A Sean Aguilar

Capital Synergies Real Estate Investment podcast with Mr. A Sean Aguilar, CCIM, and Vice President of Steelhead Capital.

On this show, Sean speaks with the host about the beginning phase of the commercial lending process, and discusses some of the key differences between investing in commercial real estate vs residential real estate.

Sean offers quite a few tips for "doing your research" prior to selecting your property to purchase, and discusses some of the recent valuation of commercial assets in light of the increased cost of the residential market.


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DARBI: Hello, this is Darbi Worley, your host for the new Capital Synergies Real Estate Investment talk show. Today we have with us on the line Mr. A. Shawn Aguilar, CCRM and Vice President of Steelhead Capital. Shawn, welcome to the show.

SEAN: Thank you.

DARBI: Shawn is here to speak with us about the first phase of the commercial lending process, which is called the acquisition. We’ll also cover some important differences between investing in residential real estate versus the more risky and potentially profitable commercial market.

Shawn, before we dive into discussing acquisition, can you quickly list the three phases of the commercial lending process?

SEAN: First of all, identifying the property, if you well. Then acquiring it, and then once you’ve acquired it from the lending point of view, you need to gather the paper work that the lenders may need to underwrite that property. So whether it’s leases, financial statements on the property, provide that information together so that you can give it to a lender so they issue a term sheet. Once that’s done, and if you agree to the terms that the lender is willing to offer, then they’ll put you under application and from that point, that’s where things really start taking off. Then the loan starts getting processed, if you will. Once all the third party reports are provided and i.e. appraisals, phase one’s, property condition reports, the lender then will then submit it to their loan committee and render a credit decision. If you get approval, a commitment letter is issued. Then you move on towards the closing document, the closing process.

DARBI: So for our listeners who may have had experience with investing in smaller rental properties, maybe single family homes, what are the differences when somebody moves into – looking at bigger units? What do they need to look out for? What do they need to know?

SEAN: To clarify, you know in the residential world single family investments at that level, they tend to be between one- to four units, and there is a dedicated, specific financing vehicle out there for one- to four units. When you then move over to the income producing commercial world, then you’re looking at four food groups. Basically you’re looking at retail, apartment buildings, industrial, and office. The big glaring difference between the two is cash flow. Lenders and investors tend to analyze the cash flow in place of these commercial real estate investments. That’s what they’re used for, determining the actual amount of loan proceeds that the property can support. Where unlike single family properties, it’s not so much the cash flow that’s in place if it’s a duplex, triplex or four-plex. They really lean on the applicant, that individual borrower, look at his overall financial statements and stuff. That’s probably one of the biggest differences – that cash flow is what’s truly used for underwriting the commercial investment properties, versus the residential platform. It’s more hindering on the applicant’s financial strength.

DARBI: Is there a certain percentage that they should be prepared to have as a down payment on the investment?

SEAN: The real estate market is cyclical, and it’s really changed over the last four years, where you know five, six, seven years ago cap rates were a lot higher, which meant the values were lower. Deals were pencilling out at 75-85% leverage. So four- or five years ago, depending on the asset class you would come in with 20% down. Today, present day, depending on the asset class, cap rates have been compressed. This means they’re lower, which means values are higher. Because of the difference between interest rates and these capitalization rates, leverage today is depending on the asset class again. It’s anywhere from 55% to 65%, maybe 70% loan to value. So in today’s market, again depending on what you’re buying, you may want to budget 25% to 30% down.

DARBI: Okay. Is it a good time to get into this real estate market?

SEAN: I think it’s always a good time to get into real estate, because it’s traditionally a long term hold for people. There’s tax benefits from depreciation, if you will. There’s the opportunity to have income growth depending on what you’re buying, whether it’s apartment buildings or retail or office. You can always increase rents over time. But it really comes down to fundamentals.

What type of asset class are you buying? What’s the opportunity with it? Is it a building that has vacancies and that, you know, you’re buying it off the income in place so then if you lease out those vacancies, next thing you know is you’ve increased your cash flow. So there you’ve increased your value.

And interest rates are still favorable. They’re low, but the concern we have for our clients is just the spread between the cap rates that they’re buying at and if they’re getting that, what interest rate is, to make sure that they’re still achieving positive leverage, not negative leverage.

DARBI: So for the first time, the person who’s coming into it for the very first time, do you have a recommendation in terms of the four food groups, the four types of real estate? What’s the best step into this market?

SEAN: My consistent recommendation is “be prepared.” Know what you’re buying. Know why you want that asset class, and why you think you’ll be comfortable with it. Especially if you have no experience in it. You really have to do a lot of homework up front. Understand how these properties operate. Understand if there’s a management component required, and if you’re going to be self-managing it or hiring a third party management company. Understand the cost, because there’s big cost difference between whether it’s retail, apartment, industrial, or office versus if you’re coming through the one- through four-unit platform.

Right now we see a lot of people looking at apartment buildings because of the slow-down in the housing market; interest rates moving up; people tend to go back into apartment living. Homes become more expensive to buy right now, not just because interest rates are going up. So therefore they’re not able to qualify for as much loan dollars as they would to buy a home, so they may end up being renters for a longer period of time than they originally planned.

To own an apartment building right now, and what you’re seeing on a trend, you’re seeing vacancies decrease and occupancy rates increase. If you have an apartment building, or buy that, and you’re experiencing a scenario like that as a landlord or owner of the building, it gives you the opportunity to increase rents and therefore increase your cash flow. So there’s an opportunity there. You know industrial – deciding where to locate it, there’s opportunities in that market. Offices, obviously, have really rebounded over the last several years and are doing extremely well.

DARBI: Going back to the first-time commercial real estate investor, what resources do you recommend that they use as research tools? Where can they get their education on this market?

SEAN: What I would do is a couple of things. I’m a CCIM, which is a designation that basically reflects our commitment to the industry and the fact that we just want to be the best practitioner that we can be. I would have people go the web page at www.ccim.com. Have them look at that. Quite frankly there is some analysis tools that they can have access to. There’s also a list of fellow CCIM’s that are probably in their market, or in the markets that they would like to go buy properties. I would suggest maybe initiating a relationship with those individuals because they have a high level aptitude for what they do. That’s one way to help the potential investor get started.

The other area to go to is the internet – Market Watch and certain other on-line entities like that decent articles on how to buy investment properties and things to look at you. Googling real estate investment or commercial investment helps too. There’s a lot of data out there. You’ve just got to make sure you don’t get into analysis paralysis. More importantly, though, it helps to have somebody that’s a professional in that area that you could bounce off what you’re reading and what you’re finding. That’s where I would start off at.

DARBI: You mentioned in our pre-sale phone call a fear that you have about the market, about real estate guys, the real estate agents who are experienced in residential kind of trying to walk their clients through the commercial side when they’re not really…

SEAN: Yes, I think everybody has a specific expertise or area that they have a focus on, and human nature is a funny thing. You could be in residential real estate selling one- to four-units and be extremely good at it, and when the market slowed down, what tends to happen is everybody wants to jump into the next sector. You’ve got to crawl before you run, but unfortunately everybody wants to just take off and start to do commercial deals. The way they’re underwritten and the things to look at are unique between the two different platforms. You’re not going to learn over night.

One of our concerns is when we work on the transaction and then, if there’s a residential agent that’s representing a client of theirs that they’ve sold homes to in the past buying a retail strip center, and they want to be the agent of record for it, we can appreciate the fact that they want to keep the client relation. But our concern is how much they really know about that asset class or the risk that’s involved, that their client is acquiring? The reality is they’re probably better off just referring it to somebody in that field that does that full time and knows that market or that asset class a lot better. Because the buyer and client will end up having a disservice done to them because they’re assuming that, hey, their guy’s helping out on the financial side and they’ve done really well. And they make the false assumption that, hey; he’ll be able to do this for me.

I can understand the gravitation to that but the reality is, it’s a really risky play. You should be thankful for the people that got you to where they got you, but like anything else you may find yourself as a potential real estate venture that you’ve outgrown the relationship. That’s a normal thing. There’s no shame to that. But the key part is recognizing that. Everybody outgrows relationships, and you have to go out and find people that have the skills to take you to the next level. That’s just part of the basic formula of wealth creation. Nobody wants to jeopardize or risk what they have accomplished today.

DARBI: Again, the CCIM web site is a good place to find people who have the proper credentials and experience?

SEAN: Yes, yes it is. Because these people have been tested. They’ve been through some rigorous coursing. They all have a resume of experience that they had to have a transactional background in order to obtain the designation. They are really committed to being the best that they can be in their area of expertise. General to more specific, the CCIM network is very strong and very powerful. If a fellow CCIM doesn’t have access to a certain market of knowledge, there’s an unwritten rule that we call a fellow CCIM and they’re more than happy to help us out. At the end of the day we just want what’s best for the client, and what’s best for the profession.

DARBI: Before we wrap any other helpful hints or bullet points that our listeners should know about the acquisition process?

SEAN: Do your homework up front. Don’t be afraid to ask any – ask all and any questions. It is a big investment. Be cognizant of your timing. If you are using what I call “fresh” money, that’s fine, but it you’re selling an investment property like one of your one- top four-unit buildings you’re going to be doing a “ten-thirty-one” exchange. You truly need to be up to date on what the guidelines are to successfully perfect a ten-thirty-one exchange. You need to know how acquiring that next property ties into that with timing and just making sure that if you’re getting financing, that you have enough equity with the loan proceeds to acquire that replacement property. That would be something to think about.

DARBI: Great, well Shawn this has all been very helpful information. Thank you very much for joining us today. Until next time, this is Darbi Worley for Capital Synergies. If you have any questions for Shawn that you’d like answered in our next podcast, visit Steelhead Capital Commercial Mortgages and drop them a line. Thanks for listening.