Brett: 

Welcome to a special edition of the Expert CRE Secrets Podcast. I'm here with a commercial real estate expert Logan Freeman. Logan, how are you doing today?

Logan:

I'm doing fantastic. Brett, just happy to be here finishing today strongly.

Brett:

Excellent. Yeah, and I'm excited to dive in, we're talking about how to find a great commercial real estate broker, and Logan, you're out of the great state of Missouri, Kansas City area, commercial real estate broker, and specialist as well as investing yourself. And you want to give like the 32nd version, and we'll dive right into some of the top questions.

Logan:

Yeah, you know, Brett, it's really simple, the model that we have set up is, you know, trying to take a consultative approach, right. And I think that everybody's position or situation is a little bit different. And so we say, look, if you want to actively own real estate, you know, we can help you do that. Or if you don't want to actively own real estate, you want us to do that for you, and collect the checks, we can do that too. And so, you know, we give access and exposure to investors, to the commercial real estate asset class, maybe they wouldn't have an opportunity to do that, by themselves. We do it all here in the great state of Missouri and Kansas City. If anybody's following Kansas City, you obviously know that it has performed well over the last 12 months and is continuing to grow. So I'm very blessed to be in a city where I can also invest in and feel like it's my home. So that's a little bit about what we've got going on.

Brett:

Love it. So let's dive right into some of these questions here. You know, one of the top ones that often a lot of folks have is or to ask, you know, if you're an investor looking for a broker, how to find a great real estate broker? First of all, let me ask you, what would the first question be Logan that you'd want to ask as an investor?

Logan:

Well, I think that there's two, there's two really, and the first one is, you know, how long have you been, you know, working in the commercial real estate space, you really want to try to get a fundamental understanding of how they're viewing real estate, right. And what I mean by that is, everybody says commercial real estate, and our niches inside of sub-niches, which can get even more niche in real estate, it's hyperlocal. But also, the asset class that you focus on is also extremely important to know. So I would say How long have you been, you know, really working in the commercial real estate industry? What is your expertise? And what would you call your, you know, your unique capability in the space? That's my first question that I think I would ask somebody?

Brett:

Yeah, makes sense, right? You want to make sure that they're the right fit, and have the right experience. And the right background will be the second question you would ask?

Logan:

So second question I would ask a broker that I'm thinking about working with is, do you own any commercial real estate yourself, right. And that's going to give you a little bit of insight into potentially how they are modeling projects, what they're, you know, what they think about from an operations standpoint. And so I always like to see if somebody has, you know, owned real estate, and they've operated real estate, because believe it or not, even though commercial real estate professionals are in the industry, I would say the bulk of them do not own any real estate. And so there's a big difference between marketing real estate to sell, operating real estate, understanding what investors actually want. And so that's the root of what we're trying to get to in that question.

Brett:

Yeah, that makes sense. In Marcus and Millichap, we always wanted to talk about getting on the other side of the phone. And it wasn't just to create more wealth, but it was also to be able to understand the assets in which our clients were in the day-to-day of operating, managing and owning, and adding value, which was the key thing here. And so I think that is key, right? You want to make sure you're working with a commercial real estate broker, who actually physically owns real estate themselves, right? Because guess what, if someone's gonna be guiding you in this process, especially if it's multi-millions of dollars of your wealth and your family's wealth, you want to make sure that they've been in your shoes. So great. That's a great second question. What would be the next question that someone would want to ask to how to find a great commercial real estate broker?

Logan:

You know, I think the third question you want to ask is something around if you do invest in commercial real estate, you know when you're evaluating new opportunities, what kind of financial metrics do you target? You know, what are you looking for? What's your total? Are you going for a first-year cap rate? Do you care about the cap rate? What's your terminal exit cap rate? And what is the return on investment metric that you're typically looking at? Because, you know, we know as brokers and as you know, investors ourselves, that you can make a deal look very good on paper, no matter what type of deal it really is. And so understanding how somebody is actually going to evaluate the value of the property, and the return on investment of that gives you a kind of a glimpse into theirs, what I'll call their, their exposure to the real estate space. Because if somebody can't really identify a return on investment metric, or they don't know how to underwrite or even, you know, break down a pro forma for you, probably not the best investment real estate broker to start working through. So I would ask about return on investment metrics, what they look for, and, you know, you know, which ones they're actually using.

Brett:

Yeah, as a part of that, even just defining what a cap rate is, right? You know, if you might ask them with cameras. Well, that's a way to it's a way to, it's a return metric. Okay. But well, what is it? You know, what does that consist of? The way I put it with one of my mentors at Marcus Miller chap, he said, it's the unleveraged rate of return. And can they simplify these complex things? So I said, Well, what the unlevered rate of return is, well, if you were to buy something, all-cash flowed in. And let's say it's a six cap, okay? That's a 6% cash on cash return, which is an unleveraged rate of return. So it kind of breaks it down, you go, Okay, so I bought this million-dollar property, and it's a six cap, and I've had an all-cash is 6%. And then reverse back that again, and say, Well, if you keep your money at the bank, maybe you get a half percent, maybe even less now quarter percent with a lot of banks. So I can buy this thing, all cash, or I can sit at the bank. So you can sit at the bank and have no headaches, you know, no, anything, right? Obviously, not a lot of upside, either you're losing out in inflation, or I can put a million dollars in there for about an all-cash and get 6% basically cash on cash, no. depreciation and the and the appreciation. Now, if you leverage, right, and this is where it comes from, as powerful, so so any thoughts on that?

Logan:

Yeah, you know, I like to look at the cap rate, as well as that's a great breakdown, but also is like, hey, what, what's the rate of risk? Right? What's the risk rate here? And you think about a capitalization rate from institutional or private equity or even just a normal? You know, I guess, institutional style definition. And it's really, you know, hey, what's the risk-free rate that you could go invest some bonds, you know, with the US government, that's probably your less your least amount of risk that you're going to get? Well, a lot of times those are, you know, 0%, right. You know, and so then you think of a capitalization rate, what's the spread between that risk-free rate and where your capitalization rate is, and in that is a measure of risk. And so typically, we have core plus value, add and opportunistic, you know, asset classes, and your core offerings are going to be closer to that risk-free rate than maybe some of the opportunistic ones are. And if it's not, then, then you're probably not paying the right price, right. So you always want to think about the risks involved, with the transaction that you're working on. And that's kind of how I like to measure, you know, a cap rate. Now, when we're talking about the value add and opportunistic deals, it's very difficult to look at a cap rate and say, Man, that's a great deal, you know, because typically, you are going in and adding value, right? So you might not have any cash flow on those properties from year one to year two, or maybe even longer, depending on the construction plan. So just understanding the capitalization rate, what it means, and when it's applicable, is also very, very important.

Brett:

And absolutely the risk-adjusted rate of return right is important as well, right? anything you're looking at, and I believe hands down commercial real estate, it's the best risk-adjusted rate of return, especially with multifamily mobile, home parks, senior housing, assisted living, there's just nothing out there that's that you can get hands-on control, tangible add value, as well as a necessity and a need. And so any thoughts on just that? I guess the next question about that is what you want to ask your commercial real estate broker making sure he's understanding that, you know, I would think does he love commercial real estate? Does he own it? Does he love it? Does he understand that? It's, it's a great asset class? Would that be something connect with a passionate connection?

Logan:

Yeah, you know, I think that it's very important to understand the underlying reasons that folks are investing in real estate, right? Its real estate has intrinsic value, meaning it has value, subject to not subject to excuse me what somebody else is willing to pay for it because it is actually paying you on a regular basis. And so, you know, private equity businesses, commercial real estate, Those all have intrinsic value. So even if the marketplace is only willing to pay you a certain amount, you know, your commercial real estate could be worth more to you because it's actually paying you on a regular basis. And so I think assets with that intrinsic value is, you know, something that you have to understand and think through it. So, I always like to have a touch feel kind of guy, right? You know, I'm from the show me state. So you show me seven? And I'll show you eight. Right? Like, that's, that's what Nelly said, right, you know, in his song, way back when, but, you know, I didn't think I was gonna be rapping here today. But there is some truth to that, you know, I mean, there really is, it's like, you can go touch and feel, what's your buddies watching what happened to GameStop and Robin Hood and read over the last couple days, and you start wondering, holy cow if that type of situation was allowed in the stock market? Is that happening on a larger scale? We just haven't heard of it. Right. So then you start thinking about the price-earnings ratio, which at 32, I think right now, or 31. For the Dow, and historically, we've been at 16. So you know, that's kind of a measure of, you know, are we overvalued in the stock market where the stocks price that, you know, I can't say I have a ball, but what I can say is, you know, if I have a commercial estate asset that people are paying me, you know, tenants are paying me or, you know, residents are paying me or businesses paying me on a regular basis, that's still going to continue, you know, depending on which asset class you're in, but I can't say that same thing for you know, going and buying game stops, you know, stock, sure it might shoot up 300%. And AMC might go up 400%, but it might go down 500%. Tomorrow, you know, I just don't know that's not going to happen in the commercial real estate world. valuations take a long time to change, and they're still intrinsic value. So I think having a broker that understands that and can talk through that is crucial to your success when you're thinking about who to work with.