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Show Summary
In this conversation, Nick shares his insights on real estate investment, emphasizing the importance of understanding property management costs. He reflects on his personal journey and the lessons learned that could have accelerated his success. Nick debunks common myths about property management fees, revealing the true costs associated with hiring property managers and the impact on overall investment returns.
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Investor Fuel Show Transcript:
Nick (00:00)
Don’t compete in an industry where you want to make money against people who are doing it for the love of doing it. Now, that means that if you think you’re going to make a killing setting up a beautiful Airbnb in Nashville, Tennessee, be ready to compete against a lot of…people who are treating it like a creative outlet and a fun hobby and who don’t need to make the money.
Michelle Kesil (01:55)
Hey, everybody. Welcome to the Real Estate Pros podcast. I’m your host, Michelle Kesil Today I’m joined by someone I’m looking forward to connecting with, Nick Harrison, who’s been making serious moves as a real estate investor focusing on commercial properties. So excited to have you on the show today,Nick (02:15)
Thanks so much, Michelle.Michelle Kesil (02:16)
course, I think our listeners are really going to take something away from how you’re approaching working on high performing investments and the commercial market. So let’s dive in.Nick (02:30)
ThankMichelle Kesil (02:32)
First off, for those who are not yet familiar with you and your world, can you share what your main focus is?Nick (02:38)
Certainly.The high level focus is real estate, specifically. I think I got into it the way most people got into it. I thought, this makes sense, I’ll buy a house, I’ll rent out a room or two to some friends, and house hacking was a great introduction to it. But then like most people, I learned that there was a little bit more upside to be had if you looked into branching out to single family homes. So I did the BRRRR strategy, nothing wrong with the BRRRR strategy, it’s a great way to get started. Buy, renovate, refinance, repeat. That scaled up nicely, got myself to a number of houses that I was happy with.
I’ve reached a personal milestone that I’ve been to looking forward to and I thought that the plan was going to continue to scale that way at Infinitum.
I realized there was a little bit more opportunity on the table. So instead of just continuing to do single family homes, I heard a lot of people moved into residential multifamily. Nothing wrong with residential multifamily, but there’s some different operating costs, there’s some different legal requirements, there’s some different risk profiles that you have to look at. And I did get fortunate enough to meet some people who had had negative experiences in, for say, the hotel investing world. Again, there’s plenty of people who’ve had
great experiences but there’s big upsides and big downsides. Especially with bigger buildings, can change, regulations can change, taxes can change, insurance can shift around a good bit and when things are good they’re excellent but when things are not so good they’re not so good. That’s when I started to learn a little bit more about the commercial side.
specifically around things like light industrial buildings. I learned that leases can be 10, 15 years, sometimes even longer. Also that rent bumps can be built into the leases. Also you can buy a property, hold it for five years, and the whole time have never turned over the tenant. Additionally, you might be able to find a tenant who’s been there for 20 years already and has another 20 years planned.
So far, things have been going pretty well. where I found my favorite niche is in negotiating sometimes on, but often off market, commercial properties. These could be through a sale rent back where an owner, you know, owners are actively working. They’re not looking for passive investment. They’re looking to run their business. An owner of a commercial business, light industrial business, might be making 150 to 250 % ROI on their cash. That’s great.
But we all know in the passive world, we’re not generally expecting to make 250 % ROI year over year. So they might be sitting on a bunch of capital that’s tied up in building that they own.
If that’s the case, and the business owner is looking to grow and expand, maybe even open another location, maybe open several more locations, maybe just really go into their marketing heavier, maybe expand their reach, expand their distribution network, they stand to make a great return on their own capital if they can just free it up from the building that they own. So that’s when someone like me comes along and says, allow me to buy this building that you work out of and rent it back to you for a pre-degraded upon rent amount. That’s a pretty good way to get started in the commercial base.
And it’s an easy one that I’ll start my examples off of. We can build from there, there’s a bunch of variations, but to give you a gist of how things tend to go, they sell the building that they own, we rent it back to them for pre-agreed upon terms, and in doing so we have a nice little investment. We might hold it for five years. Generally the better a deal I’m able to negotiate, the less I want to hold it infinitely long. So that’s why I tend to focus on the five year mark. It’s long enough to make a deal, decidedly a passive investment for my investors. It definitely still feels like a buy.
and hold strategy, but it allows you to keep a little bit more motion in the money rather than just letting it sit. If you buy something and it gives you a cash on cash return of 10 % and that’s great and you hold that forever, you’re making 10 % a year. That’s wonderful. There’s nothing wrong with that. I’m not objecting to it. But let’s say you get a very good discount on the property or you get a very big sale of credit.
If you buy something and you hold it for 10 years and you get 10 % discount, you effectively make an extra 1 % per year.
Now the other side that would be if you buy something and you get a 10 % discount and you hold it for one year, you effectively get a 10 % discount per year. And if you did that every year, on one hand you’d make an extra 100 % not compounding, and on the other you’d only make the initial 10 % not compounding. I’ve found that five-year investments for myself and my investors really hit the sweet spot of fattening up the margin, getting a much better annualized returns at exit, and then there’s still usually enough cash flow in the deal to keep it interesting. So commercial
has
been a real blessing in disguise. It also stops you when you’re looking to put more money into investments. If you do small houses, you can easily pick up houses in different spots of the country for $75,000 to $100,000 each. If you got $4 million to deploy, that’s going to be a pretty cumbersome portfolio that will have serious scaling costs associated with it as you grow. Your property management’s going to increase. You’re probably going to start doing home warranties to normalize your costs. You’re going to have roofs.
you know, you’re going to be getting a couple roofs per year and that’s all good and well, but in the commercial world it is a lot more manageable to be able to say, alright, you know, some of these buildings are $4 million, some are $40 million, but it’s a lot easier to look at and manage a sizable portfolio with a lot of predictable ⁓ factors when you’re dealing with larger pieces of real estate. That’s why I started with house hacking, I grew to buying single houses, I grew to buying housing portfolios, and then I shifted into
doing things on the commercial side. It’s going pretty well and I hope to keep doing this. What are your thoughts so far?
Michelle Kesil (08:51)
Yeah, amazing. Thank you for sharing the journey that you’ve been on and how commercial has served you. think that’s a really fascinating concept because there’s so many different types of investment strategies and everyone has their preference. So yeah, really cool to hear what’s worked for you.Nick (09:10)
Thanks so much.Michelle Kesil (09:11)
Yeah, what have been some of the main keys that have allowed your business to be able to grow and to run smoothly?Nick (09:18)
Well, things went well in the housing world, dealing with single family houses, but I noticed that the limiting factors were things like my time, my ability to run things myself, my ability to be my own general contractor. All of these things were good, but they meant that the limiting factor was my hours in the day.That was great, but when I ran out of hours in the day, I realized it didn’t really scale much beyond that. You could do things that would sacrifice margin to be able to buy your time back. You can hire property management teams. Once you reach a certain size, it starts to make sense to create your own property management team. But then you’re starting to get farther and farther from an investment that you can truly consider passive. Until you’re in a couple hundred houses, you’re not going be able to have the margin to have a property management team that is truly self-running, unless you’re very lucky, in which case if you are, well done you.
but across the board, your limiting factor is probably going to be your time and your energy. I didn’t want that to be the thing that stopped me, and I think many people get into real estate to be able to own their time and be masters of their own universe, not to run a property management side, business on the side.
So, shifting into commercial has transitioned a lot of things away from those initial limiting factors. Now, my bottleneck is one I’m very happy with. Pretty much means that any money that I can raise, I can get deployed very effectively to very good projects with a predictable outcome. I’ve been happy with that method so far, and I hope to keep doing more and more of it.
Michelle Kesil (11:15)
Yeah, amazing. think that’s an important thing for people to notes that are looking to get started. It’s like, yeah, there’s so many hats that you can wear in this world and knowing which ones maybe are your strengths and which ones you want to pass on to someone else.What are you most focused on solving or scaling to next in your business?
Nick (11:38)
Networking like I mentioned I am a boutique investor and that means that I don’t necessarily have a firm There’s limitations and regulations that you can fall into It’s possible that in the future. I’ll do something like follow. It’s called a 506 C route, but that’s Enables you to invest beyond your personal network. You can run certain types of ads. You might not be restricted to working with accredited investors But for the meantime, I’m probably gonna keep turning the crank that I’ve got my handson
I’ve had a chance to meet a bunch of people personally and through
various connections people reach out to me to say hey you know i talk to so-and-so about what it is that you do there’s most retired individuals in the area qualifies accredited investors they’ve they’ve hit their personal marks anyone who’s made over two hundred k the year as an individual three hundred k is a couple or has a net worth of one million plus is able to do investments with me and hope to do more of that the probably main limiting factor for me has been access to capital
and I’m in what I would consider a hypergrowth phase right now. So once I get a little faster at deploying the people who’ve reached out, getting their capital deployed, we’ll see what comes next. But I think it’s…
been very advantageous for all the people I’ve gotten to partner with. The reason is, we all got told in school, whether you believe it not, that in general, the stock market grows about 7 % a year. And that’s fine. And for most retired individuals, that means that they follow the 4 % rule. That means that at retirement, you can generally pull out 4 % of your portfolio without reducing the total size of your portfolio per year. That’s a pretty decent, safe number.
These are estimates. No one should take this as financial advice. I’m just simply describing trends in the industry. But there is a trend in the industry where when you invest in commercial real estate, as long as you find the right deals and you have the right partners and the deals are running well and self-managed effectively. Most investors would…
in commercial real estate, not necessarily in any one particular deal, but many investors have found that they can touch closer to 9 % of their cash per year while the portfolio still aggressively grows at somewhere around double that. Now again, those are estimates, but to have a portfolio that isn’t just maintaining but is growing while still kicking out 9%, that’s really going to put to shame most other options, especially when you factor in the consistency. You can invest in very high growth stocks, you can leverage the heck out of your portfolio, and you can see, you know,
20 plus percent returns. But in a down year, it’s going to be tricky for you. In real estate, you normalize a ton of that risk while still getting great returns. But anyone who’s got a brain is going to think, well, Nick, you’re talking about how these investments are supposed to do better than the stock market. Well, they are.
And if that’s the case a normal objection would be well Nick that means that I’m gonna be facing more risk or something’s going on why would you be able to do that? And the truth is you need to give up something in order to keep your risk low and your investments high and what you give up in real estate is twofold First of all real estate is not as infinitely variable if someone reaches out to me and they say I want to put exactly $822 into this thing. I’m probably gonna say, know, it’s not really a number that’s worth moving the needle
for we don’t really want to go through the steps to get $822 invested. By the same measure, if they’ve been planning for the last 30 days to invest $1.5 million with us and they decide with two days left that they’re like actually I want to invest $1.75 million that might not be a change that we can accommodate. So unlike the stock market there’s a little bit less ability to see infinitely variable amounts.
to be invested with very short notice. The other thing you give up is liquidity. In the stock market, depending on how your assets are set up, many people can get…
nearly their entire portfolio moved into their bank account in one week or less. And we all know that that’s just not the case for real estate. But that’s great. You gotta give up something. So the things that you give up are the variability of amount. You gotta have a little bit more intent knowing ahead of time how much you wanna invest and then invest that amount and follow through with it. And the other thing is you gotta give up some liquidity. But
I who among us doesn’t have some level of our portfolio of investments that we plan on not touching for the next five years. If you don’t plan to touch it for the next five years, don’t continue to pay for the privilege of being able to liquidate 100 % of your portfolio. Now, I will never advocate that people overspend their emergency fund. Keep your emergency fund. Whatever your personal number is, it could be 10 grand, it could be 100 grand, even if it’s $4 million. If you want a certain amount of your portfolio to be extremely liquid, go ahead and do that.
There’s no reason for most individuals that 50, 60, 70 % of your portfolio isn’t something that you can tie up for about five years in exchange for much, much higher returns and a much, much safer asset class than a lot of people get introduced to when they’re just learning about investing in high school, college. Sometimes fidelity will come to your work and talk to you about long-term investing, but the whole time they’re doing so generally with stocks and ETFs, things that don’t really show you the returns you can get from more
fixed investments especially when you want to pair them with a lower risk profile. So that’s where we are right now.
Michelle Kesil (17:33)
Yeah, absolutely. I think that’s really powerful advice and I really love how you mentioned the risk component and knowing the ins and outs of different markets and those strategies. I think that’s really good for investors that are maybe early on in their journey to take note of. If there was some sort of advice thatyou wish you had when you started that you know now, what would it be?
Nick (18:03)
Well, a couple different things. Firstly, anyone who’s thinking about real estate or getting into it, I would definitely recommend it. I wish I’d known at 20 what I knew at 26. It would have gotten me six years ahead. And I’ve been very, happy with the returns from real estate, as well as the changes that it’s been able to make for myself and my family lifestyle-wise. The other thing is that, well…There’s a couple falsehoods that I hear repeated a lot. Among them is the 10 % property management calculation. It’s very rare that 10 % will be an accurate estimate for what you will pay for to have someone manage your property. Here’s why. Most leases are going to be about 12 months long, roughly.
most property managers are going to take 10%, which is the initial starting point. They’re also going to take the first month’s rent, which is something like almost exactly 8%. So now you’re dealing with 18 % of each lease gone. On top of that, when they go to unclog a toilet for you, or replace your microwave, or fix your cooktop, or
Reset a breaker that a tenant was complaining about you’re going to be paying them, you know market rate as if they’re your general contractor and that’s gonna be Conservatively in my estimate at least another 12 % So property management doesn’t cost you 10 % It costs you 30 and many people who think they’re gonna be making money with remote self-managed properties Not self-managed but remote properties that are fully managed and they don’t have to deal with They don’t realize that their margins can be eaten up by property
And that’s okay. It can be a tricky lesson to learn. There are ways around it, but they tend to only work at scale. You know, if you think you’re going to get 6 to 12 properties, get them self-managed, if you start breaking down, especially if you put any value on your own time, you’ll find that you’ve got a side hustle, not a passive investment. In the commercial world, that tends to not be the case.
So for anyone who’s single family homes, people tend to invest in them because they’re what they think they know. Whether or not that’s the case, don’t be afraid to look into asset classes that might be a little bit outside of what you know. Also, try not to get shiny object syndrome. If you start doing something and focusing on it, do what you know is working, repeat it, scale it, learn it very well.
It can be very easy to get into one thing and then go, maybe I should be doing self storage, I’d be making twice as much. Or self storage is interesting but I actually want to get into something more passive so let me go do whatever else. Just be mindful. There’s one other factor that I’ve learned. And it’s…
If I may give you a silly anecdote, when I was young, I wanted to get a job at McDonald’s or anywhere that would hire me, but they wouldn’t hire a 12 year old. So I became a DJ. I didn’t do cool things. I just did, you know, weddings, 50th birthday parties, bar mitzvahs, bar mitzvahs, school events, things like that. And it was a good little side hustle. When I got to college, I found out that instead of being able to, you know, bill $75 an hour as a kid, I was basically able to bill like 50 bucks a night because there were so many people competing in the space who didn’t want to be a DJ
for the money, they just wanted to DJ because they loved doing it. And that taught me a very important lesson.
Don’t compete in an industry where you want to make money against people who are doing it for the love of doing it. Now, that means that if you think you’re going to make a killing setting up a beautiful Airbnb in Nashville, Tennessee, be ready to compete against a lot of…
people who are treating it like a creative outlet and a fun hobby and who don’t need to make the money.
If you go up and down Broadway, I don’t know the exact numbers on those bars at ⁓
Nashville, Tennessee. But I would imagine that they’re not the most profitable bars out there because you’ve got hyper passionate country music stars, superstars. think Taylor Swift has one or she has the Hall of Fame. Kid Rock has a bar, names that we’ve all heard of. These superstars have bars in Nashville, Tennessee, not because they need profitable businesses, but because that is their creative outlet and they feel like it is their ⁓
duty and passion and excitable thing to make Nashville awesome. They don’t care if they make a profit. That tells me I don’t want to open up a bar next to those guys because they’re not in it to make a profit and they’ve got huge backing.
If you’re thinking about opening up an Airbnb, know that you’re going to be competing against some very passionate housewives who are not necessarily limited in their ability to fix things up for a pretty modest or non-existent net profit. They may be doing it just for the love of the game, and there’s nothing wrong with that. They’re not wrong for doing so. It’s just… cautious. There’s very few, if any, people who are entering into commercial real estate just because they’re deeply passionate about owning giant metal buildings.
on obscure swaths of land a couple minutes outside of cities, city limits.
They’re not pretty. They’re not sexy. If you drive your Tinder date, buy a big old giant industrial warehouse and you go, hey, I actually own that. They’re not going go, wow, that’s so cool. You’re so like intriguing. You’re going to be like, cool. That’s a, you know, it’s got a dirt parking lot. It’s got basically a factory inside and it’s got some huge heavy trucks coming and going. Not really going to put some sparkles in their eyes the same way it would if you say, you know, you see these beautiful mansions that I own out in the countryside or amazing houses at ski resorts. It’s going to turn heads differently.
But that’s not my goal. I’m very passionate about my wife, very happy with the life we have carved out for ourselves. And she’s you know come around to understanding that the pretty boxes, excuse me, the pretty buildings don’t necessarily do for our life the same thing that the giant metal warehouses do. But I’m happy with the choices we’ve made, and I just wanted to share a couple of those lessons with some of your listeners.
Michelle Kesil (24:04)
I love that. Thank you so much for sharing your fresh perspective. Definitely something for people to consider. And before we wrap up here, if somebody wants to reach out, connect, learn more about what you’re doing, where can people find you and connect with you?Nick (24:22)
email is a pretty good place to start. can always reach me. It’s nick @ South IR dot com. That’ll put us in touch.If we decide to do more contact from there, of course we can use phones, but ⁓ for a good starting point, that’s a good way to be in touch. Like I said, we’re a boutique firm, so we’re doing investments for individuals rather than behaving like a fund. Now what that means for you guys is that if we get a chance to work together, you’re to be working directly with me, you’re going to see deals all the way through, you’re going to actually receive the tax benefits of the investments. Whereas if you reach out to someone like a REIT or a REIF, you’re probably going to get returns somewhere
in in the realm of know 9 to 13 percent you’re not going to receive the tax benefits and you’re going to be paying for a lot of overhead if you work with a boutique firm such as myself the returns are let’s just say generally much larger I can’t predict exactly what they will be all investments carry risk and all the rest of the things that people are used to hearing from disclaimers but if you’re interested in being in touch [email protected]
is a pretty good email to reach out to me at and I’d love to be in touch with anyone who’s interested.
Michelle Kesil (25:32)
Perfect.Well, I appreciate your time, your story, and your perspective. Thank you so much for being here.
Nick (25:38)
Thanks, Michelle.Michelle Kesil (25:40)
course. And for the listeners tuning into the show, if you got value, make sure you’ve subscribed. We’ve got more conversations with operators like Nick who are building real businesses and we’ll see you on the next episode.
