Apr 24, 2022
What should you look for in a commercial property?
Tom McCrossin, founder of Newlane Management, LLC, joins our podcast to tell us how to get the best value in commercial and industrial warehouses. Tom brings a diverse experience in dealing with duplexes and mixed-commercial assets and, in this episode, he gets down to the nitty-gritty of buying and leasing in the commercial and industrial space.
[00:01 - 05:36] From Residential to Commercial
- Tom talks about starting in single-family to scaling to commercial and industrial
- Here’s how he did that
- Jumping right into it and learning along the way
[05:37 - 10:21] What to Do and What Not to Do in Deals
- Tom shares their own experience with a vacating tenant
- These are the lessons they learned when leasing
- How to protect yourself in an inflationary environment
- Staying above the cost of debt in a triple net lease
[10:22 - 13:44] Finding Opportunities
- Why Tom and his team go after short term leases
- Creating credibility by taking action
- The importance of speed and getting things done
- Tom’s insights about gaining value by taking risks
[13:45 - 15:42] Closing Segment
- Here’s what Tom is curious about right now
- This is Tom’s method of learning
- Reach out to Tom!
- Links Below
- Final Words
Tweetable Quotes
“There are bad deals, and you can lose a lot of money, but you have a physical asset… And so part of my mentality is that, if we buy anything today, over 30 years, we're going to come out on top.” - Tom McCrossin
“When you're comfortable with the actions that you have to take to get to the end result that you want, it doesn't feel like it's outside the realm of comfort.“ - Tom McCrossin
“... if I sit back on the sidelines and let other people take the action, my other mentality is, like, somebody's going to make money. I want to be sure it's me.” - Tom McCrossin
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Connect with Tom if you’re curious about commercial and industrial real estate. Follow him on Instagram!
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I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.
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Want to read the full show notes of the episode? Check it out below:
Tom McCrossin 00:00
When we're analyzing a building, we're ensuring that we're buying to the point that we can even lease the building under marke rate to compete with other landlords that have to be at market rate. You buy a building at $100 a square foot in our market, you're not leasing it for $4 a square foot, you're having to lease it at market rate at six to seven bucks. There is no way that if your deposition is on $100 square foot building that you can support to have a lower market rate rent, where in our case, we're buying buildings where we can support doing under market rate rent, which protects us in a turbulent market.
Intro 00:36
Welcome to the How to Scale Commercial Real Estate Show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big.
Sam Wilson 00:48
Tom McCrossin is an industrial warehouse buyer who buys buildings for his tenants and business needs. Tom, welcome to the show.
Tom McCrossin 00:55
Thank you for having me. I'm excited to be here.
Sam Wilson 00:57
Hey, man, pleasure's mine three questions I ask every guest that comes to the show: In 90 seconds or less. Where did you start? Where are you now? How did you get there?
Tom McCrossin 01:04
I started buying duplexes, house hacking like most investors started out, got married in 2010, bought two duplexes with my wife. We do all the renovations on the residential portfolio ourselves. 2020, we bought two duplexes and single-family. I got fired from my job in 2019. And said, Let's go balls to the walls. 2020, we bought 100,000 square feet of industrial, and this year, we're on pace to buy 500,000 square feet. So that's where I started. And that's where I am today.
Sam Wilson 01:32
Wow. So let me get this number right. You bought two duplexes in 2020, or you bought two duplexes in 2010?
Tom McCrossin 01:38
I bought one in 2010, one in 2012. And then the rest of the residential portfolio in 2020 til today.
Sam Wilson 01:46
Wow. Okay. Are you still buying single-family?
Tom McCrossin 01:49
Four duplexes and the residential portfolio in one single-family bought all within 10 years. And then the rest of the portfolio has been bought in the last 18 months
Sam Wilson 01:59
Was the loss of your job, the kind of catalyst for you just to go long in real estate?
Tom McCrossin 02:06
I started in 2019, I bought my first industrial building, we took a single-tenant building and subdivided into four tenant spaces. And it kind of gave me the itch to say let's do this, again, it was that developer creativity. I mean, like house flippers, right? Then love the ability to come in and then vision like, what are we going to do in this house? And how are we going to maximize the flow, kitchen, bathroom? And I guess it took that creativity and said, Hey, we could do this in industrial, nobody's really bringing a creative juice to a big box. So in 2018, my partner and I said, Hey, this is a great opportunity. Let's take a strike at it. I got the mentality said, let's jump into feet first and figure it out later. Because what's the worst that can happen? You learned along the way, right? Like in real estate, there is no bad deal. There are bad deals, and you can lose a lot of money, but you have a physical asset. And so that physical asset will always pay you back. You know, if I buy a deal today, and we anticipate to sell it in three years. And let's be honest, interest rates are going crazy right now. I mean, I've been talking to banks, we're being quoted at three and a half percent. And in the last week, it's jumped almost one percentage point. So with that said, you know, if we buy a deal tomorrow, and interest rates in five years are astronomically high, we're or we're going to just have low flow on top in the long run. And so part of my mentality is that if we buy anything today, over 30 years, we're going to come out on top.
Sam Wilson 03:37
Right, more than likely that basic analysis would hold true. Talk to us about the education side of things. I mean, you don't just own a couple of duplexes in one single-family and then one day like, Yeah, I think we'll go buy some industrial space. I mean, how did you underwrite it?
Tom McCrossin 03:53
That is exactly how it went, man. Like, the conversation with my partner back in 2018 was, Hey, Tom, I'd love to partner with you. I run an electrical business, giving a little backstory, but the partner run that run an electrical business said, Hey, I need a warehouse. I know you're really interested in real estate, I'd love the opportunity to partner with you. That duplex I bought in 2012 was cash, no debt, we refinanced that, brought my 140,000 on investment. We're 5050 partners on the deal. And we're actually refinancing by the end of March, and we'll pull $350,000 back out of the building that we bought in 2019. So full circle, we're basically like a 35% annual return, not including cash flow. And on that we had no education going into it. It literally was like I need a warehouse. Tom can be my partner, he can run it, he can do the day-to-day I have the other tenants in our back pocket that will move into the rest of the vacancy and when you structure the deal, the numbers all worked. And when we look back and my partner and I even to this day joke like, man, I think we really just found have a home run. And we had no idea like if I knew what I knew today, I, A, would not have bought it for as much as we did. Even though the returns are crazy. Even though it works at cash flows like $100,000 a year, you know, there's all these positivity. But as you do more things you learn like what not to do, what to do, what not to do. And in commercial real estate to me is lease negotiations are like the biggest skill set that every lease we sign, we change some verbiage, some term and condition on the next one. And that's almost more important than it is the actual building itself.
Sam Wilson 05:37
Very interesting. I would assume that falls into the things that you would categorize as not to do. You said you've learned some things to do and some things not to do.
Tom McCrossin 05:45
Anticipate that a tenant is going to vacate when you anticipate… We just bought a deal two weeks ago that we'd have four months after purchase and they move out in three weeks. We already have a new tenant lined up for the building, we had that lined up before we bought the building. They signed a 10-year lease last week. But now all of a sudden we have four months with no income.
Sam Wilson 06:06
I'm assuming that tenant was intending on vacating and four months.
Tom McCrossin 06:10
Yes, they were intending to vacating I got the building under contract and a broker said, Hey, I got a tenant who will take that building all day long, they'll sign a 10-year lease to get it locked up. I said, Okay, great. So we got that in motion before we bought the building. I never really talked, if a tenant is going to vacate, I don't spend a lot of time trying to get to know, them try to understand what their position is, you know, underlying reason for vacating, reason for not staying. It's a matter of like time versus value, there's no value in a tenant that's already... And actually, the broker that brought me the 10 year tenant already knew that the tenant in the building we were buying was vacating because they were showing them space. So I think the lesson learned in that stance is do have interviews with commercial tenants because if I had a conversation with them, when we put it under contract, we may have been able to negotiate some way to ensure they weren't going to vacate before we bought the building.
Sam Wilson 07:02
Right? What will be the financial cost of...
Tom McCrossin 07:05
$7,000 a month could be a vacant building, based on our relationships with other brokers, I think we're gonna be able to find a way to get some temporary renters. In the industrial space right now, there's a ton of need for like manufacturers that are taking huge quantities of product, and they don't have enough room in their current facility, There's definitely a position that, hey, we can do a three-month temporary short term rent, and try to offset that liability. Anytime you buy a piece of real estate that doesn't have income, it's a liability, not an asset, and we got liability.
Sam Wilson 07:40
You can get the you know, any of that 28,000 bucks back that you're gonna end up shelling out. Otherwise, that'll be at least a step in the right direction. Are most of your leases, triple net lease?
Tom McCrossin 07:50
They are all triple net leases.
Sam Wilson 07:52
How do you protect yourself in an inflationary environment with a 10-year triple net lease?
Tom McCrossin 07:57
We protect ourselves because whatever, the dollar that we bought the building that is only going to exceed the value that they are renting it. So yes, the next investor that buys this deal from us is going to go, wow, that lease rate is significantly under market. But you're also protecting yourself from a position to say, hey, we bought this building at $85 a square foot. And by the time that this whole roller coaster occurs, we're going to be able to sell that building for $110-$120 a foot. So it's based on the metric that if we're continuously buying buildings, under the cost of new construction, we're going to come out on top. So I don't really heavily look at the lease rate, its impact what we're going to sell the building for, because you still are able to sell it to another investor... You have to change their mindset a little bit because the cap rates may be a little low to get the valuation of the purchase price per square foot. But we're continuously focused on buying buildings under the cost of new construction, and we will come out on top. We may not be able to get rid of this building for three years, you know, five, but that's okay. Because if we hold on to this tenant for 10 years, we're going to pay off our building.
Sam Wilson 09:09
Right? Yeah, I get that. So for you guys, inflation protection via appreciation is part of the model. And then inflation protection via buying under the current cost of build is, also, you're getting some baked in equity.
Tom McCrossin 09:24
The other side of that is that when we're analyzing a building, we're ensuring that we're buying to the point that we can even lease the building under marke rate to compete with other landlords that have to be at market rate. You buy a building at $100 a square foot in our market, you're not leasing it for $4 a square foot, you're having to lease it at market rate at six to seven bucks. There is no way that if your deposition is on $100 square foot building that you can support to have a lower market rate rent, where in our case, we're buying buildings where we can support doing under market rate rent, which protects us in a turbulent market. So if in two years, a tenant is having problems paying rent, like their revenues dropped significantly, we have the means of negotiating lower rent or adding term to the lease to protect ourselves. As long as we're above the cost of debt on a triple net lease, we're ahead.
Sam Wilson 10:21
How do you guys find opportunity? I mean, if there's other people who are acquiring buildings, we're running off your numbers, I think you just used it 100 bucks a foot, and you're buying him at 80? Why is everybody else not out there finding buildings to buy at 80 bucks a foot?
Tom McCrossin 10:35
Buildings that we're buying at 80 bucks a foot are extremely short-term lease term. So one year, eight months, six months, four months, we're having a tenant in our back pocket, and we're buying a building for their business need. We're not going out and buying buildings with rent with five-year, seven-year, 10-year terms in place, those cap rates become very low and compressed in the current last 18 months. Yes, I started in this business less than two years ago. But the amount of volume that we've gone through of identifying, opportunity helps us understand what position we need to be in when we take ownership.
Sam Wilson 11:09
Right? That makes a lot of sense, because as you've said, and maybe not so many words, but the value of that asset is tied directly to the length of time on that lease.
Tom McCrossin 11:21
Correct. And then the other side to answer that question, how do we find our deals. I talk to everybody and anybody who we are what we do and how we do it. And we're able to get in, you know, in commercial real estate, you start buying one deal, two deal, three deal brokers take notice in our market, and they immediately have credibility to say, hey, if Tom puts an offer on a building, he's serious, he's not tire kickers, and he's not wasting people's time. Our first deal that we bought in 2020 was 450,000. Our second deal was 450,000. Our third deal was 6.1 million. That's a huge jump. People are taking notice to say, Hey, Tom is buying these small, crappy mixed-use buildings. I shouldn't say crappy, dilapidated. They need roughs. They need tuckpointing, they need painting, they're 50% vacant, there's a lot of value add to be created there. And then a broker brought me you know, a deal that I was like, Sure, I'll take it to my partners, we'll see if we can get it done. And the numbers worked out that we bought ourselves a nine cap, or eight and a half cap in a point that the worst-case scenario is like, okay, so we have some shorter-term leases in place, some of the leases expired in four months, some of the leases expired in two years, some of the leases expired in seven years, it was a multi-tenant building. And we're able to keep some of the tenants with short-term leases into long term lease position term. And so that was our value add, there was the ability to negotiate the new term on a lease, we didn't have to do any CapEx, and now we have a stable asset that just helped perform the portfolio better. So it definitely opened my eyes to bigger opportunities. Because the amount of time that I had on that deal was way less than on a $400,000 purchase, probably in the last year, I may have totally spent 40 hours. But on the other deals, I've probably spent, you know, three months every day going into the building and making sure contractors are doing what they said they were going to do, you know, fall in the scope of work. And then the other thing I've realized last year is that it's not so much, you know, how many deals can we get done, but what is the velocity of speed. So the quicker that we can stabilize a deal and refi and get our money back, or the ability to position the asset. So another investor who doesn't like the risk, doesn't like 50% vacant, doesn't like spending, you know, $100,000 on a roof and $80,000 on a parking lot, you know, all of those CapEx projects take time and money. And so if we're able to position ourselves to take on those projects, and turn a 20 or 25% return conservatively, I'm looking at we're doing a roof in a parking lot. Right now, you talk about inflation. I mean, any year from now, we've gained 30% of value just based on the CapEx project dollars we spent today versus a year from now.
Sam Wilson 14:07
Man, Tom, I love it. I love your take-action mentality, go get it done, and...
Tom McCrossin 14:13
Figure it out after the fact. Like there's nothing that I can't go jump in two feet. First, we're analyzing some deals right now. And some of them are super risky, 100,000 square feet with short-term tenant in place. So what happens if it leaves, but there's a $3 million equity play with a new lease in place? So it's hard to walk away from opportunities like that. But I think when you're comfortable with the actions that you have to take to get to the end result that you want. It doesn't feel like it's outside the realm of comfort. Right? Right. So like, as humans, we only gain value and knowledge by doing and so if I sit back on the sidelines and let other people take the action, my other mentality is, like, somebody's going to make money. I want to be sure it's me.
Sam Wilson 14:58
Love it. What's something you're curious about? Right now
Tom McCrossin 15:00
curious about right now is what are interest rates actually going to end by the end of the year? Are we going to be seeing 7% interest rates?
Sam Wilson 15:08
Hard to say? I love it. What's the book you're reading right now?
Tom McCrossin 15:11
I honestly don't read any books. I really am an action taker. I've not read a single book about real estate. I only thing I've learned from, is podcast and others doing it.
Sam Wilson 15:20
Hey, you know what, everybody's got their method. I love it. If our listeners want to get in touch with you or learn more about you, Tom, what's the best way to do that?
Tom McCrossin 15:27
Instagram, Tom McCrossin,T-O-M-M-C-C-R-O-S-S-I-N is the best way to reach me.
Sam Wilson 15:34
Awesome. Tom, thank you for your time today. I do appreciate it.
Tom McCrossin 15:37
Yeah. Thank you for having me.
Sam Wilson 15:38
Hey, thanks for listening to the How to Scale Commercial Real Estate Podcast. If you can do me a favor and subscribe and leave us a review on Apple Podcasts, Spotify, Google Podcasts, whatever platform it is you use to listen, if you can do that for us, that would be a fantastic help to the show. It helps us both attract new listeners as well as rank higher on those directories so appreciate you listening. Thanks so much and hope to catch you on the next episode.