The Life-Cycle of Real Estate Investing

Eric D Brotman [00:00:04]:
Good morning. This is Eric Brotman, the CEO of BFG Financial Advisors in Lutherville, Maryland. And welcome to the life cycle of real estate investing strategies for success. We have an extraordinary I have an extraordinary co presenter. In fact, I’m her co presenter today. Meredith Mears is with us. I’m gonna let her introduce herself because I would not do her justice. Meir, welcome to to to this webinar.

Eric D Brotman [00:00:28]:
I’m so excited to be presenting with you.

Meredith Mears [00:00:31]:
Thanks, Eric. That’s quite an introduction. I’ll keep it brief. I I do a lot of things in commercial real estate, but I’ll just give a brief overview of my background. I started out working in the public sector in economic development and did that for many years and, got a taste of commercial real estate development through that role and, jumped the ship in 2018, and began working in regional, commercial real estate development and brokerage and consulting. And I’ve been very fortunate since then to do a lot of different things, but most importantly, participate in sales of up to $24,000,000. And I I I can’t say thank you enough to my clients that have, put their trust in me and work with me along along the way. So that’s a little bit about me.

Meredith Mears [00:01:23]:
I could go on, but we have a limited time, so I’ll toss

Eric D Brotman [00:01:26]:
it back to you. We do. And what I can say is as a financial advisor now for thirty two years, which is dating myself, I realize. But as a financial advisor for thirty two years, we have lots of clients who either own real estate or want to. Sometimes it’s commercial, sometimes it’s residential, sometimes it’s dabbling, which we’re going to talk a little bit about today is whether this is a business or whether this is something you can dabble in. But a lot of financial advisors sometimes feel, unarmed to have the conversation about real estate because it’s not something, even though it’s in all the curriculum for us, it is not our roundhouse. It’s not what we do every day. And so it’s real important, I think, to have specialists in that area.

Eric D Brotman [00:02:06]:
And I know you’re going to take us through the life cycle of a real estate investment just so people can get a feel for that. I’m going to flip it on the screen and let you talk about, about the life cycle of investing. And this is really designed to be for those maybe who have a limited amount of experience in real estate or or maybe who’ve never done it before and wanna consider it. And if some of our viewers today are absolute experts in this, we’ll we’ll certainly take your feedback in the chat box as well. Sarah Lohse is behind the scenes today and she’ll be monitoring the chat box. If you have questions, please, ask them in real time. If it’s related to a specific slide, she’ll she’ll interrupt me, which she loves to do. If not, we’ll hold them to the end where we expect we’ll have a little bit of time.

Eric D Brotman [00:02:48]:
So, Mare, let’s tee this up. Let’s talk about the cycle.

Meredith Mears [00:02:52]:
Well, I first think it’s important to address risk. Right? So I know as a financial advisor, you probably have sorted conversations with your clients on the amount of risk they want in their portfolio. Real estate can be very risky. Right? And so you have to have, a a a long term vision for the property. Real estate’s a long hold unless you get offered a boatload of money for an asset that you’ve acquired. But, you know, you have to be pretty risk averse to, to to to stay away from real estate, I think. I have always gotten excited about opportunities in real estate. I’ve seen how they can, work for people, how you can monetize certain investments, and really, at the end of the day, make a lot of money on them.

Meredith Mears [00:03:46]:
Sometimes you don’t always win, and so you have to be prepared and ready and willing to take on that risk. So just very broadly with regard to the life cycle of real estate, real estate is a long term play. When you invest in something, particularly commercial real estate, you’re not going to see the returns from that for many years down the road. So it’s very, very important that upfront, you are buying an asset that is priced right, that is, projected to hit certain goals along the way that make actual sense and aren’t just pie in the sky numbers somebody put on a pro form a. Once you get the property and you have tenants involved or, you know, you have a certain way of of of moving the property forward to increase valuation through time, You need to pay attention to the different levers you can pull as far as increasing that income over time, rental increases, you know, making sure your leases are at market rate when tenants transition, and certain things of that nature. You also wanna take a look at the property taxes that are raising over time and make sure that you’re kind of, responding to those increases in assessments to keep those taxes down because sometimes those assessments can be pretty off base, to put it nicely. But, so as as time progresses, you wanna make sure you’re paying attention to all of those things actively. It is not a set it and forget it.

Meredith Mears [00:05:21]:
And then at a certain point, and it might be sooner than you expected or it might be later than you expected, you may want to to get rid of the asset, and that can come through a variety of channels, you know, a sale, a transfer to someone else, Maybe one of your tenants wants to buy the property, and you wanna make sure that you’re working with someone who can provide a, evaluation that makes sense and that will actually get you to the closing table so that you can then take those funds and do with them what you want.

Eric D Brotman [00:05:53]:
So let’s begin with the with the acquisition. I mean, this is this is, before we even get to to acquiring a property, it’s should you? Is this something it’s not for everyone. You you talked about the long term time frame. There’s also certainly liquidity issues like any other asset. How marketable is it? How quickly could you sell it? You don’t buy real estate and then sell it on Wednesday. You can do that with a stock or a mutual fund, but you can’t do that with a with a building or with even a partial ownership in a building. So it is something that you have to consider. And you’re certainly looking for cash flow and you’re certainly looking for some tax benefits and you’re certainly looking for diversification.

Eric D Brotman [00:06:34]:
And there’s lots of reasons to participate. But if you’ve never done this before, what is step one? Well, I guess step one is, do I really want to do this? And then step two is how?

Meredith Mears [00:06:45]:
So, yes, those are important questions. And I will come circle back to the partnership question because that’s a very, very important one. Sometimes people can go farther with partners, and sometimes it really handcuffs them. But the first question is, how risk averse am I? Can I tolerate this? Can I tolerate the challenges that will come up inevitably? And then, the the next step is simple, education. You have got to self educate, and whether that’s through attaching yourself to mentorship, formal mentorship, informal mentorship, reading. There are tons of books out there on real estate and how to monetize real estate and structures for how to partner with people and receive, funds through cash flow. You have to educate yourself. You have to put yourself in front of the same people that are working the deals and that are, able to discuss all the things that happen in real estate transactions and in owning real estate.

Meredith Mears [00:07:58]:
And commercial real estate advisors, can do that for you. If you’re seeking a property, they can talk to you about all the things that you should be looking for. If you’re looking to dispose of a property, they can talk to you about valuation and how that’s comprised. And, you know, sometimes people want a number up here and the market’s saying here, and they can explain why and and maybe why now is the not the right time to sell. So it it’s just basically you have to start with, self motivation to educate yourself and then follow that that path.

Eric D Brotman [00:08:34]:
So there’s a lot of different ways to invest in real estate. You can invest directly where you buy a building and you, and you become a landlord and you find tenants, or or you buy a building and you self occupy where it’s it’s tenant tenant occupied, which there’s pros and cons to. It’s something I never wanted to do because I kinda like that when something breaks, I can call someone and fix it. But by that same token, I own my own home. So wouldn’t that also apply to my home? So that’s, you know, there it’s it’s a there’s this there’s not continuity in that. It doesn’t make sense. However, there’s lots of ways to buy real estate as part of a portfolio. You can buy them in real estate trust.

Eric D Brotman [00:09:15]:
You can buy them in real estate partnerships. You mentioned partnerships. There’s lots of different ways to do that. You can do it pooled with 50 or 100 or 150 investors you don’t know. You could also do it with four people you do know. And so one of the challenges is figuring out not only how you want to structure this, but, but but how much not only risk, but how much how much involvement you want.

Meredith Mears [00:09:40]:
Absolutely. You yeah.

Eric D Brotman [00:09:42]:
I don’t wanna be a landlord for anybody, but I do wanna own real estate as an asset class.

Meredith Mears [00:09:47]:
Yeah. And, you know, I can speak as someone who has owned directly and been my own property manager, while I’m trying to do 10 other things with my clients that I I work to serve, and, also as someone who has become a limited partner investor in a larger piece of real estate with about 10 other people. I’ve also had individual partnerships with two or three other people, and, you know, there’s there’s a ton of different ways to do it. It comes back to the education. K? So when you’re buying an asset or when you might wanna own or occupy an asset and either you have tenants or you don’t, it is kind of a business. You know? There are things that happen at a property that need to be addressed. It’s snowing outside. Do you need someone to clear the parking lot? Who’s gonna make the call and manage that process? Who’s gonna pay the bill, you know, as far as your administrative staff, or or do you have that outsourced? So property managers really come into play, and they’re not as expensive as you may think.

Meredith Mears [00:10:56]:
A lot of times, they’re charging between five to 7% of, the gross income on on the asset a year. It’s you know, if you’re pulling in $80,000 a year in gross rents, that’s not much at the end of the day, and it’s well worth its its weight. It took me a long time to, to make that jump myself because I didn’t wanna spend the money on it. You know? I’m a business owner. I’m, you know, I’m trying to make sure that my, my bottom line is where it needs to be. But I’ll tell you what, once I did, I never looked back. It made my life so much better. I I can You know? Appreciate it.

Meredith Mears [00:11:35]:
Regret it, and I I’ll recommend it to anybody.

Eric D Brotman [00:11:38]:
Yeah. I I think there I think being a property manager, and this is true whether it’s commercial or residential. You know, a lot of people think, oh, residential. I’ve got this this home. I’m just gonna rent it out and buy another one. And they don’t realize that that means when the toilet breaks, they’re getting a phone call unless they have a property manager. They also don’t realize sometimes that, hey. If that if that tenant doesn’t stay long term and you wind up with a period with no tenant and you have a mortgage or other expenses, taxes, and other things on the property maintenance and upkeep, that you have to have enough of a war chest to handle that.

Eric D Brotman [00:12:11]:
So, what we normally tell clients is don’t dabble. Don’t own one property. Decide you’re going to do this as a meaningful part of your financial life, whether it’s your business life because you want to manage it or whether it’s just your financial portfolio. If you own 10 properties and you have one lousy tenant, you can generally survive that. If you own one property and have a lousy tenant or have something go wrong with the building, you have a serious problem. So I don’t think real estate is something people should dabble in. I think they should decide unless they’re going to use a portfolio, a fund or something where they want some exposure, which there’s pros and cons. But if you’re going to actually do this, I think you have to decide that this is a business you want to be in either actively or passively.

Eric D Brotman [00:12:53]:
Yes?

Meredith Mears [00:12:54]:
Oh, a %. When I jumped into it, I knew that I was starting something bigger than the first property. I my first property I acquired was a 900 square foot condo medical office, and, it was small enough where I felt like, okay. If if I can’t find a tenant, I can handle this for some time. But I I bet enough on myself to know I could find a tenant eventually, and I did. And, you know, I my plan was to hold that one for quite a a long time, but I was approached with a deal I couldn’t say no to within, oh gosh, maybe six years after I bought it. And, and that allowed me to then take those funds and reinvest into larger properties. So, you know, it it’s it’s something that you have to have foresight to know where you’re going with it, where you wanna be at the end of the day.

Meredith Mears [00:13:53]:
And and for me, the reason I I loved real estate. I love real estate. I love everything about it. I’m very at home with it. But for me, in the background, the whole reason was is I knew that to retire at a certain age, I wasn’t gonna get there with the methods I had been, utilizing. So I thought I needed to up the ante, take substantially more risk, and hopefully get more reward from that.

Eric D Brotman [00:14:21]:
So it’s funny that you mentioned that you had planned to hold this building or this first condo long term, and you sold it quickly, and it was six years. That should be a wake up call for anyone who sees that as a long term investment because, you know, long term capital gains are after a year and a day. Right. So some people think of long term as as three seventy days For you, six years was short term because between depreciation and escalating rents, it does take a while sometimes to be in the black from a cash flow standpoint. We’re going to come back to that. We’ll talk about some financing. But before we do, Wayne Gretzky famously said, to be a great hockey player, you don’t skate to where the puck is. You skate to where the puck is going.

Eric D Brotman [00:15:02]:
So in commercial real estate, put on your soothsayer hat, use your crystal ball. Where do you see opportunities right now in commercial real estate?

Meredith Mears [00:15:11]:
Well, I’m completely biased towards one specific product type I’ll talk about in a minute. But, in general so I’m in the Mid Atlantic area. Right? So, you know, we have a lot of, industrial business where I am. And, so industrial is certainly seeing some gains. Multifamily where I live specifically, and and across The US, there’s been a house housing shortage. So multifamily has been very strong for some time, and it’s dipped back a little bit, but then it resurges again. So anything multifamily, anything industrial, and what I’ve been working in in my region specifically, has held on strong, especially throughout COVID. You know? After COVID, we saw a lot of office properties go vacant, go dark.

Meredith Mears [00:16:01]:
People were losing money and tenants, and tenants were closing businesses. And now we’re seeing that kind of circle back around slowly even though people more people are working from home now. We are still seeing a resurgence of office. Medical office has has held pretty steady, of course, because it’s medical, but my favorite asset class is self storage. And self storage is not sexy. It’s not exciting to a lot of people, but I’ll tell you what. The first time I was asked to come look at a self storage property, and I physically got on-site, and I saw the number of doors that I could count and add up the rents.

Eric D Brotman [00:16:43]:
Mhmm.

Meredith Mears [00:16:44]:
I knew that that was something that not a lot of people focused on or realized that that was an incredible investment, to make. So, self storage did well through COVID. It has recently seen a little bit of oversupply because it did so well. Everybody wanted to start building it. And so you have to really, with that asset class across The US, look at saturation points in the market to make sure there’s not somebody two miles down the road or five miles down the road that’s oversaturating the market before you build or invest. And to do that, you need to align with somebody who understands the product type.

Eric D Brotman [00:17:22]:
So self storage is any of the others. Self storage is is a big deal because people like stuff too much. You know? And and people like their stuff, and they don’t want to get rid of their stuff. And and, you know, they inherit stuff, and then they keep it for twenty years even though they maybe never use it. It it it’s kind of an amazing thing. And as someone with an XY chromosome, I actually enjoy the dump. I know that that’s a personal thing, but I try not My family calls me the great Zamboni because if we’re not using it, it’s getting cleaned somehow. It’s being donated or something.

Eric D Brotman [00:17:53]:
But that’s not the American way. The American way is we accumulate. And, and so I can see that as self storage. You know, office space definitely had some some trouble for a period of time. You know, multifamily, that is that is, that is industry speak for apartment buildings generally. And apartments have have, I think, done very well, but they’ve also been built up in certain areas to the point of oversaturation. The one thing you didn’t mention, which I think is if it’s not dead on the vine, it’s close, is retail. People just don’t go shopping anymore and storefronts not only because of some of the theft and some of the nonsense in some of the towns, but also just it’s so easy to click a button on your phone and have something show up and to be able to easily return it if you don’t like it, that people just aren’t going.

Eric D Brotman [00:18:41]:
The malls are they’re done. I mean, am I wrong? Am I missing something?

Meredith Mears [00:18:46]:
I I think in certain areas, retail does very, very well. I I cannot speak fluently retail because I’ve never personally been excited about retail. I get I get excited about industrial and self storage, which aren’t like I said, they’re not the sexy product types. Retail is. And, you know, I know that there was just a big international council of shopping centers conference in Vegas that looked to be very well attended. I I think that retail is is still doing well in certain markets, but you’re right. I mean, I get excited about Amazon building a, 200,000 square foot warehouse for distribution because of the growth in the online shopping movement Yes. Versus a shopping center that might be 60,000 square foot with multiple, you know, retailers.

Meredith Mears [00:19:39]:
But I think it all depends on where you go. And, you know, again, it is very, very important for anybody looking to invest in any of these to align with someone who knows the product type and can speak to it.

Eric D Brotman [00:19:54]:
Let’s shift gears. Let’s talk about money because as a financial guy, I like to talk about money. And so now we’re talking about, well, how do you do this? Most people don’t just don’t just write a check. Right? Most people are financing this in one way or another, and there’s lots of different ways to do it. So let’s talk about that first and maybe a little bit about You talked about your very first property and how you started. I’m going to use the word modest because small doesn’t sound nice, but you started with a very modest property and you’ve turned that into something which is fantastic. How easy is it to finance? I mean, money is not as inexpensive as it was pre pandemic and even into the pandemic. Now interest rates have changed a little bit.

Eric D Brotman [00:20:36]:
Money is a little more expensive, which means, you know, cap rates, I assume, are coming down in a lot of places in the in the industry. So how do you handle the the structure of a deal like this?

Meredith Mears [00:20:46]:
Yeah. So, it’s important to educate yourself, through several different lenders and several different types of lenders. This is not a one size fit all approach at all. So, you know, if you’re a first time investor, you might be looking at an SBA loan. And an SBA loan, it’s it’s a small business administration funds, that banks will administer, and, typically, they require a lower money in. Right? So if you’re if you’re buying a commercial real estate asset, you’re you’re typically going to be asked to have 20% of the gross sale price upfront to close the loan. SBA loans will require 10. Some banks will require 10 depending on the appraisal and the price that you’re paying.

Meredith Mears [00:21:42]:
There are also different types of funding mechanisms, like, you can go through life insurance companies sometimes to fund commercial real estate, who have less stringent requirements to actually do the loan. Mhmm. And so there’s just a variety of ways that you can do this, and some people get discouraged. They might talk to one bank or two banks or three banks. And the answer is no, no, no. Or here are terms that are just not gonna work. And you have to have tenacity in real estate. You have to keep showing up.

Meredith Mears [00:22:18]:
You have to keep educating

Eric D Brotman [00:22:28]:
Okay.

Meredith Mears [00:22:30]:
Yeah. So it’s a process and aligning yourself with the right people is the most important.

Eric D Brotman [00:22:36]:
I I think we’ve all heard horror stories because failure makes for good news. It makes for good television. It makes for good clickbait to hear of the the disasters, but there are also plenty of success stories in in real estate. So rather than talking about all the things that can go wrong, which wouldn’t be a whole lot of fun for everybody, let’s talk about some of the things that can but are absolutely not guaranteed to go right. What does success look like as a as a solo real estate investor?

Meredith Mears [00:23:07]:
For me, again, knowing the end game. So when I started, I knew at the end of the day, when I retire, I wanna have comfort and peace of mind in, the assets that I have and the cash flow they’re spinning off for me, or if I wanna sell one or two or all of them that I can live out my retirement comfortably the way that I’m used to living. And that bottom line is what I hold tight to. And so, some of the successes that I’ve seen are you know? And and we’ve talked about this briefly, and I know that financial advisers would never advise us. But I’m gonna tell you how I started and the success that I’m seeing as a part of this question.

Eric D Brotman [00:23:54]:
I’m I’m scared to death. Alright. Go ahead. I’m ready.

Meredith Mears [00:23:57]:
I don’t recommend this. I do not recommend what I’m going to say to anybody, but I’m going to be very honest about how I got started

Eric D Brotman [00:24:04]:
Okay.

Meredith Mears [00:24:05]:
To give you an idea of anybody can do this. So, my background, I did not come from deep pockets, far from it. But I had this vision, and I knew that I was gonna bet on me to get there. And so I worked many, many years in the public sector, and I saved up and saved up in the form of a retirement account. And when I found the first one, that 900 square foot unit

Eric D Brotman [00:24:36]:
I know where you’re going with this.

Meredith Mears [00:24:38]:
Sadly, I liquidated for my down payment.

Eric D Brotman [00:24:43]:
Okay.

Meredith Mears [00:24:44]:
I jumped. And I was so ecstatic. And for me, it worked. That is not always the case.

Eric D Brotman [00:24:56]:
No. This is now an intervention.

Meredith Mears [00:24:58]:
Yeah. I had great mentors, but that’s the one I also sold

Eric D Brotman [00:25:03]:
Okay.

Meredith Mears [00:25:04]:
For more money than what a lot of people would pay for it, which allowed me to grow some more. But you Okay. You have to you have to find those funds somewhere.

Eric D Brotman [00:25:14]:
Yes. Entirely.

Meredith Mears [00:25:15]:
So I’ll I’ll stop here because I know you have something to say about that.

Eric D Brotman [00:25:19]:
Well, I I’ve got a couple things. You’ve given me a lot of fodder here, which I’m very excited. But first of all, I’m excited that you’re gonna be on our podcast, Don’t Retire, Graduate later this year because you keep talking about retiring, and I’m gonna talk you out of that anyway because retirement’s bad for you. Financial independence is good, and, you know, daytime TV and shuffleboard is not good. So don’t ever retire, graduate to the next level and yada yada. All right. We’ll get there. In terms of using funds or having funds set aside, I tend to think it’s good for and we advise clients a lot of times to build up collateral in lots of places so that you have lots of different pockets to go to for money.

Eric D Brotman [00:25:59]:
Some of that is nonqualified money where there’s capital gains treatment. Some of that means having assets, that can be leveraged. So your home, you can use home equity to do that. Your mutual fund or stock portfolio, you might be able to get a securities back line. I’m not suggesting a margin loan to invest more, but I am suggesting a securities back line get you access without having to make a capital transaction. Insurance back lines of credit. I mean, I I look at, at life insurance, and you mentioned it earlier, but but I look at life insurance as the perfect way to do some of your own banking. I used a life insurance policy to buy my first home, and I used it to start this company when no banks would lend to me.

Eric D Brotman [00:26:39]:
And so having the right types of life insurance can be a big deal. But, all in all, the the probably, there’s the two most expensive places I can think of to get money. One is your retirement plan, particularly four zero one k loans are often predatory. They’re brutal. And early withdrawals, if you’re if you’re not if you’re not 55 or 59 for for most folks, you get clobbered there too with taxes and penalties. So some of it’s gonna depend on your on your tax bracket. So that’s number one. And the other is any type of uncollateralized personal loan where you’re paying eighteen, twenty, 20 two percent is just predatory.

Eric D Brotman [00:27:18]:
It’s brutal. So building collateral, I do think, makes sense. I know there are success stories. I know there are cash flow success stories. And because of our tax code, you’re able to sort of roll one property into the other. And there’s ways to exchange properties for like kind exchanges. And you can do that in life insurance. You can do it in real estate.

Eric D Brotman [00:27:38]:
You can do it in a few different areas. I know we’re going to talk a little bit about that. But, but yes, you used your retirement plan. I’m glad it worked out.

Meredith Mears [00:27:47]:
Yeah. It’s not the norm.

Eric D Brotman [00:27:50]:
No. Most of the time, that is not the place to go for money just for everybody watching and listening. Meredith broke all the rules, and it worked. But that’s, you know, that’s that’s a unicorn, not necessarily a strategy. So let’s talk let’s talk about taxes because that is, tax management one zero one is usually don’t do anything that creates a 10% penalty if you can help it unless there’s very compelling evidence. But there’s a lot of tax advantages in real estate investing. There are some income advantages in real estate investing, and you never have to retire because you can continue to have passive income potentially if you hire a property manager and you’ve built a portfolio to where it will support what I’m sure is a wild lifestyle now for you. You know, that’s that’s just all part of this.

Eric D Brotman [00:28:39]:
So what what are some of the tax advantages, and why is this, a a good way potentially to diversify from a tax standpoint?

Meredith Mears [00:28:47]:
Oh, wow. So, where do I start? And I’ll first say I’m not a tax professional, but I can speak from personal experience.

Eric D Brotman [00:28:56]:
Mhmm.

Meredith Mears [00:28:56]:
You know, there are there’s first, depreciation. So when you buy, an asset, you can depreciate it on your taxes, and that that, of course, gives you some buffer there. If you own property and you go to sell it, much like I did with my first investment, I had, a nice amount of funds, and I knew that I didn’t wanna treat that as income because I’d be paying taxes on it in addition to any other income that I had. And I was able to roll that in via ten thirty one exchange to another asset where I am not taking the tax event, in the same year I had a certain level of income, which, you know, it it it just every situation is different, and I always tell people always consult with your, accountant and your CPAs because they can advise you to your specific tax situation. But a lot of, people will utilize real estate to to certainly buffer the tax burden that they carry, and they do so very successfully. You know, sometimes people are are selling off assets, and, maybe it’s a $4,000,000 asset, and they don’t wanna take the tax hit, all in one year. So they will seller finance, which is essentially giving a buyer a loan where you’re seeing regimented income coming in every month, but you’re only having a certain amount in one year over a five year period as compare as compared to, like, $4,000,000 in one year, and you’re gonna be taxed, you know, appropriately on that. So every situation is different.

Meredith Mears [00:30:38]:
I advise you to talk to your CPA, or your financial adviser on, you know, your situation, but there are a variety of mechanisms to help buffer those taxes when you invest.

Eric D Brotman [00:30:50]:
So, asset management, when we talk about asset management real estate, you you said it’s not a set it and forget it. I actually think most assets shouldn’t be buy and hold. They should be buy and manage, buy and observe, buy and and, and spend some time with. It doesn’t mean that you’re constantly selling things. It does mean that there are decisions to be made along the way. You talk about value creation where you can do some tax planning. Ten thirty one is the code. That’s the internal revenue code section where you’ll find this.

Eric D Brotman [00:31:19]:
And there are a lot of very specific rules around how to do that, when you can do that. You you will want an attorney to do that. I wanna talk a little bit about value destruction just because that sounds fun and it’s not on the slide. But, one of the things that that I think about is risk management. And you talked about the risk as an investor, the appetite for risk. But I also think there’s liability and other types of risk when you own assets like these. And so most of the time, we advise folks who are going to buy whether it’s residential, commercial, or otherwise, to have individual corporations or LLCs or other structures to own each individual property so that the liability, if something goes wrong at that property, if there’s a slip and fall or there’s some event there, that the liability is limited to your investment in that specific property. You don’t lose your full portfolio, your house, your everything over something like that.

Eric D Brotman [00:32:15]:
It limits the liability to a specific property. So if you wind up with a portfolio that has 10 or 20 or 50 real estate properties in it, you might have a very significant tax return because you have all those LLCs. But at the end of the day, I think that’s worth every penny because it can protect your it can protect your other assets from a problem with one of them. And let’s face it, they happen. Do you see a lot of that, or do you see people sort of pulling this and hoping for the best?

Meredith Mears [00:32:44]:
It I think it depends on the the the level of commitment somebody has to the real estate game. Right? So I see most of what I see is LLCs. Specifically, if somebody’s partnering with another individual or a few others, they will create an LLC to protect the people in that LLC with the members, named thereafter. But, yeah, I mean, I would I would recommend that if if somebody’s looking to to invest in real estate. Whether it’s one property or more, it can definitely provide a level of protection.

Eric D Brotman [00:33:16]:
I presume it’s also easier to sell shares of an LLC from one person to another without having to retitle or sell an actual property and pay transfer taxes and some of those other things. And that might be a regionally different thing, but I I suspect that there it’s easier to sell shares in an LLC that are on paper as opposed to actually saying we’re doing a transaction and, you know, two of the partners are buying a property from three partners. I mean, that just feels like a like doing it again and needing to refinance and all of those things. Is that a fair statement too?

Meredith Mears [00:33:46]:
It it is. I’ve seen that done. Yep.

Eric D Brotman [00:33:49]:
Alright. Let’s talk about tenants and leases. It’s interesting because, an hour and a half ago, I was on the phone with our landlord because we’re getting ready to extend our lease as tenants. And of course, that means tenant improvements, and it means all the different rights of first refusal and the and the lease terms and all the things. And, you know, after thirty years of doing this, I I’ve as a tenant, I’ve figured it out, I think. I’ve never been on the landlord side of it. But, you know, when you start talking about tenants and leases, anytime there’s turnover, it creates meaningful expense. Whether it’s the end of a lease that’s being then renewed or whether it’s a change in tenant and they need to completely reconfigure the space, A lot of times, if you own the building and you’re breaking it into multiple units, you’re going to wind up having significant expenses when there’s turnover.

Eric D Brotman [00:34:38]:
So in some ways, you want to keep your tenants happy and comfortable without being robbed yourself. You want to keep everybody on the same page. It can be a win win. What are some of the things that you can do to minimize the shock that comes by, either those turnovers or constant renegotiations?

Meredith Mears [00:34:56]:
Well, I’ll tell you, I’m working a deal right now. I wanna mention because it has to do with this specifically, but I’ll say up front, do not defer your maintenance. Do not defer maintenance. Here’s the example of what I’m working on right now. I’m working with a property owner who has a building with multiple tenants. A buyer comes in and says, hey. I wanna buy this, but in order to give you your number that you’re looking for, these leases need to be extended. The leases that are in place have options to extend, so we have to work with those tenants to enact those options to extend their leases out a few years for this buyer to be comfortable in securing the asset.

Meredith Mears [00:35:46]:
The tenants are like, hey. Look. We’re not sure we wanna stay here because there’s been some deferred maintenance. And by the way, if you want us to extend, here is what we need you to do, and there’s a list of about 10 things. And those 10 things add up to about $10,000, and that’s minimal compared to what could be done at the property, what they could ask for. And so I would say if you are a landlord or someone who is looking to become a landlord and you, acquire a property, make sure when you acquire it that there’s a certain level of of things that are done and taken care of. Number one, the roof should be a good age. Number two, the HVAC systems should be a good age.

Meredith Mears [00:36:35]:
And number three, get the property inspected by somebody who’s reputable and knows what they’re talking about so they can point out some of the things that might be coming up. And then once you have the asset, get a property manager. They could advise you on what needs to be maintained over time or pay very, very close attention to your asset and keep keep up with it.

Eric D Brotman [00:36:59]:
Great advice. Sound advice. And the fact that there were 10 things, and I only had three this morning makes me an ideal tenant. I only had three things that I asked for. I really I’m very easy that way. There are certain things. They were not small things, but they were things. And I think it’s going to actually work out because it’s a good relationship.

Eric D Brotman [00:37:17]:
A tenant and a landlord should have a real, particularly commercially, should have an excellent relationship, a working relationship where everybody wins, where neither party is trying to take advantage of each other. Because if that starts, the tenant’s not going to stay very long and the landlord’s going to get a reputation and none of it’s good for anybody. So it does seem like trying to squeeze that last dollar out of a deal is a great way to to, ruin a relationship. Whereas while you want a fair deal, you don’t necessarily have to exploit the other side. And I presume in most of these transactions that you see or even that you do, each side of that transaction has their own representation, whether whether it’s an attorney or or an accountant or a business manager or or somebody to to represent them. Do you do you use somebody in those negotiations, or are you now a master of said negotiations and and can do it

Meredith Mears [00:38:08]:
so? Yeah. So I’ll I’ll most times, I’m serving as that that person, that adviser. Ah.

Eric D Brotman [00:38:15]:
Okay.

Meredith Mears [00:38:15]:
There are some times where I’ll say to my clients, you know, you probably need to involve an attorney, for this specific piece or for all of it, and I’m happy to serve as a resource in the way that I can. There are times when, clients will come in and say, hey. Advise me on the the the physical real estate asset on the structure of the deal. I have an attorney who’s gonna do all the paperwork, but I need your expertise on things I need to look for or if if if this is reasonable. And back to what you’re saying about the good relationship and carrying it through, it’s it’s important for goodwill to stay in the deal. So it’s very important for the folks working on the deal, working through the deal to not go too far over the line in in what they’re asking for or demanding so that goodwill can stay throughout the deal, and you can actually get to the goal at the end of the day. A lot of times, if there’s not, someone involved that is having those goodwill type conversations, it can get ugly quick. It can go south.

Meredith Mears [00:39:25]:
And, so, you know, I think it’s important to work with a group of people throughout your transaction that can hold on to that goodwill and kinda say, you know, I think we can press here, but let’s give up on this here because it’s probably not, at the end of the day, gonna make a huge difference in the end result.

Eric D Brotman [00:39:45]:
Yeah. I mean, this this is when you’re signing a lease, it’s a marriage, not a divorce. Oh, yeah. You know? So this shouldn’t be confrontational. It should be it should be arm’s length. It should be a fair. It should be reasonable. You know, this this isn’t a divorce where two parties are are in litigation with each other and trying to squeeze each other, which can sometimes happen.

Eric D Brotman [00:40:04]:
But this is a little bit different. So now we’ve got these properties. We’ve got them leased up. Maybe we’ve got a property manager. We’ve built a portfolio. We’ve done some exchanges. We’ve got some tax planning that’s been done. We’re depreciating.

Eric D Brotman [00:40:18]:
We’re doing all these things and we decide, I don’t want to own some of this stuff anymore. Now, we have a couple of different decision points, and one of them is what do we do with this business if if we don’t have someone who wants to run it when we’re gone? You know, you have 20 properties at some point, and maybe you have a spouse or three grown kids, and none of them want to do what you’re doing, or they’re not local, or you don’t have somebody in mind for this. And you’re going to wind up potentially leaving this real estate empire. I love the word empire Empire when we talk about real estate, but you’re leaving your real estate Empire to people who don’t want it. That seems like a recipe for fire sale and for wealth destruction again. So what do we do when you want to get out of this business? Because there there will eventually be a piper to pay. Yes?

Meredith Mears [00:41:11]:
Yes. First of all, work with your CPA, work with your financial adviser, and then work with a commercial real estate adviser that can connect you, and advise you on the different methods and routes that you have available to you. That commercial real estate adviser serves to protect your in interests. So, there will be no fire sales, which should be the first thing that person says to you. You know, they should come in and value your asset with regard to what it is actually worth, and they will be the front person in getting you that value. That is their job. At the end of the day, that is what they should present to you. When you get those funds, there are a variety of ways that you can turn around and invest those to set and forget.

Meredith Mears [00:42:07]:
It can be in another piece of real estate through a limited partnership like we were talking about before. If you have a limited partnership, you’re investing, in a in a fund or, with a group of people who are general partners who are executing on the asset and ensuring that cash flow and paying you out based on the amount of, money that you have put in.

Eric D Brotman [00:42:31]:
Mhmm.

Meredith Mears [00:42:32]:
And you don’t make any of this the decisions. You don’t have control to make any of the decisions because you’re limited. You are just seeing that money come in, hopefully, that, the asset spins off. You can also ten thirty one those funds, into, another asset that hopefully has a property manager or that hopefully has mechanisms in place that, buffer you from having to work the asset regularly. Mhmm. There are a variety, and I know that you can probably speak to some too as a financial adviser. But, you know, it is important that you align with the right people who can who can take the steps to inform you and educate you on the proper spend off the most income based on your proceeds?

Eric D Brotman [00:43:23]:
What we see in estate and legacy planning that can be extremely difficult, extremely challenging is when, let’s say, whether it’s a married couple or an individual, a widow or widower or what have you, or an individual investor, leaves a portfolio like this to their three children. And one of their children is local and wants to run the business, and two of them want nothing to do with it. One of them wants to sell everything because they need the money. One of them would love to own it but doesn’t want to be involved. And you wind up with a very sticky, difficult situation where one of the kids feels like, hey. I’m doing all the work and and and and that’s not fair. And one of them says, well, I want you to buy out my interest because I need the money for other things. We’ve got other priorities.

Eric D Brotman [00:44:11]:
We’ve got four kids to educate, and we need the money for other things. And, you know, it it can ruin Thanksgiving forever if there aren’t some guardrails. It’s honestly I, you know, I say that it’s flipped, but it’s also really true is, it is. We all want to leave. I hope we all want to leave our kids in a way, kids, grandkids, and heirs in a way that continues to bring the family together. And it’s hard when a matriarch or patriarch of a family dies. Sometimes there’s scattering, Finding ways to keep people together, whether that means family limited partnerships where everybody’s involved. There’s other strategies that involve philanthropy too.

Eric D Brotman [00:44:51]:
Where let’s say you have a $10,000,000 real estate portfolio and you could begin selling it, but you don’t really want to pay the taxes on it. You still like managing it, but you know there’s no one to manage it when you go. You could potentially donate some or all of those properties to split interest gifts, charitable remainders, or or other instruments that allow for you to get a tax deduction and allow for the properties to eventually be owned by a a five zero one c three charity that can then sell the property and not pay taxes on the sale because they’re they’re exempt. And, of course, you then say, well, wait a minute. That means I’m not leaving this to my kids. And, of course, what we would say is use life insurance to a wealth replacement trust or some other vehicle that says, you know, your mom and dad are you know, mom and dad are not leaving the three kids this real estate portfolio that they don’t want or don’t wanna manage. They’re instead gonna leave a $10,000,000 life insurance policy behind outside of the estate, outside of tax nature. It’s gonna be cash.

Eric D Brotman [00:45:52]:
It’s gonna be income tax free. And, oh, by the way, the properties are gonna go to charity. So there’s been some meaningful, donation along the way when that happens. And I think you can really win this game by being generous. I think you can do really well by doing good. And real estate’s often a perfect asset for that as long as it’s salable, as long as it’s not so unique. If you’re trying to sell the only mushroom farm in your county, that could be a problem. But if you’re talking about, you know, an office building with four tenants, that’s a a mainstream enough asset that you can donate it.

Eric D Brotman [00:46:28]:
And, most charities will be not only able but delighted to take that on and to proceed to sell it and not have a, capital gains tax. Are you seeing much, either multigenerational or intergenerational conversation or much philanthropy around real estate portfolios and the folks that you advise?

Meredith Mears [00:46:49]:
I have seen it. I I think it depends on the base, of of the client base. So, typically, I’m working with, especially in self storage, people who have built their business and their property from the ground up. They might be in their sixties, approaching 70, and they realize, I’m not I don’t wanna sit here anymore and do this all day every day. And my kids, they don’t want to do that either. And so those discussions typically center on, okay. Well, how can I take the proceeds I get and put them into, a set it and forget it type of asset? But that’s you know, the charitable aspect is is not something I’m super well versed in with regard to the clients that I’ve worked with, and I want to learn more about how that can happen from you. So we’ll have that discussion.

Eric D Brotman [00:47:48]:
Yeah. Absolutely.

Meredith Mears [00:47:50]:
But I think that there’s a lot to that because one of the reasons I got into real estate was to give back to my community. I knew that it was a method and a way to be able to do that. I have been able to do that at some level through it, but to have professional advice on how that can work in a grandiose way, maybe at the end of somebody’s real estate life cycle is something I think we could all benefit from.

Eric D Brotman [00:48:21]:
Well, and and because real estate is a cash flow positive, ideally a cash flow positive investment, it does allow for the replacement and the gifts to various trusts and the things that you can do to shelter from income tax, from estate tax, from capital gains tax, and still get a nice deduction and feel like you’ve done some good. So, you know, finding your favorite your favorite charity, whether that’s religious, whether it’s educational, whether it’s medical or health care, whether it’s anybody who who is in a position to have that kind of plan gift. It actually to me, that’s exciting. To me, that creates the greatest win win win of all, where the kids wind up with a meaningful inheritance that’s also liquid enough and protected from creditors and predators. And there’s plenty, whether it’s the person you’re married to or used to be, or whether it’s the person who’s going to be knocking on your door as soon as you’re in the papers for inheriting something or all the things, all the horror stories.

Meredith Mears [00:49:20]:
Business partners. Yeah. I just said to ask them.

Eric D Brotman [00:49:24]:
Creditors and creditors. There will be there there are ways to protect your kids, from themselves. There are ways to protect your your kids from their spouses or their spouses’ families or etcetera. There are ways to get money to grandchildren in a favorable way without them having to take on responsibilities they’re not ready for. And and when you start doing sophisticated planning, I don’t profess to be a real estate expert. I’m not a real estate expert. But I do understand estate planning. And I do understand philanthropy.

Eric D Brotman [00:49:54]:
And I do understand donor intent and legacy and family dynamics and some of the behavioral finance that comes with that. And that, for me, is the fun part. You know, for me, it’s not about which, but you might love that. And they’re like, oh, wait, look at the curb appeal. I don’t care. I mean, you’re like, oh, this building’s this building’s great. Look at what they’ve chosen for the facade. I don’t care.

Eric D Brotman [00:50:15]:
All I know is that the the fun part for me is seeing this bring families together rather than sort of break them apart. And and that that means we can partner on a couple of very cool things if you want to.

Meredith Mears [00:50:26]:
Yeah. I I agree. And I would just add to that. As real estate investors, sometimes our personalities are such that, we’re jumping and taking the risk and just, you know, educating ourselves and trying to connect and, you know, moving forward at lightning speed sometimes. And for us, it’s it’s so important to continually educate ourselves on the right on the right thing. So, yeah, I I wanna talk more.

Eric D Brotman [00:50:57]:
Well, we are nearing the end. Sarah, are there any questions in the chat box? I’m gonna put our our contact info on the screen. At least I think I am going to there we are. Like, I see, you know there we go. Okay. We got it all. Well, you do. I don’t know about me.

Eric D Brotman [00:51:13]:
I I swear you always make me look old and, like, come on. That’s not fair. Alright. So, any questions, Sarah, in the background that that we can answer from anybody or if you haven’t put them in the box, by all means do or if you you don’t want to, to ask it in front of a group, email addresses are here for both myself and for mayor. And we’re happy to to hear from anybody who’s interested. Anything, Sarah? So one of the

Sara Lohse [00:51:38]:
things that was talked about early was, the different types of real estate, like the commercials or the self storage. What about things, like car washes, vending machines, other things like that that might be a bit smaller, of an investment?

Eric D Brotman [00:51:57]:
Interesting question. You wanna tackle that first? I’ll do your first crack at that. Go for it.

Meredith Mears [00:52:03]:
Yeah. So car washes are very lucrative. I’ve had the opportunity to work on I’ve had one that I’ve worked on, but I learned that those things are cash cows. They’re also pretty expensive to maintain, so you have to go into it knowing that, hey. I’m gonna invest this amount of money. I’m gonna have to spend this amount of money per year. And you also have to make sure that the car wash that you’re buying, it should be modernized, right, so that you’re able to collect funds electronically. You have somebody on-site that can deal with the things that could happen as far as the system eating the person’s money, you might have to have a person on-site with those.

Meredith Mears [00:52:47]:
Not all do you have to have that, but, you know, that’s been my experience. So they are, lucrative. However, they do have a good amount of expense associated with them.

Eric D Brotman [00:52:59]:
So so I I have no experience with car washes other than they occasionally eat an antenna off of my car. But, in terms of in terms of other things, I think parking lots, parking lots in areas where there’s a lot of commerce can be extremely, I I would think, lucrative because they’re so inexpensive to maintain. It’s concrete slabs. It can be automated, and it feels like you’re printing money. Am I wrong, or is that a thing?

Meredith Mears [00:53:24]:
You are right. There is little capital expense to develop these things. If you’re buying something buying a piece of land and wanting to develop excuse me. But particularly boat, RV, camper storage, I’ve been able to work on that, and those things are cash cows. You don’t even have to pave the lot in some areas. You can just have gravel, which is an expense to keep up with, but it’s not as expensive as paving a number of acres. But those things are incredibly lucrative. We see a lot of those down in Florida, and along the coast, and we have some of those in the Maryland and Delaware area.

Meredith Mears [00:54:05]:
They’re not formalized businesses. They might be a grass lot somebody’s collecting rents on. There are some that, are formalized, but there’s just not a ton. And a lot of self storage properties will include a boat and RV camper parking component, which spends off a great amount of income too.

Eric D Brotman [00:54:24]:
Wow. Good question. I like that one. Sarah, anything else?

Sara Lohse [00:54:30]:
How do you determine if an investment property is going to be a good one? What percentage are you trying to secure at a minimum per year?

Meredith Mears [00:54:41]:
Oh. A percentage shot too. Yeah. So I’ll I’ll try to answer this one pretty concisely. So any investment property that you’re looking at, you need to get ahold of the leases. You need to do your own due diligence, trust, but verify what people are telling you on the income. You add up those numbers. You get your gross lease amount, and then you look at the expenses and deduct them out.

Meredith Mears [00:55:12]:
And some would say you add property management at 5% of that gross income to the amount. At the end of the day, you’re gonna have a net operating income number. That net operating income number, you’re gonna apply a cap rate to. The cap rate, depending on your market, can be anywhere between seven to 10%, and you wanna make sure that you’re financing, if it’s at 7% interest, the cap rate’s higher so that your spread of income is there. That is something that commercial real estate advisors do day in and day out and can help with. So it’s nothing you need to know and recall, but it’s it’s that’s how it’s typically done.

Eric D Brotman [00:56:04]:
So for from a financial standpoint, that’s basically a perfect answer. I’m gonna take the question in a different direction because the the question was, how do you know if it’s a good property? And the answer is a lot of times you don’t. You you know, maybe it’s got a track record. Maybe it doesn’t. Maybe the community is growing. Maybe it isn’t. Maybe it’s I mean, some of those things are qualitative, not quantitative. I’m in complete agreement, Mara, with your assessment of how to figure out if the math works.

Eric D Brotman [00:56:33]:
And of course, those leases, do they have two years left on them on average or eight? You know, and that that matters too.

Meredith Mears [00:56:38]:
Yeah.

Eric D Brotman [00:56:39]:
Lots of different factors. But in terms of knowing whether a building, whether it’s new construction or whether it’s something existing, whether it’s going to continue to be successful, some of that is also gut. I would think it would be how saturated is this market? Are you buying a multifamily building in an area that has 40 more going up? Because if you do, then the past performance is no indicator of of future results on that, I would think.

Meredith Mears [00:57:05]:
It’s heavily dependent on the asset type. If you have an office building, you’re you’re gonna wanna make sure that if the tenants that are in there, if they want good visibility, that you’re on a main drag, you have to look for that deferred maintenance. That will tell you a lot if if it’s a good property or not, how much you’re gonna have to invest moving forward. If it’s self storage, are you working with someone who knows where your competitors are in a one, three, five, 10 mile radius? You know, you really have to align with with folks that can can advise you on the product type depending on the asset you’re looking

Eric D Brotman [00:57:44]:
at. Sage advice. We are out of time for questions. I wanna give you thirty seconds to do a wrap up. I’ll do the same, and we’ll say goodbye. If your question wasn’t answered or if you wanna get in touch with us, please email addresses under your screen anytime. We’re delighted to to take questions or to have a conversation with you. I’m speaking for mayor when I say we both are willing to do that in in, wearing different hats.

Eric D Brotman [00:58:04]:
So closing remarks, mayor?

Meredith Mears [00:58:07]:
I just wanna say thanks, Eric. This was a lot of fun. I love real estate. I love to talk real estate, and I’m happy to take questions from anyone and connect via email. And, you know, if you’re looking for an adviser who can help you in any of the product types we talked about, the asset types, if you have general questions, maybe you’re not looking for an adviser, you just have some questions that you want answered, I’m more than happy to connect and and try to give those to you or connect you with someone who can. So thanks, Eric. I appreciate it.

Eric D Brotman [00:58:37]:
Oh, man. And thank you for this. I mean, your your your your knowledge, your experience, it’s it’s priceless and, and you’re fun to work with. So, I would say the same thing. If you’re looking at your financials in a way that, that maybe you want a second opinion or you want to take a 50,000 foot view of that, that’s what we do. We would love to be involved. Now our lawyers are happy. We can go back to the email addresses for one last shot.

Eric D Brotman [00:59:02]:
We’re we’re always happy to have those conversations with you, and, and I look forward hopefully to meeting some folks who watch this and maybe have some further questions. So, Mare, thank you. I hope everybody has an amazing day and a nice holiday weekend coming up. And, I know Mare will be talking soon. Thanks.

Meredith Mears [00:59:19]:
Alright. Thanks.

Eric D Brotman [00:59:20]:
Take care all.