February 4, 2025 • 22 mins
On this episode of Drilling It Down, Wes and Tyler return to explore the intricacies of sale-leaseback arrangements, focusing on the dangers of inflated leases. Drawing parallels with the Toys R Us saga following its private equity buyout, they discuss how companies opt to sell real estate for immediate cash, often leading to financial downfall. They break down the pros and cons of sale-leasebacks, underscoring the risks when companies overreach in pursuit of capital. Tyler emphasizes robust research for potential commercial investments, warning against the traps of inflated rents and the perils of uninformed property acquisitions. They highlight the necessity of local market expertise, cautioning listeners to consult seasoned brokers rather than relying solely on online listings for viable deals. The conversation also touches on the pivotal role of cap rates and interest rates, offering insights into evaluating leases for long-term success. Wes and Tyler adeptly guide listeners through the complexities of commercial real estate investing, providing crucial lessons and strategies to avoid costly pitfalls. Their discussion arms both seasoned and aspiring investors with knowledge essential for safeguarding their financial future.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Wesley Lyon:
Welcome back to another episode of drilling it down this is your host west lion (00:02):
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Wesley Lyon: co-hosting again tyler ott ty welcome back. (00:07):
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Tyler Ott: Thanks for having me. (00:10):
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Wesley Lyon: Uh today we got an exciting episode here sale lease back arrangements and how (00:11):
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Wesley Lyon: to avoid inflated ones so uh previous episode you know we put out we talked (00:19):
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Wesley Lyon: about private equity investing if you should do it what they're up to, (00:25):
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Wesley Lyon: some of their shenanigans. (00:29):
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Wesley Lyon: We didn't quite get into the details of some of the sale-leaseback arrangements, (00:31):
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Wesley Lyon: but I did mention a couple. (00:35):
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Wesley Lyon: I think Toys R Us was one, and then we didn't give any names on what we know or suspected to happen, (00:37):
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Wesley Lyon: but there's definitely a few prominent politicians that made quite a bit of (00:45):
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Wesley Lyon: money off sale-leaseback arrangements, especially with the start of the EU. (00:49):
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Wesley Lyon: But they can also hit individuals looking to buy real estate. (00:54):
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Wesley Lyon: And, you know, Todd, we're pretty big proponents of commercial real estate when it works. (01:00):
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Tyler Ott: Absolutely. When it works, commercial real estate is one of the best investment avenues. (01:04):
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Tyler Ott: You know, we have a lot of clients that come in and, you know, (01:09):
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Tyler Ott: they don't love the market. (01:12):
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Tyler Ott: And while we don't necessarily agree with that, they're just looking for some (01:14):
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Tyler Ott: other avenues to invest in to diversify. (01:17):
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Tyler Ott: And one of the things we bring up is real estate and specifically commercial real estate. (01:19):
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Tyler Ott: Now, we don't love the residential real estate. There's a lot of headaches around (01:24):
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Tyler Ott: the residential real estate. (01:28):
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Tyler Ott: But with commercial real estate, depending upon what sector you get in their (01:29):
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Tyler Ott: value range that you get in there, you could hire a management company, (01:34):
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Tyler Ott: lease out the building, collect enough to pay your debt, and you're golden and (01:39):
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Tyler Ott: you're just sitting there getting your mailbox money. (01:42):
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Wesley Lyon: You can make a lot of money. Now, it's kind of funny before anyone rushes out to go do this. (01:44):
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Wesley Lyon: The more you research, the more you discover you don't know. (01:51):
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Wesley Lyon: So we're not necessarily discouraging anyone from doing it. We actually encourage (01:55):
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Wesley Lyon: people to do it. We're just very realistic with them on what you're looking for. (01:58):
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Wesley Lyon: You're going to have to be able to get these deals. And a lot of the times, (02:03):
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Wesley Lyon: local knowledge is king. (02:05):
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Wesley Lyon: If you're just out there, you hear this podcast, okay, I'm going to jump onto (02:08):
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Wesley Lyon: LoopNet and I'm going to buy something, you're probably going to get preyed upon. (02:11):
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Wesley Lyon: But local knowledge, good real estate broker, I mean, this isn't like residential (02:16):
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Wesley Lyon: real estate where a good deal just pops up on Redfin or LoopNet. (02:21):
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Wesley Lyon: LoopNet's like the place they go to die, right? This thing isn't selling and (02:25):
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Wesley Lyon: now we're going to list it everywhere. (02:30):
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Wesley Lyon: I mean, I don't work in that space, but I'd imagine a lot of these deals are (02:32):
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Wesley Lyon: just phone calls. You know, hey, got a property here, got any interested buyers (02:36):
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Wesley Lyon: and brokers just working between themselves. (02:40):
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Wesley Lyon: But, you know, back to the point here, today we're going to talk about what (02:44):
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Wesley Lyon: to avoid, not necessarily what to do. (02:49):
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Wesley Lyon: So as we were talking about private equity, the idea of a sale leaseback arrangement came up. (02:52):
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Wesley Lyon: So, Tyler, are you familiar with this at all? (03:00):
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Tyler Ott: I could use a little more background on it. It sounds like a nice little buzzword, (03:02):
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Tyler Ott: but tell me a little bit more about it and what that strategy is. (03:06):
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Wesley Lyon: Well, we'll tell a story here to kind of explain what can happen. (03:08):
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Wesley Lyon: They're all a little bit different. So don't put anything under one, (03:12):
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Wesley Lyon: you know, kind of roof on a sale leaseback, but they're just common. (03:15):
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Wesley Lyon: So Toys R Us was actually overtaken by a private equity firm. (03:19):
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Wesley Lyon: Very famous takeover. And as I'm sure you know, Tyler, you have two little boys. (03:25):
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Tyler Ott: I could have been very successful. (03:30):
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Wesley Lyon: Apparently, you know, have you seen a Toys R Us since we were kids? (03:32):
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Tyler Ott: Yes, I don't know. I can't have been a good payoff unless they're up a liquidate. I don't know. (03:37):
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Wesley Lyon: I mean, I would imagine those trampoline parks. There's like a 50-50 shot. (03:43):
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Wesley Lyon: Whenever you see one, it used to be a Toys R Us and they had to move it. (03:47):
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Wesley Lyon: I have no idea what's in those, though. I don't really know where one is or one was around us. (03:50):
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Wesley Lyon: But yeah, they came in, they bought the Toys R Us, and I'm not really exactly (03:56):
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Wesley Lyon: certain what went on from a management perspective. (04:02):
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Wesley Lyon: But a little reminder, if you didn't listen to the last episode, (04:04):
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Wesley Lyon: a lot of times they'll go buy these companies. They buy them with debt and they (04:07):
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Wesley Lyon: straddle the companies with the debt. (04:10):
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Wesley Lyon: And then they look to decrease costs, do anything to pay off the debt. (04:12):
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Wesley Lyon: Well, Toys R Us had real estate, and I'm not exactly certain on exactly who (04:16):
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Wesley Lyon: was involved, how shady this was, but let's just say shady is probably a good word for it. (04:22):
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Wesley Lyon: But Toys R Us, what they ended up doing was selling the real estate and leasing it back. (04:28):
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Wesley Lyon: And this eventually led to the drowning of Toys R Us, or was one of the culprits (04:33):
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Wesley Lyon: of the drowning of Toys R Us. (04:38):
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Wesley Lyon: But what they were doing was, you know, there's probably some connection to (04:41):
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Wesley Lyon: the private equity firm and the real estate on the purchase side. (04:47):
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Wesley Lyon: But definitely on the sales side, you know, they take 2 plus 20, (04:52):
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Wesley Lyon: 2% of assets and 20% of profits. (04:56):
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Wesley Lyon: So they sold the real estate to extract the profits of it and left the company (04:59):
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Wesley Lyon: in really, really, really bad shape. (05:06):
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Wesley Lyon: Now, I'm not exactly certain who they sold the real estate to, (05:10):
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Wesley Lyon: if they had other plans at the end of the day or whatnot. (05:13):
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Wesley Lyon: As you can imagine, commercial real estate without a company leasing it is, (05:17):
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Wesley Lyon: you know, not nearly as valuable. They might have had other plans. (05:22):
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Wesley Lyon: Who knows what they did, but they extracted a lot of value out of this by doing it. (05:26):
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Wesley Lyon: So it's kind of a common structure. (05:31):
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Wesley Lyon: And the example we're going to use, we're not going to name any names here on (05:34):
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Wesley Lyon: the podcast for the sake of these groups have a lot more money than we do. (05:39):
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Wesley Lyon: And what I'm about to talk about, it's probably not going to be viewed favorably. (05:43):
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Wesley Lyon: But there's certainly private equity groups that will build what they need, (05:47):
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Wesley Lyon: and then they will sell that building and lease it back. (05:54):
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Wesley Lyon: And you might wonder, why would anyone do that? (05:57):
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Wesley Lyon: So what I came across trying to help a few clients buy commercial real estate (06:01):
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Wesley Lyon: was dental locations that were on great leases. (06:06):
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Wesley Lyon: I mean, the deals looked awesome. (06:12):
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Wesley Lyon: And we were super, super excited for it. And something just irked me. (06:15):
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Wesley Lyon: It's just too good to be true. When something's too good to be true, it is. (06:22):
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Wesley Lyon: You just need to dive in and find out why it's too good to be true. (06:26):
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Wesley Lyon: So I started diving in deeper, trying to figure out what was going on. (06:30):
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Wesley Lyon: And I found out, and there were a few of them. It wasn't one client trying to (06:35):
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Wesley Lyon: buy three. It was like three different clients each trying to buy one of them. (06:38):
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Wesley Lyon: Well, they were double the market rent. (06:42):
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Wesley Lyon: So they were jacking up the rent in the lease to sell it at a higher price than (06:46):
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Wesley Lyon: it's worth take the money and then lease it back. (06:51):
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Tyler Ott: And how long is that lease for? (06:57):
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Wesley Lyon: 10 years with 2 5 year extensions. (06:59):
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Tyler Ott: Probably not going to be extending. (07:01):
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Wesley Lyon: That, (07:03):
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Wesley Lyon: there is the problem what happens if they don't extend it and they come back (07:05):
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Wesley Lyon: to the table and they say hey, market rent is actually $22 a square foot and (07:11):
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Wesley Lyon: we were paying $44 a square foot. What do you do? (07:16):
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Wesley Lyon: You can't rent it to somebody else at double the market rent. (07:20):
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Wesley Lyon: You can only rent it to somebody else at fair market rent. (07:23):
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Wesley Lyon: So maybe their intention isn't to do that. Maybe it is. We don't know, (07:26):
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Wesley Lyon: but it's not a risk that we should be taking. (07:31):
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Tyler Ott: Yeah, just what it comes down to is, you know, looking at the property, (07:34):
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Tyler Ott: you know, looking at the cash flows, looking at the leases. (07:38):
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Tyler Ott: You know, you really have to dig into it. As you said, that deal looked too good to be true. (07:41):
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Tyler Ott: You couldn't identify it right off the bat, but as you dug into it, (07:46):
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Tyler Ott: you figured it out. Commercial real estate, (07:49):
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Tyler Ott: It's been in a funky situation recently with the interest rate increases over (07:54):
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Tyler Ott: the last few years going from, you know, when COVID from zero interest rates (07:59):
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Tyler Ott: to now high interest rates. (08:03):
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Tyler Ott: And, you know, the price changes have not really come down to where we thought they were. (08:04):
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Tyler Ott: Generally, we're looking for a good spread of the cap rate over the interest rate. (08:10):
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Wesley Lyon: Now, Tyler, explain to me, what is the cap rate for those out there listening? (08:16):
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Tyler Ott: It's essentially the income that you're getting on the property, (08:18):
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Tyler Ott: the rate of return of the property. (08:21):
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Wesley Lyon: And that would be the rate of return if it didn't have debt on it, right? (08:23):
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Tyler Ott: Yes, yes. (08:29):
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Wesley Lyon: Yes. (08:30):
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Tyler Ott: Yes. (08:31):
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Wesley Lyon: So usually you're going to see a cap rate somewhere between what we see and (08:31):
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Wesley Lyon: what we want are two different things. (08:37):
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Wesley Lyon: You're probably going to see them between five and seven. (08:39):
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Wesley Lyon: We're kind of looking for them between six and eight. (08:41):
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Tyler Ott: Exactly. (08:44):
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Wesley Lyon: But that would be the amount of money you make off the property, (08:44):
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Wesley Lyon: cash flow-wise, if it doesn't have debt on it. (08:48):
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Tyler Ott: And that's where the interest rate comes in because you need that, (08:54):
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Tyler Ott: as I said, spread before. You need your cap rate to be higher than your interest (08:57):
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Tyler Ott: rate because you need to make money on it. (09:02):
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Wesley Lyon: I mean, you're going to buy it with debt. (09:04):
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Wesley Lyon: But yeah, overall, we're going to jump in a little bit here into commercial real estate dues. (09:08):
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Wesley Lyon: But commercial real estate don't, especially this really applies to dentists. (09:13):
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Wesley Lyon: If you're trying to 1031 exchange your office building, you know, (09:17):
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Wesley Lyon: Hey, I'm selling to Dr. New, Dr. New's going to buy me out. (09:20):
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Wesley Lyon: I don't necessarily need the money in cash. I want to avoid the taxes. (09:24):
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Wesley Lyon: So now I'm going after a 1031 exchange. I'm looking to avoid those taxes. (09:27):
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Wesley Lyon: And now all of a sudden I'm getting suckered into something I don't want to (09:32):
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Wesley Lyon: do because Tyler, to your point, (09:35):
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Wesley Lyon: those, we'll kind of come back in here and talk a little more in depth on the (09:37):
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Wesley Lyon: why, but recently the prices and the cap rates and the interest rate, (09:41):
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Wesley Lyon: all three of them need to merge together to make a good deal. (09:46):
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Wesley Lyon: And the three of them haven't matched for two, three years, maybe just two years. (09:49):
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Wesley Lyon: Probably about two years since interest rates went up. And that's been really (09:56):
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Wesley Lyon: problematic for buyers. (10:00):
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Wesley Lyon: And that's why these sale leasebacks kind of come up. All of a sudden we see (10:02):
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Wesley Lyon: one and it's got a good cap rate on it. (10:05):
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Wesley Lyon: It's got a, you know, fair market rent increases. (10:08):
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Wesley Lyon: I mean, everything looks good about the deal. And then you're just sitting there (10:12):
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Wesley Lyon: wondering, why is this dentist getting the first crack at this deal? (10:15):
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Wesley Lyon: There's something wrong with the deal. (10:21):
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Tyler Ott: Yeah, because they would have (10:23):
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Tyler Ott: already been snatched up by the people that knew what they were doing. (10:24):
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Wesley Lyon: Yeah. So be very, very careful of inflated sale leaseback agreements. (10:27):
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Wesley Lyon: You need to figure out in order to protect yourself. You need to figure out (10:31):
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Wesley Lyon: what the actual market rent is on that space you're leasing. (10:35):
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Wesley Lyon: So if it's a dental office and dental space is leasing for 17 a square foot, (10:38):
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Wesley Lyon: and this one's at 34, boom, just... (10:44):
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Wesley Lyon: Maybe it works out for you. Maybe it doesn't, but way too much risk. Just stay away. (10:47):
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Tyler Ott: And if you don't know, that's where you need to, if you're looking to expand (10:51):
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Tyler Ott: into this realm, that's where a, you know, a trusted quality commercial real (10:55):
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Tyler Ott: estate agent would be a very good, you know, person to contact and get information (11:00):
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Tyler Ott: on, get assistance with. (11:04):
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Wesley Lyon: And one that's on your side. (11:05):
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Tyler Ott: Don't trust the one selling. They are not working for you. They are working for the seller. (11:07):
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Wesley Lyon: This is like buying a practice. Make sure you have your representation here to look at it for you. (11:12):
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Wesley Lyon: But with that, we talk about this a lot monthly in the McGill and Lyon Dental Advisory. (11:18):
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Wesley Lyon: Those of you that don't get this delivered to you every month, make sure you sign up. (11:24):
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Wesley Lyon: McGillHillGroup.com. Go ahead and sign up. There is, I think it's Podcast 20 for new subscribers. (11:30):
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Wesley Lyon: You can get 20% off by entering Podcast 20. (11:36):
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Wesley Lyon: This gets delivered to your door inside of a sealed plastic envelope each month (11:40):
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Wesley Lyon: with all the latest things that you need to know about coming up. (11:48):
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Wesley Lyon: So this one we got right in front of us, November issue. (11:52):
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Wesley Lyon: There we go. How to avoid the retirement planning, top 10 retirement planning mistakes right there. (11:56):
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Wesley Lyon: Also information on your business owner policy, different tax items. (12:02):
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Wesley Lyon: These are must-have if you're running a dental practice, and if you're not running (12:07):
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Wesley Lyon: a dental practice, they're must-have for the problems you're about to face, (12:10):
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Wesley Lyon: because as we talk about often, the easiest way, the quickest way to get out (12:14):
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Wesley Lyon: the student loan debt is to do what. (12:18):
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Tyler Ott: Tyler? Buy a practice. (12:20):
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Wesley Lyon: Buy a practice. With that, let's jump back in here, Tyler. (12:21):
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Wesley Lyon: Let's talk about to-dos when we're looking at this. We talked about what a cap rate was. (12:25):
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Wesley Lyon: So it's really the return rate on the property if it didn't have debt. (12:30):
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Wesley Lyon: But, Tyler, you said that, you know, we need to have a spread. (12:36):
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Wesley Lyon: So the cap rate needs to be above the interest rate. (12:38):
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Tyler Ott: Exactly. And that's where it's been difficult is with interest rates in that (12:41):
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Tyler Ott: six, seven, you know, range, you're looking at a cap rate, eight, (12:45):
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Tyler Ott: eight, nine, and those don't necessarily exist. (12:50):
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Tyler Ott: And so if you're looking at a property with a cap rate of six and you got your (12:53):
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Tyler Ott: interest rate on the debt of six, it doesn't necessarily make sense. (12:57):
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Wesley Lyon: And you mentioned earlier- For those of you out there, just remember what's (12:59):
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Wesley Lyon: driving this is interest rates went down to like three. (13:03):
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Wesley Lyon: So commercial real estate was four, three to four, and all of a sudden people (13:07):
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Wesley Lyon: are being able to sell at a 5% cap rate. (13:11):
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Wesley Lyon: The lower the cap rate, the higher the price on the same property. (13:15):
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Wesley Lyon: So if you buy a property at 7% cap rate or you make an offer and they come back (13:18):
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Wesley Lyon: at a 5% cap rate, what it really means is they raised the price on you. (13:22):
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Wesley Lyon: So lower the cap rate, higher the price. (13:27):
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Wesley Lyon: Well, during COVID with super low interest rates, everybody got really used (13:29):
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Wesley Lyon: to their commercial property being worth a ton of money. (13:36):
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Wesley Lyon: And now they want to realize those values, but the interest rates are double (13:40):
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Wesley Lyon: what they were back then to buy commercial real estate, which doesn't slice (13:44):
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Wesley Lyon: the price in half, but it's a pretty significant chunk of the price that should go away. (13:48):
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Tyler Ott: It should. (13:53):
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Wesley Lyon: So that's creating issues. Buyers and sellers are not on the same page. (13:53):
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Wesley Lyon: And now, as we look forward at opportunities, people might say, (13:59):
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Wesley Lyon: oh, well, why are we talking about it? (14:05):
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Wesley Lyon: Well, commercial real estate loans have balloons on them, meaning the interest (14:06):
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Wesley Lyon: rate's not guaranteed for 20, 25 years. It's guaranteed usually for 7 or 10. (14:10):
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Wesley Lyon: And a lot of these places, they're coming up on these balloons, (14:15):
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Wesley Lyon: and all of a sudden the interest rate's going to go up. (14:18):
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Wesley Lyon: Some of these deals want cash flow. Some people are going to be underwater. (14:21):
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Wesley Lyon: We might see things start to get for sale again, a little bit of sanity returning to the market. (14:25):
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Tyler Ott: That's what we're thinking. Someone, it just has to hit. (14:31):
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Wesley Lyon: Yeah, but if we're looking, Tyler, you know, we want that spread where we usually at like 2% spread. (14:34):
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Tyler Ott: Ideally, 2%. (14:39):
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Wesley Lyon: 2% spread. We also have to review all the leases, right? (14:40):
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Wesley Lyon: We just went over one type of lease that can be bad, but there's all sorts of leases that can be bad. (14:44):
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Tyler Ott: You want to make sure that that building is running. that's where the cash flow comes from. (14:49):
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Wesley Lyon: Month to month leases are not as good. Not as good is long-term leases locked (14:53):
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Wesley Lyon: in, leases without rent increases, leases below market value. (14:58):
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Wesley Lyon: Now, this is where local knowledge can really help you make money though. (15:02):
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Wesley Lyon: And we're not experts in this in any area. (15:07):
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Wesley Lyon: So, you know, you have to know, but you know, you might have a building that (15:10):
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Wesley Lyon: maybe they haven't leased it at fair market rent for a while. (15:15):
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Wesley Lyon: And you're able to actually go in there and buy it at a lower price and you (15:18):
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Wesley Lyon: can flip the tenants over the next couple of years. (15:22):
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Wesley Lyon: Now you can really, really make money in there. (15:25):
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Wesley Lyon: But if you're looking at that, you got to know, hey, how leaseable is the space? (15:28):
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Wesley Lyon: Just because they're below market rent, in your opinion, that might just be the market rent. (15:34):
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Wesley Lyon: You might be in the middle of nowhere and there's empty space all over the place (15:40):
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Wesley Lyon: or even in uptown Charlotte. (15:43):
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Wesley Lyon: It's like there's empty space everywhere. You thinking your rent is what it (15:45):
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Wesley Lyon: was three years ago might just mean the market rent is lower and that is the new market rent. (15:48):
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Wesley Lyon: But, you know, if you can get in there and maybe you can make some improvements (15:53):
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Wesley Lyon: and that's going to make the rent go up. (15:57):
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Wesley Lyon: We see a lot of people do this with apartment buildings, right? (16:00):
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Wesley Lyon: They go in, they buy them, they renovate them, they add amenities, (16:06):
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Wesley Lyon: and then they turn around and try to lease them for 500 bucks more a month than (16:09):
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Wesley Lyon: they were leased before. (16:12):
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Wesley Lyon: So, a lot of potential in there to make money. (16:14):
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Tyler Ott: You just have to be very. (16:19):
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Wesley Lyon: Very careful. So, be careful. (16:20):
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Wesley Lyon: I can't stress that enough when you get commercial real estate. Be careful. (16:25):
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Tyler Ott: Don't just hop on the first opportunity. Make sure you dig into it. (16:30):
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Tyler Ott: Make sure it makes sense. Make sure you got good representation. (16:33):
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Tyler Ott: A lot of these deals are multi-million dollar deals. You just want to make sure that it makes sense. (16:37):
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Wesley Lyon: Whether we like Tyler, I heard there's a lot of office towers that have been (16:44):
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Wesley Lyon: going for pennies on the dollar. (16:47):
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Tyler Ott: We're probably going to be outside of that range. I think generally you want (16:50):
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Tyler Ott: to be around the $2 to $10 range. (16:53):
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Tyler Ott: So you get above the minnows and below the sharks, right in that middle range there. (16:55):
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Wesley Lyon: What are your thoughts? No, I love the two to 10 range. (17:00):
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Wesley Lyon: You know, it's not quite enough. It brings in the big boys that do this every single day. (17:03):
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Wesley Lyon: I mean, you start floating in the $50 million range and, you know, (17:08):
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Wesley Lyon: the guy negotiating with you on the other side is a team of 20 people working on the deal. (17:12):
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Wesley Lyon: And you're sitting there at your kitchen table trying to figure out if they're screwing you or not. (17:16):
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Wesley Lyon: That's not great. But the two to 10, especially in like strip malls, (17:20):
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Wesley Lyon: we like location is key. You know what I mean? Location and convenience. (17:25):
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Wesley Lyon: If you got somewhere people drive by a lot, heavy traffic, places where people don't put a business. (17:30):
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Wesley Lyon: Those are things we always love. (17:36):
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Wesley Lyon: Storage units are another great one, but you have to know where to put them (17:38):
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Wesley Lyon: and you build them, not buy them. (17:42):
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Wesley Lyon: The problem with buying storage units is they trade off cap rates, (17:44):
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Wesley Lyon: just like apartment buildings or like strip malls do, but they take like half the cost to build. (17:48):
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Wesley Lyon: So if you can figure out where to build them and you can suffer the negative (17:54):
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Wesley Lyon: cash flow for a year or two, oh Lord, they profit like 50, 60% after the debt service. (17:57):
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Tyler Ott: Yeah, they're a gold mine. (18:04):
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Wesley Lyon: But everyone and their mother has a storage unit these days. So we kind of- (18:05):
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Wesley Lyon: It might have missed the curve, but if you're somewhere, I've got a piece of land identified. (18:09):
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Wesley Lyon: I'm not telling anyone exactly where it is, but in my mind, it's where all the (18:15):
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Wesley Lyon: retirees are moving down south and it's on the water. (18:20):
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Wesley Lyon: So I'm thinking, hey, if we can get a deep water dock, we can get storage units, (18:23):
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Wesley Lyon: trailer storage, and boat slip rentals. Boy, we could make some money. (18:27):
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Tyler Ott: That might be the spot. That might be the move. (18:32):
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Wesley Lyon: Probably be a lot of money to get up and running though. But those are always (18:34):
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Wesley Lyon: good ones. But really, we're looking at commercial. (18:39):
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Wesley Lyon: We don't like doing residential, like Tyree mentioned. It's just, (18:41):
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Wesley Lyon: it takes a lot of them and there are a lot of headache and, you know, (18:44):
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Wesley Lyon: getting a property manager involved. (18:49):
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Wesley Lyon: There's another big issue people don't realize is what somebody's willing to (18:52):
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Wesley Lyon: pay for a house to live in it does not always match up to what the rental is on the property. (18:56):
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Wesley Lyon: So, you know, you might sit there and go, oh, I can, or people might figure (19:02):
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Wesley Lyon: out, why can I rent a house for less than the mortgage? (19:05):
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Wesley Lyon: It's like, well, the rental market is here, but you walked in and somebody loved (19:08):
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Wesley Lyon: the house, so they had to have it, so they bid it up here to live in it. (19:13):
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Wesley Lyon: So those two aren't always the same, and a lot of people end up overpaying for (19:16):
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Wesley Lyon: residential real estate, which they say, oh, well, cash flows. (19:21):
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Wesley Lyon: I'm like, well, cash flows until you factor in the fact that you've got to get (19:25):
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Wesley Lyon: a new roof every now and then. (19:29):
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Wesley Lyon: All these things. Houses are extremely expensive to maintain. (19:30):
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Wesley Lyon: You haven't built any of that in, in most people's calculations. (19:34):
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Wesley Lyon: So we, we usually stay away from those as well. And then, (19:38):
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Wesley Lyon: My last tidbit, you know, we've talked about local knowledge is key. (19:42):
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Wesley Lyon: You need to be an expert in this stuff. I always joke, everyone wants to do (19:48):
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Wesley Lyon: it, and I even want to do it too. I just don't. (19:52):
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Wesley Lyon: The more you discover, the more you realize you don't know, the more problematic it gets. (19:55):
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Wesley Lyon: And if I counted on both hands, the 10 richest doctors I've met, (20:00):
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Wesley Lyon: probably met with about a thousand at this point, they all ran really, (20:04):
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Wesley Lyon: really good practices, kept their hands out of anything not related to dentistry (20:08):
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Wesley Lyon: and just save more than they made. (20:13):
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Wesley Lyon: Put it in the stock market. The stock market's easy. Yes, it goes up, (20:15):
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Wesley Lyon: it goes down, but if you can set it and forget it, get it invested, (20:20):
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Wesley Lyon: you're going to come out really, really well. (20:23):
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Wesley Lyon: You can definitely make a lot of money in commercial real estate, (20:26):
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Wesley Lyon: but you can lose a lot of money too. Lose a lot. (20:29):
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Tyler Ott: Yeah. I mean, it's not sexy, but well-diversified portfolio that you're just (20:34):
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Tyler Ott: auto-drafting, it'll get you there compound interest hell of a thing. (20:38):
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Wesley Lyon: Yeah no well perfect Tyler anything else we've got here. (20:42):
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Tyler Ott: I do want to touch on the newsletter one more time you're going to get a hard (20:46):
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Tyler Ott: copy but you also get the online and you can search the database of articles (20:50):
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Tyler Ott: and you know different tips and tools that we have on there so you can go back (20:56):
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Tyler Ott: years and just search anything and you'll find the article. (21:01):
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Wesley Lyon: Oh we forgot too and you get the hour long behind-the-scenes special Drilling (21:04):
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Wesley Lyon: It Down where we actually go into excruciating detail on things you need to know. (21:10):
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Wesley Lyon: So, you're listening to this right now. You're listening to the freebie version. (21:14):
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Wesley Lyon: Thank you so much for tuning in. But you are missing out on the good stuff behind (21:18):
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Wesley Lyon: the paywall. So, make sure you hit it. (21:22):
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Wesley Lyon: McGillHillGroup.com Get signed up. Best $300 you're going to spend all year. (21:24):
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Wesley Lyon: Otherwise, we'll see you next episode. (21:29):
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Wesley Lyon: co-hosting again tyler ott ty welcome back. (00:07):
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Tyler Ott: Thanks for having me. (00:10):
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Wesley Lyon: Uh today we got an exciting episode here sale lease back arrangements and how (00:11):
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Wesley Lyon: to avoid inflated ones so uh previous episode you know we put out we talked (00:19):
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Wesley Lyon: about private equity investing if you should do it what they're up to, (00:25):
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Wesley Lyon: some of their shenanigans. (00:29):
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Wesley Lyon: We didn't quite get into the details of some of the sale-leaseback arrangements, (00:31):
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Wesley Lyon: but I did mention a couple. (00:35):
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Wesley Lyon: I think Toys R Us was one, and then we didn't give any names on what we know or suspected to happen, (00:37):
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Wesley Lyon: but there's definitely a few prominent politicians that made quite a bit of (00:45):
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Wesley Lyon: money off sale-leaseback arrangements, especially with the start of the EU. (00:49):
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Wesley Lyon: But they can also hit individuals looking to buy real estate. (00:54):
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Wesley Lyon: And, you know, Todd, we're pretty big proponents of commercial real estate when it works. (01:00):
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Tyler Ott: Absolutely. When it works, commercial real estate is one of the best investment avenues. (01:04):
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Tyler Ott: You know, we have a lot of clients that come in and, you know, (01:09):
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Tyler Ott: they don't love the market. (01:12):
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Tyler Ott: And while we don't necessarily agree with that, they're just looking for some (01:14):
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Tyler Ott: other avenues to invest in to diversify. (01:17):
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Tyler Ott: And one of the things we bring up is real estate and specifically commercial real estate. (01:19):
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Tyler Ott: Now, we don't love the residential real estate. There's a lot of headaches around (01:24):
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Tyler Ott: the residential real estate. (01:28):
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Tyler Ott: But with commercial real estate, depending upon what sector you get in their (01:29):
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Tyler Ott: value range that you get in there, you could hire a management company, (01:34):
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Tyler Ott: lease out the building, collect enough to pay your debt, and you're golden and (01:39):
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Tyler Ott: you're just sitting there getting your mailbox money. (01:42):
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Wesley Lyon: You can make a lot of money. Now, it's kind of funny before anyone rushes out to go do this. (01:44):
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Wesley Lyon: The more you research, the more you discover you don't know. (01:51):
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Wesley Lyon: So we're not necessarily discouraging anyone from doing it. We actually encourage (01:55):
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Wesley Lyon: people to do it. We're just very realistic with them on what you're looking for. (01:58):
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Wesley Lyon: You're going to have to be able to get these deals. And a lot of the times, (02:03):
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Wesley Lyon: local knowledge is king. (02:05):
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Wesley Lyon: If you're just out there, you hear this podcast, okay, I'm going to jump onto (02:08):
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Wesley Lyon: LoopNet and I'm going to buy something, you're probably going to get preyed upon. (02:11):
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Wesley Lyon: But local knowledge, good real estate broker, I mean, this isn't like residential (02:16):
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Wesley Lyon: real estate where a good deal just pops up on Redfin or LoopNet. (02:21):
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Wesley Lyon: LoopNet's like the place they go to die, right? This thing isn't selling and (02:25):
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Wesley Lyon: now we're going to list it everywhere. (02:30):
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Wesley Lyon: I mean, I don't work in that space, but I'd imagine a lot of these deals are (02:32):
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Wesley Lyon: just phone calls. You know, hey, got a property here, got any interested buyers (02:36):
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Wesley Lyon: and brokers just working between themselves. (02:40):
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Wesley Lyon: But, you know, back to the point here, today we're going to talk about what (02:44):
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Wesley Lyon: to avoid, not necessarily what to do. (02:49):
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Wesley Lyon: So as we were talking about private equity, the idea of a sale leaseback arrangement came up. (02:52):
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Wesley Lyon: So, Tyler, are you familiar with this at all? (03:00):
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Tyler Ott: I could use a little more background on it. It sounds like a nice little buzzword, (03:02):
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Tyler Ott: but tell me a little bit more about it and what that strategy is. (03:06):
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Wesley Lyon: Well, we'll tell a story here to kind of explain what can happen. (03:08):
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Wesley Lyon: They're all a little bit different. So don't put anything under one, (03:12):
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Wesley Lyon: you know, kind of roof on a sale leaseback, but they're just common. (03:15):
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Wesley Lyon: So Toys R Us was actually overtaken by a private equity firm. (03:19):
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Wesley Lyon: Very famous takeover. And as I'm sure you know, Tyler, you have two little boys. (03:25):
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Tyler Ott: I could have been very successful. (03:30):
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Wesley Lyon: Apparently, you know, have you seen a Toys R Us since we were kids? (03:32):
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Tyler Ott: Yes, I don't know. I can't have been a good payoff unless they're up a liquidate. I don't know. (03:37):
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Wesley Lyon: I mean, I would imagine those trampoline parks. There's like a 50-50 shot. (03:43):
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Wesley Lyon: Whenever you see one, it used to be a Toys R Us and they had to move it. (03:47):
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Wesley Lyon: I have no idea what's in those, though. I don't really know where one is or one was around us. (03:50):
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Wesley Lyon: But yeah, they came in, they bought the Toys R Us, and I'm not really exactly (03:56):
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Wesley Lyon: certain what went on from a management perspective. (04:02):
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Wesley Lyon: But a little reminder, if you didn't listen to the last episode, (04:04):
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Wesley Lyon: a lot of times they'll go buy these companies. They buy them with debt and they (04:07):
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Wesley Lyon: straddle the companies with the debt. (04:10):
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Wesley Lyon: And then they look to decrease costs, do anything to pay off the debt. (04:12):
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Wesley Lyon: Well, Toys R Us had real estate, and I'm not exactly certain on exactly who (04:16):
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Wesley Lyon: was involved, how shady this was, but let's just say shady is probably a good word for it. (04:22):
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Wesley Lyon: But Toys R Us, what they ended up doing was selling the real estate and leasing it back. (04:28):
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Wesley Lyon: And this eventually led to the drowning of Toys R Us, or was one of the culprits (04:33):
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Wesley Lyon: of the drowning of Toys R Us. (04:38):
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Wesley Lyon: But what they were doing was, you know, there's probably some connection to (04:41):
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Wesley Lyon: the private equity firm and the real estate on the purchase side. (04:47):
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Wesley Lyon: But definitely on the sales side, you know, they take 2 plus 20, (04:52):
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Wesley Lyon: 2% of assets and 20% of profits. (04:56):
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Wesley Lyon: So they sold the real estate to extract the profits of it and left the company (04:59):
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Wesley Lyon: in really, really, really bad shape. (05:06):
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Wesley Lyon: Now, I'm not exactly certain who they sold the real estate to, (05:10):
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Wesley Lyon: if they had other plans at the end of the day or whatnot. (05:13):
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Wesley Lyon: As you can imagine, commercial real estate without a company leasing it is, (05:17):
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Wesley Lyon: you know, not nearly as valuable. They might have had other plans. (05:22):
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Wesley Lyon: Who knows what they did, but they extracted a lot of value out of this by doing it. (05:26):
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Wesley Lyon: So it's kind of a common structure. (05:31):
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Wesley Lyon: And the example we're going to use, we're not going to name any names here on (05:34):
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Wesley Lyon: the podcast for the sake of these groups have a lot more money than we do. (05:39):
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Wesley Lyon: And what I'm about to talk about, it's probably not going to be viewed favorably. (05:43):
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Wesley Lyon: But there's certainly private equity groups that will build what they need, (05:47):
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Wesley Lyon: and then they will sell that building and lease it back. (05:54):
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Wesley Lyon: And you might wonder, why would anyone do that? (05:57):
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Wesley Lyon: So what I came across trying to help a few clients buy commercial real estate (06:01):
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Wesley Lyon: was dental locations that were on great leases. (06:06):
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Wesley Lyon: I mean, the deals looked awesome. (06:12):
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Wesley Lyon: And we were super, super excited for it. And something just irked me. (06:15):
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Wesley Lyon: It's just too good to be true. When something's too good to be true, it is. (06:22):
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Wesley Lyon: You just need to dive in and find out why it's too good to be true. (06:26):
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Wesley Lyon: So I started diving in deeper, trying to figure out what was going on. (06:30):
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Wesley Lyon: And I found out, and there were a few of them. It wasn't one client trying to (06:35):
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Wesley Lyon: buy three. It was like three different clients each trying to buy one of them. (06:38):
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Wesley Lyon: Well, they were double the market rent. (06:42):
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Wesley Lyon: So they were jacking up the rent in the lease to sell it at a higher price than (06:46):
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Wesley Lyon: it's worth take the money and then lease it back. (06:51):
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Tyler Ott: And how long is that lease for? (06:57):
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Wesley Lyon: 10 years with 2 5 year extensions. (06:59):
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Tyler Ott: Probably not going to be extending. (07:01):
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Wesley Lyon: That, (07:03):
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Wesley Lyon: there is the problem what happens if they don't extend it and they come back (07:05):
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Wesley Lyon: to the table and they say hey, market rent is actually $22 a square foot and (07:11):
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Wesley Lyon: we were paying $44 a square foot. What do you do? (07:16):
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Wesley Lyon: You can't rent it to somebody else at double the market rent. (07:20):
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Wesley Lyon: You can only rent it to somebody else at fair market rent. (07:23):
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Wesley Lyon: So maybe their intention isn't to do that. Maybe it is. We don't know, (07:26):
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Wesley Lyon: but it's not a risk that we should be taking. (07:31):
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Tyler Ott: Yeah, just what it comes down to is, you know, looking at the property, (07:34):
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Tyler Ott: you know, looking at the cash flows, looking at the leases. (07:38):
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Tyler Ott: You know, you really have to dig into it. As you said, that deal looked too good to be true. (07:41):
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Tyler Ott: You couldn't identify it right off the bat, but as you dug into it, (07:46):
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Tyler Ott: you figured it out. Commercial real estate, (07:49):
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Tyler Ott: It's been in a funky situation recently with the interest rate increases over (07:54):
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Tyler Ott: the last few years going from, you know, when COVID from zero interest rates (07:59):
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Tyler Ott: to now high interest rates. (08:03):
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Tyler Ott: And, you know, the price changes have not really come down to where we thought they were. (08:04):
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Tyler Ott: Generally, we're looking for a good spread of the cap rate over the interest rate. (08:10):
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Wesley Lyon: Now, Tyler, explain to me, what is the cap rate for those out there listening? (08:16):
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Tyler Ott: It's essentially the income that you're getting on the property, (08:18):
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Tyler Ott: the rate of return of the property. (08:21):
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Wesley Lyon: And that would be the rate of return if it didn't have debt on it, right? (08:23):
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Tyler Ott: Yes, yes. (08:29):
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Wesley Lyon: Yes. (08:30):
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Tyler Ott: Yes. (08:31):
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Wesley Lyon: So usually you're going to see a cap rate somewhere between what we see and (08:31):
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Wesley Lyon: what we want are two different things. (08:37):
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Wesley Lyon: You're probably going to see them between five and seven. (08:39):
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Wesley Lyon: We're kind of looking for them between six and eight. (08:41):
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Tyler Ott: Exactly. (08:44):
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Wesley Lyon: But that would be the amount of money you make off the property, (08:44):
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Wesley Lyon: cash flow-wise, if it doesn't have debt on it. (08:48):
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Tyler Ott: And that's where the interest rate comes in because you need that, (08:54):
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Tyler Ott: as I said, spread before. You need your cap rate to be higher than your interest (08:57):
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Tyler Ott: rate because you need to make money on it. (09:02):
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Wesley Lyon: I mean, you're going to buy it with debt. (09:04):
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Wesley Lyon: But yeah, overall, we're going to jump in a little bit here into commercial real estate dues. (09:08):
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Wesley Lyon: But commercial real estate don't, especially this really applies to dentists. (09:13):
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Wesley Lyon: If you're trying to 1031 exchange your office building, you know, (09:17):
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Wesley Lyon: Hey, I'm selling to Dr. New, Dr. New's going to buy me out. (09:20):
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Wesley Lyon: I don't necessarily need the money in cash. I want to avoid the taxes. (09:24):
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Wesley Lyon: So now I'm going after a 1031 exchange. I'm looking to avoid those taxes. (09:27):
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Wesley Lyon: And now all of a sudden I'm getting suckered into something I don't want to (09:32):
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Wesley Lyon: do because Tyler, to your point, (09:35):
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Wesley Lyon: those, we'll kind of come back in here and talk a little more in depth on the (09:37):
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Wesley Lyon: why, but recently the prices and the cap rates and the interest rate, (09:41):
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Wesley Lyon: all three of them need to merge together to make a good deal. (09:46):
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Wesley Lyon: And the three of them haven't matched for two, three years, maybe just two years. (09:49):
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Wesley Lyon: Probably about two years since interest rates went up. And that's been really (09:56):
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Wesley Lyon: problematic for buyers. (10:00):
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Wesley Lyon: And that's why these sale leasebacks kind of come up. All of a sudden we see (10:02):
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Wesley Lyon: one and it's got a good cap rate on it. (10:05):
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Wesley Lyon: It's got a, you know, fair market rent increases. (10:08):
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Wesley Lyon: I mean, everything looks good about the deal. And then you're just sitting there (10:12):
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Wesley Lyon: wondering, why is this dentist getting the first crack at this deal? (10:15):
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Wesley Lyon: There's something wrong with the deal. (10:21):
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Tyler Ott: Yeah, because they would have (10:23):
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Tyler Ott: already been snatched up by the people that knew what they were doing. (10:24):
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Wesley Lyon: Yeah. So be very, very careful of inflated sale leaseback agreements. (10:27):
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Wesley Lyon: You need to figure out in order to protect yourself. You need to figure out (10:31):
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Wesley Lyon: what the actual market rent is on that space you're leasing. (10:35):
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Wesley Lyon: So if it's a dental office and dental space is leasing for 17 a square foot, (10:38):
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Wesley Lyon: and this one's at 34, boom, just... (10:44):
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Wesley Lyon: Maybe it works out for you. Maybe it doesn't, but way too much risk. Just stay away. (10:47):
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Tyler Ott: And if you don't know, that's where you need to, if you're looking to expand (10:51):
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Tyler Ott: into this realm, that's where a, you know, a trusted quality commercial real (10:55):
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Tyler Ott: estate agent would be a very good, you know, person to contact and get information (11:00):
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Tyler Ott: on, get assistance with. (11:04):
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Wesley Lyon: And one that's on your side. (11:05):
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Tyler Ott: Don't trust the one selling. They are not working for you. They are working for the seller. (11:07):
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Wesley Lyon: This is like buying a practice. Make sure you have your representation here to look at it for you. (11:12):
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Wesley Lyon: But with that, we talk about this a lot monthly in the McGill and Lyon Dental Advisory. (11:18):
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Wesley Lyon: Those of you that don't get this delivered to you every month, make sure you sign up. (11:24):
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Wesley Lyon: McGillHillGroup.com. Go ahead and sign up. There is, I think it's Podcast 20 for new subscribers. (11:30):
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Wesley Lyon: You can get 20% off by entering Podcast 20. (11:36):
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Wesley Lyon: This gets delivered to your door inside of a sealed plastic envelope each month (11:40):
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Wesley Lyon: with all the latest things that you need to know about coming up. (11:48):
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Wesley Lyon: So this one we got right in front of us, November issue. (11:52):
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Wesley Lyon: There we go. How to avoid the retirement planning, top 10 retirement planning mistakes right there. (11:56):
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Wesley Lyon: Also information on your business owner policy, different tax items. (12:02):
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Wesley Lyon: These are must-have if you're running a dental practice, and if you're not running (12:07):
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Wesley Lyon: a dental practice, they're must-have for the problems you're about to face, (12:10):
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Wesley Lyon: because as we talk about often, the easiest way, the quickest way to get out (12:14):
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Wesley Lyon: the student loan debt is to do what. (12:18):
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Tyler Ott: Tyler? Buy a practice. (12:20):
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Wesley Lyon: Buy a practice. With that, let's jump back in here, Tyler. (12:21):
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Wesley Lyon: Let's talk about to-dos when we're looking at this. We talked about what a cap rate was. (12:25):
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Wesley Lyon: So it's really the return rate on the property if it didn't have debt. (12:30):
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Wesley Lyon: But, Tyler, you said that, you know, we need to have a spread. (12:36):
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Wesley Lyon: So the cap rate needs to be above the interest rate. (12:38):
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Tyler Ott: Exactly. And that's where it's been difficult is with interest rates in that (12:41):
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Tyler Ott: six, seven, you know, range, you're looking at a cap rate, eight, (12:45):
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Tyler Ott: eight, nine, and those don't necessarily exist. (12:50):
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Tyler Ott: And so if you're looking at a property with a cap rate of six and you got your (12:53):
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Tyler Ott: interest rate on the debt of six, it doesn't necessarily make sense. (12:57):
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Wesley Lyon: And you mentioned earlier- For those of you out there, just remember what's (12:59):
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Wesley Lyon: driving this is interest rates went down to like three. (13:03):
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Wesley Lyon: So commercial real estate was four, three to four, and all of a sudden people (13:07):
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Wesley Lyon: are being able to sell at a 5% cap rate. (13:11):
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Wesley Lyon: The lower the cap rate, the higher the price on the same property. (13:15):
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Wesley Lyon: So if you buy a property at 7% cap rate or you make an offer and they come back (13:18):
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Wesley Lyon: at a 5% cap rate, what it really means is they raised the price on you. (13:22):
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Wesley Lyon: So lower the cap rate, higher the price. (13:27):
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Wesley Lyon: Well, during COVID with super low interest rates, everybody got really used (13:29):
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Wesley Lyon: to their commercial property being worth a ton of money. (13:36):
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Wesley Lyon: And now they want to realize those values, but the interest rates are double (13:40):
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Wesley Lyon: what they were back then to buy commercial real estate, which doesn't slice (13:44):
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Wesley Lyon: the price in half, but it's a pretty significant chunk of the price that should go away. (13:48):
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Tyler Ott: It should. (13:53):
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Wesley Lyon: So that's creating issues. Buyers and sellers are not on the same page. (13:53):
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Wesley Lyon: And now, as we look forward at opportunities, people might say, (13:59):
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Wesley Lyon: oh, well, why are we talking about it? (14:05):
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Wesley Lyon: Well, commercial real estate loans have balloons on them, meaning the interest (14:06):
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Wesley Lyon: rate's not guaranteed for 20, 25 years. It's guaranteed usually for 7 or 10. (14:10):
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Wesley Lyon: And a lot of these places, they're coming up on these balloons, (14:15):
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Wesley Lyon: and all of a sudden the interest rate's going to go up. (14:18):
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Wesley Lyon: Some of these deals want cash flow. Some people are going to be underwater. (14:21):
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Wesley Lyon: We might see things start to get for sale again, a little bit of sanity returning to the market. (14:25):
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Tyler Ott: That's what we're thinking. Someone, it just has to hit. (14:31):
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Wesley Lyon: Yeah, but if we're looking, Tyler, you know, we want that spread where we usually at like 2% spread. (14:34):
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Tyler Ott: Ideally, 2%. (14:39):
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Wesley Lyon: 2% spread. We also have to review all the leases, right? (14:40):
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Wesley Lyon: We just went over one type of lease that can be bad, but there's all sorts of leases that can be bad. (14:44):
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Tyler Ott: You want to make sure that that building is running. that's where the cash flow comes from. (14:49):
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Wesley Lyon: Month to month leases are not as good. Not as good is long-term leases locked (14:53):
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Wesley Lyon: in, leases without rent increases, leases below market value. (14:58):
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Wesley Lyon: Now, this is where local knowledge can really help you make money though. (15:02):
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Wesley Lyon: And we're not experts in this in any area. (15:07):
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Wesley Lyon: So, you know, you have to know, but you know, you might have a building that (15:10):
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Wesley Lyon: maybe they haven't leased it at fair market rent for a while. (15:15):
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Wesley Lyon: And you're able to actually go in there and buy it at a lower price and you (15:18):
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Wesley Lyon: can flip the tenants over the next couple of years. (15:22):
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Wesley Lyon: Now you can really, really make money in there. (15:25):
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Wesley Lyon: But if you're looking at that, you got to know, hey, how leaseable is the space? (15:28):
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Wesley Lyon: Just because they're below market rent, in your opinion, that might just be the market rent. (15:34):
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Wesley Lyon: You might be in the middle of nowhere and there's empty space all over the place (15:40):
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Wesley Lyon: or even in uptown Charlotte. (15:43):
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Wesley Lyon: It's like there's empty space everywhere. You thinking your rent is what it (15:45):
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Wesley Lyon: was three years ago might just mean the market rent is lower and that is the new market rent. (15:48):
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Wesley Lyon: But, you know, if you can get in there and maybe you can make some improvements (15:53):
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Wesley Lyon: and that's going to make the rent go up. (15:57):
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Wesley Lyon: We see a lot of people do this with apartment buildings, right? (16:00):
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Wesley Lyon: They go in, they buy them, they renovate them, they add amenities, (16:06):
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Wesley Lyon: and then they turn around and try to lease them for 500 bucks more a month than (16:09):
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Wesley Lyon: they were leased before. (16:12):
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Wesley Lyon: So, a lot of potential in there to make money. (16:14):
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Tyler Ott: You just have to be very. (16:19):
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Wesley Lyon: Very careful. So, be careful. (16:20):
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Wesley Lyon: I can't stress that enough when you get commercial real estate. Be careful. (16:25):
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Tyler Ott: Don't just hop on the first opportunity. Make sure you dig into it. (16:30):
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Tyler Ott: Make sure it makes sense. Make sure you got good representation. (16:33):
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Tyler Ott: A lot of these deals are multi-million dollar deals. You just want to make sure that it makes sense. (16:37):
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Wesley Lyon: Whether we like Tyler, I heard there's a lot of office towers that have been (16:44):
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Wesley Lyon: going for pennies on the dollar. (16:47):
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Tyler Ott: We're probably going to be outside of that range. I think generally you want (16:50):
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Tyler Ott: to be around the $2 to $10 range. (16:53):
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Tyler Ott: So you get above the minnows and below the sharks, right in that middle range there. (16:55):
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Wesley Lyon: What are your thoughts? No, I love the two to 10 range. (17:00):
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Wesley Lyon: You know, it's not quite enough. It brings in the big boys that do this every single day. (17:03):
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Wesley Lyon: I mean, you start floating in the $50 million range and, you know, (17:08):
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Wesley Lyon: the guy negotiating with you on the other side is a team of 20 people working on the deal. (17:12):
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Wesley Lyon: And you're sitting there at your kitchen table trying to figure out if they're screwing you or not. (17:16):
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Wesley Lyon: That's not great. But the two to 10, especially in like strip malls, (17:20):
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Wesley Lyon: we like location is key. You know what I mean? Location and convenience. (17:25):
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Wesley Lyon: If you got somewhere people drive by a lot, heavy traffic, places where people don't put a business. (17:30):
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Wesley Lyon: Those are things we always love. (17:36):
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Wesley Lyon: Storage units are another great one, but you have to know where to put them (17:38):
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Wesley Lyon: and you build them, not buy them. (17:42):
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Wesley Lyon: The problem with buying storage units is they trade off cap rates, (17:44):
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Wesley Lyon: just like apartment buildings or like strip malls do, but they take like half the cost to build. (17:48):
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Wesley Lyon: So if you can figure out where to build them and you can suffer the negative (17:54):
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Wesley Lyon: cash flow for a year or two, oh Lord, they profit like 50, 60% after the debt service. (17:57):
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Tyler Ott: Yeah, they're a gold mine. (18:04):
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Wesley Lyon: But everyone and their mother has a storage unit these days. So we kind of- (18:05):
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Wesley Lyon: It might have missed the curve, but if you're somewhere, I've got a piece of land identified. (18:09):
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Wesley Lyon: I'm not telling anyone exactly where it is, but in my mind, it's where all the (18:15):
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Wesley Lyon: retirees are moving down south and it's on the water. (18:20):
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Wesley Lyon: So I'm thinking, hey, if we can get a deep water dock, we can get storage units, (18:23):
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Wesley Lyon: trailer storage, and boat slip rentals. Boy, we could make some money. (18:27):
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Tyler Ott: That might be the spot. That might be the move. (18:32):
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Wesley Lyon: Probably be a lot of money to get up and running though. But those are always (18:34):
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Wesley Lyon: good ones. But really, we're looking at commercial. (18:39):
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Wesley Lyon: We don't like doing residential, like Tyree mentioned. It's just, (18:41):
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Wesley Lyon: it takes a lot of them and there are a lot of headache and, you know, (18:44):
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Wesley Lyon: getting a property manager involved. (18:49):
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Wesley Lyon: There's another big issue people don't realize is what somebody's willing to (18:52):
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Wesley Lyon: pay for a house to live in it does not always match up to what the rental is on the property. (18:56):
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Wesley Lyon: So, you know, you might sit there and go, oh, I can, or people might figure (19:02):
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Wesley Lyon: out, why can I rent a house for less than the mortgage? (19:05):
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Wesley Lyon: It's like, well, the rental market is here, but you walked in and somebody loved (19:08):
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Wesley Lyon: the house, so they had to have it, so they bid it up here to live in it. (19:13):
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Wesley Lyon: So those two aren't always the same, and a lot of people end up overpaying for (19:16):
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Wesley Lyon: residential real estate, which they say, oh, well, cash flows. (19:21):
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Wesley Lyon: I'm like, well, cash flows until you factor in the fact that you've got to get (19:25):
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Wesley Lyon: a new roof every now and then. (19:29):
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Wesley Lyon: All these things. Houses are extremely expensive to maintain. (19:30):
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Wesley Lyon: You haven't built any of that in, in most people's calculations. (19:34):
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Wesley Lyon: So we, we usually stay away from those as well. And then, (19:38):
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Wesley Lyon: My last tidbit, you know, we've talked about local knowledge is key. (19:42):
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Wesley Lyon: You need to be an expert in this stuff. I always joke, everyone wants to do (19:48):
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Wesley Lyon: it, and I even want to do it too. I just don't. (19:52):
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Wesley Lyon: The more you discover, the more you realize you don't know, the more problematic it gets. (19:55):
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Wesley Lyon: And if I counted on both hands, the 10 richest doctors I've met, (20:00):
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Wesley Lyon: probably met with about a thousand at this point, they all ran really, (20:04):
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Wesley Lyon: really good practices, kept their hands out of anything not related to dentistry (20:08):
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Wesley Lyon: and just save more than they made. (20:13):
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Wesley Lyon: Put it in the stock market. The stock market's easy. Yes, it goes up, (20:15):
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Wesley Lyon: it goes down, but if you can set it and forget it, get it invested, (20:20):
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Wesley Lyon: you're going to come out really, really well. (20:23):
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Wesley Lyon: You can definitely make a lot of money in commercial real estate, (20:26):
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Wesley Lyon: but you can lose a lot of money too. Lose a lot. (20:29):
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Tyler Ott: Yeah. I mean, it's not sexy, but well-diversified portfolio that you're just (20:34):
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Tyler Ott: auto-drafting, it'll get you there compound interest hell of a thing. (20:38):
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Wesley Lyon: Yeah no well perfect Tyler anything else we've got here. (20:42):
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Tyler Ott: I do want to touch on the newsletter one more time you're going to get a hard (20:46):
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Tyler Ott: copy but you also get the online and you can search the database of articles (20:50):
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Tyler Ott: and you know different tips and tools that we have on there so you can go back (20:56):
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Tyler Ott: years and just search anything and you'll find the article. (21:01):
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Wesley Lyon: Oh we forgot too and you get the hour long behind-the-scenes special Drilling (21:04):
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Wesley Lyon: It Down where we actually go into excruciating detail on things you need to know. (21:10):
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Wesley Lyon: So, you're listening to this right now. You're listening to the freebie version. (21:14):
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Wesley Lyon: Thank you so much for tuning in. But you are missing out on the good stuff behind (21:18):
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Wesley Lyon: the paywall. So, make sure you hit it. (21:22):
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Wesley Lyon: McGillHillGroup.com Get signed up. Best $300 you're going to spend all year. (21:24):
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Wesley Lyon: Otherwise, we'll see you next episode. (21:29):
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