Commercial Lending & Real Estate Investment

What a beautiful day to drive though. Getting in a warm car and the sun was shining and you had no idea that it was negative two on my drive over so. So they made us move all our cars this morning to yes and then the plow didn't even actually plow things but here and right there but I wasn't like prepared I was like oh I'll go get Starbucks hang out for like an hour and then come back and they still weren't done and so then I had to park my car and walk back to my door and it was like negative 10 in the nominee and I was not dressed to be walking in negative 10 weather no and like I don't like to be that person but I might send it to my landlord and be like just FYI they didn't actually do it all of the spots that's why you rent right yeah we should we should have a segment called Cooper's Adventures and then every episode we kick it off with Cooper's I you know what I did want to start a whole podcast just about things that make me upset we have a guest in the house today with us and we should not poor Scott's like what did I get myself into he's like I'm regretting all these decisions you know your adventures at your apartment that could be more fun than investment real estate to some people people invest in real estate sometimes to have tenants right like yeah it all could tie together there's a segue see Scott do you want to introduce yourself and what your role is at Royal Credit Union absolutely Scott Jones commercial lender I office out of the Hudson location but cover a wider area than that into the Twin Cities in western Wisconsin and I've been with Royal for 15 years what do you do as a commercial lender well you were talking about landlords earlier we work with a lot of landlords investment real estate people so commercial real estate can take on many different forms but a major aspect for the commercial lenders here at Royal Credit Union is working with investment real estate professionals and helping them invest in various types of real estate and yeah real estate in the investment world can take on many forms can be that apartment that you talked about it can be a retail center industrial all kinds of things so what does your day-to-day look like well there is a you know aspect of new business which is working with clients to acquire a property and figuring out the proper structure and the numbers and how much they need and what's going to work for them and Royal Credit Union then there's also the portfolio management aspect of it so helping our existing clients just with the day-to-day things that come up with owning investment real estate it's not a set it and forget it type scenario where home loan lending often it's you know you get your home loan it's a 30-year fixed rate it's good that is not the case with investment real estate loans yeah how does that usually work well for starters again as I said home loan the differences between some difference between home loans and commercial real estate loans is you're not getting that 30-year fixed rate it is going to be a five-year fixed rate typically at the most and then it adjusts after that other differences that people forget about when you know getting into investment real estate is you know we're not just looking at you we're also looking at the business so whereas a home loan you're just underwriting the person the individual but when you become a real estate investor we have to look at that person as well as the business and the business plan and how is that property going to perform is it helpful so you're looking you know the big picture right like not just that individual one so is it more helpful when you are maybe buying out somebody you know in a business and then kind of bringing in like where it's already established versus you know starting something new even if you have all the numbers and background and have worked on hey I know this could be successful is there a difference there that you guys like to see or yeah most of the investment real estate transactions that we help our clients with it is existing properties it is not ground up construction typically that is an aspect to it but again the majority is existing real estate that trades a lot in the market it's you know for real estate professionals it's no different than the stock market to them they're investing in something for a period of time and then they sell that and then they invest in something else and so they're always moving around these properties and you know we attempt to help these people in these transactions I see how it can be a very long-term relationship that you can have with you know the people that you work with if they're always trading and trying to get something new maybe you're building a portfolio yeah most people that get into it just don't do one and done they it's addiction to a lot of people and you know for most it's a very healthy addiction because it's profitable that is the goal that they want to make cash flow off these properties and then also be able to sell them for an increased value when they are done with that property and want to move on to something else so any advice to a investment real estate person looking to get into it would be you know you start small and you grow into you know the bigger properties and you know bigger portfolios keep it simple at first so what is starting small like I'm brand new I don't own anything what and you can't tell me specifically but like what's an example of what I would start with I'm like Scott I want to do this I don't know what's going on let's figure it out residential rental is going to be the easiest thing to grasp for most people it is similar to what they know as most people have rented in their life at some point and you know start with a duplex figure out the ropes there and learn that and then from there maybe go to a fourplex or an eightplex and you know you grow your residential portfolio and then if you're really getting adventurous after you've learned the ropes on residential rental you can jump into commercial rental and that is a completely different animal it is rents are not based off of you know a set monthly amount they're based off the square footage on an annual basis and we could you know probably have a whole podcast just on commercial real estate in the intricacies of there and I could throw out a bunch of acronyms like triple net leases and things like that that we would bore people with but it is a completely different animal than residential rental but there's a money to be made there too for investment professionals when somebody is getting into that first first rental what are some of the things that come up that they don't expect or can't foresee before they get into it that you that you keep hearing about yeah they they see other investment people and they want to just right away get to where those people are and so again that's why I say start small start with that smaller rental property a duplex that's going to be more manageable other challenges or things that they don't expect is again the loan that banks and credit unions are going to offer are not the same as a home loan they are different you need to come with at least 20 percent down sometimes 25 30 percent down and that's like a non-negotiable like you have to have that as a requirement for the loan 20 is minimum yes that's non-negotiable you know but again depending on the property and the cash flow you know a lot of the analysis comes down to is this property going to cash flow so it could take more than 20 percent down and in this market with higher rates and the cost of property it typically is taken 25 30 percent down so yeah that's stick or shock to a lot of people to understand that and then you know the the rate that is not fixed for the full term of the loan it does adjust like I said typically after five years so those are some of the unique aspects for the just to make sure you know we're really clear for people so 20 percent down is required right with like a home loan let's say we're getting into the residential you know there's options to do no down payment or there's assistance is there anything like that in the commercial lending world or is it you have to have that cash investment to be able to you know put into it up front but yeah yeah we get down into the weeds a little bit here on this but SBA there are some options with that but it's really not for the investment real estate professional it's more for the manufacturer that is going to build a property for their manufacturing operation a little bit of gray area there but I would say for the most part 20 percent is the minimum unless you're an owner occupied property not that there's only one way to do it but do you see a lot of commercial lenders starting like you said small building equity and then using that equity to build their portfolio exactly so again that first property you know does it have to all be cash for that 20 percent no perhaps you own a house and there's equity there and so you could tap into the equity there to help with that down payment and then once you start building your portfolio of course the goal and typically what happens is the property values go up and so then you can tap into the equity of your rental portfolio to help with future acquisitions there are ways to get a deal done without all cash into it is that something in your role that you know if I'm that new person and I'm coming in or even if I you know have a little bit of a portfolio I'm like okay hey I really I think that this is it like I want this property I want to try this new avenue work with your you know customer or a member on that like absolutely yeah there's a lot of education in it and asking them questions see what they understand about it and then if they're missing some pieces to it you know explaining to them the differences of different investment properties and guiding them to come up with cash flow scenarios we call it a cash flow performa on a property you know we don't want to they're becoming a business owner we don't want to do the work for them being a business owner does take a lot of work and effort and it's you know a lot of people think it's just freedom from having a eight to five job well no you there's a lot more responsibilities actually sometimes that comes with owning a business so we'll certainly guide them in directions we have great resources to point them in but at the end of the day they do need to put some of that legwork in to come up with a viable business plan that makes sense for them and for us because you know we're a partner in this with them they oftentimes think they can they think they can get 100 financing and that's just again not realistic in commercial real estate we will partner as I said up to 80 percent in it but they need to come to the table with a little skin in the game too and you know once people get going it works very well for them. Do you have any requirements as far as like do the borrowers need to have any app or attendance lined up ahead of time like let's say somebody wants to buy like a four unit storefront for a commercial property and if it's empty do they need to like have leads on businesses that come in and rent those storefronts from them in order to get the yeah I mean the simple answer is yes but not all members are created equal so let's someone say someone is going to buy that vacant storefront four unit property and they already have a very large real estate portfolio lots of other cash flow coming in from other avenues they have good liquidity we'll probably take that leap with them and give them a loan on that property knowing that they have great experience in this and they have something to fall back on if they don't get those tenants in right away. I would say for the majority of people it's like we want to see that this thing is going to cash flow quickly you know what is the plan yes have some plan to get this thing to positive cash flow right away. For somebody like me who likes to lock in at rates how do how does somebody get in their mind that in five years they don't really they can't see into the future so it could rates could change quite a bit how do how does somebody prepare for that or how do they go about that? Yeah we're experiencing that right now so how to prepare for that well you would hopefully be able to increase your rents over that period of time those five years and so you can absorb the shock of increased rate also when we underwrite loans we don't underwrite them to a break-even cash flow at any given situation so we always want the properties produce a little extra for that cushion and also as investor you want to make money so that is the goal and so that cushion can help absorb rate increases as well. It's a challenge that we're seeing right now and so we work with our members in lots of different ways to help absorb that increased debt load when the rates go up. Maybe that leads into how are how how is this credit union how our credit union is different from other financial institutions in this aspect of commercial lending? Most banks will only provide a five-year loan that maybe it perhaps is amortized over 20-25 years but the loan term ends after that initial five years and you need to essentially reapply and to get that loan extended for the next period of time so that's called the balloon loan. Royal with the majority of our loans we provide the full term loan to 20-25 sometimes even 30 years but we again our rate is only locked for the five years and we adjust it afterwards but there's a lot of benefits to that that you have that security knowing that we're still here with you we're not going to charge you extra costs when that loan balloons in five years that's one of the major aspects that royal credit union provides and differentiates with a lot of banks. If at the end of that balloon loan if they were at a different financial what happens if like we don't think you're eligible anymore we don't want to relend to that like does that happen and then they have to figure out you know how to pay back a portion of that or like just share a little bit about why it's such a benefit that we do it the way we do. That does happen and you know we see it a lot with big banks they have a desire for a certain type of real estate or a certain type of asset to put on their books at different points and so perhaps five years ago they really liked industrial property well five years later we have too much industrial property and they push those loans out when they balloon and so that member would have to find a way to well pay that bank off and typically they'll be refinancing that property with another financial institution that does have an appetite for that property but it creates a lot of challenges for that borrower who just had a relationship with that financial and thought that they were long-term going to be there and all of a sudden nope we have to go start a new relationship with another financial. We did see that happen a lot during great recession a lot of banks were kicking loans out when they came due at their balloon term so people that went through that do see the advantage of a full-term loan. Again just with an adjustable rate every five years. So is there a lot of opportunity right now you know with rates are increasing so that do you see a lot of people getting kicked out of their loans currently? We see people having to right size loans and what that means is pay a loan down by a certain amount so it once again cash flows at these higher rates. Again there many options when these current scenarios are happening loan rate changes and the rates are higher you know how do you solve that? Again you can pay the loan down you can re-amortize the loan so if you started at 25 years now you're at 20 you go back out to 25 perhaps. You got to get creative make it work for the financial and for the investor. Re-amortize is that the same as refinance or is that different? It's the same same thing essentially but you're just kicking the loan back out to the original amortization so instead of staying on your trajectory you would go back out to 25 years. Okay eventually when they come back down what is the option to refinance for these types of loans? Is it similar to mortgage refinancing? Is it a whole different ball game? It is slightly different there's typically pre-payment penalties in commercial real estate and so every financial does those differently but it is costly for the financial just to get refinanced every time rates go down by 10 basis points. So that's not really something that happens a whole lot for these? It's not rates would have to go down quite a bit you know for that to happen but it does happen and again when rates were low during the pandemic we worked with a lot of members to capture those low rates and minimize those pre-payment penalties as much as possible. And are those for like before five years like that would be with a pre-payment? Okay correct yeah once you reach your five years I mean you're free to do what you want. Okay so if you're at like year four and you're like rates just drop so much like maybe just hold on or you know talk to your lender? Yes because at a certain point it's I mean typically those pre-payment penalties become less as you reach that five-year mark. All right how about you? How did you get into commercial lending? Is it kind of the same process for a lot of commercial lenders? Speak to how I got into it. I went to college for a business finance degree and you know I was flipping burgers at the local bar and grill in River Falls at that time and I was thinking to myself this is not really preparing me for a career in business finance so you know in small town River Falls what would prepare you? Well the local bank. From there just continued within different departments in the banking world after college and yeah I mean 20 some years later here I am. But jumping right into commercial lending that would not be a path for I would say anyone. I would say you could start start in consumer lending you can start in credit analyst roles those are good avenues to get into commercial lending. Commercial lending means different things to different people as well so we've talked a lot about the commercial real estate lending aspect of it but there's also lending to the operating businesses the businesses out there that are making our widgets and so that's completely different animal as well and then at Royal Credit Union we have business bankers which service our smaller businesses and you know there's a little gray area in between what our business bankers do and our commercial lenders do but in general our business bankers are handling loans five hundred thousand dollars and less and working with operating businesses. Very cool so you really do kind of do it all at Royal when it comes to that business aspect of things. Oh yeah we definitely have experts and products and services to serve all business needs absolutely. So are you yourself a real estate investor or are you just like you like to give the loans out to other people that want to do it? You don't have to answer that. No that's that's a fair question and I have had real estate investments you know when you do this job long enough and you see the potential in real estate investment it gets intriguing and a number of years ago I invested in commercial real estate and I thought I knew a lot about commercial real estate from my lending career. You learn a lot more when you actually become the investor I can say that for sure and they work hard you know these real estate professionals it's not easy they have a lot of time, effort, money into it and you know you're dealing with calls at all times of the day and night. They certainly they serve a great need and service in our communities that sometimes isn't realized you know we just see the actual businesses and all these are you know storefronts but there is a landlord behind those businesses oftentimes. So I don't know if you'll be able to speak to this but something I keep hearing a bunch on just some of the financial podcasts I listen to are all about like REITs REITs like they're like a bucket of real estate portfolios that you can invest in kind of like a stock right and the way they pose them they're like well you don't have to do any of that actual you know tenant stuff you don't have to take care of that but you get the benefit of being in commercial real estate what like is there a benefit to either you know sides of things if you want to go that route it's obviously I would say still quite different than actually owning the property but that's something people ask about or yeah it comes up occasionally and so a real estate investment trust a REIT is what you're referring to and what a person is doing there when they invest in one of those is they're a passive investor they don't have any responsibilities of managing that property they're not going to get a phone call that you know I have a leaky faucet they're just putting their money into a pool of money that a lot of people have invested into and then there's a managing team that invests in properties as they see fit and also manage those properties yeah it is a way to get into real estate that is hands-off the downside to that is it's not very exciting I mean you're just it's almost like investing in a stock you know it's like oh here you go and you know the company's going to do what they need to with it and there's lots of fees taken out of it so of course these manager management companies that manage the REIT and the property they need to get paid so they're taking their piece of the pie in that we do see the lines blur there a little bit as real estate investing has become more sophisticated and we see some of these REIT like structures coming to Royal for financing and there's always we see the managing member of that REIT coming to us to finance properties so it is it's becoming sophisticated yeah fascinating cool how do you see commercial lending changing in the next five years well as I alluded to there it is becoming you know more sophisticated you know different structures to buy investment real estate and a REIT is one of those a syndication is another which is very much like a REIT just some you know smaller aspect um oh my gosh I could throw so many acronyms out there tick loans tenant in common those becoming more prevalent you know there's just going to be unique ways to get into the game and there's different programs out there that governments have that can help people whether it's with financing the property or down payment but those are just kind of come into light recently and so in your career have you seen those kind of circular programs or structures come up and things you know people have a different way of doing it and then that kind of fades away and another one takes its place or has it is this like a time that that's happening where those things are REITs are becoming a thing I think it's a those are around to stay these syndications and REITs those are going to be here stay other things that come and go are the various structures that financials are offered you know in good times let's be honest the financials are going to be a little more looser with the money and you know stretch structure and term you know offer interest only periods to make things work um longer amortizations and then when things look a little more gloomy they're gonna tighten that up and say no we're not gonna offer that anymore and so those always ebb and flow depending on market outlooks do you have like a that's just a fun question do you have a story from all your years in commercial lending where you know someone came in they said I'm gonna purchase this this is the investment real estate property but like it was just a weird scenario to be using it for where you're like okay I get that it could work out but you're like I don't know like is there any do you have anything like that where you're just like I am so happy it worked out but you know you weren't expecting it or it was just a really like unique or strange idea does that not really happen in your world I think back early to my career and this wasn't necessarily real estate but you know one of the more interesting ones was small business this gentleman had in his head that lobster vending machines were a good idea and he saw this someplace and he was going to start a lobster vending machine business and I just could not wrap my head around this of how that worked but if you can think of the little claw that goes up and grabs the stuffed animal that your kids play it was the same concept for lobsters like live live lobsters okay so it's like that lobster tank that used to be in the so was there a chance not to get a lobster yeah oh wow what you oftentimes would not get a lobster but I think it was let's five bucks uh per try or something like that and but if you won the lobster then what do you do with the lobster like that was my thought I'm like well that's dangerous having a lobster you know roaming around this bar and grill and what if someone doesn't take it out it would you know be rotting in this I don't know it was because it would come out of shoot I don't it seemed very odd to me it's definitely unique yeah you have to really kind of I mean I guess I don't really know like the profitability of a lobster but I would think for five dollars you have to kind of hope that they miss a decent amount of time to like make that a profitable solution I guess I don't know I don't know if there was a problem that needed a solution there in the first place but yes a profitable idea yeah there's been lots of interesting business concepts that you know I'm sure if you walked around all of us commercial lenders we could fill a book with interesting stories and but hats off to our business owners real estate investors and all that I mean they take on a lot of risks and they're true entrepreneurs and really they they do a lot that you know most people don't realize how much effort it takes and so yeah it's fun to fun to see it work out and I would say most of the time you know the vast majority of time we're seeing the successes of these businesses unconventional ideas I mean they're the ones that change the world so if you have a lobster vending machine idea it could be the next thing you never know you just need a plan to go along with it right I have not seen them out and about this was not either this was now 20 years ago so maybe it's still bubbling up and it's gonna hit the market by storm okay I don't think there's donut vending machines out there there's like cupcake and cake and I mean everything now probably a donut do you think somewhere in the world we need one if not we should get on that really quick that can be money donuts first real estate adventure yes in Hudson we have a little meat market and they have a you know meat vending machine outside their shop for when they're closed so they have brats and beef sticks and that's actually so smart can you imagine like the 4th of July and you're out of hot dogs like being able to drive down there genius have you ever gotten meat out of that vending machine I have not but I know people that have yes royals field of membership covers Minnesota Wisconsin but if we have a member who maybe lives down in Florida or Texas for like three months out of the year and they want to purchase a commercial property down there are we able to lend to them or does the property have to be within royals field of membership property has to be in royals field of membership now we can lend to people that don't live in this region as long as the property is going to be in our region because if you think about it our charter says you need to live work or do business in our region so owning a rental property would qualify as doing business in this region so people you don't want to winter up here yeah I mean I don't know why they would well you know encouraging tourism but winter sports yeah so they could you know have a cabin up here that they rent out in the summer because they want to be in Florida I don't think in any scenario that is a thing but you get the idea all right Scott any other tips and tricks like a lightning fast you know starting small is there any other things that business owners can kind of get in their mind to help them out you don't have a solid business plan idea and the numbers to back it up it's no surprise that in the financial world you know your banker is going to rely on data and so sell us on the concept of whatever is going to be whether that's commercial real estate investing or you know owning a coffee shop tell us why it's going to work and have the data to back that up and as lenders we have goals to make loans so believe it believe me we want to do loans within our communities we want to help you out we just need to see a viable business plan and if we see that we're going to partner with you um are there any quick resources website somewhere that you would say hey if you're trying to figure out the business plan and trying to get that data to bring to me this is where you could go and start like where would you recommend them there's universities here in western wisconsin that have the small business development center sbdc so they are a great resource to help with the business plan you can start with your banker too you can our first answer may not be yes but do these steps to help us get to a yes and that's fine oftentimes what happens is we give homework to these entrepreneurs of what they need to do in order for us to give a yes and that is our goal and that really just speaks to the fact that we are partnering with business members it's a partnership it's not just a transaction and i think that's a real differentiator i had one last question about what donut represents the commercial lending process what don't it represents the commercial lending process i think an apple fritter would be a good choice stop pushing apple fritters the real question is scott what's your take on apple fritters i like apple fritters yes i do uh but i'm gonna say a sprinkle donut because and you just have all that variation when it comes to commercial lending you guys learned a little bit about that today but we could have gone on a lot longer about all the unique aspects of commercial lending uh so yeah the sprinkle donut would represent the commercial lending world perfect i like it yeah makes a lot of sense no i learned a lot though i feel you know a lot of good information so thank you for joining us cooper steve if people like money donuts the podcast what should they do they should follow our instagram page they should subscribe on youtube and they should follow us on all of the apps that offer podcasts so leave us a review if they want rcu.org podcast yep can also go there and listen to all previous episodes well thanks again for joining yes thank you guys it was fun