The Private Equity Real Estate Podcast – Show 5

Summary
On this week shows, we bring you a conversation from the archives. We have the cofounders of First National Realty Partners, Tony Grosso and Chris Palermo, discussing why Commercial Real Estate is a superior investment. There’s a lot of gold in this conversation and I hope you enjoy it!

Thanks for listening to The Private Equity Real Estate Podcast. If you want to hear any topics from the pros we bring on the show, send us an email at info@fnrealtypartners.com and we’ll do our best to get your topic scheduled.

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http://www.fnrpusa.com/

Show Notes
We mentioned a few books on today’s show. Links below!

Different types of leases:
https://www.fnrpusa.com/different-types-of-commercial-real-estate-leases/

Chris’ favorite business book:
https://www.amazon.com/Think-Grow-Rich-Landmark-Bestseller/dp/1585424331

If you are interested in more info about us or would like to see our current deals, please visit www.FNRPUSA.com

Announcer:
You’re listening to The Private Equity Real Estate podcast, brought to you by First National Realty Partners, where investors learn from private equity experts and insiders. We share our own real-world experiences so you can know exactly what it takes to be highly successful at investing in passive commercial real estate opportunities.

Nick Cucci:                                                                                                        Hey all, welcome back to another episode of The Private Equity Real Estate podcast, brought to you by First National Realty Partners. This is the ultimate resource for passive real estate investors. I’m your host, Nick Cucci, and on today’s show, we’re actually going to take a trip to the archives. I found a conversation with Chris Palermo and Tony Grosso, the two founding members of FNRP, and they’re talking about why commercial real estate is a superior investment. All of the benefits, why you see so many successful people investing in commercial real estate. Anytime you can get those two guys in a room talking about a topic, it’s really just a mastermind on that topic, so I hope you guys find a lot of value into it, and I also just want to thank you for listening. We’ve had a really successful start to the show. There are people listening all around the world, and thank you guys. I really appreciate your time, and hope we’re adding value.

Nick Cucci:
If you do like what you’re hearing, please subscribe, please share it, please leave a review, and get in touch with us. If there’s anything that you want to hear, we’d be happy to speak about it and hope that we’re adding value to your real estate investing journey. So let’s not waste any time and jump right in to why commercial real estate is a superior investment with Tony Grosso and Chris Palermo.

Tony Grosso:
I think you have to kind of look at what makes a superior investment before you actually start to talk about commercial real estate.

Moderator:
Sure.

Tony Grosso:
I think everybody understands that we’re in an inflationary environment, and that’s been 150 years since the inception of fractional reserve banking, central banking, so I think the most important thing an investment vehicle has to have is the ability to keep up with inflation, and that’s why… I know they say it’s a bull run for bonds for 30 years, but I think the single most important thing then is that the investments that you’re in have the ability to keep up with inflation, and the most important way you keep up with inflation, whether it’s through investing in companies that increase earnings or whatnot or increase dividends, but the most important thing is the growth of free cashflow or the growth of your distributable cash flow quarter over quarter. You need something that allows you to keep up with inflation because at the end of the day, where inflation is, it just eats away at you.

Tony Grosso:
That’s why I think that fixed income investors really are dead in the long run. If you have a short term need, a bond or a fixed product might work, but one of the huge things about real estate, I’ll let Chris jump in on this as well, is that allows you to keep pace with inflation.

Chris Palermo:
Yeah, I completely agree with that, and with real estate as an asset class, as an investment at all, it’s like a get rich slow business because along with keeping pace with inflation, a good majority, because of depreciation, your income is shielded. We always make jokes with our partners and investors, it’s like a fuse burning from three different ends. You get current cash flow, you’re able to keep pace with inflation, and you’re also to shield a good portion of your income.

Moderator:
Right. Tony, you said something just now that I want to have you get into a little bit more, not too much, but you said you’re having your income increase year over year from the property, what are some ways that you can keep up in inflation? I mean when you’re investing in real estate, what are some things you can do within a property to make sure that the income on the property is keeping up with inflation?

Moderator:
I think the most important thing is that your net operating income goes higher. Whether quarter over quarter or leases or annual, on an annual over annual basis. So what we do in all of our leases is we have built in increases in our leases. It depends, it’s all negotiation. Sometimes you get a 5% bump every year, sometimes it’s 10% every five years, but you have to have that base rental rate going higher, and the other way that you can insulate yourself on a specific property level is through getting into deals that are structured on triple net leases, and the reason why that’s important is because as expenses go up, which you bet your bottom dollar it’s going to happen as we’re in an inflationary environment, the cost of the porter’s going to go up, the electricity is going to go up, the service, the hours that guys go out there is going to go up a little bit because the environment, that inflationary environment that we’re in.

Tony Grosso:
So by having a triple net lease, those common area charges that you’re billing back to the tenant will go up in count, if that makes sense.

Moderator:
Yeah, sure, and in triple net, tenants reimburse for, like you mentioned, common area maintenance, right? Canned expenses.

Tony Grosso:
Yeah. On a triple net lease, the tenant is responsible for the lion’s share of the expenses associated with operating the property. So I think that if you can get your base rent going higher year over year, every five years, if you have some increases built into the rent, as rents go higher, as net operating income goes higher, the actual value of your asset goes higher because what ultimately determines the value of a business, of a piece of real estate, of anything that produces cashflow is the underlying income stream.

Tony Grosso:
Now that multiple might change from industry to industry, deal to deal, area to area, but ultimately, the way to increase the value of your asset over say a long term period is to increase your net operating income.

Moderator:
That’s a good point. And Chris, you just mentioned something too because you kind of touched on the idea of depreciation, right? Sheltering your money from depreciation. So from what Tony said, if you’re increasing your income in the property, say year over year, and you’re also able to shelter that income from depreciation, I mean you’re really hitting a home run, so can kind of just touch on the depreciation side? What that means, how is it that you’re able to depreciate the asset and then in turn, actually increase how much you’re returning from the property?

Chris Palermo:
Yeah. Each situation is different depending on if you go into a deal, all cash, or if you finance a portion of the property you’re buying and you come up with less money, but typically, with the new laws right now in place, commercial real estate is structured within 25 years of depreciation which means you can write down the cost of the asset over 25 years, which is about a 4% a year. So if you buy a building, let’s say it’s $50 million, and you comment, you can depreciate that asset by $2 million a year. So it’s all metrics on how much money you come with. You can put yourself in a position, if you’re let’s say financing 75% more of the money, for the first couple of years at least of the property, more than 90% of your money, your income is shielded from taxes, which is huge.

Tony Grosso:
There’s no such thing as a free lunch. Obviously, we’re depreciating the building, so when you ultimately go to sell it, let’s say you bought a building for 10 million and you depreciated it over a number of years down to 7 million, your cost basis is now 7 million, so you’d be paying long term capital gains on top of that, but the reason why the depreciation expense is so huge in real estate, and look, we’re not depreciating land. You can’t depreciate it, but the improvements on the land you can depreciate, and there obviously is a certain… There’s a life that legitimately is a period of time that a roof is good for, a pizza siding is good for, but the beauty of depreciating real estate is that overall, it’s an appreciating asset. You go out and you buy trucks or machinery or whatever, you’re literally depreciating that, and after a period of time, it’s worth zero.

Tony Grosso:
The depreciation, the ability to depreciate tax code, commercial real estate is huge because the real estate historically goes much higher and you’re depreciating, so it’s a depreciating asset that’s actually appreciating, and that’s what makes it such a huge tax benefit to us.

Chris Palermo:
Yeah, plus the capital gains tax structure is lower than ordinary income. So if you’re depreciating asset down, you’re actually paying less tax if you turn around and have a capital event, so you’re saving that way and then going back towards an asset appreciating or keeping pace with inflation, the great thing about a property, if you have a longterm mortgage, your mortgage stays the same. Your income over time goes higher because tenants pay higher. So your return and profitability significantly increase.

Tony Grosso:
Yeah, and I think that Chris really brings up a huge point because by being able to finance a large portion of a commercial real estate acquisition, using debt is absolutely huge because we are in an inflationary environment. It is what it is. The fed is printing money, central banks are printing money, the dollar is worth significantly less than what it was a hundred years ago. So what does that mean? I think it’s been a great run to be in debt. Why? Because the value of that loan stays constant. The interest payments if you have fixed term debt stays constant. What happens is inflation takes place, rents go higher, obviously expenses go higher, but in theory, your rent goes higher, higher, higher and higher, your debt is fixed, so you’re able to get that margin that spreads so to speak and that’s why I think owning real estate with a long term focus, with a long term debt is one of the most superior ways to grow and preserve wealth.

Moderator:
Now you guys bring up some good points, and at the same time, so when you’re depreciating an asset, and you guys kind of both touched on it, when you go to sell that property, right? You’re going to have a healthy capital gain status, right? What’s a way that guys can kind of maneuver around that kind of snowball at the end of this big tax burden that they might be come and do once they sell the property?

Tony Grosso:
I’m coming into this lens from a long term ownership outset or vision. So there’s really two ways to kind of avoid that. One is through refinancing a property and basically come into the bank and getting more… Let’s say you buy a property for 10 million, and 20 years later, the valuation is 25 million, right? You now go to a bank, you get a new loan on the property, you pull the debt, you put new debt on the property, you pull the equity out so to speak, and now you can put that back in your own pocket and there’s no real tax consequences to that. So that’s one way. The other way is through doing something known as a 10-31 exchange or a starker exchange or a light kind exchange which basically allows you to trade a certain asset for a similar asset and incur no capital gains tax.

Tony Grosso:
There’s certain rules. You have to consult with an intermediary account, so you got to make sure you do it right, but basically the perfect scenario would be as follows, and then Chris, I want you to elaborate on this still. If you buy a building for $10 million, and let’s say over the course of 25 years which is the current depreciation schedule. You depreciate it all the way down to zero. So if you sold that building for $10 million, you’d have a $10 million capital. You sold it for $20 million bill, you’d have a $20 million cap. What you then do is now take your building that has a low cost basis of say zero, right? You go out, you find another property and you put those proceeds into the next property from this sale and you actually don’t incur any capital gains and you just prefer your cost basis into the future on to the next property.

Tony Grosso:
It’s called a 10-31 exchange, a lot of investors use that, and it really makes real estate one of the most superior asset class because you’re allowed to do that.

Chris Palermo:
The funny thing is is that a lot of the seasoned real estate investors and partners that we have that come into our funds follow that strategy and what happens is is they’re owning properties not for one generation, for two generations, three generations, four generations. So they’re able to keep that income stream going through generation after generation which is the fundamental basis of what makes real estate such a great asset class to invest into it because it’s always a long term vision.

Moderator:
Yeah. Ultimately, you’re always kicking the can down the road, right? In terms of paying that capital gains tax. So as long as the current structure of the tax code would stay intact, you could just 10-31 exchange from property to property and ultimately always kick that can down the road, right?

Tony Grosso:
That’s a strategy that a lot of long term real estate guys use. The theory is you start off with one property, then you have a bunch of properties, you’re trading up, and then a hundred years later, you’re dead in the ground, you never paid any capital gains tax. It doesn’t always work that smooth, but at the end of the day, that literally could be achieved.

Chris Palermo:
Well, I just want to say one thing, which is funny. The year 2000 wasn’t that far ago. It seems like time has gone and elapsed very quickly. Well, back in the year 2000, if you spent a dollar back then, today, it would cost $1.42 To buy that same good. So people don’t think about inflation and how important it is and how much of an impact it has on a year by year basis, but if we go back 18 short years, the dollar has increased by 42%, the cost of the goods have increased by 42%, so that’s… In 20 years for real estate, that’s not such a huge timeframe, but you can imagine what type of rents you would have in the year 2000 versus today and how important inflation is in that aspect.

Tony Grosso:
Which is ultimately why quarter over quarter or year over year, free cash flow growth or net operating income growth is so important, and there’s really only two vehicles in my opinion that you can do it in. One is owning businesses that quarter over quarter increase their earnings, increase your dividend, and by owning real estate. Quarter over quarter, you’re increasing your net operating income, and 20 years from now, you’re able to keep up with inflation. In my opinion, fixed income, you’re a dinosaur, you’re dead. As soon as you make the investment, your payments are fixed. So you go out and you buy a municipal bond today that’s paying 5%, you’re never going to make any more money than that. You’re fixed in at 5%. Inflation is constantly going higher, higher, and higher, even if you’re reinvesting in buying more of the bond, ultimately you’re going to get slaughtered.

Tony Grosso:
So that’s why the name of the game is equity ownership in commercial real estate like we’re talking about where ultimately some guys do it in different businesses, but we happen to do it in commercial real estate, so dividend growth, free cashflow growth, earnings growth quarter over quarter is the way to stay ahead of the game. It’s the only way to stay ahead of the game. If the environment changed and it was a deflationary environment, I’d give you different advice, but this is the world that we live in. You have to be an owner, not a borrower, or a lender.

Tony Grosso:
And to that point, just like we were talking about before, that’s the advantage of getting a fixed mortgage at a certain period of time has less impact over time. It’s the same reason why bonds fall out of favor over that same period because you cannot keep pace with inflation.

Moderator:
Let me ask you something. You both touched on earlier throughout your comments the idea of increasing your NOI year over year, having built in annual increases in the rents, like you mentioned earlier, Tony. What are some other things that you can do to maybe add value to a property that could be some minor things here and there that would allow you to increase rents if you don’t already have things built into the leases? If you’re bringing in a new tenant, what are some things that you can do to be able to make to charge them a higher rent than maybe someone you brought in the year before or the year before that?

Chris Palermo:
Well, I’ll answer that, and that comes down to the art of real estate, because remember, it’s always a fine balance of being able to get current income and then figuring out a way or creating a strategy to force appreciation, and a lot of times what we do with some of our big tenants when we’re looking to do a let’s say a long term renewal, let’s call it five, 10 or even 20 years, we’ll offer an option to maybe redo their entire store. We’ll actually reinvest money back in, and what happens is is we’re allowed to charge a higher rent. We sell the building or value the building based on the metrics of where we earn, so if we can force appreciation, especially in some of the core assets and choice areas that are let’s say we’ll trade below a seven or eight cap, we’ll try to figure out how to do that all day long because the dollar that we spend will be able to pull out $1.50, $1.75 in backend value.

Chris Palermo:
So tenant fit out for us or redevelopment inside our tenant space is a way that we can drive that value.

Tony Grosso:
Not to get off topic, but I think the point that Chris really nail on the head is all valuations, whether it’s a business, whether it’s a piece of real estate, comes down to the income stream that it produces. So just to give you a simple analogy, let’s just say a building is spinning off $10 a year in income. If you’re able to increase, and it’s trading in the market areas at 10 cap, meaning it’s trading at basically 10 times earnings, if you’re able to take that income stream from $10 a year to now $11 a year, you’ve actually built the backend value. You’ve increased the value of that by $10 because the multiple of 10.

Tony Grosso:
So every single dollar that you increase in net operating income has some multiple to it. The lower the cap rate, the bigger that number, the higher the cap rate, the lower that number, but it’s not like we increase the rent of the building by a hundred grand and now we get a hundred grand in value, no. If it was a 10 cap area you’d increased, you increased it by a hundred grand, you just built a million dollars in value. It’s a five cap area, you’re able to build it, you’re able to build back $2 million in value. So all commercial real estate trades at a cap rate, trades at a multiple of its income stream, and for long term investors, the increases in base rent time over time allow you to ultimately build value to keep pace with inflation.

Chris Palermo:
Yeah, and what I’ll say is that it’s all about how creative you are. It’s all about your timing in the real estate cycle for a deal, so for example, a lot of guys that are looking to exit a property, they’ll try to or we’ll try to reach our tenants, see if there are ways that we can strike deals, put some work back in because we know we’re going to get more in backend value for that property because again, as Tony said, the next buyer is buying an income stream. So if we increase that income stream, we increase it with term by getting tenants to reinvest where if we reinvest back in, we get a significant backend value which is I guess, and the not to sound cliche or to talk about what our theme is, that is the art of commercial real estate.

Moderator:
Now you hit the nail on the head with that, and I’m glad you brought that up because I think a lot of guys, they don’t consider necessarily, when you’re adding income to the property, it’s not just a hundred thousand income means a hundred thousand in back end value, right? I mean it’s a multiple. So like you said in your example, if you’re buying something for a 10 cap and let’s say you sell that at 10 cap, that hundred thousand dollars that you added in value is worth a million dollars in back end value, right? So I mean the fuse burn at both ends, it all ties in together. I think even minor things, right? I mean when you look at even just spaces, sometimes you can do things as just a little as painting, right? Good landscaping, little things here and there that you can increase rents incrementally that over time can have a big impact.

Moderator:
Let me ask you something. When you’re talking to investors, right? What’s some of the push back you guys get from guys investing in real estate? What are some of the things they’re telling you why they wouldn’t want to?

Tony Grosso:
I think the number one push back then that we get, or not we get, but just across the investing paradigm is guys don’t like real estate because it’s not liquid. I can’t sell it, I can’t push a button and sell it, and to be honest with you, we might be contrarians when we say this, but the fact that there’s no liquidity, that you can’t sell like a stock or a bond in an open market at a moment’s notice is probably one of the reasons why real estate is such a tremendous asset class, and there’s really two reasons, okay? The first one is is that when it comes to sourcing deal flow, the less market discovery, the less market participants, the less ability to buy and sell, you give yourself a better chance to actually find diamonds in the rough, so to speak.

Tony Grosso:
So let’s just say there’s a stock, there’s 10 million buyers and sellers in the marketplace of General Electric, whoever the stock is, right? You’re going to have more price discovery, you’re going to have more smart people combing through those financials and giving you their opinion on that actual stock. When it comes to a piece of real estate on the corner of Main and Main in Topeka, Kansas, there’s going to be significantly less guys looking at that. So that underlying theme I think from an actual deal sourcing standpoint allows you to get creative and to find value where other guys can’t find it, because you can’t just push a button and buy and sell it. You got to go through due diligence, you’ve got to make an offer.

Tony Grosso:
When we’re bidding on property, sometimes there’s only one or two other guys that are bidding with us. So that’s what allows you to buy stuff at that good margin of safety we talk about, that discount to intrinsic or market value. So that’s the first thing. I think the second thing to tie in why no liquidity is great is because personally, I invest in the stock market, I buy dividend growth stocks, and one of the issues for guys that invest in the stock market is the ability to buy and sell. They get emotional about their investments. Stock takes a hit, they want to sell it or it’s up a bit, “Oh, do I buy, do I sell?”

Moderator:
Sometimes they’re too reactionary.

Tony Grosso:
They’re too reactionary, right? In the long run, equities outperform bonds if you hold on through the cycles for 20 or 30 years, right? The biggest risk you have by being a long term stock market investor is getting emotional and selling your stock. The beauty of commercial real estate is that you get a lot of the same great attributes that you do about dividend growth stocks, but there’s no volatility. Why is there no volatility? Because there’s no ongoing day to day price discovery. So at the end of the day, you get all the benefits you get, you get tax benefits you don’t get at the stock market. You get income on an ongoing basis, you have the ability to build equity, and you don’t have the volatility associated with the stock market, which in my case, in my opinion, no liquidity in the commercial real estate business makes it one of the biggest sells.

Tony Grosso:
If you’ve got the ability with a little bit of a focus, you don’t need the money tomorrow, there’s no better place to put money to work.

Moderator:
So ultimately you’re saying, from a competition standpoint, right? Less buyers, you have less competition, you can get things at more discounted prices, and also the illiquid nature of it, less emotion gets involved, right? So you’re less likely to make an emotional decision that maybe isn’t the best thing to do in the long run, but in that moment, right? You got a little excited and you wanted to sell off your stock position, you look at it two years later and it’s right back to where it was.

Tony Grosso:
Absolutely. It doesn’t trade up and down on exchange, there’s no quote for the real estate, and I think it’s one of the best parts about it. Chris, you want to add to that?

Chris Palermo:
Yeah. The other thing I want to say is that when you’re buying a piece of property, you’re signing up for a specific game plan for you to have, whereas the stock market is so convenient for you to be able to just buy and sell and kind of get flushed out and move away, and the other point I would say is, and it’s just an extension of what Tony was saying, it follows right down to our underlying theme of a business or practice because there are less people bidding on that property. Because it’s not 10,000 people or 10 million people at the same time, you have the ability to walk away if you don’t get your price, which circles back around until you make your money on the bond, and with real estate being a market of what somebody’s willing to pay for it as the valuation allows us to be able to exploit and take advantage of opportunities, which in the stock market you don’t have.

Chris Palermo:
If you want to buy Apple, the price of Apple is XYZ of what it is today, and that’s the risk based on what future earnings expectation on that particular day, whereas real estate, you can put your offer and then take advantage of different scenarios because you might be the only buyer, and you’re relying on the motivations of what the sellers want to do. Whereas the stock market, it’s an auction market, you don’t have that advantage.

Moderator:
Sure. So in real estate, you can take advantage of, of certain situations, right? We call them the four D’s, right? Sometimes, those are the best situations. Death, divorce, right? Dissolution, partnership dissolutions, and debt. So a lot of times, we look to find those situations where an owner might be in a particular scenario where he has to sell, right? He might be in over his head from a debt standpoint, maybe they just got divorced and he needs to sell off assets. You don’t get that with stocks, right?

Chris Palermo:
Right, and what’s funny is is that the majority of the deals that we do, I always say it, I’ll say it again, it’s not distressed properties per se. A lot of the deals that we focus on, the core ad are mainly from distressed sellers, which changes the entire scope of the deal. They come to us, they know that we’re going to close, and the same breath, the way that we look at deals is you can’t go into a deal unless it’s a win win for everybody. You’re able to take advantage of that in the real estate market, which I think reduces your risk and gives you a future opportunity.

Moderator:
So let me ask you something then. If real estate is so superior, which we obviously, we believe it is, right? That’s why we’re real estate operators. Why don’t even more people do it? How are we able to find these situations so “Easily” to take advantage of the four D’s? Death, dissolution, and-

Tony Grosso:
The problem is this, okay? Real estate is a full time business. Finding deals is a full time business, and I think that managing your portfolio and buying stocks, you really have to have some insight and you could make a case, it’s a full time business, but when it comes to real estate, you have to be an operator. You can’t just go out. If you’re a dentist who needs to put $500,000 to work, you’re better off investing with a sponsor or somebody who does this full time than just going out and buying something because guess what? You’re probably going to step out of your door, you’re going to buy something at a cap rate that was inappropriate, you’re going to overpay, whereas if you are a full time operator, somebody who’s looking at deals all day long, making offers all day long, you give yourself a chance to be successful more so.

Chris Palermo:
Yeah, and I want to say one thing. You’re taking advantage of by working with let’s say a professional company like ours, the investor, the high net worth guy, the doctor, the attorney, whatever it is, the professional, he has not only broadened the options because opportunities are in different price ranges, and who knows if a guy can pull the trigger on 17 million? Plus you’re leveraging off of experience of guys that know how to do this professionally. So you’re able to expand to more opportunity, meaning deal flow not based on price because you’re a part of a partnership and you’re also leveraging off of expertise.

Moderator:
You brought up both good points that I was wanting to segue to and that is real estate partnerships, right? What about the real estate partnerships makes it more accessible to maybe guys who don’t have the types of funds to go after a $45 million Walmart deal like we’re doing now?

Tony Grosso:
It’s a great question, and I think that we are proponents of doing big deals. Big is different to everybody, but I think that middle market deals and up have better margins and they’re able to be run a little bit easier than small deals. So if you’re a guy who has let’s say a couple hundred thousand dollars to put to work and you can maybe afford eight or $900,000 in real estate, you’re not going to have the same results as a $45 million deal, and the reason is that there’s certain facets that go into the real estate business. You need a property manager, you need a leasing guy, you need an engineer or a physical guy, and on smaller deals, the ratios, the percentages of what those things cost as a percentage of gross income doesn’t really pencil out.

Tony Grosso:
Whereas a $45 million or $20 million, even a six or $7 million, a hundred million dollar deal, the percentage of gross income that you allocate to management, to leasing, to your physical guy, they can be run professionally, and the option you have if you’re a small time guy who has three, four, 500,000, maybe even a million dollars to kind of go out there and put the work is you can either outsource it to a competent third party and have significantly less net operating income, or you can do the work yourself which is even worse.

Tony Grosso:
So by investing in a partnership with a competent sponsor, a sponsor that has a great staff of people that’s experienced, talented, passionate about what they’re doing, you’re better off in my opinion working with a sponsor, paying them fees than you are trying to go out there and doing it yourself.

Chris Palermo:
I would say this. Running real estate for the novice or for a new investor can become very difficult-

Moderator:
And time consuming.

Chris Palermo:
And time consuming, and you’re leveraging off of all the mistakes that we’ve made 10 years ago, and since we understand and we have a system and a process that we follow, a lot of times, guys will make more money investing in our deals passively without the headache of managing it than trying to do it on their own.

Tony Grosso:
So that’s a couple of different things. I mean you get the great thing about commercial real estate is you get current income from the rents over and above your expenses and mortgage payment, you get the ability to build equity in two ways, right? Not only is your net operating income goes higher, the value of your building increases, but like Chris said, it’s a fuse burning at both ends. While your equity’s increasing, your debt is being retired by your tenants, and you’re able to finance it with a good chunk of debt from banks. You have some tax benefits, you can depreciate the asset, shield some of your income, and then ultimately trade out with a 10-31, and then finally, people that look at liquidity as if it’s as a negative, we look at it as a huge positive. So you’ve got all those different things and that’s why in our opinion, real estate is one of the superior asset class, if not the superior.

Tony Grosso:
If we thought there was a better asset class to be operating, we’d be putting together deals.

Moderator:
Yeah, we’d be in it.

Chris Palermo:
To sum it up, the last one and probably the biggest is you’re able to keep pace with inflation. As things become more expensive, as the cost of bread gets higher, our notes will stay the same, our mortgage will stay the same, and our income will go higher, and that’s when it was taught to us and I’ll tell you guys, real estate business is a get rich slow business. Before you know it, the value of your building is significantly higher, you save significant money by not paying as much in taxes, and as Tony said, you have your tenants which a lot of times in our deals, our national brands, they’re paying down your note, so you’re left with a huge return.

Nick Cucci:
All right, that was Tony and Chris, the cofounders of First National Realty Partners, talking about why commercial real estate is a superior investment. I hope you guys enjoyed that conversation. Those guys are incredibly knowledgeable, and if you ever want to hear any topics from them specifically, please get in touch with me and I will do my best to set it up. We’re always trying to make sure that we’re adding value to our listeners and letting them kind of drive the conversation. Whatever you guys want to hear, that’s what we want to talk about, so please get in touch with us, and I just want to say thank you.

Nick Cucci:
Since we’ve started the podcast, there are people listening from all over the world which is really, really cool to see, so we hope you keep enjoying, keep listening. Please subscribe, share, leave us a review, and most of all, get in touch with us because our goal is to add value to your real estate journey. That is what we’re here to do. So thank you again for listening to The Private Equity Real Estate podcast. This show is brought to you by First National Realty Partners, FNRP. One of the top syndicates of private institutional quality commercial real estate in the country.

Nick Cucci:
If you’re interested in learning more about us or you would like to get access to our private offerings, please click the link in the show notes or visit fnrpusa.com. Remember that this show is for educational purposes only and should not be considered solicitation to purchase securities or be construed as tax, legal, investment or accounting advice. Thanks for listening, everyone. We will see you next week.

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