949-392-1999
SHOW NOTES FOR EPISODE 591: CATCHING KNIVES: INVESTING IN DISTRESSED COMMERCIAL REAL ESTATE
He was a millionaire before the age of 30, only to lose it all in the Great Recession! Taking lessons learned, getting educated and finding a solid niche strategy, author, broker and commercial real estate investor Jake Harris created a winning success model that continues to generate wealth today.
What You Will Learn
- Understanding the value of being around and learning from successful people who have “been there and done that”
- Being willing to work for nothing to get on the fast tract to wealth
- How to recover from big losses with a winning attitude, grit and determination
- Strategic flipping for quicker and higher cash payouts
- The power of mastering a dynamic niche strategy
- Why distressed commercial property is an “inflation proof” asset
- How his strategy survived Covid with flying colors
- How to a conservative yet highly profitable real estate investor
About Our Guest
Jake Harris
Jake Harris is a best-selling author on distressed commercial real estate, bringing 18+ years of experience in real estate, construction and investment management, and has been a featured national speaker on real estate. Over the past 6 years, he has managed, developed and acquired $200m+ in projects and over $250m in the development pipeline. Jake loves to build relationships and communities. Above all, he is a family man, the father of two adventurous boys and a newborn daughter with his wife.
More About Jake
- Jake was in the Army, finishing up his career
- He was a sergeant in the air assault infantry
- He “didn’t know what he wanted to be when he grew up”
- Someone gave him a copy of Rich Dad Poor Dad by Robert Kiyosaki
- After reading it, he knew that this what he wanted to do
- It sparked memories from his childhood in Northern California, near Sacramento area
- When he was a kid (age 7-13), his family lived in a 16 ft camp trailer on an old farm house site
- His parents bought an old “fixer-upper” farm house built in 1888
- It was once part of a massive 1,000 acre orchard at one time in Northern California, near a railroad town
- As a little kid, he grew up around this rehab that took many years for his parents to fix-up
- Rich Dad Poor Dad made him recall those days
- But it took a few years before he actually decide to pursue real estate investing as a profession
Learning Construction
- After the Army, at 23, he got a job as a bartender at a country club golf course
- He knew he wanted to get involved in real estate investing but just didn’t have the funds
- He got the job at the country club because he wanted to be around some rich people that might be potential investors
- He would share with real estate investors, developers, contractors and others at the country club that he was 23 and ready to get involved
- One guy (a developer he met at the country club) told him he should get into construction. He said, “It doesn’t matter what you do in real estate, there’s (always) a contractor involved.” And he said, investors are always competing with contractors as far as where funds will be spent.
- Jake saw it as a true advantage to understand the contracting side no matter what he did in real estate
- So he went into commercial construction
- He talked his way into a job that he didn’t know how to do – he was very persistent!
- He also told the company that he would work the job for free!
- He was applying for an estimating position – he was confident that he could figure it out
- He got the job but had no idea what he was doing
- He figured it out as he went along – baptism by fire!
- He was more on the “administrative” side of construction as someone who did a lot of estimates
- However, he got to know the “trades side” of construction through observation
- He eventually got promoted to Superintendent/Project Manager in the East Bay area (near San Francisco) for Equity Office Properties (owned by Sam Zell, one of the most successful real estate investors in the U.S.)
- San Zell was known as the “grave dancer” because he would buy assets that nobody wanted, rehab them and boost their value
- All of this prepared him for what he is doing today with distressed commercial real estate
First Investment Properties
- Jake eventually moved to Phoenix in the early 2000s where he purchased his first investment property
- He found a job working at a company where he did high-end kitchen and bath remodeling
- In the evenings, he would flip houses at $75K on average per house
- However, he was not doing what most people would know as a typical full rehab flip
- Jake would find a house where he could do just a few quick “strategic” changes to make, for example, a 3 bedroom home into a 4 bedroom and then sell it for $75 more because of that change
- With the large cash profits he was making, he would shift to strictly investing and not that much construction
- He became a millionaire before the age of 30
- But he then, just stopped, didn’t move the goal and became as he says, “fat and lazy”
- And then the Great Recession hit and his dreams were shattered
- As he started selling his properties, he ended up writing checks “out-of-pocket” for the difference owed on the mortgages
- He eventually ran out of money before he ran out of houses
- He remembers sitting on a corner in Phoenix, Arizona (sounds like a song…lol) crying his eyes out because he lost everything
- It forced him to take a look at his life and what he wanted to do
Education
- Even though he had lost everything, it made him more committed than ever to stay the course and be the best at what he could do as a real estate investor
- Jake ended up going back to school and got a degree in International Real Estate and Finance
- He also go his real estate broker’s license
Finding His Niche
- Jake looked at various types of real estate and saw that he could make 10% on a $250,000 house and walk away with $25,000
- Or he could put in the same amount of effort into a commercial property that sells for $2,500,000, yet walk away with $250,000
- You would have to sell 10 houses to earn the same as one commercial property
- This nailed it down for him!
- Before, he had limiting beliefs that he could never do big deals like that but he soon overcame that
- He loves commercial deals between $2 and 25 million dollars
- In commercial deals that size, there’s not as much competition
- You’re above mom and pop investors but too small for the institutional or private equity funds who are only looking at hundreds of millions
Types of Commercial Deals
- Over the years, Jake has invested in a wide variety of commercial real estate investments
- Some of those properties have included:
- Hotels
- Conversions of warehouses into apartments
- Built single family subdivisions
- Apartments
- Land assemblage
- Industrial land
- Office buildings
- What he invests in more than properties are markets
- He uses a lot of data to monitor and find good markets
- Demographics
- Infrastructure
- Bond spending
- People are abandoning West Coast states
- As a result, there are booms occurring in places like Boise, Salt Lake, cities all over Texas
- Once they find a market they like, then they look at each of the commercial asset classes
- Then, they are just looking at good deals in that market
- He uses a lot of data to monitor and find good markets
- Then, he focuses on distressed properties
- You can get a greater discount
- It allows for beginning investors to make mistakes with reduced risk and still make a profit
- With the major inflation happening, it does reduce some margins but you can still make money
Commercial Post Covid
- Jake had some challenges with his business due to Covid
- He lost some retail tenants. restarters
- He had a Buffalo Wild Wings on a corporate-guaranteed lease but their lease came due and they didn’t want to sign a new lease
- Fortunately, he was able to get them on a one-year lease, and again renewed for another year
- Hopefully, they will renew for longer term as the reality looks brighter
- The positive impact was that they were able to buy some properties under-value
- They were able to buy some San Antonio commercial property at under replacement value at $70 a sq ft and $30 per sq ft for TI (tenant improvements) – all in numbers were at $100 a sq ft
- They had a competitive advantage over everyone else in the market that had maybe just transacted at $200-300 a sq ft
- They didn’t have a whole lot of wiggle room in their price that he had
- This meant that they were able to keep up with occupancy levels
- They didn’t have a whole lot of wiggle room in their price that he had
- They also were able to do some “repurposing”
- The future of the office world is still unknown, especially with so many people working from home
- However, the demand for multifamily continues to grow
- Rents are skyrocketing!
- And fortunately, multifamily cap rates benefit that additional cost of adaptively re-using that building
- Therefore, they took an older office building, a 10-story historic building built in 1920, and are converting it into apartments
- They’re doing an office conversion into 63 apartments on the Riverwalk in San Antonio, TX
- It also qualified as an Opportunity Zone
- And they layered in some PACE (Property Assessed Clean Energy) structured financing
- It has added some complexity but it has also made in a good deal
- Getting federal tax credits, state tax credits through PACE
- They were able to upgrade the plumbing, electrical, windows, etc.
- He has a broker’s license for commercial and residential but really doesn’t use it for most of their transactions. He uses outside brokers
Biggest Mistakes
- Over-leveraging early on, when he was much younger
- When they give you a loan for 105% of your purchase price you should know that it is a BIG RED FLAG!
- All of his failures were learning experiences
- He also learned that “you don’t have to do this alone”
- Real estate is a team sport
- Get people who know what they are doing in their individual expertise
- He knows construction well
- But he uses a lot of other people with expertise that he does not have
- Real estate attorneys
- Banking/finance
- Contractors
- Engineers
- Inspectors
- Early on, he thought he had to know it all before he started investing
- He got his broker license
- He got his Master’s degree
- But the reality is…
- Those are all limiting beliefs that you can or can’t do it
- He was down in Miami and this “kid,” fresh off the boat from Cuba, in his late 20s or early 30s, and he just finished a 45-story condo project in Miami
- Jake asked him how it did it
- The “kid” had just come to the U.S from another country, 4-5 years ago, with no money, no credit or nor experience
- He went out and bought a piece of land for whatever it was listed for
- He hired a contractor and architect that did another project down the street
- Whatever the price was that they charged, that was it
- He walked around, met people and raised money explaining what the project was
- He pre-sold the condos
- And was able to build it out
- His very first real estate development project he every built was a 45-story condo project that made him $28 million profit!
- He was down in Miami and this “kid,” fresh off the boat from Cuba, in his late 20s or early 30s, and he just finished a 45-story condo project in Miami
- This whole thing made Jake question everything he previously believed and his own limitations
- It made him question all of his own self-imposed limitations
- He came to the conclusion that all of your limitations are your “self-limitations” – whether you think you can or think you can’t, you’re right!
- Those are all limiting beliefs that you can or can’t do it
Biggest Success
- Whatever he is working on right now is the most exciting and successful project he has ever done!
- He doesn’t have to work any longer if he wanted to stop today
- He flashes back on when he became a millionaire before 30 – how he just sat around and got fat and lazy
- He doesn’t do well when he’s not working
- He needs some sort of creative outlet – and today it is real estate
- He loves taking his kids to see some of his job sites
- It’s the ability to control his own path, and have and do things he enjoys
- He loves what he does!
Advice for Old Dawgs Looking at Real Estate Investing to Help Them in Their Retirement Years
- Ask yourself, “What is my dream life?”
- Then, look at what it would take to achieve that
- Then, begin “reverse-engineering” that dream
- What will I need to make (dollar wise) to achieve that dream?
- How much do I need to make a year to have my dream life?
- When you have a good idea of the direction you want to go, you can devise an investment strategy around that
- Diversity is great if you want to offset risk
- But most people have made their greatest amount in one category (i.e. oil, plastics, technology or real estate)
- Triple-net leases are perfect for people who don’t want any risk, who want mailbox money coming in
- Can you go find an industrial building in the Midwest that has a corporate triple-net lease guarantee? Yes, that’s possible!
- It requires very little effort
- You can use things like cost segregation and depreciation bonuses that offset some income, or some other things you’re using with your retirement account
- Maybe you’re investing with your retirement account and are not even concerned with that, have a lower risk and want a more stabilized asset like a multifamily property
- Can you go find an industrial building in the Midwest that has a corporate triple-net lease guarantee? Yes, that’s possible!
- Diversity is great if you want to offset risk
- Why not invest in a distressed commercial property
- It has a wider margin of safety where you can make mistakes and still be successful
- Retail is more distressed than other asset classes
- It’s very location driven
- You’re selling your box of Cheerios and you have to have a margin if you don’t have your customer in that location
- If it’s cheap rent, it doesn’t matter if your customer isn’t there, so now you have to think of things more creatively
- You’re selling your box of Cheerios and you have to have a margin if you don’t have your customer in that location
- It’s very location driven
- To recap
- First think of what you are trying to achieve with your investment strategy
- That helps then to determine the next levels of steps for you to determine what you are going to invest into
- Some people like glamorous, sexy projects like luxury hotels
Current Business
- Jake is very excited about hospitality right now
- It’s merging over all other real estate right now
- People have more friends online with social media than ever before
- But people are also feeling more isolated, alone and depressed than ever before
- People are seeking community, connections with other people
- Hospitality accomplishes that really well, at a high level
- Taking some tired hotels and rebranding them is where he sees himself spending more time and effort
- Hospitality is an amazing hedge for inflation
- Rates are doubling
- You can have less occupancy but make the same or more profit!
- The rich are getting richer
- More millionaires are happening every year
- People are looking for unique experiences
- If you have the option of staying at a boutique hotel that’s different, more people are looking for that
- This category of hospitality is recovering faster and seeing better long-term investment strategy vs. the cheapest option out there
Rap-It-Up
- Favorite real estate book: Powerhouse Principles: The Ultimate Blueprint for Real Estate Success in an Ever-Changing Market by Jorge Perez
- Favorite business book: Atomic Habits: An Easy & Proven Way to Build Good Habits & Break Bad Ones by James Clear
- Most valuable web site for success (other than your own): CoStar, Crexi and Loopnet to find more deals
- Favorite Group: Gobundance.com
- Favorite app: Instagram (to see trends – hotel designers, architects)
- Favorite quote: “If you don’t rise to the level of your own goals, you fall to the level of your systems.” – James Clear
- If you lost everything – all your assets – and had to start all over, knowing what you already know, and you only had $1,000, what would you do to re-launch your real estate investing business? I would use the money to re-connect with people in Gobundance and mastermind group to find people that need talented people that can do work. I would figure out how I could work for them to get started again.
Where to Get Jake’s Book
- Get Jake’s book – Catching Knives: A Guide to Investing in Distressed Commercial Real Estate
- The book that details Jake’s successful niche strategy with distressed commercial real estate
How to Reach Jake
- Website: CatchKnives.com
- Instagram: @Jake.RealEstate
- Company Website: Harris-Bay.com
IF YOU LIKED THIS PODCAST, we would love if you would go to iTunes, Stitcher, GooglePlay, iHeartRADIO and Spotify and Subscribe, Rate & Review our podcast. This will greatly help in sharing this podcast with others seeking to learn real estate investing as a means to achieve a successful retirement.
Check out our other podcasts at olddawgsreinetwork.com.
Get a FREE copy of our 3-Minute Rental Property Analyzer at olddawgsreinetwork.com.
Additional Episode Sponsor: Meno Studio – menostudio777@gmail.com
