The Secret to Finding Hidden Real Estate Opportunities Before Others See Them

Paul Cates (00:00)
If you’re out there and you’re you’re interested in investing, developing or building and you truly feel like there’s not a good deal out there. There’s nothing there’s nothing going on. I think I would just want you to remember that that at the end of the day the challenge it there’s a deal there. And the offer might need to be different, right? The exit might need to be different than what you know.

Cody Crabb (01:54)
Welcome back to the Real Estate Pros podcast by Investor Fuel. I’m your host, Cody Crabb, and today I’ve got Paul Cates with me. Paul helps investors create commercial deals by seeing opportunities that other people miss. We’re going to talk about what separates a good deal from a great one, where AI and technology fall short, and how experienced developers think differently. Paul, thanks for hopping on. I really appreciate it.

Paul Cates (02:16)
Thanks for having me, Cody. Excited to be here.

Cody Crabb (02:19)
Yeah, we’re we’re excited to have you. Thanks for thanks for giving us some time today. So I’d love it if you could kind of introduce yourself and and what you do a little bit for our listeners.

Paul Cates (02:27)
Yeah, so basically I help investors see what a property can become before the spreadsheet or the market fully understands it, right? And then the core operation is I really I turn overlooked or stuck real estate into a development strategy.

Cody Crabb (02:45)
Now when you say stuck real estate, I th a few things come to mind. What do you mean when you say that?

Paul Cates (02:50)
Yeah, so there’s there’s a number of times people can or investors can get into a situation where they bought a piece of land that they had a plan for and and you know, once they got into permitting or or entitlements after the the purchase, they found out they couldn’t do that. Right. So they get stuck. I’ve worked with lenders who had who got left with the property, didn’t have a a really good grasp on the development strategy or how to finish it out. So sometimes I I I can put on a cape and come in and rescue. And then, you know, just newer investors or or people that just aren’t really sure what to do or what to think in a market. They know that the stats are good. I like calling them stats or the the the comps and all that, but they just really don’t wanna really don’t know the direction.

Cody Crabb (03:37)
Yeah, ’cause I think i th an accidental investor, as sometimes people will call they’ll inherit something and they’re just like, What do I even do with this? Th they like the idea of investing. They’re kind of you know, they’re they’re they’re excited about it maybe, but they’re just kinda like, What do I where do I even what do I even do with this? I like that something that I like about what you said was that you kind of see what a property can become instead of what it is and creating deals. Can you kind of tell us the difference between finding a deal and creating a deal?

Paul Cates (04:57)
Yeah, so I think that most of the real estate industry would teach you to find a deal. And what I mean by that is okay, you’ve got return X on cost Y, and if it equals this Z, you know, greater than one point two five DSCR and you know, greater than whatever my seven cap. Becomes a you know, I’ve got equity. I think that’s finding a deal. I think creating a deal is along the lines of, you know, it’s sort of the truest form of real estate, right? Creating a market, but also taking something and looking at that, physically going out there and understanding, okay, here’s a old building, right? Well like a here’s an example. I was in Waller, Texas, and I was helping a client. We’re we were just driving around. Saw an old building. He had bought a an a piece of land that had an old building and about like a a one acre parcel. He really bought it for the one acre parcel because his his plan there was he because it all came together, he wanted to build multifamily. But he had this like sou super old it was a feed store, right? And this sucker was from like the fifties, maybe even a little bit earlier. I mean it you walked in, still smelt like a feed store. It was pretty rough, right? It like movie set level like spiderwebs. You know what I mean? You’re just kinda like, I’m not going in there because I don’t know what made that, but it you know, I’ve seen that

Cody Crabb (06:24)
Big enough to make that it can catch me in that webinar.

Paul Cates (06:27)
Not dealing with that today. So a lot of people, including the my client, really was kinda like what you know, what do we do here? So I went in, talked to some some of the people in the area, just literally like old school shaking hands, hey, what’s up? Some community members, local government, like just some some of the city people just and I could kind of tell going in what I thought was gonna work. And so anyway we j I just said, man, we can really capitalize on the local history. We can capitalize on people really felt something about the building, like it was part of their childhood. Mm-hmm. And I was like, Man, we really have a gap here in, you know, restaurant entertainment. And so I got really psyched up about it. I was fortunate enough that the that the the client was receptive to it. He listened to my vision. I went and recruited the operator immediately. I knew what I wanted. And like so that right there is is probably the truest form of creating that deal. Right. It’s not just going in and saying, well, here’s a piece of land and you know, setbacks are fifteen feet on each side, 25 on the right of way. And it’s like we should just make a restaurant. Right? Like I mean that’s definitely a strategy, but it goes it’s it’s more than that, right? And it’s really I think at the end of the day what people really want, right? But the safest thing to do just as us as real estate professionals, the safest thing to do is just teach somebody what a good deal looks like.

Cody Crabb (07:54)
Hm. Right. Yeah, and I think it when you get to a certain experience level, that kind of comes becomes innate. Like you can kind of you’re sensing things and seeing things that maybe you can’t even put your finger on right away. One thing that I really liked about what you said was it it’s you’re kind of describing value add, but in a way that’s not it’s more than that. It’s it’s not just I’m gonna put in some extra something here, you’re saying like we can completely transform this in a way that benefits the local market and the local community. Because I we were talking before, you know, you said it doesn’t really matter what the numbers are if n if no one will, you know, rent your apartment complex. Like it’s you have to you have to be more aware of the those external factors. So just out of curiosity, you said restaurant and entertainment. Like what what did that end up was it like a like live music and stuff? What did that end up becoming?

Paul Cates (08:47)
Yeah, it it had it was a f food court with live music. And then they actually added on like an arcade, billiards and a a wine bar. So the idea that we wanted was you know, there’s a an like the like a boardwalk feel, right? Somewhere where you can kind of be all day or or you know, that would take on clients at different times of day, right? Like I I the thing I like to say a lot of a lot of investors ask like what what can I build here, right? Or or and I think the better question is what does the market actually need and what does this site naturally want to become? Right. Th those things are pretty simple, but if you really like think on that, it’s it’s a lot more than just what are the comps.

Cody Crabb (10:06)
Hm. Yeah, I I like that I like that thinking ’cause it’s the the market is all that matters, really. I mean, it’s if i if you buy something if you if you have the highest price priced apartments in town and you’re the only building, guess what? You know, so I I feel like that I like that a lot. So when you say what the how do you figure how do you figure this out? Like you said you spoke to local government, you spoke to locals and kind of saw what people kind of thought about the the property, but w i is there more than that? I mean, it’s it has to be more than the numbers in the spreadsheets, but what what am I missing here?

Paul Cates (10:43)
It’s it’s kind of like it’s it’s there’s inspiration really. I’m I know it’s it’s tough to you know, it’s like asking an artist, you know, why why did they paint that? And it’s been a struggle of mine to articulate it, right? Because of course the numbers are important. And of course you can walk in and say, Okay, there’s nowhere to eat here, right? Th those things that’s difficult to sometimes if you’re not on the ground there, you know, walking around. But it’s ri it really is, I think, the truest it’s just inspiration and and then recruiting, like, you know, just like a college sports team, right? You’re you’re like, All right, I have this vision. Now a part of the work is saying that this is gonna work here. But then we’ve talked about, you know, the absorption of it, right? Who’s gonna do it, right? And h how are you gonna get because you you build a restaurant like and and I love my restaurant people and I if they ever hear this, I don’t want them to be upset. But so you know, sometimes it you know, they’re they’re like herding cats. You know, they get they create a menu, they get bored with it, they run off. So you’re really you’re selling that vision, right? And then it’s it’s got to like like it just has to be a certain way. You know, and that that’s the the best thing I put like I think all the things that are great, the like the great developments that I I’ve seen know the companies like Johnson Development. I mean these guys are making things that you want to be at, right? That’s that’s ultimately what it is and and we t we’re we’re gonna dance along this theme, but like I think that when you’re so worried about making a deal, right, you forget and you make things and you cut costs in the wrong spot. And you forget why it is that we develop anyway, right? Yeah. Development really is about making something, in my opinion, that people need. And and we talk about there’s, you know, a shortage of four million houses. You know, well, that’s not all in Houston and Dallas. Right? I mean, that’s four million everywhere, right? So we don’t need to do all that. But if you are, make it somewhere that somebody wants to be, right? I think that that I don’t know, I just get a I I apologize for kind of rambling a little bit. No, that’s I guess that’s

Cody Crabb (12:52)
This is for. No, no. I I like I like that line of thinking. I mean I I never really thought about it like this, but essentially you’re it’s almost like you’re just trying to recruit the right business for a location. Is it’s not really I’m gonna buy a location to start a business. You’re like what business needs to be here because of where it is and because of how it is and

Paul Cates (13:12)
That’s exactly right. I think that again, it’s that I I’ve worked with you know, sometimes realtors they don’t really know what to do with me. You know, they’re like, Are you a threat or are you gonna help me? But the ones that you know, take a little bit of a leap of faith, they would what they really realize is that I’m the guy in the background going and getting a tenant they said they were gonna get. Right. So, and I think that I think that’s everywhere. I think I think that people build things and they believe somebody’s gonna come and find them, but I think the gap, like what where I love to be, is I just decrease that timeline, right? I go out and I say, Man, you’re you’re operating an incredible business. Doesn’t it make sense that you come over here where, you know, there’s great places to live. It’s fifteen minutes out instead of an hour in for your for your cli your customers. I love that stuff. And, you know, some people I mean, a lot of people have made a lot of money on what I do, but that’s it. That’s it. You know, so I I like to interact in all those kind of all those phases.

Cody Crabb (14:51)
So before we were before we were on, you you mentioned something that you called the spreadsheet trap. Tell me a little bit about that and and what what that looks like.

Paul Cates (15:01)
Yeah, I I think that developers can fall in love with not just developers, but investors in general can fall in love with spreadsheets, right? What’s the first thing that, you know, a guru or a market leader gives you, right? They give you their calculator. They want you to understand real estate through that lens. And it does matter. Don’t get me wrong. I mean there’s things that are important you can’t take on something that d that doesn’t make money and doesn’t satisfy those things. But there’s a tipping point, right? Where, okay, more units doesn’t actually mean a better project. Right. And I think the big developers get this. They understand it. Apartments, for example, everybody loves apartments. And I think they’re pretty cool if they’re done right. But that’s a highly competitive, I mean, you’re talking about your amenities better be on point. You better, you know, they need to they need to feel like they don’t need to leave. Right. This is big deal. And and I think that sometimes when you add those units, when you’re like, man, we can do a little bit more because it’s not that much in capital, the customer experience suffers. And then the problem with that is that it’s tough to underwrite that because you can’t forget about underwriting demand. Right? Not just density. And so that’s I know it sounds very easy to understand, but you know, and I get it, like the business side of it, you’re talking about maybe a million, couple million, depending on the size of project difference. But man, you just you go through what, one, two, three years, however long it takes you to build that thing, and it’s just nobody wants it. What are you gonna do?

Cody Crabb (16:39)
Hmm. Well, and I I I think there are so many factors too that you know, th we were we were also we were also talking about this, that the the numbers sort of work, but there’s some factor that is just not on the spreadsheet. Like it’s the it’s the neighborhood is maybe not as lively as they are predicting it’s gonna be. And it’s like there’s a lot of just kind of hope and wish. It would you say that are they’re just missing lines on those spreadsheets, or is it more than

Paul Cates (17:07)
I think it’s a little bit more than that. You know, at the end of the day, the spreadsheet matters, but the customer experience is what makes the spreadsheet come true, right? I think there is a very high or maybe it’s an understated misunderstanding of value engineering in our space in commercial. I think you can start out with a beautiful concept and to make things work on the spreadsheet, you end up canceling out things that enhance a customer experience, right? And that that’s every asset class. Could be, you know, a a a rental house or you know, I I’ve I’ve heard people talking co co-share or co-living and all that. I mean if you make something like for example let’s take that just like that, right? You go in, you you have a a multifamily or or co-sharing, if you have the option to put a resort pool or or to put something in there, right? We want longevity as operators, right? We want somebody’s gonna be there for a long time. Well, your engineer, your architect, some of the closest people, the people that you’re paying money to and trust, they may s or your general contract, they may be like, hey, we can do that pool cheaper. And you’re gonna save whatever, a hundred thousand dollars. But you’re gonna have a pool. And then when you’re kinda in it and you’re just

Cody Crabb (18:28)
Mm-hmm.

Paul Cates (18:32)
think it you’re like, yeah, let’s do that. Fine. But then you get it and you can’t figure out, you know, your your realtor’s not gonna be able tell you. Right? They’re gonna be like, yeah, look, I’m marketing my butt off. I’m using whatever technology, you know, creation has given me and they’re going down the road, right? And it’s tough and that’s a tough moment, right? So that I think is is how do you underwrite that? How do you put that on a spreadsheet? Because your best like the people you’re deploying to make it and and have your best interest, again, they misunderstand the value engineering aspects, right? They start taking away the things that matter to the customer.

Cody Crabb (19:11)
They’re optimizing for the cost and the construction ease or whatever instead of the people that are actually going to use the the space.

Paul Cates (19:17)
Yes, and it’s very hard to shake that with some of my clients. And it’s at the end of the day it’s kinda like, look, man, I want you know, this is how we wanna do it. So I always advised against it in the beginning. Say, hey, this is division, this is what we do, do not stray from that. You know, if they say if you got a metal building scheduled and they come back and tell you, we c we can do a shingle roof, don’t do it. Don’t do it. Because that’s not like that’s not what we’re talking about. You wanna cheaper metal, okay, then we can talk about that. So

Cody Crabb (19:49)
Yeah, yeah, I see where you’re going that. So just a couple more questions as we’re kind of winding down here. But one question I wanted to ask you is so for somebody who is a for somebody that’s in single family or residential in general, and they’re kind of looking at commercial as a as an interesting pivot or something to try out, what would you tell them about what what would you tell them that would be helpful for them to know, like to think differently about investing in in commercial properties that maybe they don’t have to think about or don’t think about as a single family or multifamily residential.

Paul Cates (20:20)
Yeah, I think that I think I would just tell them it’s first of all, ask yourself the question, you know, if something doesn’t work, if you’re looking at a project or you’re you’re looking at an idea and and the numbers aren’t working, I think I think the first question is to to take a second and forget what it is that you’re comfortable with. Which again, I I know that’s gonna be a little you know, a lot of people are like, do what you know and all but not er like Flex space, right, has really taken off. Flex commercial flex space.

Cody Crabb (20:58)
Which is just just to kind of round that off. What was it?

Paul Cates (21:01)
It’s like Flexpace is like it’s like metal buildings with a office suite and a in a garage storage and they can be anything from like four thousand to eight thousand, maybe six thousand feet. People are just they love these things. It’s very easy to understand, right? It’s flex space, l lot of businesses can come into there. But there’s a lot vacant right now. You know? And I think that if a new investor just said, okay, where is this thing? What’s around it? What’s gonna be absorbed? Right? That’s that’s the first step to knowing you’re you’re looking at that thing right. Numbers are gonna be what they’re gonna be, right? You’re it’s gonna work or not, the rent up or down. But man, if you don’t have if you don’t have a plan to look at something objective I think it’s you’re just spec and spec to me is it’s fine. It’s a way. If you can if you can capture that, if you understand it. But yeah, the big thing is is what is this gonna be? What’s gonna what’s gonna get me the guy that’s down the road already renting from whatever, right?

Cody Crabb (22:10)
Yeah. Yeah. Yeah. What makes you better than not even better, but more pre preferable to some someone else and what they’re doing. Yeah. Yeah. Yeah. Well I like that. So as kind of my last question, I like this question to kind of end with, you know, if someone walks away with this conversation, remembering one thing, remembering you know, a tip or a mindset shift or or something that you have for them, what would you want them to take away from you?

Paul Cates (22:33)
If you’re out there and you’re you’re interested in investing, developing or building and you truly feel like there’s not a good deal out there. There’s nothing there’s nothing going on. I think I would just want you to remember that that at the end of the day the challenge it there’s a deal there. And the offer might need to be different, right? The exit might need to be different than what you know. But I wanna I wanna make sure that I wanna give you hope that that you can get out there, you can get into commercial, and it’s not about knowing just one thing or just something that somebody taught you. It’s about going out there and truly creating that space. And if you do that, you’ll find there’s a lot more opportunity on the market than you think.

Cody Crabb (23:18)
Love it. Well, that is a great place to land things. I’d I’d love to a lot of people that are listening are like they’re hearing what you’re saying and they’re like, I this is how I need to start thinking. I need and I need some help. What would you where would you send people to get in touch with you if people want to know more about what you do and who should be reaching out to you if they want to get in touch?

Paul Cates (23:36)
Yeah, so best way right now I’m I’m I like the one to one and I take the time to do it. So email Paul, my first name [email protected] that’s the best way. And then I I really do well, I love working with people that are in the residential side looking to to break into commercial. Or their newer commercial investors that like I talked to a guy the other day, just he’s doing a thing, he wants to deploy more capital. Actually he’s been pretty successful and people threw a bunch of money at him. And now he has to deploy or he has to get into something, right? So I I help those are the people that I assist the most and I love working with them.

Cody Crabb (24:23)
Awesome. Well, that is that is fantastic. If you’ve got questions, you want to find out more, you want to work with Paul, make sure you reach out. And thank you so much for giving us some of your time today. I know our audience appreciated it. And thank you, listeners, for giving us your time as well. If you liked today’s episode, make sure you don’t miss the next one. And we’ll see you next time. Paul, take care. Have a good one.