Ep44 Investing in Industrial and Flex Spaces: A VC's Strategic Side Hustle with Michael Perrin

[00:00:00] If you're out there and you love real estate, investing full-time in it isn't required. Go be a doctor, go be a dentist, go be an accountant, go do something that you know is going to generate a lot of money. And then in your nights and weekends, you can still have fun and make money investing in real estate.

[00:00:16] From cornfields to high rises, office to industrial, houses to hotels, and every other asset class in real estate, we cover the people, the projects, and the profit. Welcome to the Investing in Iowa Show.

[00:00:30] This show is for go-doers, action takers, and business owners. It's for people like you who are sick of Uncle Sam taking a huge bite of your apple. If you're looking to get ahead of what's taking place in Iowa, learn who is doing what and how you can get in on the action. You're in the right place.

[00:00:47] Hosted by Neil Timmins, an Iowa native who has been involved in over $300 million in real estate right here in Iowa. Recording in studio from West Des Moines.

[00:00:58] Here's your host, Neil Timmins.

[00:01:01] I've got Michael Perrin here on the show. Michael, welcome.

[00:01:04] Thank you very much, Neil. Good to see you.

[00:01:06] Good to see you.

[00:01:06] And here you are.

[00:01:07] Yes, likewise. All right. So say for the audience's sake, who are you? Where are you from? What do you do?

[00:01:13] Awesome. So Michael Perrin, originally from Dallas, Texas, moved to Des Moines now about six years ago following my wife, who is from the area, actually originally immigrated from Vietnam when she was seven.

[00:01:30] Yeah, I've been here since she was seven.

[00:01:31] So my day job is I am with Next Level Ventures. We are a technology venture capital company with about $500 million under management based here in Des Moines, primarily in fintech. So investing on behalf of credit unions into financial technologies.

[00:01:51] However, my wife, who is a physician and I, we also personally invest extensively in commercial real estate here in town.

[00:01:58] So before I was in technology, before graduate business school, I was in commercial real estate private equity at a firm in Dallas called Crow Holdings Capital Partners, where we invested in multifamily industrial office, all asset classes.

[00:02:14] Kind of caught the real estate bug at a fairly young age and in my 20s, but also realized that I didn't necessarily love it at the highest institutional level.

[00:02:25] I saw a lot of opportunity in real estate level.

[00:02:28] I saw a lot of opportunity in real estate, but I saw a lot of opportunity in real estate, but also realized that I was in commercial real estate.

[00:02:49] Or a mortgage ETF or a mortgage ETF or any sort of ETF, but it's a lot harder to go and find things on the ground that you really want to own that you see long-term value in.

[00:02:59] We now own a little bit of a little bit of commercial space here in Des Moines, mostly industrial, but then also retail flex.

[00:03:08] I own a building in Ankeny on Industry Drive in the Albon Industrial Park.

[00:03:13] I own a 76,000 foot building over on Guthrie Avenue on the east side at industrial flex.

[00:03:20] And then we own Westport Center on Hickman, the green roof building right across the street from CarMax.

[00:03:27] And I've done very well with them, always looking for more, but that $3 to $7 million asset, cash flowing, multi-tenant, decent cap rate.

[00:03:37] It doesn't need to be a complete deal, but I wanted to get decent value and be below replacement costs generally.

[00:03:43] But that's my general parameters that I'm sure I missed a lot, but what else do you got, Neil?

[00:03:48] Tell me, you mentioned that the highest level, the institutional stuff wasn't the most attractive for you and you like the local things.

[00:03:56] Is that because the local components are more fragmented, therefore thus producing greater opportunity for outsized risk return?

[00:04:06] Absolutely.

[00:04:07] So when you're dealing in institutional level type assets, those are generally widely marketed to tenant or owners across the country via brokers, word of mouth sources.

[00:04:19] Like everyone and their brother tends to know about them.

[00:04:21] And as a result, pricing gets decreased.

[00:04:24] But then also at the institutional level, when you have so much money chasing after assets, that it's dumb money.

[00:04:33] And a lot of these asset managers are incentivized based on assets under management, not necessarily returns.

[00:04:39] And by the way, I see this in the technology side too, based on the type of investing we do there.

[00:04:44] As opposed to more local assets, I'd say assets 10 million or lower, you tend to not hit the dashboards of the big institutional players.

[00:04:55] But then above a million or so, you're in a sweet spot in between the institutional players and the mom and pops, where your everyday doctor or lawyer isn't going to go buy a $5 to $10 million building.

[00:05:06] With the same token, institutional asset manager can't spend their time on a $5 million deal.

[00:05:12] So you're able to get a little bit of a better value, but then also have some of the benefits of higher quality tenants, better lenders, et cetera.

[00:05:21] Multi-tenant.

[00:05:23] You and I have talked about this offline multiple times.

[00:05:25] I have an affinity towards single tenant.

[00:05:27] You've got an affinity towards multi-tenant.

[00:05:29] What draws you there?

[00:05:31] Risk diversification, in a word.

[00:05:33] Another aspect of our real estate investing is that we outsource all of our day-to-day management, given that my wife and I both have very involved day jobs.

[00:05:43] So we entrust the Cushman team here in Des Moines to manage our assets when they have the job.

[00:05:49] But basically what that enables me to do is I can outsource a lot of that kind of day-to-day work, which allows me and my wife to focus on our day jobs.

[00:05:59] But then also when it comes to the real estate, we can focus on the larger strategic issues, some of the bigger leasing issues.

[00:06:06] So as a result, a lot of investors, I think, don't do multi-tenant because they perceive it to be more work.

[00:06:13] And it certainly is.

[00:06:14] However, in the case of assets where they're triple net leases anyway, yes, you are not making that 3% to 4% of your rent is just profit to you for doing the work.

[00:06:27] But the economy is a scale I can gain by using someone else to manage it, pay them their 4%, and I can continue investing in software businesses.

[00:06:38] My wife can keep putting people to sleep as an anesthesiologist.

[00:06:41] It just makes mathematical sense.

[00:06:43] Would you say that largely the work you do after you've acquired an asset is fill the role of asset manager?

[00:06:51] To some degree, yeah.

[00:06:53] I want to position the asset to make the most for me long-term.

[00:06:57] So, for example, on our Guthrie building, we did some pretty extensive renovation, put on a new roof, new siding, painted, better landscaping, et cetera, which I think really drove rents a lot.

[00:07:09] So yes, asset manager for sure.

[00:07:11] There's a difference between asset manager and property manager.

[00:07:14] I guess what I'm asking is, do you feel like you fill that role?

[00:07:16] That is not an outsourced role.

[00:07:18] The team in which you've hired focuses on property management, not so much, or maybe not at all, the asset management side.

[00:07:25] Yeah.

[00:07:26] I certainly, given that I'm not in the day-to-day, I certainly consult with them and say, okay, I'm happy to spend money here to improve the property.

[00:07:34] What would you advise?

[00:07:36] Sure.

[00:07:36] Yep.

[00:07:36] But the end decision is mine, given that I don't have any other partners in my deals.

[00:07:41] My wife just gives me the thumbs up and said, go.

[00:07:43] When you put debt on these things, given your extensive background in the VC world, how are you viewing debt?

[00:07:50] Is there something unique about the loans or the loan structure in which you're placing on these things?

[00:07:54] To some degree, I think one thing I personally stay away from are full personal guarantees.

[00:08:00] If you think of my personal balance sheet or anyone's personal balance sheet, you have your assets and your liabilities.

[00:08:07] What you don't also normally see are what's called your contingent liabilities.

[00:08:12] As in, okay, yes, you may owe debt on a building, but how much of that is actually potentially yours to have to pay back?

[00:08:21] And so I try to minimize those contingent liabilities.

[00:08:25] Because in the case of a bad scenario, I still want to be able to feed my family and send my kids to college.

[00:08:31] Always thinking about limited guarantees when and if I can.

[00:08:35] Other than that, I'm happy with fairly high leverage.

[00:08:39] I generally only buy mostly fully leased or I'd say buildings I could get debt against.

[00:08:45] I'm not going to go, I don't do full speculative empty buildings, things of that nature.

[00:08:50] However, the best lenders I find are almost always community institutions.

[00:08:56] The big nationals are much harder to deal with and you don't have those personal relationships.

[00:09:00] And by the way, I used to be a commercial lender.

[00:09:02] Oh, know how that works.

[00:09:04] Yeah.

[00:09:04] They have their spots, but maybe not just for the product level on which you're taking down.

[00:09:08] Most of the buildings which you've acquired, do they have a value-add component of some nature?

[00:09:13] The building one in Ankeny was my first.

[00:09:16] Not much value-add there.

[00:09:18] That was my first personal direct real estate investment.

[00:09:21] 2014 build, fully leased.

[00:09:24] There was one tenant that was month-to-month that we needed to switch out, but that was just

[00:09:28] the leasing two on Guthrie.

[00:09:30] Definitely value-add.

[00:09:32] I was not in great shape when I bought it.

[00:09:34] Now it looks substantially better.

[00:09:36] And I'm now getting rents on a net basis nearly double what I was when I bought it.

[00:09:41] Yeah.

[00:09:42] Westport, I'd say, was somewhat of the middle.

[00:09:44] It needed...

[00:09:45] It had a little bit of new paint.

[00:09:47] A couple of tenants need to be leaned on again.

[00:09:49] Leaned a little bit on.

[00:09:50] I'd say taking it from a DIY kind of management like it was before with the prior owner, more

[00:09:57] to professional.

[00:09:58] Yes, I'm an individual owner, but by using Cushman as a property manager, actually, that

[00:10:04] adds a level of professionalism that a lot of other investors can't for wall to offer

[00:10:09] or choose not to.

[00:10:10] There's value that when maintenance comes by, they come by in a truck with a clean-looking

[00:10:16] truck with a corporate logo on it.

[00:10:17] People are in uniforms.

[00:10:19] It adds a level of professionalism to it that is actually that 4% of management I pay.

[00:10:24] I get a lot of that back in terms of perception of my properties in the market.

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[00:10:52] a tenant email or responding to a maintenance call.

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[00:11:09] If you look forward to 2025, what are you most excited about?

[00:11:12] Debt rates coming down.

[00:11:14] Hopefully finding some more assets.

[00:11:16] I only do a deal or two a year, or excuse me, a deal every year or two.

[00:11:21] So on average, every 18 months or so.

[00:11:23] My last one was in March of 23, so I'm starting to itch a little bit.

[00:11:27] So I'm excited to see hopefully some more things come back into range.

[00:11:31] Because honestly, at 7% debt rate with amortization, you're not cash flowing really at all.

[00:11:38] If someone wants to sell it a 7 to 8 cap.

[00:11:41] At least seeing debt come into the, gosh, low 6s, high 5s, that's going to be really helpful

[00:11:47] because those people that are holding out for 7, 7.5 cap, some of that could come into range.

[00:11:52] But also, the three properties I do own, I'm always open to 1031 opportunities.

[00:11:57] As those debt rates come down, I may start to get some potential buyers that are more aggressive,

[00:12:02] which then could allow me to then flip into another property and not feel like I've got

[00:12:06] such terrific debt.

[00:12:07] So I bought my property in 2020, 2022, and 2023.

[00:12:11] Yeah.

[00:12:12] Obviously, you have some pretty cheap debt, at least on the first two.

[00:12:15] Right.

[00:12:15] And you don't want to just 1031 into a bigger property just to have a bigger property if

[00:12:20] you're making less money because your debt's more expensive.

[00:12:22] So I'm eagerly awaiting some of that parity to come back.

[00:12:25] It would be great for us to see that reversion or at least a delta between the borrowing rate

[00:12:31] and where prevailing cap rates are.

[00:12:33] Either debt rates ran up so high, but the cap rates did not move in step-lock fashion.

[00:12:39] They didn't.

[00:12:40] And honestly, as a seller of a building, potential seller of a building, of someone who doesn't

[00:12:44] need to sell, I was staying firm on what I wanted too.

[00:12:47] So I can't blame the sellers that were staying firm.

[00:12:50] So I can't blame someone for not doing something that I wouldn't do either.

[00:12:54] Sure.

[00:12:54] Yep.

[00:12:55] So much of it has to do with the velocity of deal flow, doesn't it?

[00:12:59] I think you, me, everybody, we're all seller at any day of the week at the right number

[00:13:03] so long as we've got an opportunity to put the capital to play someplace else.

[00:13:08] And when the answer is, yeah, you got nothing else to buy.

[00:13:11] The answer is no.

[00:13:12] I love it when brokers come to me.

[00:13:14] This is a message to all the enterprising brokers out there that have a buyer for one

[00:13:18] of my properties.

[00:13:19] Please bring me something else to buy when you bring me a buyer or an opportunity to

[00:13:24] flip into what my buildings were.

[00:13:26] You probably have some idea based on when I bought it, approximately how much equity I

[00:13:31] might have, and approximately what kind of asset I want to go into next.

[00:13:35] Please come up with an idea just because nothing's more frustrating than telling someone, yeah,

[00:13:39] it's for sale if you got something else for me, but it needs to be something else I can

[00:13:43] make more money on.

[00:13:44] So show me that doing this deal, I will make more money.

[00:13:47] And then you've got my attention.

[00:13:49] Yeah, you're right.

[00:13:50] You said it earlier, and I've seen that a number of times where somebody will 1031 out

[00:13:54] of something because they want to get more square feet.

[00:13:57] They want a bigger building.

[00:13:58] They lever up into something else.

[00:14:00] A lot of times they can get the deal done, but they don't make any more money doing this.

[00:14:04] In fact, they sign up for more debt and likely a bigger, potentially larger headache.

[00:14:09] Right.

[00:14:09] You got to do that analysis.

[00:14:10] Okay.

[00:14:11] What is actually the way I view my profit, given that I'm an individual investor is I take

[00:14:16] my NOI minus the interest component of my debt.

[00:14:20] I view my amortization as money that's essentially in my pocket.

[00:14:24] And so if I'm 1031-ing into an asset that my profit, my NOI minus interest, and that interest

[00:14:31] now is higher than it was on my first building, not only by interest rate, but also on the

[00:14:36] loan amount in the event of 1031-ing into a bigger property, it's really hard to make

[00:14:43] the numbers work and get excited without debt rates coming down.

[00:14:46] It's 25.

[00:14:47] It's going to be hopefully an exciting year.

[00:14:49] Looking forward to greater deal velocity transpiring in the market.

[00:14:54] And on my technology side, I led an investment with our firm into a business called Bowery

[00:15:01] Valuation, which is a tech-enabled commercial real estate.

[00:15:05] You should check it out.

[00:15:06] They have AI that goes and helps the appraisers more efficiently appraise their properties.

[00:15:12] Also, eagerly are waiting for that volume to come back too.

[00:15:15] So I want lower rates all across my investment.

[00:15:17] If you're a house clipper, execute the burst strategy or do double closings and are in

[00:15:22] need of money.

[00:15:23] Little Guy Loans is your go-to lender here in the Des Moines area.

[00:15:27] Time is money.

[00:15:29] Loan approvals in 24 hours.

[00:15:31] Closings in five days.

[00:15:33] Little Guy Loans was founded by Neil Timmons, an investor just like you.

[00:15:37] Since he has been in over 10,000 homes in Des Moines, there's never an appraisal.

[00:15:42] Houses, multifamily and commercial property loans up to 1 million.

[00:15:47] Check out www.littleguyloans.com.

[00:15:51] I think there's a tremendous amount of opportunity utilizing AI in specifically commercial appraisals

[00:15:57] because the data is so fragmented.

[00:16:00] It's so challenging in comparison to say residential, for example.

[00:16:04] Absolutely.

[00:16:04] And I think Bowery is doing some great things in their board meeting yesterday.

[00:16:09] So fingers crossed.

[00:16:11] Michael, you ready for the final three questions?

[00:16:12] Do it.

[00:16:13] If you had one piece of advice to your 20-year-old self, what would it be?

[00:16:17] I would say start sooner, but actually I wasn't, start investing sooner, but honestly,

[00:16:23] I wasn't in position to make good investments and make informed investments until I was probably

[00:16:30] about the age that I was.

[00:16:31] So I would say be patient.

[00:16:33] But also one thing I've learned is I'm making very good money investing into real estate on

[00:16:39] a part-time basis, abling to arbitrage a very good paying job outside the real estate business,

[00:16:45] along with my wife.

[00:16:47] So we have an engine that's running or two engines that are running that are making good

[00:16:51] money.

[00:16:51] And then with the extra, being able to then invest in real estate.

[00:16:55] So don't, if you're out there and you love real estate, investing full-time in it isn't

[00:17:01] required.

[00:17:02] Go be a doctor, go be a dentist, go be an accountant, go do something that you know is

[00:17:07] going to generate a lot of money.

[00:17:08] And then in your nights and weekends, you can still have fun and make money investing in

[00:17:13] real estate.

[00:17:14] That's what I'm going to tell my kids.

[00:17:15] Don't necessarily go do it all the time.

[00:17:17] Go be a plastic surgeon and spend the rest of the time investing.

[00:17:21] Love it.

[00:17:21] Two books that changed your life.

[00:17:24] Oh boy.

[00:17:25] I don't do enough reading.

[00:17:27] I'll start there.

[00:17:28] I'm trying to get back into it.

[00:17:29] Actually, the real estate game, if you've ever read it by Bill Porvu, was a book I read in

[00:17:34] business school that kind of really nicely in the real estate business.

[00:17:38] And anyone that's ever asked me about investing in real estate, I point them towards that

[00:17:42] book and it can bring them a quick summary of the big thing you need to be thinking about.

[00:17:48] I don't have a second book for you right now.

[00:17:50] I'm sorry.

[00:17:51] One's good because that's one I've never heard of, or at least have not read.

[00:17:55] Really?

[00:17:55] It's an older, it's written by an HBS professor.

[00:17:59] I was assigned to when I was in graduate school.

[00:18:01] It's old school, but a good one.

[00:18:03] Still applicable today.

[00:18:04] Yeah, very much.

[00:18:05] If you were cast away on an island for a year, you can only get three pieces of data about

[00:18:10] your real estate business each and every month.

[00:18:13] What three things must you know?

[00:18:14] Wow.

[00:18:15] What three things must I know?

[00:18:17] Do I know how big they are ahead of time?

[00:18:19] But I knew about my buildings before I left.

[00:18:22] Is that right?

[00:18:22] Yeah.

[00:18:23] Yeah.

[00:18:23] It was late.

[00:18:23] Let's say you're cast away today.

[00:18:26] You're leaving today.

[00:18:27] Yeah.

[00:18:27] Okay.

[00:18:28] I want to know my top line rent income.

[00:18:31] I want to know my bottom line expenses, and I want a picture of the building.

[00:18:35] A picture of the building.

[00:18:37] Tell me more about that because no one's ever said that.

[00:18:39] I want to know if it still looks good because I know that if it doesn't look good, my rent

[00:18:43] next month is going to go down a lot.

[00:18:45] The fact that you can't see everything, the numbers only say so much.

[00:18:50] Right.

[00:18:50] And the numbers are a reflection of the past, not a prediction of the future.

[00:18:53] You're saying that the physical representation of the property, what it looks like today,

[00:18:57] better indicates to you what happens tomorrow.

[00:18:59] I think if I'm only asked for three things, I need some, like if it's got a big gash in

[00:19:05] the roof or I've got some massive capex issue or someone wrote a bunch of graffiti on it,

[00:19:10] I need to know that.

[00:19:10] I try to get by physically each of my buildings at least monthly just to, I want to know it's

[00:19:16] there.

[00:19:16] I want to know it looks good.

[00:19:17] I want to know it's being taken care of.

[00:19:19] I'm probing because I think it's fantastic.

[00:19:22] And now something's going to change in our office.

[00:19:24] I've asked you lots of questions.

[00:19:25] I love talking to you and I could talk all day with you, but what's one question I did

[00:19:29] not ask that I should have asked?

[00:19:30] I think I'd ask about my, how I balance the technology investing into the real estate investing.

[00:19:36] Let's do it.

[00:19:37] Okay.

[00:19:40] In not one, but two asset classes, I think makes me better.

[00:19:44] I was actually just talking to one of our partners today about this in my day job office

[00:19:49] about how technology investing, investing into early stage technology businesses is so highly

[00:19:56] speculative and the numbers can only tell me so much.

[00:20:00] However, on the flip side of the coin, as I said, in my real estate investing, I only do

[00:20:04] a deal every year or two, but it's big and it's meaningful and the numbers really matter

[00:20:09] to me.

[00:20:10] And so trying to get left brain and right brain.

[00:20:13] And I think stretching both sides of the brain is important because if I look at a number

[00:20:19] just by the number, a deal just by the numbers today, I may be missing the long-term opportunity

[00:20:25] of that location.

[00:20:26] For example, the same way, like if I'm looking at a software business that's on the verge of

[00:20:31] doing something great in AI, but they've had no revenue, they're burning money like a son

[00:20:36] of a bitch.

[00:20:37] I need a little bit of the numbers aspect in that deal too, because it's a melody of the

[00:20:42] mind.

[00:20:42] You need to know both about your numbers and the long-term vision.

[00:20:45] And so that having, doing some of a lot of both and trying to stretch in both ways, I

[00:20:50] think is valuable.

[00:20:51] I'm curious about this characterization.

[00:20:52] Would you say your day job is you betting on the jockey and not the horse?

[00:20:58] And I'll call it your night job.

[00:20:59] The real estate piece is you betting on the horse and you are the jockey.

[00:21:03] Okay.

[00:21:03] In technology, I'm definitely betting on the jockey and the jockey is the most important,

[00:21:08] but having a horse that at least on the right racetrack is important.

[00:21:13] In real estate, I am not really the jockey.

[00:21:17] I'm more the, I'm the general manager.

[00:21:20] I'm the general manager of the football team.

[00:21:22] I'm trying to put the pieces in place and hoping that they make the most of it, but I'm

[00:21:26] not on the field.

[00:21:27] I'm not taking the call.

[00:21:28] I'm not doing the leasing.

[00:21:29] Yeah.

[00:21:30] That's great.

[00:21:30] Michael, I appreciate your time being here.

[00:21:32] This has been great for people.

[00:21:33] They want to find you.

[00:21:34] They want to follow you.

[00:21:35] They want to connect with you.

[00:21:36] Where can they go or what should they do?

[00:21:37] Go to my LinkedIn and go to my email.

[00:21:39] I don't know if I put my email in my profile, but happy to provide it or my phone number.

[00:21:44] I can give you that too.

[00:21:45] Fantastic.

[00:21:46] We will get the information.

[00:21:47] We'll put it below in the show notes for everybody.

[00:21:49] You can find it there.

[00:21:50] Michael, appreciate your time.

[00:21:51] Awesome.

[00:21:51] Thank you, Neil.

[00:21:52] Thanks for listening.

[00:21:53] If you're enjoying the show, may I ask a favor of you?

[00:21:56] Naturally, subscribe so you never miss an episode, but would you rate and leave an honest

[00:22:00] written review on Apple Podcasts?

[00:22:03] It does a lot for us here at the show and I appreciate reading your thoughts.

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[00:22:16] Visit Investing in Iowa to fill out an application or recommend a guest.

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[00:22:32] for the two of us to get on the calendar and connect.

[00:22:35] Until next time, keep investing in Iowa.

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