|
    |
This week Bruce is joined by Andrew Waite. Andrew is the founder and publisher of Personal Real Estate Investor Magazine, which debuted in 2003. He has authored a total of nine magazines, is a recognized expert, and is extensively published in sales and marketing automated processes, sports marketing, and sponsorship.
In 2003 when his magazine debuted, his company had just sold a technology investing magazine in New York, closed on September 10, 2001. After September 11 occurred, Andrew and his partners had to think what to do because of the impact September 11 had on technology investing and since they had investments in real estate. They discovered that despite the fact that the stock market had been severely impacted by both the .com crisis and September 11, their real estate investments had not been affected. They decided to go find the national magazine on real estate. At that time they didn’t understand anything about the market dynamics, so they asked the usual questions such as whether the 300 national brands were interested in real estate investors and were they supporting that market with large media buys. On the other side, they asked who is the logical newspaper or magazine that has a list of subscribers that will lend themselves to real estate investment. Andrew went to do his research and at first could not find a thing. He started looking around and tried to list the 300 companies he knew it would take to justify the launch of and budget for a national magazine. He found four magazines that had some national footprint that were interested in real estate investors. He went back to his two business partners in New York and told them his problem of not being able to find either classes of people listed above, but in Phoenix alone there were a group of people spending about $3 million a month on real estate advertising. So he didn’t really understand what was going on with that. The statement that is now made is that real estate is local, unlike the traded assets, stock bonds, funds, etc., which is not traded on a national exchange but rather a very inefficient one-to-one process in local markets of the world of traded assets, which is regulated by the FCC, FINRA, and other interested parties. The world of real estate is regulated, if at all, by the local department of real estate and practice standards within the NAR. Andrew and his partners found it was a major structural difference in the real estate business and the subset notice known as real estate investing that could not be kept compared to the world of investing from retail or an institutional point of view at a national level.
Bruce said he just bought one of Andrew’s magazines at a Borders store, and Andrew wondered why no one else has reached out and gotten any footprint in the local Borders or Barnes and Noble stores, in airport stores, or other kinds of bookstores. At first they decided to start selling in Phoenix, Arizona because back in 2003 the market was booming and because it was a mid-price point market that attracted people outside the state like Californians. It was also a Sunbelt state with a lot of production housing and a destination for both tourists and capital. By chance they launched in Phoenix, and then what they found was the poll factor, meaning people who bought the magazine then subscribed to it when they were out of the state, and the people at the newsstands showed that they were selling so well and their rate exceeded Time Magazine and Cosmo. They were asked by other paper sellers if they consider expanding to California and to the rest of the United States. All in all, the market pulled them through, and they found that there was a very interesting dichotomy in the market. The DIY real estate investor makes up about 5% of the market. What they found was the interest for the remaining 95% is in performing assets that are packaged, presented to them, and managed at a portfolio level by people they can trust. This business is continuing to expand at an incredible rate.
In his publisher’s letter, Andrew talked about how a lot of people with their current investment strategy are destined for destitution. Real estate is different from traded assets, so you shouldn’t try to apply a traded assets lens to real estate because you will get crazy, non sequitur responses from places like Case-Shiller. They look at real estate data and try to wrap it in the convenience of a national number. Clearly, this is not the way it works. What Andrew found was as soon as you start granulating the market, looking at individual markets, and taking it into neighborhoods, you’re stock-picking for real estate investment properties is a pretty logical process; but most people have never looked at it this way. In the real estate industry, the traditional owner-occupied seller and big sales brands have always found real estate investors a problem because they ask lots of questions and mistake due diligence for indecision and questions. As a result, they marginalize real estate investors as not a particularly productive client. There is a lot or reasons why real estate investors are marginalized in this way, and these reasons create opportunity for the astute real estate investor.
It seems the astute real estate investor would have a hard time turning the reigns over to a group. If you step back and look at the traditional real estate agent selling what they claim to be investment-rate real estate to an investor, they say, “Here is this wonderful property that is going to generate $1,000 a month in rent,” you see that the investor makes his decision based on those representations. He then buys the property and hands it to a referral property manager who immediately sits down and asks who told them it would earn $1,000 a month. They say it will actually only earn about $750 a month and that they bought in the wrong neighborhood. Consequently, what are found are the effective property managers who understand rentable and attractive property profiles tend to be a better source of selection intellect than a realtor who is transactional and commission driven. The opposite is also true. A conscientious realtor who does know everything there is to know and does a good job, but then passes off a valued client to a poor property manager loses that relationship and the potential for recurring or repeat business. What is being found is a number of companies who have realized that just sitting, taking a property, doing the renovation for a client, and then renting it, the revenue and returns is very low and the risk is much higher. When they actually control the process from expectation creation through property selection, through property preparation, lease-up, and finally performance, then it is a much easier purchase for a retail investor who is looking to be treated like they would at a Merrill-Lynch and a cash management account. In this case, it’s a property management account or real estate management account. If you think in terms of the 5% of the market that is acquainted with do-it-yourself real estate investment, it’s probably never going to go across and relinquish all control and management to a property management or a real estate management company. Why it is attractive to the retail investor is when you can deliver an 8, 10, 11, or 15% true net yield, all of a sudden when you take indexed inflation into account you see that this particular investment asset becomes a very competitive asset against a traded asset. We see on the financial advisor side that they are losing clients to the real estate space. Andrew was invited to speak at the First Innovative Real Estate Conference, and he shared the stage with Nick Edwards, who is the advisor’s advisor. He was saying to the other clients/advisors that if they’re attracting clients on the basis of providing them protection of the principal in downturns, then that’s not good because you’re still going to treat them poorly. What we are now confronted with the volume of boomers is they will be driven into destitution because the assets we strongly believe in tips and reaps. Funds, bonds, and equities just don’t have any inflation indexing in them to speak of, whereas residential real estate is completely inflation-indexed, both on the income side and the appreciation side. When you look at these buyers who have no background in real estate investment or renovation personal management, you see their heads are not even turned by the option because they have lives, careers, and families. If you’re an effective real estate investor, it’s not very long before you go full-time or at least give up your weekends because you’re doing it yourself.
One of the vehicles good for the busy professional is trust deed investments. The Norris Group has $40 million of people’s money involved in trust deeds, and some of them are now financing long-term rentals for our investors. The investor with the trust deed is getting a 9% yield, and the Norris Group charges 9.9% to the California investor who is getting rentals that cash flow almost twice the payment. This is a true pre-tax net yield, and there is no tax benefits involved. Andrew watches both the funds play out and direct ownership. In the direct ownership, there are some other models that are beneficial because even though it is managed transparently, the tax status is as if they were doing it themselves.
In April the National Real Estate Investors Summit was held, which culminated with a trip to Washington D.C. and meeting with legislature. They conducted an investor provider leadership summit, so they took their vendor side clients and told them they needed to understand what was going on at a legislative level. There are good resources in that space, one being the National Association of Real Estate Investors and American Rental Property Owners and Landlords Association. He told the clients they need to get alongside the people in the aforementioned organizations, and one of the benefits would be their lobbying enterprise. The National Association of Real Estate Investors typically picks on a particular subject, whether it be financing or the current Safe Act. There is a lot of unforeseen consequences coming out of this mess, and you can tell the whole thing was assumed that anybody providing money or had access to real estate was going to be predatory lender. They completely missed the boat on it, but the impact is obviously very negative for creative financing any way, shape, or form where there is money left in the deal by the investor to make the deal happen. On the other side, there is also an attempt to put feed governance into long-term contracts whereby any future transfer generates a fee for a Wall Street entity. There has been a huge movement to prevent any transfer covenants or transfer fees creating fees for HOAs or developers who transfer the package fees and try to sell them as funds to investors much like CDOs or other derivative style transactions. This is pretty much being shut down in all but about twenty states now. There are about 30 states that have come back at an AG and Department of Real Estate level and said they were going to forbid any kind of transfer taxes.
At this point, there is no difference between a speculator and an investor since it is far too nuanced for them. They are still running on the five-year old definition. When Andrew first launched his magazine, their title was Personal Real Estate Investor Magazine, and is still called this to this day. If he had another shot at doing his magazine, he would probably soften the investor title because it is designed for the DIY investor who has no shame or embarrassment in calling himself a real estate investor. Andrew was encountering people who said they don’t deal investors and had several anti-investments clauses in their buy/sell agreements and would not speak highly of them. He said he and his business partners would go talk to a Del Webb or a KB, and they would go through a whole conversation and only to hear from the company that they don’t deal with investors and had these investors’ clauses so you couldn’t sell within a year. The meeting would go nowhere, but at the end of the meeting the companies would say with pride that they were investors too. They were buying their own stock and were speculating on company housing stock. These were huge SEC violations, which they were not recognizing. So Andrew was getting from the companies that they did not like investors, yet they were ones themselves. What he found was that when you did the analysis, there were a lot of people investing in real estate that weren’t showing up to the local REIA clubs, but they were holding one or two houses that they accumulated either as a matter of inheritance or a relocation that had not sold. They realized that to them it worked, they were doing okay, and the buy and hold model they had fallen into was a good idea. Andrew spoke with Real Trans president Steve Murray, who was one of the best real estate analysts in the country from a practice point of view, and he said they should work out how big a portion of the market real estate investment makes up. They put together a study and had Harris Interactive do the quantitative analysis. They asked 44,000 people in the last quarter of 2007 if they had bought a home, why they brought the property, and whether they were a first-time occupant, if it was a move-up, second home, or intentional investment. Twenty-eight percent came back and said they were buying it as an intentional investment. If you took the size of the market in that year, it was running about 2.4 million transactions, and 28% of them were people buying for investment purposes. It was a $320 billion market.
The National Association of Realtors runs a poll of about 1,000 realtors, and they ask them what proportion of their sales was made to investors. Andrew said he does not really like this question because it assumes ahead of time that people define themselves as investors. That’s why instead Andrew and Steve asked them why they bought the house. NAR found it was round about 20%, 19% the year before and 25% in previous years, so both NAR and Andrew’s own research were all in the same ballpark. Judging by NAR’s poll size and the types of questions they ask that they are probably missing a number of people. They also tended to use validation from a lending point of view, asking questions such as whether the property was owner-occupied or an investment. The problem was back in 2006 and 2007 people were lying through their teeth over these statements. Everything NAR does tends to downplay the numbers, so Andrew and Steve were very comfortable saying that in 2008 about 28% of the market was intentional investments.
Andrew will be holding an event called the Investor Provider Leadership Summit on September 30 which he said will be on the provider side because he said he wants to make an industry out of real estate investment sales, providers, and service leaders. Andrew said his goal with the magazine is to be the magazine of record for the real estate investment industry as it speaks to individuals and not to the institutional market because from those numbers the market is huge. You can check out more on the event at www.personalrealestateinvestormag.com.
For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.