using the Bank

0:00We buy smaller buildings those giant Amazon buildings are a million square feet a million and a half square feet 800,000 we we buy what we call Class B buildings they're a little bit older and they're a lot smaller and mostly they're in Phill which means they're close to the city of Chicago or they're in the city or they're very close to O'Hare Airport that's that's sort of like a there's a diameter around the airport in the city that maybe is four miles every everything that's beyond four miles is the hinter lands it's like it's way out there and the problem that I've learned is in bad markets because I've been through four downturns in bad markets those areas that are far out are the last to lease when there's vacancies and

0:48When companies have expanded into those areas a lot of those companies are not quite as well established and so when the downturn hits they may not be prepared financially to withstand all of the financial turmoil so I have learned that closer in is better and I love manufacturing companies as tenants because they generally don't leave very much they stay in the buildings the average industrial tenant in manufacturing in our buildings has stayed 18 years and it's going to be longer because some of them are still there and they're not leaving wow wow yeah that's incredible so so what's an ideal type of property then is it like a you know multiple garage bay

1:37Doors with manufacturers in each one or is it one tenant in a whole property how's that what are you target yeah we like the single tenant buildings they're they're easier to manage than multi-tenant there's no fighting over who's got the parking space or who pays for the damage to the sidewalk or any of that stuff but companies like to have their own freestanding building where they're not connected by a wall to another company especially manufacturers because they could make some noise they could make some some odors depending on what they're doing especially food companies if you're next to a company that's doing baking of of chocolate or something like that which we do have one of those tenants the smell wafts yeah into the space next door if there's a common wall there's no way to

2:26Make it perfectly airtight but in a freestanding building building the the smells the odors may go outside the building but they don't permeate into the neighbor space so a neighbor may be manufacturing components for your headphones they don't want to be smelling chocolate all day yeah either they're 300 pounds then or they hate chocolate at the end of the day one or the other there's no right no middle ground right yeah no that makes a ton of sense and I you know we've had the the flex Bas multi-tenant operators on the show before and you know there's obviously pros and cons to both but it makes a ton of sense around the ease of management long-term tenants that sort of thing so so when did you transition or or I guess it

3:14Sounds like you started with all cash right from the start so did you ever consider using financing or how how did you decide that you're going to stick stick with this all cash strategy yeah so we've done a 100 deals we've sold 80 I've lost money on a few but I have lost money on deals and my investors have lost with me and primarily if you look back to the four downturns since 1989 there was a savings and loan crisis and a Gulf War there was the 2008 disastrous Global crisis all all these downturns they're inevitable and what happened was I was doing all

4:02Cash deals for the first few and then I brought in a young partner who was 10 years younger than I was very aggressive very ambitious and he said Joel it's so stupid that we're not borrowing we should be like everybody else and borrow money and at that time cap rates were 10% if you bought a building it was very easy to do the math if you bought a building for a million dollars your return was a 100,000 and as interest rates would go up and down if rates were low my partner's point was we can get positive leverage and make much higher returns which we did however when things go bad and you got leverage you make much worse losses because they're magnified by the percentage of your debt so we ended up doing

4:51Most of our deals between 2004 and 2009 with that and we didn't think we were taking a lot of risk because my partner convinced me 60% loan to value ratio is really safe guess what it's not that safe it's only safe if things are good and and tenants stay in the buildings you don't have vacancy and you don't have to put a new roof on for a half a million dollars things happen so my partner unfortunately passed away at age 48 in 2017 and at that point he stopped pushing me because he wasn't he wasn't around he stopped pushing me to do deals with debt and I woke up one day and I said I

5:40Used to do deals all cash no mortgage and it felt so good I but it's hard because you have to raise more money if you have a 75% loan to value ratio on a $4 million deal you only you only have to raise a million dollars from investors you borrow 3 million it's easy money it's kind of I call it lazy money call the bank hey bank I need three million sure Joel and if things are fine and good it's sure Joel we'll transfer the money right into your account right now and then when things go bad and you owe the bank money they say hey we're going to put you in default and start our proceedings for your your building being foreclosed upon it's like well wait a minute how about the surgel well things are bad now we have Regulators we

6:29Have a president we have a board of directors we have to come after you and take the building away and then put it into receivership so we didn't have a lot of those but we had enough that it felt really bad it's like you know when you throw up when you're sick and you got like the stomach flu or food poisoning you know how bad that feels you don't want to do that yeah it was just like that it was similar yeah I don't want to do that again it didn't feel good it was not good it was not good for my investors was not good for my reputation it was not good for my mental health so I decided Dave had passed away I'm gonna go do all cash deals again like I did very safely before he came along and that's what we do now and I have to raise a lot of

7:17Money and it's much harder to raise four times as much and explain the deal multiple times to many people yeah but it's great because I feel like I can sleep at night and not worry about what happens if rates go up or if the market goes down yeah yeah and I imagine you probably are speaking to a specific type of investor because I would think that most people who are used to like a typical syndication where there's Bank financing they're they're going to go well why aren't you raising Bank financing and leveraging this right so it's probably people who want a cash deal right so can you kind of explain who who your private money partners are yeah they're mostly

8:06Individuals they they run the gamut from being owners of businesses wealthy families people who used to be a dentist or a doctor that's sold their practice it's mainly people who are over 40 I don't have too many have some but not too many younger because the younger people want to take more risks they don't mind the debt and I don't mind them I'm not against Deb I'm just against debt for me so it's fine if they do deals and they should with people who borrow money safely and carefully but my investors are what you call the top 3% you know you've heard of the top 1% of people in the United States those are the wealthiest people the top 1% to qualify in the United States you have to have a net worth of approximately 11 to

8:5412 million those are the top 1% it falls very quickly in the top 2% down to about 5 A5 million and then the top 3% are down to about 3 million so generally speaking most of our investors are in the top 3% I'd say roughly a third a third a third top 1% a third of them top 2% a third and the 3 million-ish net worth about a third and they invest with me anywhere from 20 5,000 per deal to 250,000 some are a little higher some are in between and so when I do a deal I raised roughly a million and a half two million three million last year we raised 13 million

9:42For one deal it was hard it's hard to raise 13 million 100,000 at a time you need 130 people yeah so it's a lot of work yeah yeah but I know almost every one of our investors personally and when I put a deal out I send it to them personally and they can call me anytime and talk about the details with me which is really fun for me because I learn from their questions things I might not have thought of because I can't think of everything and my investors are smart as hell they're really really smart people they didn't become the top one two or three perc by being idiots they became that because they were strategic and they were smart or they were lucky and they inherited money from their grandfather that's

10:32Some of those which is great that's fine that's that's the real that's the easy way there's a what what do they call that the lucky sperm Club exactly I think Charlie Munger I used to say that yeah Charlie Munger he had so many great things but I love Warren Buffett saying that rule number one is don't lose money and rule number two is go back to rule number one that's right but I have to tell you Kirby about something that I'm doing now first of all finding industrial buildings to buy in Chicago of the size that we like is really difficult yeah that's what I was curious about to and also to make it worthwhile for an all cash deal too probably you know that makes it even harder

11:22Yeah the the the sales come from what I call the 5Ds the people who are sellers we just bought one from somebody who was in the middle of a divorce he needed some cash to pay his his future ex-wife so divorce death disease someone's sick they want to get rid of it dissolution of a partnership that means Partners want to be done with each other they've had enough of each other they're they're ready and probably the the best one is family dysfunction when a family owns a building and there's a bunch of cousins they want to get rid of each other so 5DS we have to find so there's 3,000 buildings in the size range in the location that we would buy in the Chicago area so I've only got a universe of 3,000

12:11And I've owned a hundred of them and now we only own 20 because we've sold 80 but in order to buy a lot of buildings which is what we like to do we have to be actually contacting the owners because we don't know who's got one of the 5Ds unless we talk to all of them so we have a program where we talk to the industrial real estate brokers through emails and phone calls and we say bring us your deals but we have another thing summertime now and I believe in in working with teaching and benefiting from Summer interns so we just hired eight summer interns from local Midwest colleges who are on their summer break break from school mostly

13:01Between their sophomore and junior year or their Junior and Senior year and those eight people are coordinated by someone in my office who is the sort of administrative head of all this and we send them out we've taught them how to go door Todo in industrial parks like I did when I was 22 and they they go in pairs and sometimes even with three or four of them which is really funny to see this happen yeah they walk in the front door of an industrial building and they ask for the owner by name and we literally have 3,000 offers that we've already written up onepage offers and they walk in the door with an offer to buy the building and hand it to the owner there

13:49A 19y old kid yeah wow yeah yeah that's amazing and they say hey I'm an intern and I work Joel I don't know if you know him but he owns a bunch of industrial buildings he's looking to buy buildings he'll he'll buy this one and lease it back to you if you want to stay or if you want to move out he'll buy it vacant and I've got this fantastic training program where we roleplay with with these people and we teach them what to say and how to respond and then we have a a group of them that does follow-ups two weeks later because the making the first call is first base you know when you're in baseball if you don't go all the way around all the bases you can't score you got to

14:38Go all the way to first second third and then home and it's the same way in trying to buy a building first base is walking in the door the first time meeting them and giving them the offer second base is stopping in again in a followup third base calling them or following up again and then home is working through what the building's worth making sure that your offer makes sense talking about the details of a contract and then going forward to make a contract with the seller and buy the property and then we have to do our due diligence to make sure the building's actually got a good roof good heating system zoned properly doesn't have anything that's hidden that we don't know about there's a sprinkler system all that kind of thing is due diligence environmental and

15:26Industrial is really important we make sure there's no spills of contaminated liquids and things like that so we're right now we're in this period where all these young college people are going door too to my favorite 3,000 buildings we're hitting up 200 buildings A week we're making 200 offers a week wow it's costing me a fortune and I hope it's worth it yeah oh