GI179: Commercial Real Estate Investing with Mike Sowers

In 2005, Mike Sours founded a remodeling business and grew that company to over 50 employees. From 2005 to 2017 Mike rehabbed over 1,000 properties, mixing in wholesaling, flips, and rentals. In 2017, he sold his remodeling business and used the capital to start purchasing commercial properties.

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Announcer:
Welcome to the Global Investor Podcast, a show that focuses on helping foreign investors enter the lucrative US real estate market. Host Charles Carillo combines decades of real estate investing experience with a professional background in international banking to interview experts in all areas of US real estate investing. Now, here’s your host, Charles Carillo.

Charles:
Do you have money sitting in the stock market? And you’re worried about it or worse. You have money sitting at the bank, not keeping up with inflation. My name is Charles Carillo, founder and managing partner of Harborside Partners. And since 2006, I’ve been investing my money and my family’s money into income producing properties. These are real assets, real properties with real addresses that produce real cash flow. At Harborside Partners, we provide passive investors who love real estate with a turnkey investing solution. If you want to put your money to work in real estate, but can’t find deals, don’t have the time to get funding in. The last thing that productive people want to do is manage real estate. We find the deals. We fund the deals and we manage the tenants, the termites and the properties. Partner with us at investwithharborside.com. That’s investwithharborside.com. Go to investwithharborside.com. If you love real estate, you like the idea of passive income and believe that income producing properties will appreciate over time. Go to investwithharborside.com. That’s investwithharborside.com.

Charles:
Welcome to another episode of the Global Investors Podcast; I’m your host Charles Carillo. Today we have Mike Sours. In 2005 he founded a remodeling business and grew that company to over 50 employees. From 2005 to 2017 Mike rehabbed over 1,000 properties, mixing in wholesaling, flips, and rentals. In 2017, he sold his remodeling business and used the capital to start purchasing commercial properties. So thank you so much for being on the show, Mike.

Mike:
Yeah, thanks for having me.

Charles:
So I kinda give a little brief introduction there, but can you give us a little bit more in depth background of yourself both personally and professionally prior to being involved in real estate investing?

Mike:
Well I started real estate investing at 21. So prior to that, I guess I was I was a college kid running a franchise for college pro painters and I sold books door to door

Charles:
<Laugh>. I had friends that did the college pro painting, so

Mike:
I did it. Yeah, yeah, yeah. Business for young entrepreneurs.

Charles:
So when you got involved, why did you choose to get involved in real estate? Like what was that choice to make that your investment vehicle?

Mike:
Well, real estate’s unique for a variety of reasons and I I think that people are really attracted to it because it allows recurring cash flow and what’s sexier than real estate. Right? You can, you can make a lot of money selling anything and I mean, selling Boeing air jets are cool and, and and things like that, but at the end of the day, real estate’s also one of these things that you can touch and feel and you can walk through the buildings and you can see them with your own eyes and you know, it’s kind of like the old age. They’re not making any more land and people will always need a place to operate their business and they’ll always need a place to live. So, you know, the market ebbs and flows, but it’s not gonna disappear. People aren’t gonna wake up one day and be like, you know what? I don’t need a place to live and I don’t need a place to work. Right.

Charles:
Yeah. It’s kind of funny every time if you speak to anybody in any economic class, they know someone that makes money in real estate or have made money in real estate, even if it was selling a house that made money, you know, whatever it is. Any situation any tiered income level, you can find someone that knows someone that made money in real estate different compared to different investment opportunities, I guess you would say out there in the alternative space.

Mike:
Sure. And when you look at the ultra wealthy, like the top 1% of the top 1%, almost all of them hold their money in real estate for a reason, because traditionally in historically it’s been the safest asset class there is to invest in. And that a lot of them will invest heavily into specific businesses. And what’s cool about real estate is it is actually a business. And if you do something wisely, you can not only build a real estate portfolio that has a cash flow and a net equity value to it if you were to liquidate it, but you can also build a business around your acquisition funding and your asset management aspects of your business. And if you do it properly, that business will actually have an enterprise value and a sale value that’s separate from your real estate properties themselves. And that’s really what I’m trying to teach people.

Mike:
Why we started franchising our company is to expand into other markets and really grow our portfolio, but to do it in a way where I’m not one person quitting away from having to fly all over the country, managing assets and replacing people if they leave the company. That’s not the vision I had for my family. I, I wanna stay local and, and be here with my kids. I enjoy the occasional travel, but doing something where you’re traveling 50% of the time or leaving for weeks on end to get markets set up real, really isn’t of interest to me. What is of interest to me is entrepreneurship. It’s what I majored in in college and I love what we’re doing because we help people who wanna get in the real estate game, but they understand the benefit of buying a franchise and plugging into an existing model that’s proven. We are the only commercial real estate investing franchise system in the world. So think of it like we’re the kind of the commercial version of home investors, if you will. Right. If you wanna start a house flipping business, you look at home investors or, or, or hiring a coach. If you wanna start a commercial real estate flipping business we’re the only option <laugh> for a franchise.

Charles:
Interesting, interesting. So Mike, when you made the kind of, you were going from flipping houses, remodeling them and you went to the investment space, what was your first real estate investment and how did that turn out and what would you have done differently?

Mike:
I bought a duplex in a marginally successful portion of town and I paid about double what I ended up selling it for and I lost a ton of money on, so it was a complete failure. My next property I bought, I think a month after that one, that was a a property that I had eight bedrooms, six roommates. I was in college and I also paid double what that one was worth and lost a lost a lot of money on that deal. Both of those I had to negotiate with the lenders because I couldn’t sell ’em for what I owed on it. And so we did a short sale on those projects and what it taught me is the value of really understanding how to analyze the deals properly. And, you know, I bought into this kind of rich dad poor dad, you know, just get in, just get in and do it.

Mike:
And all things appreciate real estate and obviously we know that’s not the case, right? You don’t, you don’t make money in any market in this business just by getting in at the right time. That’s called speculative investing. And I am not interested anymore in doing speculative investing. What I am interested in is capturing on the opportunities that are apparent wherever we’re at in the market cycles, so that I can make money when the market’s good, I can make money when the market’s going down and I can make the most money when the market completely tanks <laugh>. And all that comes back to being able to analyze deals properly and project where you’re at on the market cycle and use that market data when you’re analyzing your deal to figure out really how much you can pay for a property.

Charles:
So Mike, where you are right now, what is your company’s current investment strategy and prop, you know, your criteria of what you’re looking at when you’re searching for properties and acquiring them now.

Mike:
So we pull money from accredited investors and small family offices to buy commercial real estate, primarily in the warehouse and suburban office sectors, but we’ll also do strip malls and apartments if the deals make sense and they’re in good locations. So we’re a little bit asset class agnostic. What we are particular about is only doing deals that are distressed where we can renovate them and solve some kind of other issue, whether it’s a leasing issue or a property management or an accounting and billing issue. And there’s a lot of different property level issues and really people issues from bad managers or bad owners or or bad leasing agents that we can solve through our process. So I like to say we’re, we’re kind of in, in the, the business of, of solving complex problems to create value and properties and really help you know, help them get to their intrinsic value. So if we can buy something for three, put a million into it, but it’s worth five, I don’t care what asset class it is, as long as I can do deals with numbers like that, then I get excited about that. And so do the investors who put money into our deals and make money on them without having to do any of the work.

Charles:
Mm. Explain to us a little bit about cause you used the term distressed and can you give us a little definition of what a distressed property looks to you? Are we looking for like 20, 25% vacancies in some of these properties? Are we looking for just management, like minor, minor mismanagement issues? I mean, what do you like to see?

Mike:
Well, there’s varying degrees of distress, right? So I’d say it’s more of a spectrum than kind of it’s distressed or not distressed. It’s really how distressed is it? And the easiest way to measure that is what is the stabilized net operating income? And that’s rents minus expenses when the building is at market rate occupancy with market rate rents and being properly managed on the expense side. So let’s say a building stabilized occupancy is 90% occupied and market rate rents are 10 bucks and whatever, let’s say that translates to a stabilized NOI of a hundred thousand. Well, when I’m looking at it, if it has an NOI of 25,000 for the trailing 12 months I consider that very distressed. Yeah. If the trailing 12 months NOI is 90,000, then that might be marginally distressed.

Charles:
Okay. Interesting. Okay. So when you made the transition going from remodeling and flipping houses into actually doing commercial deals, I, I imagine that’s quite the stepping step, right? And what did you need to change to make that a reality both in your business and personally?

Mike:
Mindset, first and foremost we, we are our own biggest obstacle. And the reason I never got into commercial and did house flipping for, you know, 13 years before I got into commercial is because I, I had created all these limiting beliefs in my own mind based on what other people told me. And so there were three things really that I had to solve when I moved into the commercial space. One was how to raise equity capital. Most people in the residential house flipping space know how to go get a hard money loan. They know how to raise debt and then they put their own money into the deals. Very rarely do they know how to structure a partnership on the equity side to raise 1, 2, 3, 5 million. So that’s the, that’s I’d say the biggest piece and that’s the most coveted skill that if you crack the code on that skill and change your mindset to, I mean, there are millions of people out there who have lots of extra cash that they have invested in the stock market or in whatever mutual funds, or really they give it to their financial advisor and that person tells ’em where to put their money, but they don’t realize that there’s these other investments that they can make outside of their financial advisor directly into these deals.

Mike:
And that’s what I didn’t understand and I kinda like, was like, well, why would they ever give their money to a person like me? And and the answer to that is because people love investing in real estate and they wanna make money on, on flips without having to do the work. Most people think that that’s cool. Whether or not they have the experience or the time to do it is different, but a lot of people have the money with no experience or time, and that’s where that symbiotic relationship comes in. So that’s the first thing. The second thing is I thought that commercial was extremely risky because I saw for lease signs all over town always. And I never realized that that was a lead generation strategy and that the majority of those buildings were actually full, but they were still generating leads off their science.

Mike:
So they left them out all the time. And once I realized that, I was like, oh wow, okay, well maybe it’s not as hard to lease commercial spaces, especially if you tailor your investing strategy around targeting buildings with relatively small units like thousand, 2000 square feet. Cause then you’re not needing to have all these big corporate connections. Guess where those people go, look for a, a a thousand square foot office, Facebook marketplace, Craigslist, and they drive by your billing and see your sign. That’s how we generate almost all of our leads for small, tiny spaces. And I’m dealing with the CEO or the president of that small business directly. So I don’t have all this bureaucratic red tape and brokers to deal with and all those things in between us being able to get a deal done. I don’t need to navigate through all that when I buy buildings with a lot of small spaces.

Mike:
And that’s the space I play in because I love small entrepreneurs. We have 375 small business owners that are tenants of ours right now. And I love each and every one of them. I know ’em all and, and you know, they have really cool businesses. And so having conversations with those people is exciting. The third piece is how to generate off market deals. If you’re only looking at deals that are on market, it’s gonna be extremely difficult to find deals and make anything work. And you’ll probably come to the conclusion that there’s no money to be made in commercial real estate, that the market’s horrible, that now is not the time to get into it. And that is a problem of just not knowing how to market properly to generate deals that nobody else is able to look at. And if you can’t do that, good luck.

Charles:
It’s one thing about the renting small commercial spaces, cause we have some that we do rent out and every time they’d go on like a large broker site, they would never get sold, you know, or not get rent at least. But you put a sign in front or it goes onto a local Craigslist or something like this, they get, you have, you know what I mean? You did that beforehand. When you know someone’s moving out, you have no vacancy. It was, it was amazing. Completely different of how people in that, in that looking for that type of property, looking for that type of product are searching. It’s completely different than, you know, what other people do when they’re looking for bigger spaces or to buy apartments or something like this. So it’s kind of kind of interesting there, but

Mike:
It’s two, it’s two different worlds, right? Yep. But the, the larger businesses hire broker and that broker goes on to all these, you know, catalyst, CoStar, you know, LoopNet those platforms to find these properties. The small business owners, they don’t like the idea of hiring a broker, right? They, they, they just want, they go to Google and type in office space Minneapolis or whatever, and then, you know, or they go to Craigslist or Facebook

Charles:
And they’re also looking for a deal too, you know what I mean? They don’t have the budget. Yeah.

Mike:
They want a deal. And, and they know that the moment they hire a broker that, you know, and I am a broker, right? So I’m talking about myself, it’s not that brokers don’t add value to deals they do, but I will tell you this, that that a broker gets paid like maybe a couple grand to place a tenant into a thousand square foot office suite. So, you know, they’re not excited to put a lot of energy into those deals. You can’t make a living. Most commercial brokers are making two 50 to 500,000 per year. That’s the average for a commercial real estate broker. They gotta do a lot of those leasing deals, right? So they’re interested in doing the 20,000 square foot 10 deal that pays em 200.

Charles:
Makes sense. Same

Mike:
Amount of work,

Charles:
<Laugh>. Yeah. It’s just like buying a hundred units versus buying 10 units, you know? Exactly. so let’s talk about systems. I mean obviously you’re a very system oriented person. What types of systems does your firm have in place to handle your asset management throughout your different properties?

Mike:
Well, our overall systems, the seven steps to freedom that I gave away to the public in my book that we published last July, it’s available on Amazon. It’s called commercial real Estate investing. And the seven steps are, are how to find deals, figure out what to pay for ’em, fund use equity partners, and then you fix ’em, fill ’em, drive the financials and exit out for freedom. So that’s my seven Fs or seven steps to freedom. That’s the big level. You know, the kind of the high level macro processes, if you will. And then within each of the seven steps, there’s a whole rigorous set of sub processes and, and things like that. So, I mean, we can spend all day going into each and every one of those aspects. And when I, when you say asset management, typically I think of asset management as steps four through six, which is fixed fill and financials, which is your construction, leasing and property management.

Mike:
And we have a lot of really good tools and processes in place for those things. The biggest system that we have from a software perspective is the custom proprietary software that we built called CRE Tools. And it’s actually the backbone of our entire organization. And it’s a super cool software. It allows us to generate leads with the click of a button, analyze deals, generate documents, streamline and track workflows and processes. And really what all that equates to is we can spend more time finding and funding deals, more time creating relationships with our tenants and our brokers in our community, and less time just doing the actual aspects of the business. What it also does is it removes a lot of the risk that is inherent in all of these deals because of their complexity, because we’ve streamlined the process and there’s literally checkpoints at every single step along the way from the lead to the analysis to the due diligence, to the funding, the closing, and ultimately the asset management. All of those processes are systemized inside of our software with people assigned to all of those tasks along the way. So it reduces a lot of risk for our group, our lending partners and our investing partners because we, we have a structured process that we follow and whether it it’s a Minneapolis deal that we’re doing or it’s one of our franchisees in in our different locations, everybody’s doing it the same way because they’re all using the same software.

Charles:
Right. Very interesting. So talking about as we spoke before, you said finding properties making a lot more money when the market pulls back. How would you suggest someone preparing for a downturn in commercial real estate if they haven’t made the jump from residential yet into commercial? How do they prepare for that going forward and how do you guys do that?

Mike:
Well, I don’t think there’s ever a bad time to get into the market. And I think that the way that you should prepare first is you gotta get mentally prepared. Like if, if you don’t have a strategy, a system and somebody to help support you and help you see your blind spot, then start there. If you have all those things that, and, and you’re talking higher level, okay, now I, I have an established business, I know how to find deals, I know how to figure out what to pay for ’em. I know how to fund them. Then the conversation moves to, well what are you doing to actually prepare yourself for the market shifts? And that, that’s actually a different conversation, right? That conversation is like, what are we we doing right now? Well, we are we’re taking a pass on some deals that are a little more marginal.

Mike:
We’re underwriting deals with a future value assumption that’s much lower in the future than, than it would be in today’s numbers. So essentially we’re using a higher cap rate than current market cap rates to underwrite that future stabilized value. In addition to that, we’re also underwriting rent rates and occupancy rates to be a little bit lower in the future. So that we’re, what all that translates to is that I’m making lower offers now than I did a month ago for the same exact property with the same financials. The second thing we’re doing is we’re structuring our equity partnerships where we’re setting expectations with our investors that you know, when you invest with us or put your money in our fund, it may sit there on the sidelines cuz we’re gonna take a pass on some deals, but guess what is gonna happen?

Mike:
Money’s tightening up and deals are still hard to find, but there’ll be a shift in that where money becomes very difficult to get and deals become very plentiful. And if we stack enough investors and cash on the sidelines right now to prepare for those moments, when somebody’s got a property, they had a big tenant who defaulted, they have to sell and nobody can go get a bank loan cause the rates are 7% to make the deals work. I’ll be sitting there waiting and ready with my investing partners to capture that opportunity at a deep discount. And and that’s what we’re doing. So we’re, we’re stockpiling cash, we’re, we’re signing subscriptions for investors who, who wanna get in on those opportunities because when you go back, the people that made an absolute killing were the people who did what I’m saying in 2008 and 2012, who they started buying when there was blood in the water.

Mike:
I mean, I, I know a guy who bought like 50 properties in one of the tougher areas of town here for like 30 k a pop single family rentals and he’s selling ’em all right now for like 200 to two 50 a piece and he just, you know, he made a blood bath on him and that’s what we’re doing, right? We’re gonna go try and find properties. It’s a little different in commercial cuz it’s so hard for people to figure out what their property’s actually worth and it’s really worth a multiple of the income it generates so you can force the value or manipulate the value much easier than you can in the residential market where it’s kind of like, well you’re really relying on what the neighbors house sold for. That’s like yours. You can’t manipulate the value like you can in commercial.

Charles:
Yeah, very interesting. It’s also interesting too is that during those times you mentioned the financing really tightened up and when we were investing, when we were buying stuff at oh nine, it was paying all cash. That’s the only way you could do it. And there wasn’t a lender there that you were gonna refinance into. I mean it’s just, you know what I mean? It was a whole different ballgame. So you knew you were gonna have to hold that for so many years to be able to refinance it out. So it’s much different than today where, or I guess a year ago where it was very easy, as you said, my knee is tightening up now, but Mike, so what are some common mistakes you see real estate investors make

Mike:
Not getting started? Go do a deal and break even on it? Cuz you’re gonna learn more on that first deal than, than you will watching a thousand YouTube videos or listening to a hundred podcasts. The learning in this business happens from doing and going through the actual process. With that being said, you can do a hundred deals and still not do a deal as well as somebody who does their first deal, who has the right process. So, so get a coach, get a mentor, you know, buy a franchise, do something, but plug into somebody who’s done it before and, and, and use their mistakes <laugh> as your learning platform. That’s, that’s my advice.

Charles:
Yeah, that’s why you’re paying them. What do you think are the main factors that have contributed to your success, Mike?

Mike:
A sense of urgency and a deep desire to achieve my goals, but do it for the right reasons. When you live your life, you know, with the right why and the right underlying purpose it takes a lot of pressure off. I don’t need to do deals. If they come, if they come and they’re the right deals, it’s because God put them in my life and I was meant to do ’em. And, and when they fall apart at the bottom of the ninth inning, they were meant to fall apart. So it just, it it creates a lot of sense of relief at the end of the day if you just, if you know that you’re doing things for the right reason. And I think that that contributes a lot to our success because we think long term about every decision we’re doing, I’m, I’m not, I’m not thinking about how I can make the most money on the deals. I’m, I’m thinking about how I can create the most value for the different stakeholders that are involved in the deal. And all the decisions are driven from that, from the investors, the lenders, the tenants. Everybody is considered when we structure our business plan for each project.

Charles:
Very interesting. So how can our listeners learn more about you and your business, Mike?

Mike:
Well, you can pick up my book. It’s on Amazon if type Mike Sows, o w e r s. It should come up. It’s called Commercial Real Estate Investing. I have a audiobook on, I think you can get on Kindle as well or you can just check out our website. I think you can get a free PDF and audio copy if you go watch one of my webinars where where I tell you about our franchise opportunity that’s on our website commercial investors group.com.

Charles:
Okay, great. I will put that link into the show note and yes, you can get free your links to your book and everything else on that website. So that should be if you’re interested in learning more about Mike, that’d be the place to go. So thank you Mike for coming, coming on today and looking forward to connecting with you here in the near future.

Mike:
All right. Thanks so much for the interview.

Charles:
Talk to you soon. Bye-Bye. Bye.

Charles:
Hi guys! It’s Charles from the Global Investors Podcast. I hope you enjoyed the show. If you’re interested in get involved with real estate, but you don’t know where to begin, set up a free 30 minute strategy call with me at schedulecharles.com. That’s schedulecharles.com. Thank you.

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About Mike Sours

Mike got his start in the construction and real estate field as a Franchise Owner for College Pro Painters in 2003. At the time, Mike was enrolled in the entrepreneurial studies program at the Carlson School of Management of the University of Minnesota where he was able to apply what he was learning in the classroom to the real-world business ventures he was involved in.

Mike also worked as a loan officer originating residential loans while studying in college. Mike then started Executive Exteriors & Remodeling in 2005 and grew that company to over 50 employees. From 2005 to 2017 Mike rehabbed over 1,000 properties, mixing in wholesaling, flips, and rentals.

In 2017 Mike sold his remodeling business and used the capital to start purchasing commercial properties. Frustrated that he couldn’t get others to open up about their strategies, Mike started the CREative Commercial Real Estate Podcast to have a forum to interview the ultra-wealthy investors and uncover their secrets. It worked! In 2018 Mike rebranded his house flipping company to Commercial Investors Group, and got his CCIM designation (the highest designation available in commercial real estate). Mike started scaling up and doing larger deals, some which netted him over 7 figures just on a single deal.

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