Investing strategy with Boone Nerren is the topic of Podcast 27 for Champions DFW Commercial Realty. The weekly radio show and podcast airs Friday mornings on 620 AM KEXB in DFW as part of Texas Money & Business.
Mr. Nerren joined Jim Kelley and Ron Taylor to offer his investing strategy insight in commercial real estate. Here’s an excerpt of their conversation followed by the podcast.
Jim Kelley: Well, and like the investor we met with this week, Boone, I think we have a lot of new-time investors. They’ve got money to invest, but they don’t know a lot about commercial real estate. So they’re looking to folks like you that have been there done that, that can help take them on that journey.
I think it’s critical. What you’re offering is the ability for a new investor to come on board. Invest into commercial projects and take the learning curve and learn how it’s done. And grow their money and protect their investment. Do you ever have a time where you have challenges with getting funding on a project, either individual capital investment or lenders lending on the project?
Boone Nerren: I’ve learned over time that getting your capital secured is also a handy thing to have. The last thing you want be doing is having money into a project, earnest money, appraisal, surveys, etc. and have a contract moving along on its deadlines. And not know that you’re going to have your capital in place to close.
Although I don’t get it in-house, I’ll get it verbally committed to and I’ll know that I have…I’ll show… Once I’ve seen a project, I’ve run my analysis and I’ve got it shaped up enough to show to two or three other partners. I’ll send that out and say, “Hey, I’m looking at this thing. If you’d be interested, let me know.” I’ll get a couple who’ll say, “I’ll do 50 thou, I’ll do 100, I’ll do 200.” Whatever the size of the project may be.
You need a bench just like in baseball. You needed someone to come in some case a starter has to drop out. So you have one or two others that can fill in just in case any type of…any situation, like a medical situation, a loss of a job or something that would cause someone who really intended to and wanted to invest. But two months later when you get down to it, they can’t. So you queue up enough to get the initial capital committed to and then you have a little bit of bench strength to know that you can rely on that if you need to. Having your capital committed will take a whole lot of pressure and stress off you because nothing’s more stressful than getting down to the end, and needing another 100,000 or 200,000 or you’re going to lose the whole deal.
Jim Kelley: Excellent point. And when you have strong investors Boone, I think it makes the financing on the construction go relatively smooth. You know, banks are lending and they want to lend on good projects, profitable projects. At the end of the day lenders just want to get their money back and make a few points. Is there anything from a pro forma analysis that is important as you look at a project or top line analysis as you’re evaluating it, that’s key?
Boone Nerren: I think what’s important is just to make sure that you get a template that identifies all expense lines. The last thing you want to do is do it on your own. Run the expenses as you think they would be and then leave something out that’s critical. So that’s where having a full pro forma template that has everything included… Make sure that you fill in the boxes. You know, that’s already line item, so that you know you need to go look up and see if that particular expense applies to a property. And most of them are pretty basic. You’ve got your top line, taxes, insurance. You’ve got utilities, maintenance.
So a lot of this comes down to really analyzing a property well, too to know what other additional capital you need to bring to it. Or are the units in great shape and has the current owner done a great job of keeping the units up to market? Replacing carpet, replacing utilities, keeping the counter-tops resurfaced occasionally. Replacing quality flooring in them. What’s the status of the units? Because that’s a big outlay too. If you’ve got the bulk of your units that are really aging and have not been kept up and updated, you’re gonna have to pay anywhere from 2,000 to 5,000, depending on the decline of the individual units, in order to bring them up to rentable, highest market rents possible.