Industrial Real Estate Investing: What Actually Works | Darren Smith

Darren Smith (00:00)
Yeah 100%. I know partnerships can work both ways and I’ve heard of terrible stories with people getting into bad deals in the past, but I’d rather you get in with somebody that knows what they’re doing in the beginning. I didn’t. I bought most of my deals. I was the sole GP, but here’s what I did do to kind of pseudo partner with people.

Dylan Silver (01:52)
Hey, folks, welcome back to the show. Today’s guest, Darren Smith, is the owner of Solid Growth Properties, focused on acquiring industrial properties in South Central and Southeastern Pennsylvania. He takes a disciplined approach to investing, sourcing strong opportunities, underwriting deals carefully and building a portfolio designed to perform over the long term. He emphasizes the importance of relationships across every part of the business, working closely with owners, brokers, investors and attorneys to consistently find and close deals.

Darren, welcome to the show.

Darren Smith (02:24)
Thank you so much for having me on Dylan.

Dylan Silver (02:26)
It’s great to have you. I do want to start off at the top by asking you about acquisitions and sourcing these deals. Are you heavy into off-market? Is that how you’re finding a majority of your deals?

Darren Smith (02:39)
you know, it’s been kind of a changing over the years, just, you know, they keep moving the cheese on us, so to speak. And when I was earlier on in the industrial space about eight years ago, the off-market deals, they were much more prevalent. I continued on with the same marketing I kind of did in the housing side when I used to do that space, just kind of made it a little bit more professional and that worked well.

Then there was a couple years there when the rates went up that things just got really tough either on market and off market was very challenging. And I did a couple more on market deals at that time working through brokers. So I would say about 75 % of my deals are the off market direct to direct to owner building those relationships. But brokers are

very valuable resource right now. just closed the property in late March, my largest property by size that I’ve ever done. And that was an on-market deal that I’ve been working for several years. So it definitely need to build relationships on both sides.

Dylan Silver (03:30)
for brokers specifically and nurturing those relationships, once you have shown a track record, of course they’ll come back to you and they’ll bring you their best deals before anyone else has an opportunity to look at them. But specifically finding who has the good deals and who to work with, walk me through that process when you’re maybe starting a relationship with a broker and when they’re bringing a deal to you or when you’re doing outreach to them.

Darren Smith (04:00)
That’s an excellent question and it’s critical to get that right because nobody wants to waste their time. They only want to spend their effort and talk to people who can get deals done and we’re going get them paid. So the first thing if somebody was new looking to get into the industrial space is sign up for all the listings that are so every single brokerage out there get on their list. Co-star Luke Nat Crexie.

have those just automatically sent to you so you can keep that database. I use AI actually to have all those pull taken from my email, put in a database in my Notion CRM. And I kind of track a lot of it that way, who the brokers are, what’s happening, how long they’ve been on the market. So I’ve automated a lot of the data collection part, but the relationship part is still all you. And so when you get on the phone, you need to kind of stay in front of mine. When you see brokers sending stuff out, just respond to it, even if it’s not that interesting to you for whatever reason, tell them why and then maybe give them a

who are looking for. So I know a lot of people do like automated emails and they’ll send things out to mass brokers. I’m not saying there isn’t a place for that just to kind of maybe once in a while, but you really want to keep your touches a little bit more personal

there’s only so many brokers as you said, actually doing deals that actually have ⁓ products in your market. So if it’s 10 people, take the time to talk with them. If you can, once a quarter, once every six months, you know, try and grab a coffee if you can, but at a minimum respond to them. And then I’ll say one extra thing I do to

to add value to them besides just giving them, you know, getting them paid when we close a deal is when they bring me something, I make sure I want to give them very quick feedback on, you know, whether it works for me or not. And then if it’s a no, why it’s a no, if it’s a maybe, here’s how I could make it work. So I try and do that, you know, within 24 hours. The other thing is if they’re having problems with the property, they’re working for other clients. And if they know that if there’s a property that maybe is not getting some offers on, even if I’m not that interested,

I will actually submit LOIs on these properties because you never know what would happen but it helps them with their conversation with other owners so that’s a value that I give them because now they can go back and here’s where getting, here’s where the offers are looking at and it just helps with that conversation a bit too. So however you can give value that’s what you’ve got to figure out.

Dylan Silver (06:50)
That’s

a great point and the ability to be able to give them value, even if it’s not something that you’re particularly.

set out or looking for, right? You mentioned, you know, this might not be in my ideal buy box, but here’s where I’m coming in at. If I were to lock something like this up, I’m thinking from the perspective of wearing my agent hat, that’s a huge value to that seller because if they’re not getting offers on a property and they at least know where the market stands, that’s better than, hey, we don’t really know where the market is on this specific deal. I do want to pivot here though, Darren, and ask you about the off market space. You mentioned 75 % of your acquisitions are coming from off market.

In the industrial space, what’s an off-market acquisition look like? Is it a quote-unquote distressed seller? Is it someone who’s a quote-unquote tired landlord? What’s off-market acquisitions look like?

Darren Smith (07:43)
Yeah, maybe a little bit more of the latter of the tired landlord, but very, very few occasions you’re going to find distress, especially industrial has been so hot. So mostly these owners have plenty of equity in their property. It’s not like they need to sell. You will come across the occasion where maybe somebody there just lost a major tenant and they have to pay their bills and it’s hurting. But most of the owners I’ve worked with, and I think of, I probably bought about 15 properties now.

since I started on the industrial side, specifically since I started. So it’s not that many properties per year. It was a year or two where I only bought like one property in those years, just because the market was so tough. But most of the owners I talked to, they’re multimillionaires. These are people that, you know, conversely on the housing side where you are helping with distress much more often, these people are in bad situations. So it’s kind of like you’re trying to take them from a bad place to like acceptable or good. These people are already in a good spot or a great spot. And you’re like, how do I make it better? How do I maximize maybe the, the

Maybe the price for the building, can pay more, but that also a lot of times ties into maybe there’s some owner financing involved in these deals, but that helps the seller because now they’re able to minimize their tax burden. Maybe they’re able to, for some of these people, they’re older, they’ve owned the building a long time. If you can kind of show them, show them the respect and the interest in their property and in their lives, a lot of the times these people do want to help you. They do want to help somebody else who’s kind of in their shoes from 30, 40 years ago. And I see these people,

these sellers sometimes honestly a little bit of as a mentor in ways learning from them what they’ve done over the years and so those are the type of people I like to work with because they’re just good people they have fascinating stories I can most of them have sat down over one two three hour lunches or breakfast sometimes you know just kind of learning those lives building those relationships and and that’s all it’s just so much fun it makes makes the whole process of investing and learning about these people a good time.

Dylan Silver (09:32)
You mentioned creative deal structuring. Are sellers aware that they’re going to be receiving offers like that or is this the first time that they’re hearing conversations like this?

Darren Smith (09:45)
I would say most of them are somewhat sophisticated. mean, they own a couple of properties. So, and now, especially they’re getting more more phone calls. Whereas in before five years ago, I was probably the only one calling a lot of these people or a few people. So I think it’s kind of on their radar, but

the initial, don’t want to don’t bring that up right away. Usually I don’t even bring up price in the first conversation or two. It’s more just situational, what you’re looking to accomplish. How can I help? But you want to frame it in the right way in only after you’ve

found all their desires. What are they trying to accomplish? What’s their financial situation? If you talk to somebody and says, hey, I’m going to net a million dollars in this property and I need to go pay this bill or I have this other building I’m going to roll it into, well, then you don’t even bother bringing that up because it’s not going to help them. But if conversation starts to, man, I’m going take a heck of a tax hit on this thing, man, gosh, you’re going to get a big chunk of money from this. What are you going to do with that money? Well, you know, I looking at some funds or something. They’re not quite sure. Well, now you can approach that conversation of here’s how much you would save.

you’re get that million, you’re gonna get, let’s call it six, 700,000. Here’s what you would save in taxes or defer in taxes, should I say. And then here’s the interest you make on that. So you could even earn a couple percent more in something else, not that they usually do, and still make less money than by selling the property to me and getting creative. And it doesn’t mean even total seller finance. Most of the deals I’ve done, it’s a small portion. It’s 10, 20%, just to kind of make my down payment a little bit better. Banks are usually comfortable working with something like that. So.

I can pay more, can get that seller more of what they’re looking for. They can pay less taxes and it improves my returns a little bit by allowing me to come with a little bit less money.

Dylan Silver (11:53)
Now, once you’ve acquired a property, are they typically already tenant occupied? Is that the ideal? Someone has tenants in their property or do you prefer them vacant?

Darren Smith (12:03)
You know, I’m very flexible either way. That’s kind of one of the strange things in the ⁓ industrial space is that a vacant property, at least in the last several years, has actually been worth more than an occupied property, which is counterintuitive to all the other asset classes because they’re all based on this income. But there were so few properties out there available that the owner occupied user, the owner who’s saying, I need to put my business in here.

Dylan Silver (12:18)
Yeah.

Darren Smith (12:27)
They don’t care. That’s not don’t care, but like they’re willing to pay much more because they’re losing money by not having enough space to operate and grow their business, which when the economy is going well, that that was in high demand. So for me, I’m very flexible on either way. I’ve been able to make them work buying them vacant, even obtaining financing on those when they’re vacant, because you can work with different banks and they’ll have you put maybe 18 or 24 months of interest reserves in. But you can show here’s the value. Hey, if I rent it for this, here’s what the market is.

you can tell that story and banks will even fund some of those for you. But I would say most of my properties have been mostly or 100 % tenant, either with a single tenant in there, maybe it’s a sell these back scenario. I bought a industrial park that had about 10 tenants and I’ve flipped over a couple of them and adjusted rents somewhat closer to market. So, you know, trying to get below market rents, maybe you meet them in the middle of market because I do want to work with existing tenants as well and keep the continuity if at all possible.

Dylan Silver (13:23)
I’ll stumble my way through this question best I can. When you’re looking at the totality of who are tenants in the industrial space and what does an industrial property look like, walk me through the scope here. Is it mechanics and is it large companies? I’m thinking like the Amazons of the world. Who are the tenants? And then also how large are these buildings?

Darren Smith (13:47)
Yeah, great questions. And it really, runs the gamuts. It’s like saying who occupies houses in a little bit, you know, you have a $50 million house, you have a $5,000 trailer. And I’m kind of in the middle of that. don’t do like the small, small bay. I do have a couple of spaces that are in that two to 4,000 square feet space, but those are in an industrial park that I have where some of those were segmented out a little bit smaller. My average tenant is probably, I have one tenant that’s 52,000 square feet, you know, over two buildings.

Most of them are somewhere in that four to fifteen, nineteen, know that range, a lot of those. And the businesses run the gamut. I’m in that middle. don’t have…

leasing to Amazon at a million square feet, know, brand new warehouses. The newest warehouse I bought is actually built in 2008. So that’s kind of like newer for me. Most of my stuff is eighties and nineties. I really liked that vintage. Still very functional. Definitely have some work that needs done. You know, you get 40 year old roofs, you know, so you gotta, gotta count those kinds of things, but it’s also the middle of the tenants. I’ve had a tenant, those subsidiary of Toyota motor corps. So very credit tenant. I just, the building I just bought, they’re a multi-billion dollar company in 25.

Dylan Silver (14:44)
Yeah.

Darren Smith (14:57)
25 countries so you have that range in some of them and they take up a whole big building

is 129,000 square feet. That’s my newest acquisition But most of them are smaller. They’re they’re running a small business. I have a toy manufacturer I a lot of metal fabrication. I have a milk company that does dry storage in there Someone builds trucks in a truck body type things So it’s really just a it’s a mix of anything you can think of that’s gonna be in a warehouse where they need a space with loading docks drive indoors that type of thing

Dylan Silver (16:06)
How long are these leases typically, or is it varied by tenant?

Darren Smith (16:11)
It does vary a lot and I’ve never been too concerned on lease length unless I’m buying a building and I’m thinking one specifically I bought it where I overpaid a little bit on the price per square foot compared to market but it had a really good tenant in there that was the subsidiary of Toyota Motor Corp and the tenant was very critical to the deal for me one for the financing but they had seven years of term on it so that’s what made that thing work so well and I knew I could overpay

and still in seven years I would be just fine. The market would catch up and I’d have paid down enough and it’s fine. Other tenants, ⁓ these buildings are in such demand right now that I’ve been able to even push rents, let’s call it halfway to market, because let’s say they’re five bucks gross and market is, well, that’s a perfect example, somewhere five bucks gross and my market is now 850 triple net.

Well, that’s a that’s they’re basically less than half of market rates from these tenants. So I’ve been able to push them closer to halfway in the middle. I still want to work with these businesses. don’t I want to support the you what they’re doing. But if they did happen to leave, I’m not concerned with the length of the the lease on the property or you know what, whether that happens because I’ve been back filling these things in a matter of weeks to maybe a month or two at most on most buildings.

Dylan Silver (17:26)
Bonus question here for you. For folks who are scaling into the industrial space and they’re looking for their first deal and they’re trying to figure out how they’re going to acquire financing, what these conversations will look like with all parties, right? With the seller, right? Reaching out to brokers. But they’re also trying not to overpay for these deals because they understand that, hey, this is my first deal. Do you recommend?

partnering with someone who’s more experienced than them and maybe pooling funds together? Or do you recommend, you know, if this is your first deal, be conservative, but do this on your own.

Darren Smith (18:07)
100%. I know partnerships can work both ways and I’ve heard of terrible stories with people getting into bad deals in the past, but I’d rather you get in with somebody that knows what they’re doing in the beginning. I didn’t. I bought most of my deals. I was the sole GP, but here’s what I did do to kind of pseudo partner with people.

I brought on limited partners. And again, we’re talking one or two limited partners at most on a deal.

But they and I overpaid for them. And the reason I overpaid only from a numbers perspective is that they were very knowledgeable. They were experienced investors and I could call them anytime they were in the deal. Now I weigh underpaid for them because of the knowledge they brought to the table. You know, there’s a big difference in what I’ll pay for capital for, you know, for somebody to bring an equity to a deal. If I think they’re smart and they know what they’re doing and I can, I can pick up the phone. First of it’s just cash. Those are two completely different categories for me. And then just one last point on that, the property I just purchased.

in March, I could have been the sole GP on that deal. If I had it, was my deal. could have taken it and I would have raised $2 million on that. 40 % with the limited partners. I could have had 60 % of the equity in that deal and taken it all the way through. And I could have done it. It would have been fine. However, I knew a local guy. was very experienced. I’ve known him several years. He’s just a good person. I would say the test is, would you go on vacation for a week with him? He absolutely fits that bill. And I would, but he’s experienced with entitlement.

And so I said, hey, look, if you come on this deal, and actually I just, said for quote unquote free, you he’s signing on the debt with me and he’s doing the work, but let’s split this GP side. And so we did. So we each took 30 % of the GP share. He actually came on in the LP side as well. But I did that because even though I probably in the end, that’s going to be well over a million and a half of equity. If you want to say a profit to me that I gave up.

But now I know I have a solid partner, I have someone who’s experienced and I was more than happy to do that. And also because I did have LP money on this deal as opposed to some of other ones where it was just me, that I really wanted to make sure I did the right thing. No matter what the LP money is the most important thing in any kind of deal and returning that to them. So by bringing on an experienced local GP who knew the market and knew entitlement, I just was doing the right thing by my piece.

Dylan Silver (20:18)
We are coming up on time here, Darren, any new projects that you’re working on and then as well, what’s the best way for folks to get in contact with you or your team?

Darren Smith (20:28)
Yeah, I would love for people to reach out. My biggest project is probably what a lot of other people are doing right now. And it’s just how am I incorporating artificial intelligence more into my business? So I’ve taken a lot of the systems that I used to do and automated my marketing in a lot of ways where these sequences go out. Automating a lot of the data collection, automating my CRM. I could go on and on on that, but I started a twice a month mastermind for using AI in commercial real estate. So we meet.

twice a month just on Zoom and our Google me and it’s been fantastic. I’ve learned so much from people and I think we’re getting close to 100 people in that group now that show up. So it’s been really beneficial for me and for the others in it. And if anybody wants to reach out, my name is Darren D-A-R-R-E-N @solidgrowthproperties.com. So if anybody wants to join that, if they’re in commercial real estate, I’m gonna join a call about artificial intelligence in your business. ⁓ Please hit me up.