Day 9. How to Become a Programmatic Investor

What is a programmatic investor? (Tip of the hat to Derrick Lobo at Rock Advisers where I first heard the term - Programmatic)

It's a term I use to describe an investor who is crystal clear on what he/she invests in.  

You can communicate to the marketplace specifically what type of commercial properties you want to invest in and, as important - what you're not looking for.

This clarity allows the marketplace to focus and deliver properties more in line with what you own.

If tell the marketplace: "I'll look at everything". Or, bring me any value add deal. Chances are, you're not getting the first call.

First- nothing unique about wanting a value add property.

But worse, the deals you will see- you won't know how good (or bad) they are without spending hours/days on. Even seasoned investor have a hard time staying on top of all the latest trends and metrics.

Specialists on the other had- can look at property in about 3 mins and tell you if it's a deal they will pursue.

Trying to be a jack of all trades is probably the biggest mistake I see new (and seasoned) investors making..

Take the time to really map out what they want to invest in.

• What city.
• What property
• What size?
• What returns?
• How much leverage
• Type of tenants.

Wasting your time looking at the wrong deals will burn you out.

Wasting time of CRE professionals- will burn them out and you'll end up seeing the deals no else wants.

My goal is for you is to see the best deals- first. So you have the unfair advantage needed to capitalize on.

In my 12 years of investing in CRE- the common theme I've seen is the most successful investors specialize. And, they can communicate what they do to others in 15-20 seconds.

Ex: We only buy retail properties over 20,000 sq.ft in major markets of 50,000+ in Western Canada with growing populations.

There's nothing magical about that.

It could be tighter- you might only buy service based retail. Or, grocery anchored retail.

But, you get the picture. Your pitch communicates clearly to brokers and sellers what you invest in.

You may put yourself in a box- where you'll miss out on deals.

That's ok.

There is no shortage of deals.

Plus, once you understand the players in CRE- you can adapt your pitch to the type of broker you're speaking to (advanced strategy).  

THE GOAL:

When a broker hears your pitch- they immediately know you're a professional.  

The broker will give you far more trust and faith because you're communicating the way a pro does. See the broker's biggest worry is that 1) you won't close on the deal if you put it under contract (wasting his time) or, 2) that you'll mess around at closing and come in for a drop close or retrade (asking for a big price reduction).

The agent wants to get paid and the seller wants the deal closed on the terms and time you agreed to.

If you're viewed as an expert- who's been down this road, you get taken seriously.

(Side note- many new investors who have not taken time or practiced their Programmatic Pitch- tell me they have a hard time getting commercial agents to call them back. This is one of the key reasons- if you sound like a newbie- you won't get return calls).

Before we get into it how you become a programmatic investor, we should discuss the 3 Core Concepts of Investing in Commercial Real Estate:

1. Buy on cash flow today. Not for future appreciation. (forced appreciation is different).

2. When possible- secure long term debt (provided you're holding the property)

3. Keep Sufficient Cash Reserves - in CRE, unpredictable things can happen: vacancies, long timelines, cost overruns. You don't want to run out of cash.

Let's drill down on finding specific properties and locations in the city you chose yesterday (hopefully the city you live in).

As a sample, here is my investing strategy.

This is right out of my Investing Roadmap:

"I focus on value add cash flowing commercial properties apartments between $5M - $15M". And, I'm currently looking for infill land assemblies to build 30-60 MF units.

This is my North Star so to speak.

I'm looking for the right properties with the right things wrong.

• I want vacancy.  
• I want deferred maintenance.  
• I want properties I can add value to
• I want properties that have been neglected and forgotten about by their owner.
• In areas where the demand is growing.

As you start to think about investing in CRE, I want you scanning your market everytime you drive through it.  

You're looking for properties with signs for lease or properties that have been of mismanaged. Problem properties.

You fix the problem, push the NOI, and crank up the cash flow. You can either cash flow it, or refinance and go into you next property.

The game of CRE investing is not complex. The hardest part is finding the right properties.  (For some- the hardest part is raising the money- but, that's actually much easier with the right deal)

Some markets it will be much easier.

Story: I had a client who in the first 3 weeks of working with me, found a great value add property. One he could double the apartment rents and 3x the retail rents (as the leases role).

Property was listed on MLS. And in a good size city (500k).

1. He was clear on what to look for.
2. Understood the market he was investing in
3. Went to where the puck is going- IE- transit and new infrastructure.

If the deal works and he's able to execute- this 1 property could replace his earned income.  

Now, I explained this might take him 2 years to execute. It's not like fixing a home in 90 days.

CRE takes longer. Leases are generally longer terms. And, when something is new, expect it to take 2x as long as you think.  

Steps to becoming a Programmatic Buyer:

Where do you start looking?

Recall yesterday's lesson: you're looking for Demand.

There are a few ways you can verify demand.

1. The Complicated route (which is what the professionals will do):

Go to city websites and look for where new infrastructure is going

• where is the city expanding?
• where are new jobs moving?
• look at the data on new DP's and BP's
• talk to locals and find out where people want to live
• find household income and spending per capita
• look at the demographics of the area
• look at the population growth on cities website for various communities. Is it increasing? Faster than surrounding areas

For industrial- this is less important. There are other factors to consider for industrial, access to the labor pool, access to freeways and airport are important.

Doing this homework would be a good idea.  

But, I'm also pragmatic and know many new investors will not take the time to go deep into this research.

The shortcut is in step 2 (caveat- I'd start at #2 first to narrow down your search and then go back to step 1).

2. "Follow the smart Money".

Understand that some of the commercial real estate developers and investors in the market are billion dollar companies with massive payroll. It's their jobs to look for the best locations in a city and invest.

You can piggyback off them.

Grab a map and start to circle in red, the places you notice sophisticated investors going.

• Where are they investing?
• What are they building or buying?

This is where driving your city and starting to look for signs of new development or revitalization come into play.

When you see big companies making bets on new developments- you can start to narrow in your search for 'good locations'.

It's not a hard and fast rule but a good place to start. 

Big development companies do make mistakes- but less than avg investors.

So, if you're new and looking at Multifamily, Industrial or Retail and don't know where to start by focusing on the big boys in the market.

HOMEWORK:

Step 1. Get a map of your city.  

I'd focus on A and B locations (maybe C- Blue Collar). Stay out of D or war zones.  

Step 2. Circle all the major Retail or Industrial parks in your city. 

Step 3. Look for trends on your map: 

If you're into multifamily- start looking for new developments, schools, transit lines and amenities (like grocery stores).

Retail is at high traffic intersections.

- Consumer income (per capita, avg HH income, median HH income)

- Population (size?)

- How much they spend (also known as consumer expenditures % -younger families generally spend more)

- high visibility and traffic counts.

Industrial is about access:

- Access to large labor pools (public transportation)

- Freeways /Airports for ease of delivery of supplies

- Major Distribution Hub - drive time for most truckers is 11 hours. Distance they can reach in 11 hours for same day delivery? 

- Neighbors- like to stay away from dirty users

Multifamily- these days, pretty much follow rapid transit.  

Obviously Schools/ amenities/ close to the jobs (CBD's central business districts).

Step 4. Get in your car and drive the area's you think are going to keep growing. 

If you've been in a city for a while, you should have a good understanding or growing/popular locations.

Step 5. Make a note of new developments. 

If there are lease signs - take pictures and make audio recordings of the locations.

When I come across new sites like this- I'll call the leasing agent or developer and ask them what they are building? When will it be ready?

How much are they asking for rents.

If they ask why I want to know- I might say I have a tenant (when I was a broker). I might say, I'm the tenant and looking for space.

You want to become the local expert.  

The fastest way to do this is through conversations.

Your first conversations might be awkward. That's ok.  

When I was knew, I'd plan my conversations for 20 mins before picking up the phone.  

Now, I can call a sign and roll with it. That's thousands of calls and practice.

Keep at it and eventually you'll sound natural.

We will get into what to say to brokers and owners in week 4- but, just know there is nothing holding you back forms starting.

Q2. Comment below. How are you finding this homework? Difficult? Timing consuming? Helpful?