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Active Commercial Real Estate Investing Show

Essential Legal Insights for Beginner CRE Investors


The legal component of commercial real estate investing can be one of the most important yet daunting elements of any beginner’s first few deals. How do you protect yourself in a deal? How do you ensure you receive your fair share of the profit in a partnership? How do you set expectations with tenants and have the proper legal documentation to hold them accountable? In Episode 004, Patrick and Noelle are joined by Ron Rohde, a commercial real estate attorney and investor who has represented over $1B in commercial real estate transactions. Throughout the episode, Ron provides valuable insights into the legal aspects of commercial real estate investing and walks beginners through key legal considerations they should keep in mind throughout their first few deals. In this episode, you’ll learn:

  • Common mistakes in forming LLCs and PSAs and tips to avoid them.
  • How beginners can familiarize themselves with the legal language in commercial leases.
  • The concept of recourse vs. non-recourse debt and the implications for personal liability.
  • Legal essentials when pulling in limited partners and the importance of proper legal structuring in commercial real estate.
  • How your real estate may not be fully protected in some situations (even if you own the property in an LLC)
  • And much more!


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Meet The Guest

CRE Attorney and Industrial and Self-Storage Investor

Ron Rohde is a seasoned real estate attorney specializing in investment acquisitions, dispositions, and triple net leasing. What distinguishes Ron is his unique role as both a legal expert and a successful industrial triple net investor. He has represented over $1 billion in real estate transactions across diverse property classes, including multifamily, industrial, and retail. As a principal, he currently owns a robust portfolio comprising over 120,000 square feet of industrial triple net properties with 15 acres of outdoor storage. Whether you’re new to investing or part of an established group with hundreds of units, Ron Rohde offers valuable insights to help you via YouTube and Twitter.

Ron Rohde, Esq.
Commercial Real Estate Attorney

Ron Rohde, Esq.


Patrick (00:22)
Hello and welcome to the active commercial real estate investing show brought to you by the one and only school of commercial real estate investing. I’m Patrick. And today we’re joined with Ron Rohde, a seasoned real estate attorney specializing in investment acquisitions, dispositions, and triple net leasing. What distinguishes Ron is his unique role as both a legal expert and a successful industrial triple net investor.

Noelle (00:31)
and I’m Noelle.

Patrick (00:49)
He has represented over 1 billion in real estate transactions across diverse property classes, including multifamily, industrial, and retail. As a principal, he currently owns a robust portfolio comprising over 120 ,000 square feet of industrial triple net properties with 15 acres of outdoor storage. Whether you’re new to investing or part of an established group with hundreds of units, Ron Rohde offers valuable insights to help you via YouTube and Twitter.

Noelle (01:16)
Ron, welcome to the show and thank you so much for joining us. We’re so grateful you’re here today.

Ron Rohde (01:21)
Thanks, Noelle. Yeah, excited we could get this on the calendar. I know we’ve been trying for a while.

Noelle (01:26)
Well, I feel like before we jump into questions, it would be good to start with a little bit of your background. So the how and the why you got started in real estate investing and law.

Ron Rohde (01:38)
Yeah, I think the how or the why, you know, the why is I do it for profit and for fun. I think real estate is just one of those things that’s enjoyable. I love real estate. It’s all I do for work. It’s what I do for my personal investments. And then

When I have any free time, I record YouTube videos and I’m posting on Twitter. So that’s probably the why and it’s profitable. But my parents were investors and so they kind of instilled in me that I thought when I had a job, I would just save up enough money and I would just buy a house. That, you know, it was just kind of ingrained to me that I would just buy a house once a year and just manage a rental.

But…After a while it became too much. I was starting a young family. I was starting the law firm. I just didn’t have time even with the property manager to manage this many houses. And so I sold everything and pivoted into industrial triple net investments, which is what I do in my day job and never look back and couldn’t be happier.

Noelle (02:47)

Patrick (02:48)
Yeah, that’s a great segue into what you’re currently doing, which is practicing real estate law and investing. And I think that combination, as we call that in your bio, is very unique in a lot of ways, a combination, because the legal component of commercial real estate investing is a very important component. And so today we would love to break down.

For the beginning investor, some of the key steps that they need to be thinking about or working through as they look to get into commercial real estate investing. So I’m curious, what essential steps do you recommend active investors take to clearly separate church and state, so to speak, when it comes to their personal lives and their personal assets, as well as their commercial real estate investing business or assets.

Ron Rohde (03:41)
I think a lot of people coming from residential, there’s a lot of debate or there’s a lot of chatter about, do I need LLCs or one LLC per property? In commercial, it’s generally a much easier decision because if you have a loan, the lender is going to require an SPE, which is a single or special purpose entity.

In order for them to fund the loan, you can have one piece of property per LLC per loan. It’s kind of period, end of story. And it makes sense because it silos the risk, and if you have a partner such as a lender or another equity partner, they don’t necessarily want to be a part of the risk— operational risk —of another property that they’re not aware of or not handling. And so, to me, it always starts at that LLC level for commercial because if you’re gonna have a partner, lender or equity partner, you’re going to have to have an SPE— one per property. It’s very simple. So you start with that, you create the LLC, you may make an offer.

The three major steps I would say is the LLC from your formation, the PSA, which is your purchase and sales agreement, that’s a lot of the due diligence occurs in commercial prior to closing. Maybe it’s post contract, but pre -closing, you’ve got to do a lot of work in that time period, and then finally, your leases.

After you’ve closed on the property or even prior to closing, you want to review and make sure you understand your leases with your tenants because that is the single source of all of your legal rights and remedies, late fees, and penalties. Everything derives from that document because again, unlike residential, which residential leasing has a lot of statutory overrides.

And I’m here in Texas, which is even a landlord friendly state, there are still a lot of situations that your lease in a residential situation doesn’t need to be, quote, ironclad. It doesn’t need to cover every single permutation because the statutory code covers a lot of those gaps for you. And it mandates a lot of things. And so you can’t, for example, charge a $5 ,000 termination fee. They would probably find that unconscionable.

And so in commercial, because you can contract for anything that you want, it’s really critical that you understand the lease. So that’s what I would say is the beginning and the end of legal LLC, PSA, and understanding your lease. And maybe we’ll throw in loan docs if you have a lender, but for the most part, those are the three primary legal areas to start with.

Noelle (06:28)
And when you talk about understanding your lease, because obviously that is a binding contract between you and whoever you’re leasing out to and will be the thing that’s, I imagine, upheld in a court of law, should anything go wrong. What are the steps you recommend people taking to make sure that they have the proper language? I mean, obviously contacting someone who understands real estate law, I would imagine is the first step, but where can people find that information? Should they look locally? Should they look at the national level?

Ron Rohde (06:59)
Yeah, so I think understanding your lease really starts with the investor themselves. You know, these documents are written, I won’t say in plain English, but they are written to be very detailed and specific. They’re not meant to be confusing. So my best clients, they can read leases and they really understand them. They can look for base rent, they can look for the term, they can look for termination options. So they should be able to understand these, and there are plenty of leases, I would say you can just start by going on the internet and just practicing and looking at leases and seeing if you understand the terms or what do you have questions because that’s a much better situation, better for the investor in terms of time spent and delays as well as cost with your attorney. You don’t want to just send him the lease and say review this because … When we don’t have clear instructions, we’re just going to review everything top to bottom to be very robust and thorough. But the best investors say, hey, Ron, I’ve looked at this lease. The base term is pretty clear, the renewal, blah, blah, blah, all that’s good. I have specific questions about their permitted use and what this would be interpreted as and why is it written that way.

That narrows my attention to say, “Okay, I’ll skim still the other sections and I might flag things that I think are crazy or way out of market, but if they draw my attention to permitted use, I know that that’s something I can focus on and spend less time on other areas.”

Ron Rohde (08:33)
So that really saves the investor two really important pieces, which is time of review as well as cost of the attorney. Having the ability to read the lease, and again, they’re not complicated documents, but you should be able to read them and understand specific paragraphs that you have trouble with or you want more clarification, and that ability to direct your lawyer’s attention is going to be a win-win for everybody.

Patrick (09:00)
That’s really good advice there. For the beginner investor who maybe isn’t as familiar with these types of leases and language, for them to take advantage of that piece of advice, what would you recommend they do or where do they start to become familiar with what type of language should be expected within a triple net lease or any commercial lease for that matter?

Ron Rohde (09:25)
Yeah, for beginners, my advice is just to start looking at multiple, multiple deals. So whether these are online listed, depending on the state you’re in, you may have recorded memorandums of leases. But the key is to try to just get exposure to as many lease documents as you can that are within your market or subtype.

Again, I know that sometimes it’s hard to get your hands on it, but I guarantee you they do exist. They get recorded in litigation. They’re in the website. So there are lots of places to get sample leases, and you’ve just got to start looking at them in your asset type, in your industry, and start to see what are the sections, because they do follow typical patterns.

Patrick (10:13)
And regarding the other two key components that you mentioned, the LLC and the PSA, what would you say are common mistakes you see when people are forming those?

Ron Rohde (10:28)
I’ll go for the LLCs, people don’t understand that the operating agreement is the only agreement between partners. And that is your live and die agreement if we have partnership. If it’s a single member LLC, I’m much more permissive. You don’t really need to do as much because you’re not gonna sue yourself. However, if you have a partner, and you have a bunch of these email chains where you guys talk about, “Oh, Patrick’s gonna do this. I’m gonna do Y. You’re gonna put this money in. Oh, okay, I fronted this. Oh, this is a loan. No, this is gonna count as equity.” You have all these emails, but if it’s not reflected in the operating agreement, there’s difficulty in getting that legally enforceable. And if you have a breakup and your partnership is forced to dissolve, it puts everybody in a very bad spot. You’re probably gonna end up litigating to divide up the equity piece of that LLC.

Patrick (11:27)
Mm-hmm. And then similarly for the PSAs, what would you say are common mistakes you see there?

Ron Rohde (11:34)
Uh, PSAs, I usually can come in…with prior to execution, even if it’s kind of last minute. And I fully recommend this. I would say if you have a simple deal or if you’re starting off, use some of the promulgated forms. There’s no such thing as a standard PSA, same as no standard lease, no triple net lease. But there are certain commercial transactional forms that you can use for the acquisition. And I would say start looking at those. And it’s a mistake not to use the form if you don’t every paragraph of a custom contract, right? Because that’s basically your alternative. You either have a custom PDF contract, which is probably good for, I don’t know, 30% of the deals, but it’s just not custom to your situation. And then the alternative is to have a Microsoft Word completely custom contract that’s drafted by an attorney, and that will be very clean and logical looking.

But it’s really, I think it’s harder to get started in a custom contract versus a form. So I would say, at least for beginning investors, look at the form, read every paragraph, and see if you understand how to check the boxes. If you don’t know how to check every box or what numbers to fill in, you’ve gotta get some help. You gotta get an attorney or maybe a broker.

Noelle (13:06)
I’m a big fan of relying on the professionals, but totally hear you and think it’s really good advice to make sure that you understand the language too, because even if, Ron, you and I are in partnership and I have you reviewing something, I want to be able to understand the language that you’re talking back to me in as well so that I can be better educated moving forward. So I think that’s great and I think it’s always a good idea to call a professional.

Ron Rohde (13:25)
That’s right. And that’s a big, that’s a big

Yeah, real estate is a team sport, especially in commercial real estate. And there’s a big difference from residential where you’re used to having a agent or a broker do everything. They, they tell you the sales price, they negotiate, they look at the tenants, they look at the lease, they fill out the contract and they’re a one-stop shop for that 3% commission. They do everything.

In commercial, you have such specialized roles that you may have an investment sales broker, you have a debt broker, you have your loan officer is different, and then you have a lawyer.

And all three of those people, your CPA, property manager, your construction manager, you cannot do all of these functions to have one sales agent looking at a house and be like, “Yep, 20 grand to fix that, we could rent it out for $3,000 a month, and here’s a lease, and let me write up the contract. You wanna pay $210k for this? Okay, great.” That process doesn’t happen in commercial just because of the expertise, and it’s really a disadvantage if you think that you can just have one person or yourself do all of those roles that I just mentioned casually in commercial and it takes time. And I think that’s kind of related to the PSA. You’ve got to build enough time for your due diligence phase where you can terminate because I see people come in. We want to just summarize the number one mistake I see with people doing their own contracts is too short of a due diligence period. They think they can do a quick close because you know, it’s a good looking property or it’s not that bad. And they don’t have enough time to even order an ALTA survey. And it just limits their choices pretty drastically.

Patrick (15:15)
What is the recommended period of time that you typically like to see in a PSA?

Ron Rohde (15:21)
So again, it’s gonna vary by asset type, the size of the property, the age of the property, how it’s being used, and ultimately kind of the lease too. But we are seeing in this market probably 60 days. I think in the last two years, buyers had to compete and they were doing 30 day due diligence and you had to be really Johnny on the Spot and order all your surveys, order all your vendors, all your reports, day two of earnest money so that you could hit 30 days and decide. Now we can see 60. If there’s more value add, if you have to get more construction bids, it can be up to 75, but 45 to 60 I would say is normal.

Patrick (16:04)
Okay, that’s great. A great general guideline to have in the back of your head as you’re going through this process. Shifting gears a little bit, you’ve talked about creating an LLC, a PSA, and your lease to get going. How does the legal picture start to shift when you start to pull in limited partners into the picture? What type of legal essentials do you see as being absolutely critical for beginners to get correct right off the bat when they start pulling in LPs?

Ron Rohde (16:38)
Yeah, so this is how do you form your capital stack when you find a deal? And I think beginners really tend to maybe over-focus on what they don’t have. And what I mean by that is if you lack subject matter expertise or if you don’t have a great concept of legal, of the way the US laws work, eviction courts, people focus on what they don’t have because they see it as a weakness. And that’s where partners, I recommend in the capital stack, you either have solo, which is just Ron stroking $2 million to go buy this property. That’s the extreme, full risk, but full reward and full control and nobody to deal with.

On the other extreme, you kind of hinted at LPs. So that’s gonna be like raising a syndication, doing a reg D, 506 offering. These are security offerings. That is the highest level of capital raising from strangers that you don’t really know, doing an OM, an offering memorandum, PPM, private placement memorandum, subscription agreement, all that. But in the middle, there’s something called the active partnership, or JV agreement, and that’s what I usually advise people. You should at least be aware of this as an alternative because maybe the three of us want to go in on a deal and instead of me stroking a check for 2 million, we can each go in for 630 or whatever, 633. and it spreads the risk a lot more, but then you also have active partners that are recourse for the debt, they’re knowledgeable and they’re able to participate in the operations or the due diligence of the property. And so in my scenario that I just outlined, go with the 2 million raise, you can stroke one person to have a check, deep pockets, full control, least amount of operational legal risk. On the middle is joint venture or active, and I really like this one because you’re not doing a securities raise, everybody is active, they’re typically spread pro rata or pari passu for equity contributions. So maybe Patrick and Noelle you guys are at 800,000 each, and I’m 400k, whatever that works out, but it’s pari passu, and so you guys would have the lion’s share, and then I just take a lower spread. But that can be a really good middle ground for people starting off, because they don’t really want to be GPs, right? You actually want somebody to help you to be a sounding board and to help you manage the property. And another partner may really help with your balance sheet if you’re trying to personally guarantee debt, for example. It’s more comforting to the lender if we’ve got three guarantors for personal recourse on a debt. So that’s why, you know, when you’re coming up with your capital stack, you’ve got a $5 million purchase price.

How are you gonna fill $5 million and maybe even more, 5.1 if you have some working capital or value add. So 5.1 million plus closing costs plus due diligence fees. How are we gonna raise that total amount? 3 million in debt and 2.1 in equity. And then of that 2.1, where’s it gonna come from? So that’s a very simple document, but to your point, if you’re a beginner, you need to understand where that’s coming from because it’s no longer a automatic assumption that, hey, I’m myself, I’m just gonna buy this property. That’s fine in residential and there’s plenty of people that do that. And I did that for a while, but in commercial, just because the numbers are higher and the amount of work is higher, there’s a larger volume of work, it’s nice to spread it out. So that’s a very long answer to…

How do you formulate a capital stack as a beginner?

Patrick (20:37)
Yeah, thank you for providing the spectrum of risk. I think that’s incredibly helpful just to understand almost some of the pros and cons from a high level on going solo versus JV versus doing a reg D raise. You mentioned the notion of recourse versus non-recourse, and you put a fairly positive light on doing recourse debt. I’m curious from a legal perspective, can you dissect the concept of both recourse and non-recourse debt? And then as a personal investor, where you like to source your debt or structure your debt in that regard and why?

Ron Rohde (21:18)
Yeah, so when I refer to recourse, it’s a personal guarantee from an individual that promises to repay the bank for their costs associated with the loan. And primarily, I think the most common situation would be, okay, we buy that property for $5 million, the bank loans us $3 million, we have horrible issues, tenant vacates, building gets damaged, whatever. We have to sell the building and it’s only worth, well, I guess this has to be worth below $3 million because we guarantee that they get three, but we have our equity as a cushion. So we would have to sell the property for net proceeds of 2.75, which if you’re buying a five million, we’re talking about like almost a 50% haircut on loss of value, and it’s dramatic, but we, the three of us, would have to reimburse the bank for that shortfall.

So theoretically between 3 million and 2.75, 250 would be on top of all the equity that we lost. But the idea is you are going to make the bank whole for the amount that they lent out. And I typically see it, you know, it happens if there is just no occupancy or the building gets damaged and we don’t get insurance for some reason and it’s just gonna cost too much. Like what if it costs 3 million to rebuild and we didn’t get insurance?

That’s a situation where I may not say, “Hey guys, I’m not in to rebuild this building out of pocket. I would rather sell it for whatever we can get and pay the bank $80,000 instead of tripling down, to rebuild without insurance.” Does that make sense? And so.

Patrick (23:07)

Ron Rohde (23:08)
That’s what recourse means. Unfortunately, if you default in some way, that’s gonna include the bank’s attorney’s fees, that’s gonna include interest and late fees and penalties. And it can be fairly significant, but the idea is that you can’t just give the keys back to the lender and give them the deed and just walk away. You have personal liability to make sure the sale happens. You have a duty or you should be financially motivated to get the top sales price. So we could probably have sold it for two million if we just gave them the keys, but if we work hard, we could sell it for 2.75, that sort of scenario. And it’s a big deal. I think people should understand what a personal guarantee means, how there’s limits to it. You know, your net worth kind of drives how much debt you can guarantee. And there are limits.

And it’s different with each bank. Sometimes it’s like a per bank exposure where I’ve got two loans with one bank right now, and I was talking to them about a third, and based on my net worth and the amount of debt I have, they wouldn’t extend another loan of another like two and a half million dollars. They said no, for me alone on a deal. And so you just have to be aware of it as individuals that you can’t just sign a bunch of personal guarantees if you don’t have the net worth behind it to back it up.

So your alternative, and this nice segue to talk about non-recourse, you can also approach those same banks, those same lenders and say, hey, same deal, same $5 million property, what would you offer for non-recourse debt? And typically what happens is they will drop the LTV a little bit to cushion them even more. I mean, I think we had 60% LTV. That’s a pretty safe number.

Normally, they’re going to be in their 70s or 75%, sometimes 80 when they’re aggressive. But if you come to them and say you want non-recourse, they may drop to 50%, 55%. And if the three of us say, hey, we have the cash, we just don’t want personal guarantee. That protects the bank, but it doesn’t impact our balance sheets that we have contingent liabilities related to these personal guarantees. And so, as a beginner, I think you’re gonna have to be personally guaranteed that. So you should understand what it means for your other assets. Whether they’re exempt from, I would say bankruptcy, but if you didn’t have the money, you could file personal bankruptcy. But what assets do you get to keep? Your 401k, your retirement, your primary home, two cars, your guns, jewelry, clothes. There’s a lot of things that you can keep. But what you don’t keep is your other investment properties if you filed bankruptcy for example. So given the choice between recourse and non-recourse, beginners are going to have to do recourse because they just don’t have any credibility otherwise. And then you can think about quickly transitioning to non-recourse to kind of protect your assets and limit your downside.

Patrick (26:23)
And can you elaborate on what you just mentioned about what you could potentially keep in bankruptcy if you had to take out recourse debt and defaulted?

Ron Rohde (26:32)
Yeah. So again, we’ll stick to that like five million scenario. And let’s say you levered up with a little bit higher. You know, let’s say you got 80% financing. So four million dollar loan. And if you personally guarantee that and the value drops to three million, you will still, you know, you sell it and then the bank says you have a deficiency. They’re going to sue you for that delta between the loan amount plus their losses minus the cash that you gave them from the closing. And what you do is that’s basically an unsecured judgment and you file personal bankruptcy and that will wipe out that, I don’t know, what’s the loss? So if it’s just me, say it’s like a $2 million loss, right? They loaned you four and you paid back two, that’s a $2 million judgment. They will wipe that, but you’ll lose all your other investments, but you get to keep all the equity in your primary home, you get two cars, you get, you know, you don’t have to like, be poverty-stricken. You don’t have to sell all your clothes. You get to keep jewelry, certain number of guns in Texas, that sort of thing. But it’s a pretty drastic response, but people should understand that might be your best outcome if you don’t have $2 million somewhat liquid to be able to pay it off. What usually happens, I think, is that you will be forced to liquidate all of your other real estate or other investments, and then you try to pay down that two million. But if it’s not enough, you’re gonna lose those assets one way or the other, right? Either you’re gonna sell it and try to give it to the bank, or you’re gonna file bankruptcy and lose it to the bankruptcy. So that’s when bankruptcy comes in.

Noelle (28:13)
And so tying this back as well to like talking about LLCs and having everything in an LLC or at least one property per LLC that doesn’t necessarily protect your properties then in this instance, if you’re talking about a legal structure.

Ron Rohde (28:29)
Right, so LLCs do not protect your LLCs from yourself. If you have a personal judgment against you, that doesn’t matter. What the LLC does is it protects you from third party and your tenants from suing you. Because their recourse is limited to the LLC and also third party, we call them like invitees or trespassers, the slip and fall people that walk onto your property and get hurt, they don’t have access to suing you personally. They can only sue the landlord LLC. But you know that’s maybe a perfect example of if it’s a non recourse the banks recourse is limited to the assets of their borrower LLC and they would just eat the two million dollar loss while you the borrower person get to keep all your other assets.

Noelle (29:23)
Make sense.

Patrick (29:23)
Now, on the inverse side of this, let’s say that the three of us have a joint venture together. We’ve taken out recourse debt and one of us is in a car accident and the person that we’re in the car accident with sues one of us individually. That JV property is still protected by the LLC, correct?

Ron Rohde (29:51)
I mean, it’s not protected. It’s not going to get sued, but your interest in the LLC of our joint venture is an asset, and it’s an individual asset of you, so that if you actually get a judgment against you, it is subject to the creditors of that lawsuit.

So the financial value, I will say, not the operational control. We don’t wanna be partners with the guy’s wife that got hurt in a car accident. She doesn’t get to vote with us, but financially, she’s our partner, and she may take that and try to sell it. She might sell it to us. She might sell it to somebody else, whatever. But the idea is yes.

That’s why you got to be very careful, I guess, about individual actions that you do. I recommend umbrella insurance. It is cheap. Get it because in your scenario, you have $2 million of umbrella. If you get sued personally, that umbrella insurance is supposed to protect you from non-contractual claims. Again, lawyers talk about privity of contract, which is, “Do I have a legal agreement with this person?” If I don’t, then they’re considered just like a random person down the street. How do you protect yourself? Well, you don’t have a contract with them, so you can’t limit your liability. But you can have umbrella insurance, which covers it. But for everything else, you wanna make sure that it’s signed in an LLC, so that you can control and silo the damages. I don’t know if that answers your question, but getting hit by a person from a car accident does affect all of your personal investments.

There is a solution though, you could move your interest into a trust, which gets it out of your personal name, but then this conversation is going down a very detailed asset protection. And for beginners, you don’t wanna overcomplicate it. I just want you guys to do deals first, make some money, and then worry about asset protection. But yes, there’s some things that you can do to protect against hitting somebody in your car, but then not subjecting your personal real estate holdings to that lawsuit. Those would be separate.

Patrick (32:05)
Yeah. And thank you for pointing that out because one thing that I think I’ve learned thus far in our journey is that there are many different ways to put each puzzle together. It’s not like each piece is, you know, predefined out of the box. As your portfolio grows, these pieces will change and there’s ebb and flow and you continually need to stay up to date and have experts to help guide you in terms of how to mitigate your risk and ensure that you’re positioning yourself in as strong of a position as possible.

Ron Rohde (32:40)
Yeah, and I think for asset protection, I always give different answers. If a client comes to me and they wanna start in commercial and they have a net worth of $5 million, my answers are different for them, as opposed to somebody coming to me and saying, my net worth is $700,000, and I’m gonna put $200k of that into real estate. You can be a little bit more risk loving if that’s what your net worth is, because you can kind of start over.

But somebody with five million, you’ve got to be careful that you don’t open yourself up to liability without understanding the risk.

Patrick (33:17)
Yeah. And in terms of partnering with people and the legal risks that is associated with that, do you have any, let’s call them extreme cases that you could provide as examples, just to highlight for beginners, why the legal component of investing is important to take seriously?

Ron Rohde (33:37)
Just when you’re dealing with large sums of money, real estate is interesting in that it’s very stable investment because you’re buying a tangible hard asset. And that’s what makes real estate capital intensive. But at the same time, I think it’s less volatility but a higher entry price because your floor is limited. I mean, again, for the most part.

You could be investing in a business, right? And if we bought a $5 million business, the value can go to zero. The value can go negative with contingent liabilities and that sort of thing. But with real estate, all of our examples, we’re only talking about a percentage loss. There’s a floor that the dirt value, the building has some value, and that’s what the minimum is. So,

because real estate is like that, I think there’s much more of an important emphasis on the contracts because you’re just dealing with larger sums and you need clarity about how a partnership is supposed to operate, how it’s supposed to manage its funds, how it’s supposed to handle disputes, and ultimately how it’s supposed to dissolve. You need to have clarity on that because there is almost always going to be assets worth fighting over. Again,

referring back to my business example, if we went together in partners in a business and the whole thing exploded and our partnership fell apart, the value of that business might go to zero, in which case we’re not really fighting anymore because there’s no assets, right? There’s piles, there’s maybe some inventories. We’re not fighting over anything. With real estate, I can pretty confidently say the value of 99% of people’s investments is not going to zero.

So what that means is there’s always gonna be some value there. And candidly, it’s probably gonna be 50, 60, 70% of your purchase price. That’s a lot of money. And so partners will always be fighting to try to figure out how to divvy up that pie. And it’s just kind of the nature. I mean, real estate is a little bit legal heavy. We talked about the lease, but the lease is critical. That’s the only way you’re getting paid. And some people will ascribe to the…

you’re buying a stream of payments and the lease is the only thing that matters. They could be renting a toothpick stand and the lease, if they pay you $10,000 a month, then that’s the lease. But yeah, I mean, I think ultimately it is real estate if that lease gets terminated for some reason and they say, well, it’s Amazon, they’re not gonna terminate and it’s ironclad. I’m like, yeah, well, stranger things have happened, but if that does happen, what’s the market rent for that toothpick stand?

it’s probably gonna be $500, not 10,000. So you can’t pay as if it’s gonna be 10,000. So same thing for any other building. I mean, that’s an extreme, but paying above market rent puts you at risk.

Noelle (36:27)
Good insight to have and you always, I mean, we probably get in too much of the analysis paralysis, at least personally for Patrick and I, of thinking about these things and how to protect yourself. But I like what you said is like, get in there, do a deal, figure it out. I mean, for beginners, for me, probably in my risk tolerance, I would say do a deal that doesn’t have a high level of risk, you know, if you’re going to get started so that you have those trial runs. But if you’re already investing in single family homes

residential, you might have an idea of what those things look like and, you know, hurdles that you would just take and exponentially multiply if you’re looking into a bigger unit, whether it’s multi, industrial, or any other type.

Ron Rohde (37:09)
Yeah, and we didn’t go through this question, but what is commercial real estate? You know, multi-residential, I think from a lender perspective, they define it as four units or more. But candidly, if you’re buying a six unit, it’s not really commercial. That’s just managing a slightly bigger building. But, you know, if you get into the 18, 24, that’s definitely a commercial. You got to run that professionally. But

multifamily, office, retail, multi-tenant retail, industrial, hotel, land, all of these things are considered commercial. And my only caveat to getting started is I don’t really like small commercial deals, like the really small ones, like $600,000 for this office condo. Those are tough deals because they have all of the fixed costs

of hiring the team that we talked about. You got to find the specialist, got to have the CPA, got to have this, got to pay extra for the lawyer. But none of the upside, because how much profit are you really going to make on an office condo for $600k? You would have a great deal if you bought it for six and sold it for eight, but you’re not really making that much money if you have a $200,000 down payment. So I think the smaller commercial, it really has to start at a million for a price point.

So you get a little bit of heft, you get a little bit of size where the juice is worth the squeeze for your attention, you have an hourly return that whatever it is you do. So doing too small of commercial actually I think discourages people because they’re not going to chase and look into all the problems or optimizing rent

when it’s making a difference of $300 a month, right? It’s kind of almost the same as residential. I’m sure there are people that buy residential properties that are six or seven or $800,000, and it’s just a house. But in commercial, you’re gonna have commercial insurance, you’re gonna have an LLC, you’re gonna have all these costs with none of the upside. So with that caveat, yes, just do a deal in the asset class in the market that you wanna be in, and don’t be afraid to just get

into it and you can always sell it.

Noelle (39:22)
Yeah. Great point. And like you said, 99% of what you’re buying is not going to go down to zero. So you’re going to be able to make money back. It’s a really good thing to be able to fall back on. But I know we’ve taken up a lot of your time and we’re, I’m playing project manager here since we’re running short on that. But Ron, I just want to thank you so much for joining us. It’s been a pleasure. We are so appreciative for all of your insights and your value and really hope the listeners will find value in that as well.

I know you do a lot of education, like you said, at the top of this on, on the side, you record when you can as well. So we’re going to make sure to put all of your information in the show notes so that people can reach out and they can learn more from you outside of, of this podcast. And thank you so much for joining us today.

Ron Rohde (40:10)
Perfect, thank you guys for having me.

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