Top 5 Reasons We’re Switching from Residential to Commercial Real Estate Investing

Patrick
Hello and welcome to the active commercial real estate investing show brought to you by the one and only school of commercial real estate investing. I’m Patrick.

Noelle
And I’m Noelle.

Patrick
And this is episode number one. So this episode is designed to give you just a brief background of who we are and what brings us to the show. Noelle, do you wanna kick us off with a little bit of our background?

Noelle
Yeah. So obviously Patrick and I share the same last name. Yes, we are married. We are life and business partners together, which doesn’t work for everyone, but it works very, very well for us. We have actually been investing since really we started dating in 20, we started dating in 2018 and started investing in 2019. So it was very quick in moving into real estate investors as well as dating and moving through life together. And real estate has been so fun. It’s been such a fun journey with you. It’s been fun how we’ve been managing our assets, which have really been more in the residential space to date. But I feel like it’s done so much for our lives. I mean, I, I happen to know that you feel the same, but definitely want to hear from you on how you feel like it’s benefited us now over the past five years.

Patrick
Yeah, it has certainly come with its ups and downs. We’ve been in the game long enough to have been gut punched a handful of times. We’ve also been in the game long enough to have seen the power of real estate investing firsthand. I think just from a financial perspective, it has certainly made our finances far more robust than they would have been otherwise. I also think that from a relationship perspective, it has been a catalyst for growth in our personal relationships with one another in the sense that we’ve had to go through some things together. And in doing that, we’ve had to be very clear with one another in our communication. We’ve also had to support each other through, you know, challenging circumstances at times and things along those lines. So I think in a lot of ways it has helped us grow as partners, both from a business perspective and a couple because we’ve had to set goals together and align on those. And then we’ve had to pursue those goals together and work through things together. So I feel like it’s done really good things for our lives, both in terms of the financial component as well as the personal component.

Noelle
Yeah, I feel like we’ve had to be really tough on ourselves and on the budget, which, you know, finances can make or break a relationship. Let’s be honest about that. And I feel like for us, we had good communication coming into it, knowing that we had to use our own money to be able to get into real estate since, you know, we didn’t have anything at the time that was being gifted or provided by others and no other assets that we could take and funnel into that. So it definitely obviously turned out for the benefit for us.

You know, I know that this is obviously not a residential real estate show. This is a commercial real estate show. So we personally feel like we have done residential real estate. We have seen what it can do and what it can provide. And now we’re looking to push ourselves further. Last year was year of baby and giving ourselves grace and becoming parents. And now we’re just coming at it with a totally renewed sense of energy, as well as a different perspective, because now there’s a little human in the picture who we want to be able to set up for success, and to do that, we wanna do it in much bigger ways than we have been, because while we’ve been reaping benefits of real estate, it’s not like it’s allowed us to quit our full-time jobs or anything like that. So it is still more of a passive, paying for itself type of venture. And I know we’re looking to get into something that, you know, can become a little bit bigger for us and maybe be able to pay us back dividends as well.

Patrick
Yeah. And you mentioned up to date, we have spent all of our investing time in the residential space. That’s how we’ve gotten started. And we’ve built in, we’ve built a portfolio of about $3 million of assets under management in the residential area. Um, and there are a number of reasons that we’re looking to now make the switch to commercial. Um, and that’s what brings us here today. So Noelle, do you want to give us the rundown of the five main reasons that we’re making the transition from residential to commercial.

Noelle
Yeah, I think the first one we want to talk about is definitely efficiencies of scale. So right now when we’re looking at our assets under management, you know, if you have five assets, you have five roofs, you have five different pieces of property that you are looking to have to make updates to versus if you look into the commercial space, you might be looking at seven different buildings, but they have one shared roof. So that is one roof that you are maintaining versus seven different roofs. You know, please provide some examples as well. That’s the first one that comes to mind for me.

Patrick
Yeah. And I think that’s probably the best one that highlights it. Um, you mentioned seven buildings, seven roofs, but I think what you meant was seven units under one roof, right? Like you can have, you have that scale of multiple units or multiple businesses within one roof. And that just allows you to scale a little bit more efficiently when you’re looking at your capital expenditures, um, along with other service based expenses that you have on a recurring basis, such as landscape.

Noelle
Yeah. I think another big one is the control over value. So this might be one of my favorites because instead of keeping up with the Joneses and worried about what your neighbors are doing to their house and what your neighbor’s house value is, you can have control over what that valuation is because the rents and what you are actually making on your property, your units, is what’s going to drive that value, which…I personally love the idea of, because I’m tired of trying to keep up with the Joneses and wondering when that house down the street is going to clean up their yard.

Patrick
Exactly. And just to elaborate on a little bit more. So on the residential side of real estate, the homes are valued by comparable sales within the immediate neighborhood. So if you have a home down the street that sells for less than market rate, that’s going to impact the value of the house that you’re trying to sell. Whereas in commercial, the valuations are derived by the net operating income of the building.

If you acquire a property and you go in, you clean it up, you’re able to increase the income or the revenue that it’s generating as well as decrease the expenses, then you’ve successfully improved and increased the net operating income. Then the value of the building is directly derived from that net operating income. And it doesn’t matter as much what the other buildings in the same block as you are doing because it’s not necessarily about them, it’s about what you’ve done with your building.

Noelle
like the idea of being able, you know, we talk about this all the time, right? But you can’t control others. You can only control what you do. I feel like that is a huge thing for personal motivation, but it really drives with this reason why we want to switch as well, which is when we can have that control, we know what we can do over it versus what is out of our control.

Patrick
Yeah, yeah. And then I would say the third reason that we’re largely making to make this shift is the law of big numbers. So with the law of big numbers, there’s this concept of a property can increase in value the same percentage, but if that’s $100,000 property and it increases 3%, you’re looking at about a $3,000 difference.

But if you have a $10 million property and that property increases about 3% in value, you’re looking at about a $300,000 difference. So the same percentage in the increase of a property’s value can have drastically different meanings.

Noelle
Yeah, so, so important. Big numbers means a small percentage goes a longer way. Excuse my twist of the tongue there.

Patrick
Yeah, yeah.

And I think that with people, especially coming from the residential side of things, you may be thinking like, well, I can understand how to get into a hundred thousand dollar property, but how would I ever get into a $10 million property, right? But on the commercial side of things are also, I think, just more opportunities for larger debt products, which means that you don’t have to finance that on your own, right? Like you can, you can raise, you can syndicate money and then utilize that as a down payment and banks are typically more than willing to cover the remainder of it so long as it’s a good property and they see the value in it.

Noelle
Yeah, and I know we’re going to plan on covering a lot of that as we bring on guests and as we’re able to talk about some of those specifics from people who are in it and doing it day in and day out. So really excited to get some of those people to come on the show and talk a little bit more about that. And then I’ll jump in to the next one because the next one is lease structure and coming from the residential space. You know, we have leases.

They are very specific to basically like you as the tenant are responsible for you know general upkeep of the house But if the HVAC goes out if the oven goes out we as the landlord are responsible for those things So there is a lot of onus on us to be able to manage replace and make sure that everything is done in a very timely fashion because obviously we don’t want a Heater to go out and have tenants having to wait for two weeks until we can get something replaced like

that is just not acceptable. However, when we’re talking about commercial space outside of multifamily, because you obviously still have lease structures there, you have larger equipment to be using and replacing, but when we’re talking about more of office or retail, we’re talking about being able to have people come in and we say, here is your building shell.

You can have this building, but you are responsible for the construction to make it what you need it for your business. You’re responsible for the upkeep of all that construction and that in the state of life that we’re in now and wanting to be a little bit more hands off as the landlords sounds very appealing.

Patrick
Yeah. And I think one quintessential example of this that a lot of people can relate to is fast food industry, right? So a lot of the fast food chains don’t own their own real estate. I think McDonald’s often purchases their own real estate, but I think a lot of the other chains are often renting the buildings from developers or other fund managers. And so the way this typically works is you have a building, it’s great for a burger place, that burger place comes in, they rent it from you under what’s called a triple net lease. So that means that all expenses aside from, you know, the main debt payment are covered by the tenant. So they take on the property tax, the building insurance. Um, they come in, they build out the space the way that they want it based off of their branding. Um, so that means they’re responsible for all of the kitchen equipment. And if their oven goes out, they’re responsible for replacing their oven. If the toilet gets clogged, they’re responsible for unclogging the toilet.

But they have maximum control over the space and you as the owner have less to be worried about on a day-to-day basis because a lot of that responsibility shifts to the tenant. And this is true for many retail stores as well. So think of popular cell phone companies that have multiple locations all over in things like strip malls. You basically provide them the space in a triple net lease. They come in, they build it out based on their branding and how they want their store to look and feel.

Noelle
Yeah, I mean, can you even count the number of hours that you have spent dealing with things like that we’ve dealt with in residential management? I mean, when we think about our time to cost ratio, the amount of money that could have been spent utilizing hours elsewhere than dealing with that is probably more than we actually want to spend the time to dig down in

Patrick
Absolutely.

Noelle
And then the last one that we wanted to talk through is the cycle of buying and selling. So that being that commercial just has a shorter expectancy of when it’s anticipated that things will be back on the market unlike residential, which tends to hold on for many years upwards from 10 to even 60 years, depending on how long people are in their properties.

Patrick
Yeah, I mean, residential real estate is designed to be a primary residence first and foremost, and so you have people that will purchase a house and then stay in that house for the remainder of their life. So that house may not be back on the market for 50, 60, 70 years. On the commercial side of things, based on the way that the debt products are structured, it’s much more common to see, say, a three to 10 year holding period. That’s not to say that all fund managers or syndications will only hold for that amount of time; some do buy and hold for a much longer period of time. However, a very common cycle in the commercial space is to acquire a property, fix it up, increase the rents and the revenue that it’s generating, decrease the operating expenses, which again, like we talked about, will increase the NOI and the value of the property and then stabilize that for a couple of years. And then

turn around, sell that property for a profit, take those profits and spin it into something bigger. Right? So it’s the whole system on the commercial side is almost designed to spin property valuations up over time and it’s designed to change hands a little bit more frequently on average. And so with both of those designs kind of being built into the system, more or less, based off of the debt products available, you know, I think that

It just offers more opportunity to get to know a market really well and have some eyeballs on certain properties that we would want to acquire over time and have a more realistic shot of actually having the opportunity to bid and acquire those properties, whereas, you know, you may have your, your eye on a residential property and it could just sit until you die. Right. Um, so I think that’s an appealing component of commercial as well.

Noelle
No more slipping your neighbor or your business card and saying, when you’re ready to sell, please let me know. And then finding out 20 years later that they’re finally ready. But this is all great. And I feel like it took us a while to get comfortable with being uncomfortable and moving from residential to commercial. And I think a big part of that was the research and the availability of information to.

Patrick
Yeah. So.

Noelle
what I would consider an everyday investor like you and I, right? Like we don’t have developments already under our belt. We haven’t been handed any type of money to be able to go and play with in this space. And I know I lost you for a little bit of time in 2022 in the mornings, which was fine because going through pregnancy, I was asleep and I appreciate you for persisting

Noelle
having previously decided like, we do wanna make the switch, but we wanna make sure we understand the information first, which is the crux of why we are making this show. And hopefully listeners are with us and saying, yes, that sounds really great, but how do I actually do that? And where do I find this information? So I definitely want to give you the chance to, explain what you were doing all those mornings in 2022, when I did not see you.

why this came to be and why we’re setting out to do this.

Patrick
Well, it was a conversation that you and I had back then, which was revolving around residential to commercial. And we want to keep investing in real estate. We see that’s where a lot of our investment dollars going because of the returns and the benefits that we’ve personally received from our portfolio thus far. But we were starting to have conversations around the five things that we just talked about and how we felt like we were hitting a little bit of a ceiling in the residential space.

And so we started kicking around the idea of like, maybe we do start to look more seriously at getting into commercial. And so I dove into that research and there are certainly books out there that are helpful and some podcasts that are out there that are helpful, but I couldn’t find the resource that I was wanting, you know? And that was a little bit frustrating because I was hoping to find a platform that had

enough resources that covered all the fundamentals of commercial real estate investing across all asset classes with the option then to dive into specific asset classes that I was interested in learning more about. And I just couldn’t find that. And so I figured, well, if I’m going to be doing all of this research, I might as well start documenting this because documenting is the way that I learn best. I love to read something and I love to rewrite what I learned.

to help solidify what I actually learned and check for my own understanding. And so effectively, I just started writing articles for myself and thought, well, if I’m going to do this for myself, might as well just throw them up on a website and let them live somewhere so that if somebody else is coming behind us on this journey, they have a more clear cut path to get from point A to point B. And so I did that for the better part of a year, almost a year and a half.

where I was just waking up every morning, 5 a.m., reading, writing, publishing, and learning a lot about the commercial space, which was amazing. And then we had our beautiful first child, which, you know, you can only do so much once you’re learning how to be a parent and not getting a ton of sleep in those first handful of months and constantly questioning whether you’re…

Patrick
destroying a child’s personality or psyche for the rest of their lives by a mistake you made or think you made because you’re second guessing everything of how to become a parent. And so the website, what’s that?

Noelle
Sounds about right. I said, sounds about right. Anyone else out there resonate with this? Please tell me we are not the only first time parents who feel this way. I know we’re not, but.

Patrick
Yeah.

Patrick
Yeah. And so, you know, the website definitely took a backburner during the first eight to nine months of our daughter’s life as we figured out how to raise her. And now that we feel like we have our sea legs under us, so to speak, when it comes to being parents, we’ve definitely revisited this whole project with renewed enthusiasm and I would say a different level of passion than we had before.

Um, you know, given that we now have a child to create a legacy for it and pass things on to and all of that. So it’s been fun to revitalize and revisit this whole thing. Um, and the goal is certainly to make commercial real estate investing more approachable and accessible, uh, for the common investor, just like who we are, you know, as, as we learn about the space and, and enter it.

Noelle
Yeah, I think it’s so important. I just, I really do feel that there is this idea that commercial is for the big guys. Only the big guys can do commercial. Commercial is not for the everyday person. And while that is generally probably more true because the big guys have the money to keep investing, I don’t think that prevents people

from getting into it from the ground up. There are so many people now who have interest and who want to do that. And I do feel like there are a lot of the big guys who want to encourage that as well. They wanna see more people have this ability to build generational wealth for their families. And so I’m excited because I can’t wait to tap in to the people who are.

Experts are doing this and maybe making more than we ever think we’ll be able to make in our lifetime and then the people who are at the beginning similar to us starting to get into this journey but are ready to go are fired up and want to make this the best that it can be And create a life not only for ourselves, but for our children and hopefully their children and something that lives far beyond us That drives me every day

Patrick
Yeah. And you mentioned a keyword there that I think is really important to call out, which is journey. We are definitely starting this journey in the commercial space and have launched the website and the podcast for others to join us and follow along. And we certainly hope that you do. And as we advance in our journey, obviously we’re newbies in the commercial space as we start this, but over time we will get better and better and better and become experts. And with that, I think it’s just important to mention that we’re hopeful to reach everybody on the spectrum of commercial real estate investing over time, right? I think at the beginning, as we’re newbies, a lot of the content is going to resonate most with people who are in a similar stage as us looking to get into commercial real estate investing. Over time, we’ll have a lot more.

that will be supportive of the people who are already doing it and the experts in terms of leveling up their game as well. So definitely keep an eye out for that and recognize that wherever you are on your journey, it’s all good, you’re welcome. We hope there’s something that you can learn from this as we take this initiative on and build this community and share all the knowledge of our guests and what we learn along the way openly.

Noelle
Yeah, and would love to make connections in any way that we can. Um, I will say to the people who are listening, if there are specific things that you’re interested in learning about and you’re in a similar stage or a completely different stage, don’t hesitate to reach out to us. We’ll leave details, um, in the show notes and you can obviously contact us through school of commercial real estate investing as well, which the website will be.

in those show notes too. So please reach out and submit any suggestions that you have because we want to make this the most useful it can be for everyone. And if there’s a theme that everyone’s like, hey, there’s this one thing and we keep seeing that time and time again, let’s address it. Let’s talk about it. Let’s make sure that people have that information and they’re armed with what they need to be armed with to be able to move forward.

Patrick
Yeah. Well, I think that about wraps up this first episode. Hopefully that gives you the high level overview of who we are, what brings us to this and, uh, you know, how we’re hoping to help one another along the way. So please subscribe. If you’re interested in learning more about commercial real estate investing and also visit the website, schoolofcrei.com. We’ll see you in the next episode.

Noelle
See you next time.