Mixed Use Rentals and Dominating Your Niche – Hanna Azar

[00:00:00] Hey everyone, and welcome to another episode of the everything real estate investing show with Sean Pan. Today, we have Hanna Azar. Hanna is a real estate investor who focuses on purchasing commercial mixed-use properties in San Francisco. He’ll tell us how to generate wealth with mixed-use properties and how to vet a quality reach out tenant. If you enjoyed this episode, subscribe to the show and leave a review. We release episodes every Wednesday and Sunday. Enjoy!

Sean: [00:00:22] Go ahead and introduce yourself and let us know who you are and how you got into real estate investing.

Sean: [00:00:26] Hi. My name is Hanna Azar. I got into real estate; it could be such a multiple ways. My father told me about investing early on maybe I was 10 or 12 about real estate stocks and just business in general, come from a family of small business owners and entrepreneurs so real estate was always a topic for Thanksgiving and Christmas dinners. Yeah, that’s the bulk of it when I got started.

Sean: [00:00:51] I mean, that’s pretty awesome. I wish my parents taught me when I was young.

Sean: [00:00:54] Yeah had some pros and cons but definitely when you’re older cousins are talking about something and you kind of look up to them naturally, it kind of resonates with you and sticks with you for your early childhood. So that kind of had that effect on me for sure.

Sean: [00:01:08] Absolutely. So what is your main investing strategy now?

Sean: [00:01:12] Right now, I focus on value-add investing particularly mixed use buildings in and around San Francisco. I got started starting small. I bought my first investment which was a single-family home in East Palo Alto. I was 20 or 21 years old. It was right around 2012. I got started just renting it out for two or three years. It was a short sale. I then sold it in 2015 and did a 1031 exchange into an 8 unit mixed-use building in San Francisco’s Mission District. My father was my partner on that and I also help manage the family portfolio.

Sean: [00:01:49] So is that currently which you own right now? Just an 8 unit in San Francisco?

Sean: [00:01:52] I own that along with another mixed use building in the Mission District which is 5 units.

Sean: [00:01:57] So what is it comprised of? Is it like 8 units of residential plus another like downstairs unit?

Hanna: [00:02:03] So yeah, it’s 7 residential units and one ground for commercial retail and same with other building. It’s 4 residential  upstairs and 1 retail downstairs.

Sean: [00:02:16] Do you know what kind of retail stores they are?

Hanna: [00:02:18] Oh, yeah, of course. One actually just signed a lease with them. It’s a funny story actually. The building used to have a ground floor garage on a commercial street, a pretty busy corridor, and we converted it into a retail space. It took about I think 13 or 14 months of construction but we finally got it completed. We actually just got the certificate of occupancy yesterday. So it’s kind of funny and having to talk with you now.

Sean: [00:02:45] Congratulations.

Hanna: [00:02:46] Yeah. Thanks. It’s a long time coming. We did lease it out to a yoga studio focused on families. So she’ll have like kind of a babysitter or nanny type situation at the back that is covered. And the mothers and fathers will be doing yoga in the front in the main yoga studio.

Sean: [00:03:06] How about your other property?

Hanna: [00:03:08] It’s a camping gear rentals. So you rent or buy I think predominantly rent camping gear and it’s also in the Mission District.

Sean: [00:03:15] And why did you decide to do something mixed use and not just do the traditional route of multifamily?

Hanna: [00:03:20] I guess growing up in retail, I also co-own and grew up in retail stores. I own with love with my father and my brother cell phone stores throughout San Francisco. So retail has always been the kind of a big thing push for me plus I kind of like the diversification of having ground floor retail and residential. It’s sort of a diversification on its own and it just kind of pride of ownership to when you see like a business you’re building.

Sean: [00:03:47] Yeah. I mean, it’s really cool and in fact, it’s exactly what you said like for me, I don’t have retail experience so if I buy a building with the retail tenant, I wouldn’t feel very comfortable with it. But for you, you guys have lived and thrived in at your entire lives. So you guys probably very comfortable with that.

Hanna: [00:04:03] Yeah and you can learn it. Just because we were in retail doesn’t mean I don’t discourage anyone from not pursuing it. 0In retail, it’s much more so like the credit worthiness of the tenants. San Francisco obviously is a city full of small businesses so you won’t have so much of that credit worthiness. It would be kind of up to the individual to determine how busy is this restaurant that night by maybe going with friends if you are interested in the building. What are the owners financials look like? How much security deposit do they have? How long is their lease? Do they have an option to renew? Do they have revenues at projections that they can share and so on so forth? It’s definitely something anyone can learn. We just happen to have that background and I just happened to like to research on Loopnet and Costar and other real estate focused websites that I am a little more familiar with those terms. Yeah, mixed-use is definitely something I like and hope to continue to grow in.

Sean: [00:05:01] And did you have to kick out any of the old tenants when you bought those properties?

Hanna: [00:05:06] Like retail tenants or residential tenants?

Sean: [00:05:09] With the residential ones. Like one of the biggest problems in SF is that they’re so rent-controlled that you know, you’re renting for like $600, but market could be $4,000 so sometimes you buy them out, cash for keys.

Hanna: [00:05:22] The one we just completed the conversion from garage to retail and that one we did buy out a tenant. They were paying about $1,500. There were some overcrowding going on that wasn’t very sanitary or safe. So we had a discussion and we came to a number. I believe the number was basically a total package of $75,000 and that is comprised of new money which is actual money going into her hands and back rent that we essentially forgave. So we work that out. It took some time. It wasn’t easy by all means. It was it was difficult. It took almost 14 months, I believe but we ended up doing a full renovation on that place putting wide-plank flooring, very high ceilings, I think 13 or 14 footers, two-bedroom, two-and-a-half-bath, modern huge living room, and I was able to rent it out for just $4,750 to new guys that leave at Midwest that work at Twitter.

Sean: [00:06:27] How much did it cost you to do the remodel?

Hanna: [00:06:28] About $100,000.

Sean: [00:06:30] Okay, that’s pretty good. Wow.

Hanna: [00:06:32] Yeah. Every time I go in that unit to like giving them letters or any kind of updates, I always get jealous because ah man, it’s so nice. These ceilings are really cool and like the two-bedroom, two and a half bathroom and both bedrooms have en suite so both of them are technically master bedrooms.

Sean: [00:06:50] Yeah, you’re like I want to live there.

Hanna: [00:06:52] Yeah. I know. Yeah, I just had a kid so living in the city is a little too tough for me at this point.

Sean: [00:06:58] Oh, man. I totally understand and I know how you feel. Like when I do my flips. I’m like, I want to live in this house. I don’t want to sell it.

Hanna: [00:07:04] Yeah. Yeah, there are definitely a couple of those, definitely.

Sean: [00:07:09] Yeah. So you’re talking about vetting a retail tenant. I think there’s something that’s very unique. I haven’t had anyone who actually has retail tenants before. Can you go to some more specifics on what exactly do you look for. You’re talking about the numbers that they have but like what numbers exactly are you looking for?

Hanna: [00:07:28] Yeah, I mean because the San Francisco, like I mentioned, a city of full of small businesses. It’s their first business and their first endeavor. It’s really hard to hold them to the gun for turn standards that you would like a Starbucks for example. We look first and foremost at the person and the individual. What are they like? Are they enthusiastic? What’s their background? Do we see them staying there for a long time? And we obviously look at any kind of business models that they have, financials, security deposit that they’re willing to put up.

Sean: [00:08:05] So do you charge like a two-month security deposit for retail? Where’s this so just one month?

Hanna: [00:08:10] One of the two tenants I just mentioned, one of them we charged him a lump sum of about $22,000 and he preferred that to avoid being personally guaranteeing the lease. So we decided to go with that option. It’s not something we initially wanted to do but we felt strong enough in his ability to run the business and it’s been about 3 years now and he’s doing very good.

Sean: [00:08:38] So is it rents for retail in San Francisco like $10,000? I don’t even know what the order of magnitude is for retail space.

Hanna: [00:08:45] Yeah, it varies quite a bit. It’s really based on a price per square foot. Most of our buildings, 5 of them are in the Mission District and I would say the price per square foot range, it really depends on the size of the square footage to. So something that’s 2,000 square feet for example is gonna be lower that you could charge them the price per square foot. Then something that’s 500 square feet, we have 500 square feet retail tenants that pay between $7 and $10 a square foot depending on the nature of their business, but we have tenants that are like a 1,500 square feet, the pay about $325 to $375 per square foot plus in commercial real estate, you also charged cam which is like double or triple net where they pay a portion of operating expenses such as property taxes, insurance, and sometimes management.

So just to give you an example, if you have a 1,000 square foot tenant and you’re charging them $350 a square foot, the rent would be $3,500 if they are taking up 30% of the square footage of the building. So let’s say the building is 3,000 square feet, you would charge them 30% of the operating cost of the building. So if the operating costs, hypothetically is $20,000, you would charge them $60,000 a year. And what we like to do is divide that. So it’s a recurring monthly charge. So it’s just not like one lump sum once a year or twice a year. So we just kind of built it into the monthly rent. Obviously, if you go to Union Square, it’s going to be a $100 or $50 a square foot. I am not really familiar with price per square foot there, but people do it. There’d for brand recognition sometimes more so than actually running a profitable business.

Sean: [00:10:29] It’s kind of like Game of Thrones, right? It’s a lost leader.

Hanna: [00:10:32] Yeah sure.

Sean: [00:10:33] You don’t make money on that show. Okay, it’s cool. Good to know. So what kind of financials would you expect retail tenants to have if let’s say rent is I guess like $4,000, $5,000 a month. How much gross do they need to be able to support that kind of rent?

Hanna: [00:10:48] You know, we typically charged about 2 months security deposit. It’s really on a case by case scenario to be honest and some of the buildings I must note that we inherit the commercial tenant so we didn’t choose them. Not that they are bad or anything but we buy buildings and then you know when you sell a building, the security deposit transfers the new landlord and we inherit the tenants there. And just to give you an idea, we manage about 68 units in and around San Francisco. So it’s really on a case by case basis, but we look to see that they can do, you know support the construction costs, and obviously for any build out that they want to do. That they have a solid business plan and that they could afford 2 or 3 months of security deposit.

Sean: [00:11:35] So you don’t really check to see if their average gross is like 2 times the rent or something like that?

Hanna: [00:11:40] Sometimes we do but in cases where it’s a new business owner it’s tougher to do so. So a lot of times, it’s like kind of a gut feeling. A gut feeling along with those other things I mentioned.

Sean: [00:11:52] So you manage 68 properties. So do you guys also have a property management component to it or you’re talking about this is like a family portfolio of 68.

Hanna: [00:11:59] So it’s a family portfolio of 68 units. I might be off by 1 or 2. I want to look beforehand, but I miss that. But we do the property management. To give you an idea, we started small. I think we grew from about 10 properties in 2011 or 10 units rather to about 68 today.

Sean: [00:12:21] Wow, amazing. What is your buying criteria?

Hanna: [00:12:24] We always look for value-added components. And I want to give a shout out to a book that I feel like helped me quite a bit. It’s a Manny Cushman’s book. It’s how to build your hundred-million-dollar real estate portfolio.

Sean: [00:12:38] I like that. I never heard of it before.

Hanna: [00:12:40] Yeah, that was definitely a big inspiration. Very easy to read and so was confessions of a real estate entrepreneur. I think the author is Jim Randle. Those two had a really big impact in my real estate investing philosophy and so far career. Like I said, I bought my first house when I was 20 years old. I decided to sell it three years after because I just thought that I need to grow and I felt like growing was doing 1031 exchange and kind of scaling up that way, and I recommend the same to my father and we did it as a basic family portfolio. And that’s sort of how you grow, especially when we’re investing a single family homes, I feel like it gets overvalued and over capped and it’s limited to what you could do. So that’s kind of where I got that philosophy.

Sean: [00:13:30] Yes, definitely more creativity, possibilities and commercial and do you want to give us a quick summary of what the 2 books are about and what are the key takeaways you got from them?

Hanna: [00:13:40] Yeah, definitely. So Manny Crispin is a real estate entrepreneur based out of LA. He talks about his journey and his real-estate journey. And he talks basically very much so about value-add ideals, never fall in love with the property, increase basically NOI, sell after 2 to 4 years and just continue to grow exponentially that way. And he found out that he would personally like office buildings the most and he went to multiple states, so kudos to him for making the leap over states, but the same concept apply no matter what you do whether it’s multifamily, mixed-use commercial office and even single family homes. I mean everyone starts somewhere and I think it’s just the main key points is adding value and that’s the way you create real wealth in real estate and I’m sure most of your listeners know that you know, flipping homes and adding value if you time everything right and you focus on what the client wants is a form of adding value. That’s creating real wealth not just buying and holding and just forgetting about it and putting on your shelf as if it’s a book for active investing.

Sean: [00:14:54] Can you give us like an example with like numbers of what a potential deal would look to you? In terms of like they are value-add component. What is your purchase price range? How much do you think you would put into it and how much you think you’ll be worth after you’re done?

Hanna: [00:15:08] Yeah. I actually have a pretty recent case study of one of the buildings I mentioned. So we bought it for $1,400,000. We did major construction to the ground floor in terms of foundation work, beams, moment frames, all kinds of city inspections and the remodel of the residential. And I think that cost us just around $600,000 and we, you know, utilized construction lines of credits and we recently got an appraisal and it was appraised at $2,800,000.

Sean: [00:15:39] Nice.

Hanna: [00:15:40] So that’s a recent case study that’s very, very recent, but it took, it’s also took time, It’s been 2 years now since we acquired it, 2 years and maybe a month and a half.

Sean: [00:15:52] So you said you use construction lines of credit for it. How did you acquire the property? Did you use hard money?

Hanna: [00:15:57] We actually did a 1031 exchange from a duplex that we essentially flipped in Oakland.

Sean: [00:16:05] Okay.

Hanna: [00:16:05] That one was actually a funny story. It used to be a church and we converted a church into a large duplex.

Sean: [00:16:14] Nice.

Hanna: [00:16:15] Yeah, and that was in West Oakland. That one took a while as well, a lot of construction, almost brand-new construction minus existing wall. So it was like a really, really big project.

Sean: [00:16:27] Do you have your own crew?

Hanna: [00:16:28] We don’t have our own crew but I think we went through 2 or 3 contractors and we have one handy man that’s been working for us for 5 or 6 years. I [00:16:39] think the hardest part of real estate investing is the contractor portion and be happy to hear any insights or top tips from you or any other of your listeners on that because that’s obviously the hardest part for us to manage, is timelines and so forth.

Sean: [00:16:55] Absolutely. It feels like the best way is to have either really close friend or partner who is part of your organization or family member. Otherwise, it’s very difficult.

Hanna: [00:17:05] Agreed, agreed.

Sean: [00:17:06] Now you’re talking also about how you converted a parking space into a whole retail area. And I’m sure it’s not easy, especially in San Francisco to go through the whole permitting process.

Hanna: [00:17:18] Yeah, so the permitting process is actually not that hard as long as it’s zoned for commercial. So we essentially came across these two properties that were in a pretty commercial zone. They have been used as parking garages just because they have been used that way and no one has taken the time to convert it and it’s obviously a pretty big job as I mentioned. So they were actually in commercial zones, the permitting process wasn’t too hard, just getting our architect to do the plans and submitting it but I don’t think that the actual approval process is very hard because they are existing, they are zoned as commercial use.

Sean: [00:17:59] So basically you had your architect draw some designs, you submitted it to the city planners and then it just goes in a long queue and you wait, is that basically it?

Hanna: [00:18:07] I think it was relatively quick. I think the hardest part was getting our architect to actually do the work to be honest with you. It’s because you’re not changing the use of the building, you are using its existing used by city definition and you are just basically taking over that use essentially, that pre-existing use.

Sean: [00:18:27] Okay, got it.

Hanna: [00:18:28] It’s like if an office space was used as residential, but it’s really zoned as office.

Sean: [00:18:33] I see. So it’s just that your architect took a little bit longer because he had to do whatever he had to do.

Hanna: [00:18:38] Yeah, I think it took maybe 2 or 3 months to do that.

Sean: [00:18:41] Did you say it took you 14 months, you mean actual construction?

Hanna: [00:18:44] Actual construction, yeah.

Sean: [00:18:46] Okay. Got it.

Hanna: [00:18:47] Yeah.

Sean: [00:18:47] Got it. How are you finding your deals now?

Hanna: [00:18:49] Most of them are MLS.

Sean: [00:18:52] Really? Like LoopNet?

Hanna: [00:18:53] Yeah, yeah. You know, it’s funny, obviously you hear a lot of people that say you can’t find deals on MLS, you can’t find deals, but I feel like the more niche of the product you get into real estate, the smaller the pool of competitors. I mean there’s been tons of a time where it would just, well there was a couple deals that were bigger deals where we attempted to pursue that it was just really between us and one other party and the upside on those were huge. So I know sometimes you see a bunch of people that go to open houses or open properties, but never doubt the ability to make an offer and try because you might actually win.

Sean: [00:19:34] That’s true. As long as you set you’re buying criteria right. They might take you, right?

Hanna: [00:19:39] Yeah. Definitely.

Sean: [00:19:40] Your niche is retail mixed-use, right? That’s pretty much where you guys are going for?

Hanna: [00:19:45] At this point, yeah, I think it’s mixed use apartments mostly, yes. We’ve done flips in the past, we’ve done duplexes, but I think that’s kind of where we’re headed.

Sean: [00:19:55] So going back to your buying criteria, like is there a certain like number do you look at? You said a value-added but like, you know $100,000 or just I mean, I’m just wondering what are your actual buying criteria?

Hanna: [00:20:08] I think after the refinance or sale, we’re looking for 15 to 25% IRR.

Sean: [00:20:14] Makes sense. Right now is your real estate business doing better than your cell phone business?

Hanna: [00:20:18] I love them both. I mean it’s hard to say. We have managers at our cell phone stores. I also work alongside my brother and my father so there’s definitely support on both sides for both businesses.

Sean: [00:20:32] Yeah. So you’ve been doing this for 7 years now, 8 years now?

Hanna: [00:20:36] Yeah, yeah. I guess it’s been 8 years.

Sean: [00:20:39] Cool. What advice would you give yourself if you can go back in time or if you could start over what would you do differently?

Hanna: [00:20:45] Buy more during the recession and yeah just buy more I guess. And obviously a big one is utilizing more creative financing solutions and it’s only recently that I’ve been going through more meetups and meeting great people like yourself that I’ve been learning more about creative financing which I think is huge into doing this on a much larger level. So as long as the numbers work out, utilizing creative financing whether that’s seller financing, private or hard money. If I could go back, that would be like my number one thing because that would allow us to scale much, much quicker.

Sean: [00:21:26] Right. Because I guess in the beginning you’re always finding out ways to purchase with maybe 20% down and then you quickly run out of cash.

Hanna: [00:21:33] Absolutely. If I knew that would help a lot, I’m not sure how much larger or faster but it would be definitely helped a lot. Yeah. Another tip would be I have my real estate license and my father is a broker, but any deal that we want to pursue, I would recommend for your listeners as well to always have the listing agent represent you. It always helps and it seems like it always works. And I think we lost a couple deals at least by not utilizing this strategy and another wise investor also mentioned the same thing and he was very adamant about the strategy. So that’s definitely one other tip I would recommend.

Sean: [00:22:15] Right.

Hanna: [00:22:15] To your listeners.

Sean: [00:22:16] Especially in the commercial world.

Hanna: [00:22:17] Yes.

Sean: [00:22:17] Especially in the commercial world. Double ending is definitely a thing.

Hanna: [00:22:21] Yeah. That’s huge, it’s huge. Another tip I can give to your listeners, if you’re making an offer on a property and you know that there’s multiple offers and you receive a counter offer, and you know the other parties are also getting like counteroffer and you really want it and the pencils out, even at the counter price, what I would recommend is countering the counter offer by let’s say $3,000-$5,000 more because you know, the other parties are going to accept the counter, but if you counter the counter with a higher offer, you’ll stand apart from the crowd. I also recommend letters. I mean even in commercial deals, they won us a couple of deals by writing personal letters, laying out your intentions, putting a couple of pictures. I think that’s also along with kind of financials if you could also include like references from other real estate investors, sellers that you worked with in the past. Just kind of building in that offer substance helps a lot when presenting your offer to the seller.

Sean: [00:23:38] Yeah, that’s a great tip. I usually think that letters in a matter, but then I realized, oh man, this is a very emotional business so if they like you, they’ll tell you at least hey, here’s an offer we got just match it and we’ll sell it to you.

Hanna: [00:23:52] Oh, yeah that absolutely happened last year for us. We were making an offer on one of our larger assets and it was an old family trust and all the family members were spread apart the United States and it was between us and two other parties. I wrote a letter to the sellers thanking them for the long ownership, telling them our background as small business owners and small time investors, and apparently the other competitor is a Taqueria owner and all of the commercial tenants on that building didn’t have a lease and there was a restaurant there, so because they knew our intentions that we weren’t in the restaurant business and they knew who he was and that he would potentially basically kick them out on day one, they essentially went with our offer because of that aspect. So you never know what will touch people in different ways, but that definitely worked in that case study.

Sean: [00:24:55] Awesome. So what’s next for you guys? What are your plans for the future?

Hanna: [00:24:59] Yeah, that’s a good question. I guess looking at existing debt and maybe doing some of re-finances and potentially doing a couple of more acquisitions if the deal comes up and it’s right. And potentially selling some of the existing buildings if the offer was right on those too. So little up in the air and we’re just seeking opportunity as opportunities as they come.

Sean: [00:25:25] Awesome, so how can people can contact with you?

Hanna: [00:25:28] Yeah, they could call, email me. My number is 415-875-0177. My email is hanna@azarrealtygroup.com?

Sean: [00:25:56] Awesome. Well, thank you so much for sharing today and I hope to see you around in the very near future.

Hanna: [00:26:01] Definitely, nice chatting with you, Sean.

Sean: [00:26:02] You too man. Alright thanks, take care.

Hanna: [00:26:04] Bye.

Here are some of the key takeaways I got from speaking with Hanna. It’s possible to find good deals on the market. You just have to find your niche and actively look for those types of deals. For commercial real estate, let the listing broker double-end the deal and always write letters to the sellers, telling them your background and your intent. It doesn’t hurt and it may help you win the deal. If you get offered a counteroffer with other people, bid a few thousand dollars more to secure the win and throughout your real estate career, think of creative financing solutions to allow yourself to scale quicker. And finally the real way to creating wealth is to purchase properties to have an opportunity for value-add. Hope you learned a lot. Thanks and have a great day.