If you look at people that started investing in apartments in 2010, 11, 12, 14, everybody made money. All the leaky boats came off the bottom of the ocean. Every deal kept appreciating. And I think the last couple of years, people did no due diligence. They went with any sponsor that showed a deal. Shallow Bay Flex is the multi-tenant in the industrial world. I might have the deal we’re literally just putting under contract now of 147,000 feet. I have nine tenants. I’m about to lease a vacant space to another tenant. Some tenants have been there as long as 20 years, and the leases are triple net. What if you get someone that destroys the place? What if there’s a fire? How long can you be without cash flow? Let’s say it’s nobody at fault, you still got to company insurance to rebuild. I think the best opportunity is the one that fell out of contract. It’s like never be the high bidder. Nobody needs a deal that bad. And if you’re investing with somebody else who’s a sponsor, you really have to understand their business. How do they pay their bills? How do they pay their staff? If they do it based on the fees they generate, I got to take a step back.

Welcome to the Real Estate Masters Podcast where we bring you the top real estate investors in the country. If you also want to be in the top 1%, you are in the right place. Listening to podcasts like this is exactly what helped me to scale my real estate investing business to seven figures, flip over a thousand houses, and more importantly, step out of daily operations of my business over a decade ago so I could start and grow other businesses. So get ready to learn from the best and start building a business that works for you and not the other way around. Enjoy.

What’s going on guys? Irwin, thank you so much for coming on and taking the time. I’m curious to see how you got into real estate in the first place.

I guess my father was a real estate attorney and I went to school to undergraduate. I have a degree in accounting, took the CPA exam, and my first job out was as an auditor with a firm that’s no longer around as they’ve all merged, but they had a lot of real estate clients. And you do the audits, you look at the books, the records, and back then accounting was on a piece of paper wider than the screen here. It wasn’t computerized. And so I learned a lot about operating partnerships, but it told us numbers. You really don’t understand what’s going on as far as the daily operations. And when I had enough of the numbers, I went to work for a very large residential owner operator who was, and still is on the Forbes list, in the New York City and suburbs as far as multifamily housing. And they taught me the management side of the business. So then you really actually got to see why some of the expenses were the way they were, why it was so really hard to make money. And I had to deal with federal and state agencies. I had to go to landlord tenant court. Then the city of New York, the tenants can stretch out not paying rent for sometimes more than a year. And so over the years, I’ve either been working for owners. I worked as a lender originating loans on apartment buildings and industrial and things like that. Then I worked for another owner. I worked tax credit syndication to learn about the affordable side of multifamily. And then one of the relationships I had as the lender, they asked me to help them with acquisitions and they were doing a lot of industrial, which is what I do now, industrial and shallow bay flex. And I’d like to think that over 30 plus years, you’ve heard all the stories, the good, the bad, the ugly. When people say things you should run and when people say things, you could shake their hands and take them at their word because there are all kinds in this business. There’s some that are good at marketing and it’s all marketing. And there are some that don’t say anything but just perform.

Yeah, for sure. And for the people listening, what does the business for you look like today?

Paycar Capital, it’s a multi-generational family office. The family’s been investing in commercial real estate for over 30 years. Started as passive investors and over the years invested on their own behalf, seeing that the parent company is a big user of warehouse space. They taught themselves how to build it. And about six years ago when I joined them, sort of the friends and family kept saying, “Hey, you do industrial. You don’t ever invite us into your deals.” So we started an investor platform, which has done quite well. Being a family office, we’re not betting on IRR or equity multiples or proformas. The only thing you really know the day you close on a property is what your leveraged cashflow is. And if you can compound that top line 3% a year, it’s all triple net, meaning the tenants absorb the operating expenses, it all goes to the bottom line. It’s like if I said to you, take your body weight, compound the 3% a year for the next seven or 10 ears, people say, no, I got fat. I’m like, well, that’s how I know where the value’s going

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What was the main problem that you were trying to solve when getting into that space?

Well, I guess I started in apartments, a multifamily. And in multifamily at the beginning, landlords paid everything. And then everybody says, “Well, we’re going to build back water and sewer. We’re going to charge for trash.” We had all these amenity fees. But you still couldn’t control what payroll costs were, insurance, real estate taxes. And over the years, I watched insurance go all up and down. The last apartment building I had an interest in was sold two years ago. And when the building was bought, I think insurance was two or 250 a door. And at one point it spiked to 1,100 a door and it was 448 units. So you can imagine what the insurance bill was and where it went to. And if you operate with a lot of leverage, it’s like the perfect storm. You go upside down. And we started renovating, full renovation of a one bedroom apartment was I think $10,000, including countertops and floors and appliances. The next thing I know it was $22,000 five or six years later. And so even though you could pass utilities onto the tenants and there’s valet trash and amenity fees and reserve parking spots and all sorts of things you could try to do, you couldn’t control insurance and taxes. And if you wanted the A team, you couldn’t control the payroll costs. You had to pay for it. And so we were looking going forward years ago, what do we do to better insulate ourselves from these rollercoaster rides of cashflow? Because people that would invest with you were looking for cashflow. They were looking for certainty. Some people that were more well off had been through this before and some like Wall Street, it’s binary. It’s either you win or you lose. But for the average accredited investor, losing isn’t an option. And being a family office, we have some risk capital, but we like to sleep at night. I’d rather have more cash flow and less upside.

Yeah, for sure. Why do you think so many investors overlook this piece of the business?

Well, I think that the lowest common denominator is housing. You can’t sleep on the internet. You got to put your head somewhere at night. And there’s a housing shortage. We all know it. Although most of the shortage is at the lower middle end and the low end where it’s prohibitive to build new. And so housing has always been good. And if you look at people that started investing in apartments in 2010, 11, 12, 14, everybody made money. All the leaky boats came off the bottom of the ocean. Every deal kept appreciating and everyone. And I think the last couple of years, people did no due diligence. They went with any sponsor that showed them a deal. And then the perfect storm hit. As cap rates compressed, interest rates moved, operating expenses moved. Models were engineered so tight that if operating expenses moved three or 4%, you’re screwed. Floating rate debt? No. And so it became a perfect storm for people.

What do you think the most common misconception is about what your offer is?

That it’ll stay full. People say, “Well, it’s industrial. What if the tenant moves out?” I’m like, “Well, that’s why it’s multi-tenant.” Shallow Bay Flex is the multi-tenant of the industrial world. I might have the deal we were literally just putting under contract now of 147,000 feet. I have nine tenants. I’m about to lease a vacant space to another tenant. Some tenants have been there as long as 20 years, and the lease is a triple net. And it underwrites differently. So some people may not be able to. They get so used to looking at apartments, spreadsheets that they can’t understand why there’s a difference in how you underwrite it. But I’d rather take a bet on a multi-tenant shallow bay deal where one tenant moves out, two tenants move out, they move back in and the right market, it will stay full except for a little frictional vacancy. For me, it’s a lot better investment.

Yeah. It seems like a lot of people start out in single family and then end up in multifamily. Seems like you kind of just went straight into the multi. What was it about single family that deterred you from it and kept you at that multifamily and industrial as well? And why do most investors take a little while to get there?

Well, I’ve looked at single family. I still do more on the Airbnb side because I’ve stayed in them and I could do the math, I know. But I’m always thinking, what if you get someone that destroys the place? What if there’s a fire? How long could you be without cash flow? Let’s say nobody at fault, you still got to collect the insurance to rebuild. It could take six months. And I actually have had more recent investors who have been selling single family, don’t want to do the multifamily stuff because of people they know who have had capital calls or deals gone bad, and they want diversification. So they like the fact that it’s largely triple net and they’re insulated from operating expenses. And if you’re investing for cashflow, because maybe you want to have some extra money in your pocket every quarter, you want something that’s more predictable. And I just don’t think. For years, industrial was ugly. Nobody wanted it. And now that people can’t do other types of investments, everyone’s becoming a maven. Everyone’s becoming an expert on industrial and shallow bas seeing more and more people talking about it now who are just like out of high school. I look at some of their faces.

In single family, it’s a lot simpler to find deals to buy because you’re buying it from just everyday people. When it comes to finding your industrial deals, where’s the best place you’ve found opportunities?

Well, the major brokerage have all the listings, especially if it’s a national operator or a public operator or a fund, they have to go to market. But I think the best opportunity is the one that fell out of contract. It’s like never be the high bidder. Nobody needs a deal that bad. And if you’re investing with somebody else who’s a sponsor, you really have to understand their business. How do they pay their bills? How do they pay their staff? If they do it based on the fees they generate, I got to take a step back. If they can go for years without doing a deal and still keep the lights on and run the business, that’s the guy I want to invest with. That shows me that their interests are more aligned with mine, that they understand you got to be very selective and it’s not about making fees.

Right. Right. What mistakes do you often see people in the industrial game make that you think could be really easily avoided?

Well, some people think that, oh, we’re going to put in solar panels. We’re going to make a lot of money. We’re going to sell the electric back to the tenants. We’re going to put in superchargers so we can have charging stations there. Sometimes that works, sometimes it doesn’t work. Or they just go in thinking that they’re going to do a much better job than current ownership and for some reason move the rent 20 or 30, 40%. I never assume I’m smarter than the current owner. I just say, look, am I happy if I have a few leases that are clearly below market and we get those up to today’s market? Not an inflated future market a few years down the road. And if I can continue to grow all the rents at 3% a year while controlling expenses and passing them on to the tenants. So people have some lofty expectations. Some people bet on cap rate compression, and sometimes you do see that, but you can’t time it. And I also think that if you really need to use bridge financing, especially floating rate, to me, that’s a red flag. Some people think they’re going to bridge it. They’re going to move all the rents and two years from now they’re going to refine cash out. But you know what? You don’t know where interest rates are going to be. You don’t know if you’re going to be successful.

Yeah, 100%. Well, in the single family space, there’s a lot of people that do one or two deals a year, maybe a handful of deals a year. And then there’s a lot of people that are doing a lot of deals, a lot of big operators. What do you think separates the top operators from everyone else in your experience in the industrial game?

Well, I look at it that I have to make my money on the buy. I have to make sure that I’m happy with the going in cash on cash return, assuming rents are just going to go at 3% a year. And you have to be patient. It’s not about volume, it’s about getting deals at work and not losing money, your own or your investors.That’s the number one rule. It’s okay that we got eight or 9% a year for seven or 10 years and we sold it for our purchase price, but it’s not okay to return less than people put in.

Yeah, 100%. I’m curious, the word success to me has always been very intriguing. I feel like everyone defines it differently, measures it differently and strives for it differently. How do you define the word success? How do you measure it? And how do you strive for it every day?

Well, I guess success is being aware of what’s going on in the market, checking out interest rates, seeing what else is happening as far as federal policy, state policy, seeing what businesses are thriving. So we do a lot of reading of the trade publications, which tell us who’s doing what, whether it’s logistics, whether it’s third party logistics that might be your tenants are moving goods and services to now this AI data center craze on how that’s gobbling up electric in some of the warehouse space in addition to what local vendors are doing. If I see plumbing contractors thriving and carpenters doing really well, I know they might need more space. So it’s about trying to keep current because you can’t keep ahead, but you can keep current.

Yeah, for sure. What’s the biggest change you’re seeing in the industrial real estate market right now?

Well, I guess with current administration, there’s more of a demand for onshoring. So properties that do have power in certain locations where you have roadways and railways are more desirable. Seeing even older properties that have electrical capacity potentially have new life because either you’re going to demolish the old structure, this doesn’t work, but you have the electrical feed and you’ll build something new because you could be data center, you could be a cloud service, or even the manufacturing people are worrying, where do I get power from? Why would I look at this location? So I’m seeing a lot of that. And then we’re seeing a lot of the current tenants trades expand, especially as people sell their businesses as they age out and they want to retire. There’s a lot of acquisitions. So if you have somebody who’s have a younger management and they’re buying out older management, they’re competing properties, you might be able to take advantage of consolidating them all in one building.

Yeah. Yeah. If you were going to start from scratch today, the business completely goes away, but you get to keep all the knowledge that you’ve learned over the years, what would you focus on first to rebuild what you have now?

That’s a good question. I think I’d still look at real estate because it’s never worthless. I would look for things that are triple net in nature if on leases. Multi-tenant, of course. But I’d also look at operating businesses because of the margins that they operate at. And it’s one thing that we actually are actively looking at. When I look at some of these people who are older than me that want to sell the business, the kids don’t want it, and they just want to go on their way. They’ve running this business for 20 or 30 years. It’s like, all right. Some of them I would take a run at, but I’m not an electrician, I’m not a plumber. I don’t want to own that, but I can’t believe the numbers that you see. And this is further substantiated by tenant financials when we lease space to some of these people. You get to look at their financial statements and I’m like, wow, who knew that these trucking companies worked in those? There’s that kind of profit. And so I would probably look for something, some hybrid model, somewhere where I could invest in operating companies as well as the real estate.

I love it. I love it. I’m sure you’ve been a big influence to a lot of people in this space, but who’s been the biggest influencer mentor for you in this space?

Well, I guess when I was a banker 27, 28 years ago, probably Jeff Greenberg and his brother Steven at Heritage Capital, small family business. The family’s been in real estate all their lives, but I saw them go from office to multifamily to industrial. And they always stood a little bit ahead of the curve. And it was largely their money plus some investors. And that was their rule, don’t lose money. First rule, second rule, third rule. It’s all about the money. And that one phrase that I coined with them was like, “You can’t eat the IRR, so don’t bank on it. It’s a fantasy until it actually occurs.” And I think they’ve helped me understand if you do a lease that has an office component, you want a certain payback period of the tenant improvement leasing commissions. On a five-year lease, you ideally want to break even on a first year and things like that because the tenants always want the landlord to pay for the improvements. And the landlord always wants the tenants to pay. And I’m actually negotiating something like that right now where the tenant came to me and they said, “We need $100 a square foot.” And I’m like, “You have eigh and a half years left on your lease.” I said, “It’s going to take me six years to break even.” I’m like, “Not going to happen.” I said, “You want to give me more term?” “No, we don’t want a longer lease.” I said, “Well, I’m going to give you less money.” So it’s things like that you remember.

For sure. Any last advice for any investors that might be getting into the industrial game or already in it and looking to grow or scale? Any final words for them?

Sure. I find that the really small deals, you can’t capitalize all your closing costs on them. So don’t fool yourself by saying, “Oh, I’m going to buy a 300,000 or a million dollar deal.” Because all the closing costs, it really zaps your cashflow. Unless you’re the investor that has very low closing costs, you have your brother-in-law’s the attorney and you figure out you’ll pay whatever the CapEx is out of your pocket. All right, and it’s in your backyard. But if it’s something bigger that you might have to bring in third-party management for, or you might want to bring in investors, you need something of a little bit of scale. Like for us, it’s hard to capitalize anything that’s less than probably $9 million in purchase price or 100,000 square feet. It just doesn’t make economic sense because you lose all your economies of scale.

You want me to – I love it. I love it. Well, Irwin, thank you so much for coming on today. Everyone, thanks for watching and we’ll see you next time. Thank

You so much for having me.