The Retail Real Estate Edge Most Investors Miss wtith John McNellis

The Real Estate Investing Club

Join an active community of RE investors here: [https://linktr.ee/gabepetersen](https://linktr.ee/gabepetersen)  0:00 Introduction and Welcoming John McNellis 1:40 How a Young Lawyer Accidentally Found Real Estate 4:00 Turning $1,500 Into a Life-Changing Investment 5:40 The Path Into Shopping Center Development 8:00 Why Retail Real Estate Continues to Thrive 11:15 The Hidden Rules of Retail Investing 14:00 How to Learn Retail Real Estate the Right Way 18:20 Development vs Buying Existing Properties 21:20 Building Wealth Without Institutional Partners 23:15 Retail Market Outlook and Ground Lease Opportunities 29:35 Biggest Real Estate Mistakes to Avoid  🏢 REAL ESTATE INVESTING LESSONS FROM 40+ YEARS OF DEVELOPMENT EXPERIENCE  In this episode of The Real Estate Investing Club, I sit down with veteran real estate developer John McNellis, a developer with more than four decades of experience and over 100 completed projects. John shares the lessons, mistakes, strategies, and market insights that helped him build a successful career in commercial real estate, retail development, shopping centers, and long-term wealth creation.   If you're interested in real estate investing, commercial real estate, passive income, financial freedom, property development, or building long-term wealth through real estate, this conversation is packed with practical wisdom from someone who has survived multiple market cycles and economic downturns.  🏬 WHY RETAIL REAL ESTATE ISN'T DEAD  Many investors believed e-commerce would destroy brick-and-mortar retail. John explains why that prediction largely failed and why neighborhood shopping centers remain one of the most resilient real estate asset classes. We discuss the importance of grocery-anchored shopping centers, the evolution of retail tenants, and why businesses such as medical offices, restaurants, service providers, and essential retailers continue to drive demand for physical locations.  This conversation explores how retail investing differs from multifamily investing, self-storage, RV parks, and mobile home parks. John reveals why local market knowledge, tenant relationships, and industry connections can create a significant competitive advantage when evaluating commercial real estate opportunities.  #RealEstateInvesting #CommercialRealEstate #PropertyDevelopment #FinancialFreedom #PassiveIncome  Want to learn more about our guest? Connect here: [https://www.johnmcnellis.com/](https://www.johnmcnellis.com/)  Want to learn more about the REI Club Podcast, how to invest with Gabe at Kaizen, or join our community of active real estate investors on Skool? Visit the podcast website at [https://www.therealestateinvestingclub.com](https://www.therealestateinvestingclub.com) or click here: [https://linktr.ee/gabepetersen](https://linktr.ee/gabepetersen)

Transcript

00:01All right. Welcome back to another episode of the Real Estate Investing Club. I hope

00:06you guys are having a great week, great day, wherever you are and whatever day it is for

00:12you. It is an absolutely fantastic week for me. I know you guys, I've mentioned a few

00:16times that my wife is pregnant and we were getting into the end. Well, my son came early.

00:21So the last, I think it was four days ago now, my son was born. Everybody is happy and healthy,

00:26so I couldn't be happier. And I decided, you know, we're just going to keep going with the

00:31podcast. My son's asleep and so there's no harm going forward. So today is a good day for a second

00:37reason, though, because we have John McNellis with us on the show from McNellis Partners.

00:42John has over 40 years in experience. He's a developer, over 100 years, 100 deals done.

00:48And I apologize if I trip over my words sometimes during this episode because we are lacking sleep

00:54here in this household. So we're going to do as good a job as we can here. But John,

00:58I am super excited to jump into this. Thanks for hopping on.

01:02Gabe, it's my pleasure. But before we get into it, what's your baby's name?

01:06His name is Vigo.

01:08Vigo?

01:09This is our, yeah, this is our second. So we got a three-year-old daughter and she is,

01:14her name's Astrid and then Vigo is four days old now.

01:18That's cool. Vigo Mortensen is one of my favorite actors.

01:21That's what everybody, that's what rings a bell for everybody.

01:26John, I told you before we get on here, we always like to start with stories. We like to hear

01:30how

01:31people got to where they are. So why don't you take us back to the beginning 40 years ago of

01:36your

01:36story in real estate and tell us how you got here.

01:39Well, it was kind of a long, winding, accidental road. In college, I was a journalism major.

01:44I loved to write. And then I woke up my senior year of college and said, whoa,

01:49it's one of my smarter decisions. I don't want to be a journalist. I don't want to write about what

01:53other people are doing. But I had zero talent, Gabe. So I thought, what am I going to do? And

01:58I

01:58didn't really want to go to work. I was kind of lazy. So I went to law school. I thought,

02:03you know,

02:03I'll be Perry Mason. You know, I'll be the guy helping the innocent and going to court and strutting

02:08around like a peacock. Got a job with a fancy law firm in San Francisco right out of law school.

02:16figured out within a month, no more than two, that big firm litigation is nothing,

02:23nothing like it is on the TV and the movies. It is just soul killing. It is just fighting,

02:28fighting all the time. These little paper wars. Basically, what you're trained to be is becoming

02:33a professional asshole. Just a jerk. And I said, I hate this. Fortunately, the firm was big enough.

02:40It had a real estate department where we represented the money. We represented Bank of America,

02:48Transamerica, and so on. So I got on my knees, crawled to the managing partner and said,

02:52please let me be a real estate lawyer instead. You know, let me be a business guy. And he said,

02:58no. But then one of the junior partners quit. There was an opening. And so within a year as though,

03:04I shifted into being a real estate lawyer. And that was a lot of fun. Meanwhile, on the side,

03:12I always kind of, I was always sort of good with money. I started buying, I bought a house. No,

03:18I take that back a duplex when I was 24 and I paid around 25,000 for it. So I'm

03:24going to kind of the

03:24nights. Wow. And this is in California? Yeah. Well, this is a long time ago.

03:28I was going to say, that's, that's probably over a million dollars at this point.

03:32Uh, no, cause it was in my hometown, which I won't name. Whoops. Lancaster.

03:39Arguably just, just a dump of a town. Sorry, Lancaster. Anyway, I got lucky with that one.

03:45I bought it for about 25,000. It scraped together like 1500 bucks to do it.

03:50But it was a rising market. Even in that town, a year later, it was, I sold it for 60

03:56,000,

03:57traded it into a fourplex. Uh, and a year later, still market rising. It was 120,000. So my 1500

04:05bucks, uh, this is the best deal I've ever done in my life. 1500 became 90,000 within the space

04:11of a

04:11couple of years. So I'm doing these. And I've been, I, I, I hear people, uh, um, some guys that

04:18I know

04:19who were, you know, they got into real estate during like, uh, 2018, you know, when it was

04:24kind of hockey sticking and they realized that they actually made more money cause they were

04:28having W2s and they made more money just on appreciation in the houses that they bought

04:33than they did in their W2 income. Like in the job they were working, they made less money than

04:38appreciation. And I hear those stories that I was always like, yeah, that's pretty funny.

04:42I hadn't thought of that. I, I, I was making 18,000 a year as a young lawyer. So yeah,

04:48it was,

04:48lights out different. So, so I'm doing little deals on the side, uh, at nights and weekends.

04:55And then in my day job, I was doing big fancy deals for clients. And then what that enabled

05:01me to do in hindsight, hadn't thought about it was it, let's say that the house flipping is,

05:07is a rookie ball or not even a little league ball. But by working as a lawyer with these, uh,

05:15I got to meet the right people, the right, uh, lenders, banks, uh, financial partners,

05:22uh, developers. And so I was able to kind of skip past rookie ball and single A double

05:27A and kind of jumped in with a partner, uh, who'd been a client into shopping center

05:32development. Uh, and we built our first shopping center, uh, in the early, about 40 years ago.

05:39It opened in 84, uh, in Healdsburg, California, which is now a very, I love Healdsburg. Yeah,

05:45it is. It is the square in the middle, middle of that town is beautiful. Yeah. Okay. But so

05:50my center, which we still own today, uh, and it's free and clear, uh, is just a block off

05:56the square. Uh, Oh, nice. It's a great property. Yeah. Yeah. That's how I got started.

06:02That very cool. And we've been shopping center developers ever since. Yeah. And that's,

06:07that's a very unique, um, you know, we, we have a bunch of developers on the show. Most of them

06:12they're, they're in the, you know, SFR, a single family and they'll, they'll do, um, lots, uh, or,

06:17or larger developments, but, um, shopping centers is very unique. And why, why shopping centers? Like,

06:24why was that the thing that brought that, uh, you decided to latch onto when you got into real estate?

06:29Well, I'd like to tell you that it was this brilliant strategy. So this Napoleonic wonder can,

06:36there's pure chance, Gabe. And so as I do, I was doing deals on the side and what I was

06:42doing,

06:43because I didn't know anything about construction, I was a lawyer. So I was doing kind of paper lawyer

06:48deals. And by that, I mean, uh, as, as we got bigger, I would do a, I'd buy a fourplex

06:53and

06:53convert it into condos, or I'd buy a couple of buildings on one lot and do a lot split and

06:58sell

06:59off one, but, you know, kind of paper developing. Uh, and then we, with my partner, I tried

07:06industrial, didn't work for us. Uh, it's too long a story, but then this client that I had,

07:12who was about 15 years older. And remember I'm in my twenties at the time, he was a shopping center

07:18developer. And so as lawyer and client, we built a couple of shopping centers. Uh, and then he was an

07:24accomplished developer, but he really was, uh, you could charitably say charismatically challenged

07:30that, you know, the, the, the guy could not sell the snow cones in the desert. So I teamed up

07:38with

07:38him. And so I became the, the, the marketing guy raising money through my contacts. And it was just

07:45purely, purely fortuitous. Had he been a multifamily guy or an industrial guy or hotels, I probably would

07:52have gone that way. But as it turned out, my whole career has been retail and I've loved it.

07:58It's a great discipline within real estate. Yeah. And so many, um, so many things in life,

08:04at least for me have been that way. Like, you know, I like to claim intelligence, but a lot of

08:08things, you just kind of step into it and it works out. And so you just keep going down that

08:12route.

08:12Um, so yeah, that, that makes complete sense. Uh, it is, like I said, it is unique and it's something

08:17that I've actually, we just bought our first, um, commercial retail location. It's a, it's a

08:22standalone. It's not part of a strip center. Uh, we mostly buy mobile home parks, RV parks,

08:27self storage facilities. And so this is my first time in the commercial retail like world. It's

08:32very unique. It's very interesting. I love triple net. It's, it's a great way to go about owning,

08:36um, owning real estate. So what, uh, what do you like about retail, about, um, shopping centers?

08:43Like what is it about the asset class that you feel is superior to other versions or other asset

08:48classes? Well, there's one basic fact people have to eat. So, uh, what we like, and just to get much

08:58more specific, what we do, our neighborhood shopping centers, uh, that's usually around 10 acres, 10,

09:0412 acres, a hundred to 120,000 feet. Uh, in the old days that we used to call them barbell

09:09centers

09:09because you'd have a supermarket on one end, a big building, and then a thin row of shops

09:15in the middle and then a drugstore on the other. But, you know, for a long time, a retail was

09:20out

09:21of favor, Gabe, because everyone thought all the geniuses thought that, uh, e-commerce going to

09:26kill retail. Yeah. But that hasn't happened. In fact, my sector and neighborhood centers came

09:33through with flying colors, the, the COVID mess, you know, everybody realized that supermarkets are

09:39here to stay gas stations, banks, pizza parlors. So it's, yeah. And even the, the things you feel

09:45like would be, um, or would kind of go out of business, they're, they're not going out of

09:49business. I mean, uh, even, you know, accountants are staying in, in retail locations, lawyers. I mean,

09:55the things that you think internet AI, those are going to completely destroy it or not, they're,

10:00they're still going to be there and people want to go somewhere physical. They will, even though

10:03you can do it online, they want to go into a place that has, um, you know, something

10:08physical, some, a person that they can actually see in front of them. So yeah, it makes a lot

10:12of sense to me. Um, it has shifted a little bit, you know, so there are more, like you

10:17say, uh, we were putting in medical, we're putting in dental, uh, accountants, H and R

10:23block, I guess that, that, that qualifies. There are, are some businesses that, that hard

10:28in soft goods, you know, like a, say a sweater shop that you probably wouldn't find in a

10:32neighborhood center anymore because that's easy to buy online. Uh, bookstores, as I'm

10:37sure, you know, are relatively few and far between, but pretty much everybody else is

10:44still going to the market. You know, we love it.

10:47Yeah. Um, so if you, I know it's kind of hard to take this position in your mind because

10:54you've been in retail for your entire career, you know, it inside and out, but if

10:58you were to put on the hat of someone who wanted to get into retail, retail, they

11:02wanted to learn it, they wanted to understand how to underwrite it, all that

11:05stuff. Um, what, what, what like first biggest pieces of advice could you give

11:11them to understand the asset class?

11:14Sure. The first thing I'd say is retail isn't something that you dabble with. Uh,

11:19it's very much an inside baseball game. Uh, you, one of the charms of retail

11:24uh, and one of the dangers is that we deal with the same people year in, year

11:30out, decade after decade, you know, and with Starbucks, with Safeway, with

11:34Walmart, with Ross, it's the same people on both sides. So I'm an insider. You

11:41could say, cause I've dealt with these guys for so long. We, we have a number of

11:45properties. So if you gave say, Hey, gee, I want to buy this shopping center and you

11:51don't know anybody. Uh, and you can, if you say, Oh gosh, I need to find out how

11:58well this supermarket's doing before I buy this, you're not going to know who to

12:02call. Uh, if you call a number that you're going to get an email address. And so

12:06you're probably never going to find out, or if you push hard enough and long

12:10enough, maybe you'll find out how well the market's doing or how well the

12:14Starbucks is doing. I won't get any different information than you, but I'll get

12:19it immediately. You know, I'll call, you know, my friend at Safeway, my friend at

12:24Starbucks or Walmart and say, Hey, is this a good center? Or Hey, I've got this great

12:29lot right here at corner of Maine and Maine. Do you want to go there? So I get the

12:34same answer you do, but I get it immediately. Uh, and retail can be really

12:39tough. You know, a market can be doing poorly, uh, which is pretty obvious to see

12:44instance. And if you buy a shopping center where the market is doing poorly

12:47and it moves out, you're going to lose all your money because the moment the

12:51market moves out, even if it still has to pay rent, the shop rents are going to

12:56go through the toilet because the, you know, the shops all depend on the traffic

13:01from the anchor tenant. Conversely, which is a little trickier, the market can be

13:07doing too well. You know, it can be bursting at the seams. It can be an older

13:11store. Let's say today they here on the West coast, the classic battleship size

13:17market is about 55, 60,000 feet, but there are plenty of older markets, uh, that

13:24these big chains have that might be 30,000, 40. So you could look at a center and say,

13:29wow, you know, they're just knocking the socks off on this one, but not realizing

13:33that someone like me is a quarter of a mile away has tied up a piece of ground and

13:39he's going to move your anchor tenant to a brand new store. So what I, back to your

13:44question, I'd say one, join the ICSC. That's the international council of shopping

13:50centers. Everybody who's serious about retail is a member. Uh, two, I I'd say,

13:56don't try it out. If I could give someone advice, I'd say, go to work for someone in

14:01the business, uh, find a retail developer that you can work with and learn because

14:06there's so much on it, like the inside baseball on it. Uh, or to start, if you're still right

14:13out of college, one way to do it is to start with a retailer, learn the business on, on

14:17the tenant side and then switch over or start with a retail brokerage firm, which is probably

14:24not a bad idea. Uh, learn the leasing and, and not so much sales, but leasing, uh, leasing

14:33brokers tend to learn all the nuts and bolts, you know, where the money is made and lost

14:37in the leases and they can become a good developers.

14:42Yeah, that makes a lot of sense. Um, you've mentioned like markets consistently throughout,

14:47throughout what you've said is that, um, when you're talking about retail centers, are you

14:51only looking, are, is a supermarket, is that like a requirement for something that you invest

14:58in? Or would you also, if the anchor tenant is something like, I don't know enough about

15:03this, this sector, so I don't, let's just say a Dick's sporting goods or something like

15:08that. If the anchor tenant is not a supermarket, is that usually a no go for you? Or are you

15:12or is the supermarket like the, the, the tenant that you want for a strip center?

15:18All right. Let's just zoom up to 30,000 feet. Supermarket people go to the market on the

15:24average couple times a week. All right. Your local supermarket, maybe more go to Dick's

15:29sporting goods store a couple of times a year, you know, maybe three or four times a year.

15:34So, um, what we call those are our big box centers, you know, whether they're, where there's

15:40a Dick's sporting goods, where, uh, there's a big five or, or Ross in all those, what we,

15:48we don't necessarily look for a market, but like a Walmart, of course, Walmart's now have

15:53markets in them target. There are all kinds of ways to have anchors, but yes, we are a little

15:58leery of, of, uh, a project that doesn't have, you know, the repeat everyday business that a market

16:06has. You can do it with a drug store, a smaller center, maybe a three to five acre, a 30

16:11to 50,000

16:12feet. You can put a 15,000 foot, uh, CVS or Walgreens that can be your anchor. And then you

16:18can have

16:18some shops with it. Uh, you can do it with a center that's all pads. And by pad, I mean,

16:24one acre, you know, that sits in front where it's, it's a bank on a pad. It's a McDonald's

16:29on a pad. It's a Chick-fil-A. Those work as well. And we'll do smaller projects like that

16:35when they come along.

16:38No. Okay. That makes sense. Um, I'm assuming so, so this retail location that we just bought,

16:44um, it, long story, it was originally a strip club, um, but it was right next to a storage

16:50facility. Yeah, exactly. Right. But, uh, it was next to a storage facility that we owned

16:56and it was kind of dragging our facility down. So we, we made an offer, bought the, bought

17:00the location. Um, and it, I think the reason that this guy hadn't been inundated with offers

17:07was because it was a strip club. And so people just didn't call him. Um, but my assumption

17:12for retail is that most deals are done through brokers and not off market for mobile home

17:17parks, self-storage, um, RV parks. Most of what we do is off market. We direct call, we

17:23send mailers, that kind of stuff. We talk directly to the owner. I'm assuming that's not the case.

17:28You guys kind of operate the same as large multifamily where everything, you know, 95,

17:3296% of the deals are done through a broker. Is that pretty accurate?

17:36Yes. And for you, that has to be that way. You've got to figure out if you want some free

17:41advice, uh, who is the top retail leasing brokers in your area and then give them a listing and let

17:49them work it for you. Uh, now once you get a, if you've been doing it for decades or where

17:55we have,

17:55we tend to do the, the major, the anchor deal directly, you know, the, the Walmart, I would say,

18:01we still have to pay a commission, but that's life. But the, the, the drug store, the market,

18:08the, the, the department store, we'll do those directly, but we have a leasing broker, uh, on

18:13every project that, that handles all the small shop leasing. Yeah. You need to do that.

18:18Yeah. Makes sense. Um, so you've, I know you guys development is your big thing. You guys

18:24do development. Do you also, I'll use the word flip. Do you also, you know, do repositioning for

18:30you buy an existing commercial center and then, um, do whatever you need to do to add value,

18:36uh, to bring the, bring the value up? Or are you guys only developers?

18:40Well, I would say that both of those are developers. If you're doing, uh, you've kind of

18:46asked several questions in that. So yes, I looked at it, you know, I've written this book that I guess

18:52we'll get, we'll talk to it. Somebody asked me a couple of years ago when I was doing a talk

18:57about

18:58it, what percentage of our projects were, uh, ground up or basically ground up, you know,

19:05major, major renovations versus opportunistic purchases of existing properties. And I scratched

19:11my head game and I said, gosh, I never thought about that. Uh, and so then I went back and

19:16looked

19:1685% of what we've done was either ground up or a major redevelopment. And about 15% was an

19:23opportunistic buy, like, Oh my God, that this shopping center or this office building is,

19:28is too good a deal. We'll just buy it. And then to answer the next question, our success ratio,

19:34it was about the same, uh, between, you know, winners and losers. Uh, and so which calls to mind,

19:41well, why don't you just buy existing properties all the time? And I thought about that. And the

19:46reason is it's much harder to find an existing property. That's a good deal. And it's a little

19:50counterintuitive. It's easier to find a development deal because it's a lot of hard work. You know,

19:55you got to tie it up, get the zoning, uh, find the tenants, find the bank, everything else much

20:02easier to buy existing, but the great deals just don't come along that often. Yeah. Yeah. I'm,

20:08I'm happy to buy existing. Uh, yeah. And then to answer another question that was kind of buried in

20:13there out of the hundred odd projects that we've done over the last, you know, say 45, close to 50

20:19years, we've sold 70 of them. Uh, and a reason why we did that, we did not, we started with,

20:26we had started with, you know, thumb and forefinger together, no, no money. Uh, and so we

20:31had financial partners and it took me a while to figure out that as long as we had financial

20:36partners and they, we weren't selling, then I was always going to be working for financial partners.

20:42Uh, and so then I had this 30 odd years ago. I said, ah, I'd rather own a hundred percent

20:49of a

20:49million dollar deal, a hundred percent of a gas station, uh, then 10% of a $10 million deal or

20:55worse, 1% of a hundred million dollar deal. So we stopped having financial partners. We haven't had

21:01one for over 30 years. We just use our own capital. So that means we do fewer and smaller deals,

21:07but if you run the numbers because our ownership is a hundred percent, we're way ahead of where we

21:12would have been had we stuck with the, you know, the New York, uh, wall street financial partners

21:18that so many guys like to work with that. That's just not something we do. Yeah. Yeah. I, uh, that's

21:25kind of a hard conundrum. Um, when you start getting into bigger deals for real estate, like I hate

21:30taking people's money. I, I would prefer to just use my own money. I don't like having to, you know,

21:36that extra stress of needing to get returns of all the communication that has to go into it. Um,

21:42it's not, not what I enjoy, but it is, I almost feel like it is necessary at a certain point

21:48in

21:48your career because you get to a point where you just run out of money and you can't do, uh,

21:53you

21:53can't do bigger deals unless you raise capital. So no, that's right. Yeah. But then, then the question

21:59is, once you get to that point, once you do that bigger deal and let's say you, I'll pick a

22:04number

22:04right. You've got a $5 million profit and, and your financial partner takes 70% of that. So

22:11three and a half million, you've got that main and a half left. Yeah. What do you do? Do you

22:16want

22:16to go do another deal with him and reinvest that whole 5 million? Or do you want to pull some

22:20of

22:20that off the shelf and say, okay, I'm going to take my main and a half and I'm going to

22:24go buy that

22:25strip club, uh, and I'm going to own it myself and be the captain of my own ship. Yeah. And

22:32it's,

22:32there's, there's no right answer. You can go back. I've got good friends who have been

22:36institutional partner guys the whole time and they've done really well, but I don't have to

22:42go to meetings. I don't have to go to New York and kiss ass. Uh, I don't have to do

22:46quarterly

22:46reports. Uh, so I, I, I, I like the simpler, more direct approach. Yeah. Yeah. I'm, I'm in the

22:55same boat as you. I prefer a direct ownership. And so there's no, it's just the, yeah, all that

22:59communication that has to happen. Um, yeah, not a fan. Um, but Hey, I did take a peek at

23:04the clock. It looks like we have run it down before we move on. I always like to ask, uh,

23:09what does the next, you know, two to three years look like for you? What are your guys'

23:13big goals?

23:15I think right now, to be frank, it ground up development in retail. And I'm pretty sure in

23:20almost every other discipline is not working in Northern California. Uh, the interest rates

23:26are high, uh, for, for those who need equity, equity is sitting on its hands because of the

23:31Iran war. Uh, I, I think interest rates are only going to go up, uh, construction costs

23:36haven't come down. So basically development isn't working. What we're working on right

23:41now are, um, ground leases with, you know, fast foods. So where we just buy the ground and

23:47we're not taking the construction risk. The only risk that we're taking is the, the cap

23:52rate risk on, uh, on exit. So, you know, buy it now, build it and sell it. Uh, you

23:57know, and I think it's going to be choppy for the next couple of years, frankly.

24:02So you guys are, um, you're buying land. I'm sorry, ground leases. Does that mean

24:06you're, yeah. Okay.

24:07I know there was go out again, retail being, I work with the same people all the time.

24:13So I can go to say Chick-fil-A and say, Hey, uh, I've got a great site here in

24:20Modesto

24:20or, or another Valley town, uh, Fresno. Are you interested in this? And then they

24:27say, yeah, we liked that one. Okay. You know, usually you tie it up first. Uh, if

24:32they say yes, then, then you go forward, you buy it, you ground lease it to them and

24:36then keep it or sell it. If they say no, then you, and you can't find anyone to

24:41take it, then you drop the, uh, the purchase contract.

24:44Yeah. Yeah. Land deals, uh, um, because a lot of mobile home parks, when your mobile

24:50home RV, when you're marketing for it, you get a lot of land. At least we do. Um, and

24:54I've done a few land deals in the past and I, I almost want to just switch to land

24:58cause it's so much easier without the management. But, um, yeah, there's pluses

25:02and minuses on both sides. All right. With that, I do have to push us on to the

25:07quick question around. Are you ready? Sure. All right. Starts with education. It could

25:11be any form, could be a book you've read, movie you've seen, mentorship program you've

25:15been a part of, conference you've been to, anything like that. I just need two

25:19recommendations, one for general life wisdom, and then one for real estate.

25:22Oh, for real estate, I would join the ULI urban land Institute. Uh, anybody who's

25:27serious about it and wants to, uh, work with professionals. I would suggest that,

25:33uh, books. I gotta, I gotta put my own pitch in here. I would suggest that they

25:39read my book, which is what, why you and I are talking. It's called making it real

25:43estate. I'm showing it to the, your viewers, uh, making it real estate, thriving as a

25:48developer. Gabe, uh, the first, it's in now its third edition, uh, which just came

25:53out, sold over 40,000 copies. The book is required reading at all the fancy schools

25:59across the country, Stanford, Berkeley, Clemson, Georgetown, UCLA, Vanderbilt, and on

26:06and on and on. I think it's a terrific book. I guess is where it would be nice if I

26:11had

26:11an agent or a manager who could say that, because it's a little awkward for me to pitch

26:14it. But the smartest guys I know say this is the best book on development that's out

26:19there. Uh, so yeah, I, I took a look at it on Amazon. You got some really great reviews.

26:25I actually am going to buy it myself because I, I have never done development. I don't

26:29know enough about it and I want to, you know, learn, I want to learn a little bit

26:32about it. And, uh, so I understand more and there's opportunities that come across my

26:36desk. I'll, uh, I'll be able to jump on them. Here, here's one tip. If you back to what

26:41you said about land, if you're going to buy land, buy it all cash and land just eats you

26:46up. Uh, you know, cause you got to pay the taxes every year. You've got to pay the, at

26:51least in California, you've got to pay to get it cleared every year, you know, the

26:55brush and everything. And if you've got, Oh, I didn't know that about California.

27:00That's like a law. Like you have to have it cleared. Yeah. Or, or, or the, the county

27:05or the city will say, okay, we're sending the fire department out, whoever it is. And

27:10yeah. And then they charge you. Right. Right. Okay. Yeah. Makes sense. All right. Moving

27:18us on to the next question. This is for your younger self. Let's go back to the John who

27:22was buying. I think you said that duplex when you were 24 years old, go back to him, look

27:28him in the eye, give him one piece of advice moving forward. Never date a woman named Debbie.

27:35Great. There you go. You get a good, good, get rid of that heartache. Yeah. All right.

27:43Next. Yeah. That's a relationships are definitely the number one thing in life. And if you got

27:50a bad one, you don't want to, you want to be able to sidestep that catastrophe. So it totally

27:54makes sense to me. All right. Next question is about the U S it's a big place. There is a

28:00lot of opportunity out there. Give me the single Metro you're most excited about investing in

28:05today.

28:08Ah, well, I'm here in the heart of Silicon Valley. Uh, so I'm in Palo Alto, which is, isn't

28:14quite the heart, but it's probably the brains of Silicon Valley. And, you know, it is insane

28:18here. And so the rest of real estate throughout the country is, is kind of lackluster, but the

28:25guys who are doing the AI deals right now, you know, they're, they're leasing properties,

28:29uh, by the hour, it seems. So this is a great location to do it, but I think it's going

28:36to

28:36be, uh, uh, another bust just like we had in the dot-com bust. Gosh, about 20 odd years

28:43ago, 25 years ago. I think there's a bus coming, but this is an excellent place to invest. It's

28:49just hard to develop here because of all the regulations. Uh, other places, you know, the

28:55usual places, Arizona, Texas, Florida, they're all good, but Gabe, we're lazy. Uh, all of

29:02our developments are within a two hour drive of, of say San Francisco. I don't, you know,

29:08it's developing as hard. You're going to get your ass kicked by the city invariably, you

29:13know, by the neighbors, you know, when you propose something new and I don't want to have

29:17to get on a plane, fly to Boise and then get my ass kicked there. I'd rather be able to

29:22drive to handle the, uh, the project in a morning and be back in the afternoon or vice

29:28versa. So I don't travel for business. Let me put it that way. It just for fun.

29:34That is a totally understandable. Um, speaking of getting your ass kicked, uh, the next question

29:40is called lessons learned. Not every deal we go in, we get into goes the way we expect

29:45it. In fact, pretty much every time something goes wrong and that's when we get to learn a

29:49lesson. So what was the deal that went a little bit sideways for you? And then what was the lesson

29:53you pulled from it? Okay. So I, to put it a whole together, I'm now old enough. I don't care.

29:59So

29:59the old expression goes, I opened the kimono. There's a whole section in my book about my worst

30:04mistakes. And I think there are seven or eight deals that, that went awry for different reasons.

30:10Um, just to, cause I know this, we're short on time. Biggest mistake I think is to overpay on day

30:18one.

30:18That that's a mistake. You just cannot get around. Uh, second biggest, I would say is

30:23over leveraging. Uh, you know, if you combine those two, you're absolutely toast. Third biggest

30:30mistake is, and again, it's, it's, it's too long to go into, but it's overdeveloping. It's,

30:35it's taking your little strip club and saying, gee, I want to put a 10 story office building on this

30:41location. Cause it'll be just great. And then, you know, working on that and working on it and

30:46whoops, it, that deal doesn't work. And it suddenly I've spent five years on this dream deal

30:51or worse, actually building that, that 10 story office building, you know, on the, on top of the

30:58strip club and then finding out, Oh, I over, there's no market for this. So those are three quick

31:04mistakes. But again, uh, I'm pretty transparent. I figured it out. We had lost money. It either lost

31:15money or didn't make money because we were using other people's money in the early days,

31:19about 15% of the time. I know this is a really tough business, you know, and anyone,

31:26anyone who tells you any of your guests who says they've never lost money, uh, is what I would call

31:32an outlier. And I would emphasize the last two syllables of that, you know, our business is too

31:38hard. You know, everybody lost money during COVID, right? You know, nobody anticipated COVID. Nobody

31:46anticipated the Iran war. We're trying right now, Gabe, to sell some high-end condos here in Palo

31:51Alto. Uh, started out great. You know, the, the home selling season here starts around St. Patrick's

31:58day. Boom. We sold one right away. Uh, open houses were teeming. The war comes along. Where'd

32:06everybody go? The buyers are all sitting on their hands. So there's just bad luck is going to hit

32:11you in real estate as well. So, uh, I would suggest that you go into the business knowing you're going

32:16to lose some of the time and then just batten the hatches down. You know, keep the leverage low.

32:22Uh, don't go too big, too fast. That's a mistake I made early in my career. You know, just, you

32:28know,

32:28keep it steady. Yeah. Cashflow is king for a reason. You got to have cash in the sidelines. And I

32:34would,

32:34I love all three of them. Uh, the things you mentioned, especially number one, you said

32:39overpay. Uh, I do, I have coaching clients and that is the thing that they always are nervous

32:44about is, you know, if something is listed or a seller asks for X amount, you know, let's just

32:49say a million dollars. Um, and they're like, Oh, you know, I can't offer less because he, you know,

32:55it's worth a million dollars. And I always say, no, what they, what they ask is not the price that

32:59it's actually worse. It's what they want, but you determine the price that it's worth. You guys

33:04are negotiating. You are coming up with the actual price from your interaction and, uh, never,

33:10never feel bad for offering less than a property is worth because the, or what less than the property

33:15is listed for, because you cannot come back, like you said, from overpaying on a property. It's

33:23impossible. If you paid a million dollars and it's only worth 500, you can't fix that mistake.

33:27It's not something that can be fixed. So you need to be able to, uh, um, prevent that mistake at

33:34the

33:34very outset. I made that mistake once and I'm never going to make that mistake again. So I I'm a

33:39hundred

33:39percent with you. Um, all right. On the other side of that, you talked about lessons learned.

33:44Sometimes things do go right. And those are our highlight reels. Those are the deals that kind

33:48of stand out in our mind is our favorite. Which one is that for you? Well, if I said I

33:55lost money 15%

33:56of the time, that means we made money 85% of the time. And that's, we've done a lot of

34:00deals.

34:00No particular one stands out. You know, the easy deals are the ones that you've already done.

34:06You know, the, the, the, the hard deals are the ones that you're working on right now. But yeah,

34:11we have had that luck goes in both ways. Uh, we bought a piece of property in 2006, uh, didn't

34:19own it

34:19for more at 23 acres. It didn't own it for more than a few months before a big tenant came

34:26along

34:26and insisted that they buy 18 acres out of the 23 for an enormous profit. So it was a very

34:32easy deal.

34:33And we kept the, uh, the remaining, uh, five acres, which we gradually developed. And, uh, you know,

34:40you do it long enough, you get lucky, uh, or unlucky.

34:44Yeah. Yeah. You just got to stay in the game. Eventually luck's going to come your way.

34:48Um, and that does lead us to the very last question you've given us a lot to think about. I'm

34:53sure

34:53people want to reach out, get in contact with you. You've already mentioned the book, but why don't

34:57you tell people where they can go and get that? Um, and then, uh, next, well, how they can get

35:02in

35:02contact with you. Sure. So for you listeners, my name is John McNellis. It's M C N E L L

35:09I S.

35:09The book is called making it as a developer, uh, or making it real estate rather thriving as a

35:16developer. It's the third edition you want. Uh, the third edition, each edition over the last 10

35:21years is 50% longer. You can buy it on Amazon. Uh, you can buy it pretty much anywhere, you

35:28know,

35:28on online. Uh, you can write me just my name, John at McNellis.com and happy to hear from you

35:36a few

35:36questions. Um, if you do buy the book and like it, love a review on Amazon. Uh, that's the way

35:42that these things move. Uh, and again, I'm pretty sure there's more than 20 bucks worth of good

35:47advice in that book. Perfect. I will put John's links in the show notes. So if you guys want to

35:53reach out, all you got to do is click the little more in the description. It'll pull down that full

35:57description and in there you can find his links. All right, John, that wraps it up. Thank you very

36:04much for hopping on the show. Thank you, Gabe. And congratulations on Vigo. Thank you very much

36:10for everybody who's with us today. Thank you guys for showing up. You are the reason we do this.

36:14So if you guys have any questions, reach out to me, Gabe, the real estate investing club.com.

36:19If you guys want to support the show, just leave us a comment, review, anything like that.

36:22Other than that, I hope you guys have a great week. Keep rocking real estate. And I look forward

36:27to seeing you on the next episode.

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