E222: Paul Neal Discusses Wealth Building by Owning Business Property

[00:00:00] Ronald Skelton: Hello and welcome to the How2Exit Podcast. Today I'm here with Paul Neal. He is a financial strategist and author of a book. I think it's called Unleash Your Business, Un-Lease Your Business. I keep wanting to say leash, but "Un-Lease" Your Business. And it's unlock wealth autonomy and control by buying your building and firing your landlords. So I think I got it right. Did I get that right?

[00:00:22] Paul Neal: You got it right. You sure did, Ronald.

[00:00:25] Ronald Skelton: Cool. So we've had some people, we were talking about before the show. We've had a lot of people on the show and we talked about different strategies. I've had one other guy who's like, no, you got to keep the real estate. Most of the people that come on here are like, no, you sell the real estate off to fund the transaction.

So I'm really looking forward to this conversation because I want to learn what you know and get the knowledge from you. So, uh, we talked a little bit about the show, but share with the audience, kind of your background and how you ended up in this book, I mean, in the space. And what led you up to wanting to write the book and to get this message out.

[00:00:56] Paul Neal: Yeah, yeah, appreciate it, Ronald. I've been in the real estate finance space. I got into it in 1998. My background's actually engineering and really just because I was good at math and science, but I had more of an interest in finance and wealth creation and business ownership than I did engineering. Although I've built six companies and so there's some and sold one and so there's some engineering involved with that, right?

But I've been fascinated with real estate finance and real estate for quite some time. And I kind of, sort of tangentially got into real estate finance when I was looking to buy my first home. Only because I had a business at that point and it was operating pretty well, generating a nice income and didn't require a whole lot of time.

And I remember going through the home buying experience on the residential side that never bought a home before, never financed one. And, it was just, it was a horrible experience. And I thought, wow, this, this was terrible. And I thought, man, I could do that so much better and so much easier. And so, I learned the business, won't get in a lot of detail there, but ended up launching a business on the residential side in 1998.

And ran that for about 10 years until the global financial meltdown. In the meanwhile, I got very interested in the commercial side because so many of my, my friends and the circle I ran with and so forth were business owners and entrepreneurs. And so, and I had businesses as well. And so, we always talked about, business finance and, and commercial real estate. And, long story short.

I really went head, headfirst into it. About five years ago, I had a little interruption in 2008. Like I said when the world sort of crashed. I sort of moved tangentially and spun up a data extraction company with another friend and we built that over a number of years and it eventually sold it. The last few years of that, I was really hankering to get back into real estate finance.

And again, the commercial just kind of rang my bell and I started to notice that a lot of the people that I knew and associated with in terms of business owners and entrepreneurs, they're all trying to build freedom and wealth and they've kind of fell into two classes. There was the one group that, that rented the space that their businesses were in, that were growing. And these were profitable businesses. These were not startups, you know the first couple year kind of thing. And then the other group that didn't. And the sort of the benefits of one versus the other. Like I had a great friend, Kathy, she was an OBGYN, and she was not an entrepreneur per se, but a, high net worth, high producing professional.

And her, her husband kind of kicked her into this, the idea of buying the building that the practice operator did. So I watched her over a number of years and she was approached by one of these large venture funds that was buying up small medical practices and whatnot. So they bought her out because she was getting close to retirement. She sold, she bought her out for a nice, very nice sum of money.

She negotiated staying with the business, you know, as the OBGYN for 3, 4, 5 years. It's kind of on her own terms before she totally retired. And they had this building that they had purchased and it was completely paid off. They owned the building. And so now, the company that bought her out agreed just to rent the building from her because that was the practice, that's where the patients were coming.

And so she's created this, five figure retirement stream just from the one piece of real estate outside everything else she did. And the fascinating thing to me was that, the 12, 13 years it took her to pay off the building, she was going to pay rent to somebody anyway. Time was going to go by anyway. But the difference was the substantial amount of a retirement plan that was kind of baked in, kind of forced in and now she has options, right?

She could 1031 exchange that. She could do a lot of different, sell the building. Do a lot of different things but, it was that versus the other, I have countless people I know that have had businesses and they want to sell them or they get to this one just the other day. He basically closed his business down for 30 years.

It was a, I guess a lifestyle business, right? He had a good income. But he rented the space for, for 20 some odd years and he was just lamenting on, man, wow, I wish I would have bought the space because now I would have this building is worth a couple million dollars.You know, just a few years later and time goes on.

And so,so I became fascinated with this idea of why don't business owners buy the building, buy the space, all the benefits that are associated with it. And, there's a lot of reasons they don't but the biggest reason that I came to my conclusion was, there's just a lot of ignorance out there and they don't know.

And business owners are heads down doing their thing, right? Trying to grow their business. And so many of them are so busy in the technical aspects. They're not really building a business anyway, they're working in the business, which is a whole another, a whole another topic. But that's kind of a long sort of intro to how I got where I am and why I do what I do and why I wrote the book.

Because I wanted to provide at least an educational platform to, to open the eyes of that business owner to say, Okay, maybe I should consider this. 

[00:06:09] Ronald Skelton: I have so many questions. Let's start with, cause it's just like my head's turning here. I can see where a lot of businesses, it makes a lot of sense, right? I'm thinking things like your automotive repair, your, things where you know, the OGBYN, you know your customer's coming to you, right?

What worries me now is this push for,working from home, remote work and all that. So general office space, I see a huge push right now for finding a higher, I was in real estate for a while too. And it's always, what's the highest and best use of the facility, right? What are you going to do with all this office space now when so many people are working from home?

There's got to, you got to figure out what the now, what the new highest and best use for that facility is going to be. And there are just going to be businesses where it makes sense for the business transaction to happen at the facility. Like I was saying, I say auto repair, but for the last year, for the last four or five years, I've had a mobile mechanic come to my, my business and work on my car.

I've had my, I've had my whole front end redone, everything. Brakes turned and rotors replaced, you name It. A lot of businesses are at risk right now where they've, they've got a lot of real estate that they don't need so much cause half their workers went home and are remote working.

Is there a certain businesses where you see this as more viable than others? Or you think it's still a good idea to, you come up with a higher and better use and rent the office space to somebody else that would need it?

[00:07:30] Paul Neal: Yeah, I mean, yes and yes. I think that, A, it presents a, this change in sort of the workforce distribution. Creates opportunity for people, to maybe buy some space that they, they couldn't buy before. I'm not an advocate of going out and buying sort of plain vanilla office space for a lot of the reasons just mentioned. I'm very careful to sort of qualify what I think is a good, you know a business that's really sort of fit for this type of thing.

One that it has a need for a local presence, right? Okay. So that is the number one thing. And what does that mean? Well, it means that you have to have employees come to your office for some reason. You have customers or patients or clients that have to come to a local location and for the protracted future that will be the case. That could be your veterinarian. Yes, you could have a vet show up at your door.

You could have a mobile vet. Let's be honest, they're not going to take over the world. Mobile vets, right? Somebody's got to board your dog and your cat when you go on your, your Aspen ski trip for three weeks as a business owner, right? Your chiropractors, your dentist, your doctors, your auto mechanics, by and large, home service businesses, right?

You talk about having a pest control company. Well, if it's just you and a truck, then you probably don't need space. But if you have 10 trucks, and employees and you have to have meetings then that, and you have to have other equipment and maybe some inventory you could make a case that you could, you could use minimum space and then and use, you know, just in time delivery and all that. Although that didn't work out so well during COVID either.

You know those types of businesses that have a need for that space is our prime target, right? But you know a business that's going to be, totally, e commerce, you know, you got virtual systems distributed all over the world, you got employees all over the world, all over the country, then that might not be the best use of your capital. But another reason you would buy your space is if you have related businesses that maybe you're the vet and maybe you want to lease out part of your building to the grooming company.

Maybe you don't want to own the grooming company or maybe you do. Maybe you set someone up in that space and they lease that back from you to help pay the freight. So there's a host of reasons why, again, I do believe and agree with you, highest and best use. I'm not really sure what's going to happen to the, you know, the 20 and 30 and 40 story Class A office buildings.

Not really sure what shopping malls are going to turn into, there's a, a litany of opportunities there, right? But I, I just know, the other thing that is happening out there is that, as we get more and more, sort of AI centric, right. Everyone walks around like a little chat robot,that we're human beings and the more things get,sort of impersonal, the more personal experience we want.

You look at like, for instance, the music industry, right.Obviously Apple, completely changed and flip the model from, we're going to tour as a band for exposure and live on Beans and Franks, and hopefully we sell millions of albums. That's where our revenue comes in. To, we're going to sell songs for a buck and Apple's going to get 35 percent of that.

And we're not going to make anything because people only going to get the songs they want. But oh, we're going to go tour. We're going to charge, you know, $400, $500, $1, 000 a ticket because people want that in person experience. And I think people want that, I know personally, I do. I like to go walk downtown and see the people and go to the coffee shops, which, that's another great example of the little micro brewery that those are popping up everywhere.

So there's a lot of reasons, a lot of businesses where it makes sense. If they have a need to be there and can justify it over the long run.

[00:11:10] Ronald Skelton: Yeah, we looked into this space for a while. There's a, there's all kinds of things you can do inside of the commercial real estate space too. A lot of people think, well, I don't want to be in the commercial real estate space. I don't want to be my own landlord, like the new business owners. I had one recently, I guess I don't want to own my building.

I want to go there and run my business and and I don't want to worry about the roof or the heat and air. I was like, you haven't looked at commercial space, have you? You know, you went triple net is? He's like, yeah, I think I'm looking at three buildings right now for them to be in and they're triple net.

I said, read that closely. Cause you're going to take care of everything you just told me you didn't want to do. It's really hard to find commercial space to where the landlord is a landlord, like you're thinking, like he was thinking. Where they take care of everything, right.Most of them are tripling that where you're taking care of all that, about all that and some. 

Which is brilliant side of the thing. There's all kinds of other things like your little strip malls you're talking about, right? If you're the coffee shop and you don't want to own the whole strip mall, there's a thing called tenants in common. You guys can buy it all together and separate your space out and own it as a business and it's used tenants in common, right?

There's this, there's all kinds of cool stuff to do. I liked that, you know, I don't know what they're going to do with the big sky rises and stuff either. Just a lot of people, are they going to turn them into residential? I was like, you understand the building code differences and plumbing and how, what a nightmare it would be to like, to get bathrooms and kitchens and stuff up to code in a commercial office space that was built out that way?

Two different building codes, two different fire suppression codes, two different codes for elevators and occupancy levels and just everything that's about the building. There would have to be changes at the city level, right? There are places in, in Europe and stuff years ago, we had an offer to fly over a couple of investors and myself. The country was paying to help do some of the conversions because they had such an overrun office space.

And they were trying to convert it to living space because they really needed living space. And the expense we were looking at was insane. It was, you know,a hundred plus dollars per square foot to do that conversion. But the,the country was covering part of the cost. 

I was brought in because they thought I was going to just throw money at it and next thing I know, they were trying to schedule a flight for me to go somewhere and I had a kid on the way and I was like, I'm not going. So I didn't end up doing the deal. But, that said, the space is so diverse.

There's so many different things to set a commercial. I could definitely see,if you're a company and you know you're going to be there and you know that you've got room to grow on your, on that facility. Two X, three X, or whatever you think you can grow. Definitely owning the place makes sense.

One thing I can say about the U. S., even when we've had corrections, they don't last for long, right? You look at the most brutal collection, corrections of 2008, 2009, where these places like, I'm in California now, where properties dropped 50 percent overnight. They're above that now, right? You know, just a few short years, short years later.

They're, they've surpassed that, regain that plus some. And there'll probably be another correction. I think everything's kind of in a bubble right now because I look around here and see people paying 1. 5 million for a 32 in our area. And I'm thinking this has got to pop soon, but maybe not.

[00:14:21] Paul Neal: Well, some areas, as you, as you know, is, is real estate is very, is very local, right? And so some areas is, it's both extremes before we get this regression to the meat, to the mean. But like California is definitely one of those very cyclical markets. There are some markets that are much more consistent and stable and as we would say, boring, but predictable, right. 

[00:14:42] Ronald Skelton: I don't know. I own a bunch of real estate and, or I say own. I owned, a lot of it's been, I got one of them closing tomorrow. A lot of it's being refinanced off and I'm being paid off because I owner financed a lot of the houses, but, in Tulsa and that's never had a decline. They've had, they had a big run up recently.

I, for the first time ever, I've had people, I own or finance the house to them that when they come and say, Hey, I want to move. And I had to say, look, you really should put this on the market. Is you've got 30 or 40,000, I know you've only been there for six years, but you got $40, 000 of equity sitting there, right?

That the house ran up. Now I'd love to have that. It's mine if you leave and you don't sell it. If you just deed the house back to me, it's a contract for deed. If you deed it back to me and leave, that's my money. But if you put it on the market, I'll help you sell it. I'll even use my broker. She'll sell it for us.

You get a big check. I get a big check and that's the way it probably should work. I've got one closing tomorrow where they're getting, I'm getting 30 or so, and they're getting, you know, probably 38 to 40, because of that run up. That said, not all markets are like that, right?

So you've got markets that are different. On this commercial space, what are some of the advantages? I know you, you've got the book out there. What are some of the advantages as a business owner? What's the, besides peace of mind that you're on your, you know, your own landlord, what are some of the advantages?

There's gotta be other advantages, either tax or otherwise to owning that property.

[00:16:00] Paul Neal: Yeah, yeah, well starting with peace of mind, I don't normally start with that one. But, peace of mind slash control, right? So you, if you own the building and you mentioned the fact that you could have your diesel truck basically completely renovated right there because you own the business there.

When you own the building, then you don't have to ask permission, right? So for instance, I have a great friend, Steve, who is a commercial builder and he was 50 50 owner in this cabinet company as a side business. Well, he was able to buy out the other partner after a number of years and, but the business had been profitable.

The other guy's been operating it, but Steve is a very smart guy. And he knew that that business could be run much more efficiently. So he hired a guy to come manage and basically take over with this other partner was doing. This guy was like Six Sigma, process guy. And anyway, they, they looked at the current work throughput and flow of operations and how it operated.

And basically they redesignedthe way that the product moved from, you know, start to finish. Bought a piece of new equipment that was, sort of, well, cutting edge and high tech, right? Reorganized the entire, but rebuilt the whole space, basically. Knockin' all the walls, which he could do because he owned the building.

And they were able to keep essentially the same staff they had, and they almost doubled their output on the same input just by retooling and reorganizing the space. And so he didn't have to ask anybody. So if you lease the space, you might be able to do that. You might not be able to do that, right? And if you do that, then you're improving someone else's building, right? Coz you're doing leaseholder improvements.

[00:17:36] Ronald Skelton: Is he looking to retire? I told you I had clients that, I'm joking because, semi joking. I told you I have clients where I help do growth, growth through acquisitions. One of them is a cabinet maker in woodworking rollup that they bought a company in Australia already. We're looking here in the United States.

And so, if he's looking to retire, we should talk afterwards, but, uh, or even advise, right? Cause we're going to be, we're going to revamp to the ones that we're looking at. So.

[00:17:59] Paul Neal: Yeah, yeah, absolutely. I could definitely connect you guys up. He's a, he's a great, great guy. Very, very successful commercial builder. But that's one example. So another example of control, had a client that owned a couple pizza shops and, you know, he was an immigrant here. Been here for like, I don't know 15 years. But these shops have been up and running for about eight or nine years. He took what he's renting both spaces and you know how locally oriented like a pizza shop is right?

I mean, there's one every, you know, in every other corner it seems like. So you can't just pick up and move and drop everything and expect to, A, find a similar space and be to retain your client base. He'd invested about 80, 000 in the kitchen and getting it the way he wanted of a leased building but nonetheless he wanted to make his business profitable. He gets a knock on the door one day and it's the, it's a landlord and he says, hey, Osmond I'm getting, I'm set, I'm gonna sell the building.

What do you do? And fortunately he gave him first right of refusal. And so we were able to work together and help him buy the space. But, that's not always the case. You're at that point, the time has run out, you know, all the grains have dropped through the hourglass, and now it's like, you either can or you can't. And if the, the landlord might have a bigger vision, they, maybe there's a higher and best use, a better use case for that space. To your point, maybe a wall wall wants to come in and, and, or a sheets and mow it down and build a a giant gas station.

And good luck on that. So you've got all timing and control,any changes in things you make. You're improving your own facility versus somebody else's facility. I alluded to it in the, in the beginning, another benefit is, this wasted money that, that we call rent, right?

You, most leases you're going to sign, you're going to have escalations built in year to year to year. And again, it's you're trading your rent for a value. You're getting a value because you have a place to run your business. So that's win win. As long as that arrangement is still a beneficial arrangement to the landlord then, then you're able to stay there. So at least renewal,they don't have to renew your lease, right?

It's a negotiation standpoint. Again, if the market has changed significantly, you could face a large, a larger than expected rent increase, which could affect your, your net bottom line operating profit. Or the landlord could say well, we're not going to renew the lease for whatever reason but the flip side of that is you know, with a, by owning the space every month you're, you're not paying rent.

Yes, you're paying interest and you're paying,taxes and insurance on the building, but you're making it a positive to the equity bank every single month. So it's, it becomes a four savings plan for a lot of professionals and small businesses that start making decent income. A lot of them tend to, to graduate their lifestyle up to their income level, right?

We start making good money, right? Spending money. Okay, so, alright, when you look back, you talked about when you own the paying business that you're spending all the money, you're making good money, spending all the money. Okay. Well, that's what happens a lot of small businesses as well. They want to get a little nicer car. They want to get a little bigger house.

Maybe get a boat. They want to do these things, which is all fine and good. But meanwhile, they're chunking out money at rent where could, a portion of that money could be going into that for savings program which is building equity. They can lock that, they can lock that payment in as well and not be faced with rent escalations every single month is another advantage.

You know, that the, the property value appreciation, we had this conversation, you can't really bet on appreciation year to year to year, but generally speaking, and depending on the market, over time, the property is going to go up in value, right? So 5, 10, 15 years, it's probably going to be worth a lot more than it is today.

If you bought it well. Again, no guarantee there, but a pretty high probability on that. Whereas if you rent, not so much the case. You know, there are some tax advantages to it as well from just the way you would structure it. A lot of our, a lot of people will set up a real estate holding company to buy the real estate and then their operating company will pay rent to their real estate holding company.

So you can literally pay a market rent and you can build in rent escalations to yourself. And meanwhile you have a fixed mortgage and so that's, you know, basically profit coming into your holding company. And you're depreciating against that passive income is one way to do it. You have opportunities there on the tax side for potentially 1031 exchange downstream if you wanted to grow into another building, a larger building. My gosh if you wanted to, as your equity grows, you could do, I heard, I think I heard you say this too, you could do a cash out refinance of the building because now you have equity and now you're basically taking money tax free out of the building without paying any kind of a capital gain on that. To redeploy, maybe use it to buy a competitor.

I've seen people do that. So, wow, I could keep going on and on. How about the opportunity to leverage the space? not just for that, but for, to bring in other tenants. Like, I have a client, we just closed on a 12, 000 square foot warehouse. Where he's ground up flex warehouse space, which is in high demand in the part of Virginia he's at. And he's taking 8, 000 feet for his business, and he's leasing out the other four. Already leased, and he hasn't even broken ground yet.

And the lease rent from, from those two tenants is going to almost pay the freight on the entire mortgage. So he's going to have almost no mortgage. These guys are paying down for him and oh by the way, as his business grows because he expects to grow over the next five to ten years, he can just non renew their leases and expand it in their space.

He's got a built in growth plan right there in the building. So there's a few right there that are, or benefits and opportunities,that,that we see and for reasons why people that, that want to do it. We talk about selling a business, right? You know, well, you talk about sale leaseback.

Well, it's hard to, it's hard to lease back the building if you don't own it, right? I mean, in the sale. The opportunities to create, create a financing for buyers with, with there's real estate as part of the transaction versus just the business and blue sky, it creates more opportunity. And a lot of times I can bring more buyers to the table. Than if you're just trying to finance blue sky.

So there's a lot of, there's a lot of benefits and potential benefits that can be realized from it. If it makes sense, it's not for a startup, right? It's not for someone who doesn't have a, a solid history of profit in a,in a forecast of future growth, right? They gotta get their steel legs first in the business, before it makes sense.

But, you know, if you're into a five year lease and you're coming up on your fifth year and, you ought to be pretty stable and profitable at that point. If you don't, then, definitely don't look at owning yet.

[00:24:43] Ronald Skelton: You know, I've seen one over the one company falter because the landlord did something different. We had a, a gentleman who owned a historic, burger joint of all things right across the street from one of our residential places. And, he, they were there since the fifties. I think his, he bought it from some gentlemen that started it, but they didn't buy the land.

They had a landlord, a family owned trust or something had it. Then, oh, about five, six years ago, the parent company of like Taco Bell, the franchise and stuff, they offered them three and a half million dollars for the spot, right? The landlords. So they, uh, bulldoze down the house. I mean, they basically had him move.

Now he's got to find a new location for his burger joint where everybody from there, they went there, their grandparents went there, their great grandparents went there. Now he's got to know that it moves somewhere down the street and you show up to buy a burger and it's been bulldozed down and there's a Taco Bell, Kentucky Fried Chicken, something else combo, in one, in the same spot, like the three little drive thrus. And it was a beautiful spot right off the highway. He had a highway frontage for his signs, you know, everything grew up around it. There are some businesses where if your location is critical to your business, you probably ought to own the location. And a lot of businesses you think of that, you don't think are location critical, maybe.

Like I, I had a, a slight partnership, a minority stake in a little martial arts studio, back when I was much thinner. And with, teach martial arts. And we needed to move the facility just by probably 600 yards around the block. And we lost 22 percent of the, the students just from the move, right? People are so used to going there and it was a tough school anyway.

Like we beat each other up pretty good in there. So they, like you, I think they would just use it as an excuse or whatever. We lost, we lost a lot of students because, and, the other one had street footage. So a lot of people got to see it every time when they drove by. So say they missed a week or two, but they drove by it every way, every day on the way home. It was now, it's out sight, out of mind. 

[00:26:44] Paul Neal: Oh, absolutely. Absolutely. I had a guy, well, I don't know to finish your thought, but just to dovetail on that, a guy that owned an HVAC company. He had been buying up little HVACs and kind of building this larger one. And, he just bought a piece of land with a building on five acres right on the main highway.

It's one of these, it's not like a freeway, it's a highway, but, you know, most of the traffic in the town goes right in front of there. And so now he's got all of his trucks lined up there. He saves, I think he was paying four or five thousand a month on a billboard. He can take that down because now he's got it right there on his property. And he's got room to expand and build as much space as he could ever want or need. And, just by positioning stuff right there in that location, a better location than he was before combine the two.

[00:27:31] Ronald Skelton: There's another one where, I just looked at one here. There's another scenario where it's really critical that you be the owner of your business, right? So this company was a, a, they had the license to manufacture one form of trailers. So, uh, they could make custom trailers for, when I say trailers, utility trailers, farm trailers, horse trailers, dump bed trailers, that type of stuff.

And when I say manufacturer, they could custom make it so they can, if you want a triple axle, they could put that. If you needed certain weighted axles, they could build that, but they had about four or five acres of a, of a lot. And then they had their building where they built these things out. And it was up for sale.

The price was good. The revenue was good. But when I went to talk to, you know,I'm a farm boy by trade so it appealed to me. I've owned quite a few of those trailers in my other businesses, real estate and stuff. I thought this would be a cool one. It's not, you know, it's got two sales reps and a couple of maintenance guys.

And, a couple of guys working in the custom shop and it, low maintenance. Money was good until I talked to the landlord. Landlord, it was a buddy of his. Been leasing him land for 25, 30 years and the condos around him, this is California, Sonoma Valley, one country, about 45 miles north of me.

The landlords, the condos around him had been offering him insane amounts of money for his five acres because they built up around him to the tune of millions. And he's like, look, I know the guy's trying to retire and sell his business, but you're going to have to move it because I would need some insane amount for rent.

To justify, letting it stay there when all these people are like this opportunities eventually go away. And, um, it kind of stuck out too, cause it was like this five acres of trailers and, it was, I was in a painted building, put a privacy fence around their scrap yard cause they had axles and stuff piled up and make it look nicer anyway.

But,when you walk into a place like that, I could really give it, you know, a coat of paint and a six foot privacy fence would give this place a lot more appeal. That said, there's no way he's going to ever sell that business. It's not sellable because it has to move. And multi generations around here, all these vineyards and farms, around here where I live, it's either a city, a cattle farm or a vineyard, right?

There's no in between like, it's just, if they can grow vines on it, there's wine growing or white wine grapes. If they can't, it's cattle. If it's too hilly or too, whatever, it's a cattle farm or dairy farm. Other than that, it's got houses built on it. That said,that business is not sellable, right? That, he's got a business now where if he moves it, he's going to lose such large percentage of his customers. Like, if you think about all the, the old farms and stuff like that, their granddad bought, this thing's been around for a long time. He bought it from somebody else. Their granddad bought trailers from that particular spot. They know, when they get them repaired, people, they jump in the car and they drive to that spot.

They don't even call ahead. They just drive up there and go, Hey, can you fix this today? Oh, tomorrow I'll just drop it off and pick it up. That's the name of his game and his business. They're going to show up one day and it's gone. And there's gonna be a sign that says, for a week or two, there might be a sign that says we moved four blocks over and then the sign's going to be gone. 

And I'll be honest with you, I had multiple trailers and worked with companies that had multiple. I had two repair guys. I can't tell you what the name of it, and they've repaired everything we touched, but I don't remember the name of their business. I just know exactly. We took them over. I tell my guys, go over to so and so street, drop it off, talk to John.

[00:30:40] Paul Neal: He'll get it done. And he'll,he'll have it done a day or two, right? You know, we knew exactly where it would go. And, like I just had a guy on the show here who bought three locations in Dallas doing trailers. And he said, location is critical. If somebody had to up his location, right, and move, you move him to different spots, he'd be in trouble. Yeah, so it's a, so, so it's not only an offensive move, but it's a defensive move, right? To your point there that you're protecting, you're protecting your asset, right? Cause the business is an asset that you, maybe, maybe it's a lifestyle business. But maybe you want to sell it one day, or maybe you want to pass it to, the next generation to your, to your kids.

And if, if you have real estate, you know, there are ways to do that too, with some tax, tax advantage,stepping up values and things like that. But,the reality is that it, it's, it's not just, I think in terms of opportunity costs, right? And so what, what opportunities am I losing by not doing it?

You don't have to do it of course, right? You don't have to do anything. But, there's a lot of people out there that will gladly lease you their space, so you can pay for their building and build their wealth and their future, right? Until they decide they want to put condos on the on the land, right?

That really accelerates their, their use of, of a wealth creation. But I mean opportunity cost you think about what, what you're giving up. Every month that you make that payment and you know that you really, you really you're doubling. You go from one business to two because now you have a real estate business that's independent of your operating business, right?

And what i've seen a lot Ronald with some of our clients, a lot of the professionals and a lot of the service companies will go out. And they'll, they'll buy not just a building, but they'll buy multiple buildings where they're operating. Like, over the, in, in the part of Virginia that, that we're headquartered in, down towards the beach, there's like, it's a major cities there.

And so,there's one dentist that, that every couple of years will open a new location in a different city. They're only 20 minutes from each other, but they build this beautiful 10, 000 square foot building and they hire a young dentist out of college at a dental school. Put them up in there to run it.

And give them a decent salary, but, but the, the overall, the dentist who owns the business and the practice is really building his real estate empire and letting somebody else, it's almost like the McDonald's thing, right? Where McDonald's went into business of the, in the real estate, they're really in the real estate business, but they sell hamburgers to pay the freight.

Same thing. There I have friends that just sold a couple of car washes and made big, big bucks. Their whole mission was to find real estate in a high value, high traffic area. And we're going to put a car wash there so we can pay the freight on the, on the land. While the property appreciates in value. And these are two kids that started out of college, 15 years ago that just sold for eight figures and have done really well. And they've traded up selling these really small ones in the beginning and using the 1031 exchange to larger. And so, and they kept doing that and were able to get a number of locations. And so that multi location sort of strategy you talk about business acquisitions.

That's another way to do it, right? I can plant my flag and you know, if you could expand and open a new location every two to three years and own the real estate. And then chiropractors are doing that, right? i'm gonna hire a chiropractor out of school and I'm gonna mentor them and let them run the office. And then, if they ever leave and decide they want to go, I'll offer them a little piece of the business, right?

So hopefully they'll hang around. And if not, I'll hire another young one out of college and let him run. Meanwhile, they're paying for my real estate instead of having one building that's now, appreciating in value and the debts being, being serviced and paid off. I've got two of them or three of them or four of them or five of them.

And a lot of times the financing terms for owner user space are as much more favorable than just straight up investment space. When it comes to leverage and down payment, that sort of. 

[00:34:39] Ronald Skelton: It's interesting because you got both sides, right? You got the McDonald's model that you were talking about, who, is buying the real estate and you know, the business pays down the real estate and they've, they own as much real estate as they do anything else. And then you got like the CVS or, where I'm from originally Oklahoma, and they have some down in Texas now, the quit trip model, right?

So CVS quit trip and those guys, they'll go out and build a facility. And then they sell that facility off and lease it back from them for a guaranteed return on investment to investors. So if you are a real estate investor, you can, either fund the building of a new gas station, quit trip, what these things are, make a gas stations or, a CVS and the, the lease terms are really favorable, but CVS looks at it as a way to redeploy the capital faster, expand faster and grow faster.

So there's both sides of this coin is to, and they've got, their contracts are pretty solid. You're not going to kick them out. They may do a 15 year lease from now, but 15 years, they have their first right of refusal to renew or buy it or to renew the lease or buy it back.

So if you try, if you try to sell it on the open market, they have first right or refusal, but there's another,they have a, there's a clause that you can put inside of things, drag or tag. So if you try, if you negotiate with the lease and it's unfavorable, they can drag you to sell and buy it back at open market rates.

So they can force, force you to sell it back to them I think.At least I was told that I didn't get to look at the lease. I didn't look, I know somebody invested in one and he said, yeah, at the end of this, if we don't agree on terms, they can afford, they can force an appraisal and pay me and buy this, buy the real estate back from me at current market value.

[00:36:11] Paul Neal: Yeah, that's interesting. And that is an interesting model. In fact, ironically, the, the car wash guys I was talking about, they used some of the proceeds from the sale. They 1031'd some of that into a couple of these buildings where they built one for a large national mattress company. It's going to be, you know, very solid lease, right?

And they did a couple of them. And so I think that's a valid strategy as well. Most, uh, smaller business people though aren't really able to pull that model off, you know?And so you have to look at the capital investment there versus, investing in what you're already spending. And then if you can leverage, cause most of the, most of the people, our clients aren't building, 10, 20, 50, a hundred units, in a fairly short period of time. Although some, some candidates have do.

But, there's different ways to skin the cat for sure.

[00:37:01] Ronald Skelton: So, uh, let's talk about the kind of the, what does it look like your, how do they approach their landlord? What's that conversation? You know, you've been in this for five years and you're thinking, okay, I probably need to own this building.

At the five year mark, you're still, you've got your market. If you think about the business life cycle, right. And how many businesses fail within the first 10 years. The number starts to taper down after 10. And you're really, if you're out, you're on solid footing if you made it past the 10 year market and you're profitable. But at five years, you still could be feeling out your product market fit. You can, you're still probably in a growth cycle and stuff like that.

If you need to move that could be a very serious strategic decision to whether or not it's viable. If you're a burger joint, probably not. If you're a dentist office, maybe. If you can really communicate well with your clients and maybe you can find a place that has better street fundage and some other advantages.

But, I think it's such a strategic move, it could make or break you at the, at early stage. Let's say it's a good deal. You think, okay, it's a, this is a great location. I need to buy this location. How do you approach that landlord? What does that initial conversation look like? 

[00:38:12] Paul Neal: Yeah, I mean, you know, there's no boilerplate answer there. A lot of it depends on what kind of relationship that you have with the landlord. If you've had a, a very collegial relationship the whole time, then, it's one of those things that you approach with a perspective of, first of all, you don't approach them 30 days from lease renewal, okay?

Very bad timing. You want to start the conversations, you know, 12 months out, maybe even 18 months out. Because maybe this isn't your first five year lease or you're not your first three year lease or something. So you want to approach from a standpoint of, sort of information gathering up front.

You're like, hey, Mr. Landlord, Mrs. Landlord,our business is doing well. This has been a great opportunity for us. We love this location. We're hoping that you would, agree with that. We're at a point in our business where we're considering the, the opportunity, the idea of maybe buying a building or building our own space or doing something like that.

I know we've got lease renewal potentially in the next year or so. Have you ever considered selling the building that we're in? And just kind of letting them, kind of feel that question. To kind of see where they are because you never know. Could be that they, they might be looking to liquidate their investment because they've got other goals that maybe they want to sort of punch out and move to Florida.

Or somewhere else and they don't want to have to be responsible for a lease. Maybe they've got other needs or maybe they want to deploy the capital in some other way or maybe not, right? You just really don't know, but the first step is to have that conversationbecause, you might be surprised.

The other thing about it is I tell people all the time, there's about five ways that you can buy a building. And, first is cash, which we generally don't recommend. But the second is seller financing. So, you know, they may be willing to sell and they might even be willing to do the financing. Which in many cases would be the easiest, cheapest, simplest way to, to go about it.

So it's, it's really just floating the trial balloon in a respectful manner to kind of see where they're coming from. And,and even they may at that point legitimately say, no, we've not really considered it. We don't intend to sell it, but you're so far out in the lease process that you've planted a seed with them. And you might could then revisit it in a month or two and say hey, Have you thought any more about it? Or you may not need to revisit it.

They might be thinking about it or have, you know, kicking around the idea since you've, you've sort of broached the idea because as a real estate owner it's one thing to, to sell a property.And you, you think about just sold a house. And we moved and it's like, you think about all you got to do to, you know, get the place ready. And you got to clean up the attic and then you got to do all these little maintenance things. And you got to hire an agent and you know all this money and time and hassle.

But it's a whole another issue if the current tenant says hey, I'm basically wanting to buy this or write a check. Which means I don't have any hassle. I don't have any real estate agent. I don't have any of that. You know, it's very easy for them. So, it's a great conversation starter and an easy way to approach the idea and the topic and plant a seed anyway.

And then, now you have a sense of where they are. But I think the big takeaway here is be thinking about it 12, 18 months out before that lease comes up because then you have lots of time to consider all the options and be in and make an intelligent decision.I get people all the time calls up, you know, they're 30 to 60 days out and they want to do a deal and i'm like, okay. You're not a good place to be, right?

You're, now you're under the gun. You're going to make decisions that probably aren't the best decisions for you or your business. And so, take some time, have some time. Approach it before it's too, too late and pressure's involved.

I get that. And you're saying, I mean, what's the time to close a commercial loan? It's gotta be 60, 90 days anyway. Yeah, 60 to 90 days you know

[00:42:23] Ronald Skelton: Yeah, so you gotta have that. And that's after you've come up with agreed to terms on the, with the landlord. And even if you do the owner of finance, unless you're a seasoned real estate investor, like yourself or myself, you're going to need somebody else to draw a lot of that paperwork.

You're still probably going to do a little bit of due diligence, maybe a little building inspection and electrical and stuff to make sure you're not buying something that you're going to have to put a lot of money into you didn't expect. So there's some time and some work that has to be done before you do that.

I'm buying a commercial building. I kind of want, I want to code inspect it. I want a commercial building inspector to come out and say that your fire suppression system. Some of these things are outrageously expensive, right? My fire suppression systems up to code. So is my heat and air system.

And so is other stuff. A lot of this stuff in some cities and towns kicks inwhen the change of ownership changes hands. The change of ownership means you're gonna have the fire marshal come by and visit the place or the,the city code and, you know, code inspectors gonna come by and check out the place.

It's kind of one of their things that triggers a, you know, a visit. 

[00:43:22] Paul Neal: Yeah. No, you're absolutely right. You want it, you want to do all due diligence for it. You know, the, the lenders, we do it because we want to protect all parties, but if there's no lender involved, you definitely make sure you're protected. Including getting an appraisal. You want to make sure you're not overpaying for a property that, you know, just because the, the seller says, well, it's, I'll sell it to you for X. What's the justification for that, right?

[00:43:43] Ronald Skelton: I heard a good one was that building I was telling you about my business partner. I helped negotiate purchasing the building. I own a small piece of it. Everything looked good. They had rent 1 of the, they had 3. It was only 3, 700, less than 4, 000 square feet.

And so it was a small commercial building. And, had big conference area and some classrooms and some small offices. And had three different zones for AC. One of them was brand new and the other two are a little aged and they were running good when we bought it. Within probably 12 to 18 months of doing the owner finance and structure and the payments and everything.

The other two, the other, it hit 110 in Oklahoma and the old units couldn't keep up with the new units. And our heat and air guy said just the offset for them being different like that, cause, cause strain on some of the other ones. And like the new unit, we ended up having to have the new unit repaired and both the other ones replaced to the tune of, I say, we, that was my business partner had to do it.

It was, you know, 10,000, $12,000 worth of units. And you can't not do it because it was a coworking space. We had other tenants there. So it's not like we could just go and say, it'll be hot and we'll be there. We run the real estate investment group out of it. And, um, the training center out of it. I had my pest control company that would, office like our, that's where we kept our filing at two different locations.

So you said earlier, like you can move a pest control company, or you may be able to do that remotely if you had trucks. There, anything that stores chemicals has to have a registered place where the chemicals are stored in a certain way. They're locked up. There's can be inspected and stuff. So that facility was on a commercial farm we owned.

And that had commercial. So we just stored the chemicals there. Cause we already have stuff for the cattle and everything else. My business partner has a cattle operation, so we already had, that was already inspected. So we put all the chemicals in a lock box in his big barn and that was part of our facility and all the files and keep, all the file keeping was in our office.

That said,if, had we done, you know, a full due diligence on the building, we probably would've seen that those two other units were a little aged and might be able to negotiate the price down on that. I think he still got a good deal.

[00:45:47] Paul Neal: Yeah. Well, yeah. So sure. You definitely want to do due diligence. That's part of the process and that can be negotiated. And generally is and, you know, it's going to be reflected in the terms of the pricing or whatnot. But, you know, again, you're not necessarily married to any one particular space or one particular building.

One of the things that a lot of, a lot of our folks do is they, they built something new. And, it's expensive to build something new, but you can build it just the way you want it and you can build for future expansion. And you're gonna, therefore you'll mitigate a lot of those, you know, unforeseen costsup front.

But, I think the takeaway is there is a timeline in the commercial, you know, a lot of business owners have never bought commercial. They bought two or three homes or four homes, or maybe some single family investments. And the residential real estate finance is a lot different than commercial, right?

It's much more sort of boilerplate, plain vanilla, you got Danny Freddie out there mostly. Making all the rules and everyone is kind of operating within that, that world. So everyone has pretty much the same rule set, but you know, commercial, not necessarily the case. I mean, you have, you have conventional bank lending.

You have, lots of private money and sources that are going to be all over the map from insurance companies to family offices you mentioned. To just private investors. And then the SBA has a couple of programs, the 7A and the 504, which are guarantee programs. And they sort, they, they're more like Fannie Freddie, where they control the rules and everything, but they also create a lot of leverage for business owners.

Done right with the right investor, the right funder. Can allow some pretty crazy things like, you know, if you're buying real estate, if you go to the bank, they're going to want 20, 25 percent down. But if you're owner user and you go the SBA route with the right investors and the business is profitable, you can get in with 0 percent down in a lot of cases.

So you're really leveraging, cause that's a big, that's a big, like stop for a lot of people. They go talk to the local banker that's got all their deposits and, is their best buddy, right? And they think maybe 20 percent down on a million dollar building or two million dollar building and they're like, that's a lot of money to take out of my operating account and put into bricks and mortar. 

And I agree it's a lot. And generally we don't recommend it. There are exceptions, but, we'd rather see you put, keep the money in the operating account and dry powder and use it for growing your business than stick it in the bricks.So that's a myth that a lot of people sort of run into, but it's very different than residential. And there's so many variables that come into play. It is 60 to 90 days once you sort of identify that you negotiate the property and the terms, and then we move into it. Anda lot of the financial pieces are handled upfront.

And so we like to work with clients to sort of uncover early and often any issues and address all that. Cause if you do all that and get the financial house and order up front, then it can be shorter. It can be 60 days versus 60 to 90, and a much more stress free experience. Cause I tell people it's like, well, in, in commercial and even residential today, but definitely in commercial, they're going to find out about it in the process, right? When you go to finance.

[00:48:55] Ronald Skelton: So the only commercial building I looked at was business that I was looking to to acquire before I even got into this space. And the commercial loan actually startled me a little bit because I'm so used to residential. And it was amortized over, I want to say I had a choice between amortizing the loan over 15 or 20 years.

I didn't think they had a 30 year option. But they had a 5 year balloon. So even though it was amateur, amortized over a longer period, my payments were, they, I had to requalify for the loan every five years. So basically their balloon, like, and I said, well, what does that mean? It was like, we have to come back here and requalify for the loan.

Show us your business financials and move forward. And the other I was like, that's horrible. I go to another bank and they said, well, you got to requalify every three years. They had a three year like, you know, and I'm like, what is this? I guess that's normal inside of some of these commercial, especially for a first time business loan, buying guy.

That's very, very common. We did still look across one that loaned us the money on that one building. at a 30 year amortized, like it was just like a residential mortgage, but it was like 3, 700 square, like I said, it was a smaller one. But, only one I'd seen where, you know, we reviewed the mortgage and that was what it was.

[00:50:05] Paul Neal: Yeah. Yeah. Typically you're, that's right. When you go to a bank and your conventional financing is going to be a three to five to seven year term with a balloon and then it's amortized over 15 20 years. Most typically what we see is 25 year AMS, sometimes 30. And we do have some fixed rates that'll go out 25 years.

I mean, it's definitely, there are some more residential like opportunities out there. You just have to know what you're looking for and it has to make sense for the particular borrower. But you're probably not going to get that when you walk into the local bank because they don't want they don't want their money out there that far.

They're not pretty risk averse at the end of the day, right? As we all know, and they talk about how much they love small business, but that's just a marketing line. They love small businesses deposits is what they want. 

[00:50:52] Ronald Skelton: We just hit new heights on the, you know, on the stock exchange. But you know, inflation is running wild. So I can see why the bank just like, they want long term gains with short term bets, right? So, uh, I can get that. Uh, how does somebody reach out to you if they're,if they're in your market, if they just, I don't know if you do advising outside of your, your licensed broker, brokered area, but, um,

[00:51:15] Paul Neal: Yeah, we,we do. We work nationally. Our main focus, Ronald, is we, again, we'll let you get in front of the, of a transaction. So when someone's 6 to 12, 18 months out and they're considering this idea, that's when we like to talk to somebody. Because our main business is really understanding their business, evaluating and educating and then really advising on options because we, we can, we discuss the market. Because we have funding sources whether we fund it or we have other funding sources nationally. We can show someone sort of the, the pluses and minuses of each of whether conventional or private or SBA and the different SBA programs, because they all have pros and cons.

Like, do you want to, do you want to put your house on the line? Do you not want to put your house on the line? Okay. Let's talk about that. Let's talk about how we can mitigate that and get around that. And so that's really our value. So, um, you know, after education, then we will facilitate if they want us to in getting, getting the funding in place.

But to reach out and find us, the simplest way, we've got a website, ownyourbuildingnow. com. OwnYourBuildingNow. com and then they can pick up a free copy of the book, Unlease Your Business. I'll ship it out. Just pay for, for shipping and printing. In addition to that, on that site, I have an assessment.

It's like a two minute assessment, 20 questions that someone, basically go through and I'll ask questions regarding sort of where they are business wise, revenue, cash flow and the whole thing is to come, come back and give you a result in four categories about are you sort of buyer ready. So it's a pretty, it's really it's very neat. We had somebody put that together and build it, it offers some pretty interesting insights. And then lastly they can schedule a time of what we call an ownership strategy call, which basically is a 20 minute call where we just kind of chat and find out if it's something that potentially could make sense or not for their situation.

And that's on the site there as well. So that's, that's what we do.

[00:53:12] Ronald Skelton: Awesome. Awesome. So if somebody listened to the show and they only walk away with two or three things, what would you want them to, the takeaways to be?

[00:53:19] Paul Neal: My takeaway would be is if you have a business that's local and has a need for a local presence and you've got a pretty decent runway ahead of you, you're not punching out in the next two, three, four years, you need to at least consider the option or the opportunity of buying some kind of space to run your business in.

Whether you do it or not is, is irrelevant, but you need to, you need to at least consider the opportunity and explore it because it could be transformational 10, 15, 20 years downstream for you and your business. And the other takeaway would be that if you, if there's something you're interested in, don't wait until the last minute.

This is not, you know, I see a house in the market. I want to go buy it and put an offer in to be in next week. It's a process. And you want to make an intelligent decision. And so,get advice from people that know and whether you have them or we have them, the attorney, the real estate broker, the, the appraiser. Important professionals that can give you the information you need to make an intelligent decision.

[00:54:18] Ronald Skelton: Awesome. Awesome. All right. Well, I think we covered the topic fairly well. We'll call that a show.

[00:54:23] Paul Neal: Awesome. Well, I enjoyed it. I appreciate you having me on.

[00:54:26] Ronald Skelton: Thank you. And hang out for just a minute when this is done.