Why Real Estate

Welcome. This is the Insider's Edge to Real Estate Investing with James Nelson, the principal and head of Avis and Young's Tri State Investment Sales Group. In this program you'll learn game changing strategies to outperform the market. James will teach you how to source, execute and capitalize on the best real estate opportunities in New York and around the world. Now here's your host.

Welcome everyone to episode number 115 of the Insider's Edge to Real Estate Investing. Yes, you heard it. This is our second show now with the new title and thank you everybody for the feedback. The social media channels just getting incredible feedback from you all support for this new show, what we're doing and it just, it means so much to me. It really makes this so worthwhile. I was asked the other day in an interview on, you know, why do I do this? And you know, it really is giving back. And you know, I had some great mentors. I still have some great mentors in the business and to what extent I can share my story, my experience. And if you didn't listen to the last episode, that's exactly what I did. I talked about starting, starting off, I knew nothing about real estate. I was very, very lucky to get a job in 1998 at Massey Nackle Realty Services. I was an English major. I had no prior experience in real estate. I was very fortunate that I was one of only two candidates who applied. I was their second choice. So we had a little bit of a laugh about that. But go back and listen to my story. You'll hear about how I learned the business, my first few investments, some that went over incredibly well and others that did not. And that sets the stage for today. I'm going to be having another conversation with Rachel Hartman, my writing partner. We are working on a book right now that's going to be out early next year. After this discussion that we're going to have today on why real estate, what do we think of it as an asset class? What are the advantages? And what I love most about it is, yes, it is an investment where you can have that inside edge. You can have an advantage if you have the knowledge that and the right team to execute on it. So after we have this discussion today, in the next 10 weeks that follow, we're going to be going step by step and talking about what you need to do not only to find opportunities, how to build the right team, how to reposition assets, how to raise capital, how to capitalize, how to manage everything. You need to know the goal of this book where this all will culminate is that I want you to be able to read this and this, not just get inspired and say, oh this sounds great, I'd love to get into this. No, I want to actually teach you how to do it so you have the skills and the roadmap to be successful. So lastly, I just want to share some feedback from one of our listeners who said, hi James, I just listened to your latest podcast episode about your story and I wanted to let you know how much I appreciate it and enjoyed it. My girlfriend and I are looking for our first investment now so it hits close to home. Hearing about your early days and how you parlayed your brokerage career into investments, that gave me a lot of great food for thought. So yeah, thank you Bobby for sharing that. And thank you to everybody who's linking in with me at James Nelson nyc. Your comments, your feedback, I love talking about them on the show. So we're going to have a brief word from our sponsor and then we're going to get into this discussion on why Real Estate with Rachel Hartman. Thank you again for tuning in.

A different approach to putting our clients first. Avis and Young's Tri State Investment Sales Group sells multifamily office, retail, development and specialty sales throughout the New York metro area. As experienced thought leaders in their industry, our 35 member group is available to help you make informed investment decisions by advising you on your current holdings or identifying new opportunities in the marketplace. Our one unified team is built on an industry unique platform which promotes unparalleled collaboration and teamwork. We share core values of hard work, integrity and expertise. We put our clients first, providing tailor made strategies to achieve superior results. Please Visit us at aytristateinvestmentsales.com and follow us on Twitter LinkedIn and Instagram amesnelsonnyc to learn more.

Rachel, I'm super excited to be talking to you today about why real estate. It's such an exciting asset class and opportunity and I know there's so many people out there who would love to figure out a way to get into this and there's just so many advantages that I see when comparing it to other types of investments. So I know we're going to have a really great conversation today and I really hope that our our listeners can benefit from it.

Exactly. I'm so exactly. I'm so excited about jumping into this one. James. I have topics that I know we're going to cover in today talking about investing in general, the opportunities with real estate and I Think I personally, I'm guessing a lot of other listeners would agree with me. I feel like there's so much information out there about investments and ways to go. You know, you see a. Seen quite a few surveys where if you just ask the mass population, what's a smart investment? You'll often find that they list stocks as number one, or if they. Or they might list real estate as number one, it's often with the concept of owning a home. So you see real estate and stock market come up quite a bit. Of course, there's other investments that you can make, too. And I feel like when you're thinking about that and diving into that material, it's so important to go to a trusted source. So I know you have so much experience with real estate in New York. You're also in the center of investments, including other types like the stock market and such. So I'm hoping we can dip into those different investment types and talk about advantages and disadvantages with each. In fact, I thought we might even start with this stock market because like I said, it does get a lot of buzz. You'll see it in the headlines. Sometimes it seems like it's an easy one to jump into, Set up a few accounts, make a few clicks, and away you go. But I guess I was hoping you could talk a little bit about what draws. What's the draw to the stock market, and then what's the reality that comes with it. You know, what advantages and disadvantages are we really facing when investing in Rachel?

It's a great question, and I think for many, it's. As you mentioned, it's accessible today. Anyone can sign up for an online account and they're in business. And there's no shortage of advisors and news feeds out there where people can try to find out about their favorite companies and how they want to go about investing. And again, you can jump in. The barriers to entry are very, very low. That being said, I think there's a lot of inherent risk in that as well. The fact that it is so easy to get involved. There's really no barriers to entry. So when you think about it, when you're investing in the stock market, you're really competing almost against the whole world. Everyone is supposed to have the same amount of information. And if you didn't, if you had inside information, that's actually illegal, you can go to jail for that. So, you know, no one should have the inside edge to investing in the stock market.

Right?

You and I can go right now, you know, online, Yahoo Finance, wherever You get your stock quotes and you can find on instantaneously where something's trading. We know where it was a year ago. We know the, you know, the averages, and it's right there for everyone to see. And so, you know, the ease of this does not make it necessarily a better investment. And at least for myself personally, and I have, you know, I will say I've got a great wealth advisory team and I would, you know, I'm not sitting here saying, put your entire fortune into real estate.

Right.

Of course you want diversification. I've got holdings, I have retirement accounts those are invested in the stock market, mutual funds. But again, I've got an advisor. They're bringing to me research that they have. But look, I'm a retail investor. I'm assuming that the information I'm getting is, again, what everybody else is hearing. And yes, I have someone, an advisor looking out for me, but there's really no way to get an advantage. There's no way for me to actually get an inside track. Is this, if I'm going to go buy this stock, is it going to go up? Do I really know what's going on in the boardroom? Do I really know where the opportunities for growth are? Do I really know how to improve that company?

Right.

Do I know how to manage it? Do I even have a say in it? Of course not.

Right.

So the appeal of real estate, and I know we're going to get to this, is that it is, you do have so much more of an advantage to get that inside edge and to really understand what's going on in that property and get an advantage over others who might not take the time or effort to really research what's going on there or be able to take control for yourself to make an improvement. So again, you know, I'm not saying don't invest in the stock market, but to me, that's a very passive exercise. You know, you should do that to have a balanced portfolio. But there's really no advantage there because the information that's out there is for everybody to see. And I think, in short, it's just an overly efficient marketplace. Whereas I would make the case that real estate is inefficient. And when there's inefficiencies, that's where you can really gain a true inside edge.

Okay. Okay, that makes sense. I have a few questions about real estate, but I think before we get into it, I just want to set the baseline and I'd like to hear what our definition of real estate investing is for Instance, when people bring up the term real estate, you know, some immediately gravitate to I own a home, you know, am I investing in real estate? I own a home. Or of course there's cases someone owns 15 office buildings. Which one is the real estate investor? Where do we draw the line, I guess is what I'm asking. So I think a base definition would be helpful for us as we move forward to talk about it a little bit more.

Sure. I mean, I could certainly make the case that they're both certainly investments in real estate. And over the years, some of my best successes have come from real estate that I've owned. Or maybe it's a second home where I rented it out along the way when I wasn't using it. Maybe I was there a week or two out of the year. But I think for the purposes and really what we're trying to provide information for on the show is for income producing properties. So these are properties that you can purchase for the purpose of renting them out, making improvements to that rent roll, improving their operating efficiency, producing cash flow, and then the ability to profit on that, not to mention, you know, the tax advantages that come along with it, the ability to actually sell that property, that investment property. And there's a definition for it. If you go to, if you look into section 1031 of the IRS tax code, they talk about the definition of investment property.

Okay.

Held for an investment as opposed to a primary residence. Okay. So yes, for the purpose of this, you know, unless we're talking about it's a four family that you're looking to buy and, you know, you live in one unit and collect the rest, I mean, I would call that a live invest, but we're really hoping that our listeners, maybe that's where they start off. But this is really, you know, for more aspirational investors who are going to be looking to really leverage and take advantage of larger opportunities that are out there. So, you know, let's talk about 10, 20, 50, 100 unit apartment buildings. Office is something that's very capital intensive. Typically you need a company, a team to take on something like that. I think most of the people listening who are looking at one of their first investments here are probably looking at that multifamily, maybe mixed use, maybe it has a store on the ground floor and apartments above. But again, the point is, for these are income producing properties as opposed to ones where you live.

Okay, great, that makes sense. So then if we, with that baseline in mind, I'm curious to hear what some misconceptions you often hear about real estate investing that you, we can break through those myths and then what are the actual advantages and disadvantages? I'm especially curious. You mentioned inefficiencies in real estate, and I'd love to hear more on that as well.

Yeah, I mean, so I think one of the biggest myths that is out there, and I would assume is stopping from people looking to invest in real estate is saying that they have lack of capital and lack of experience. Now, lack of experience, that's something you're going to have to do something about. And a good solution that might be partnering with someone who has that experience. So I'm not going to discount that. But I think, you know, lack of capital, again, that that is really something that stops, I think, a lot of people from investing in real estate. Seriously. And again, this is, you know, when you talk about investing, I always have the rule that you got to be prepared to lose everything that you, you, you know, that you put into that investment. So we're not talking about. And if you, if you listen to my podcast in the past, you will hear sponsors who put everything on the line, you know, deal after deal. Not only do they put all their life savings into it, mortgage their house, and in some cases they personally guaranteed. Right, they said that I'm going to personally guarantee this loan. And if I don't pay off this loan, yes, you could come after me, you could take my house. That's not what I'm recommending. Although I'm sure we've got some risk takers listening who, you know, maybe on the weekends they're out in Vegas. But, you know, the point is that, yes, even if you have, I mean, we're talking about 100, $200,000 of working capital. That doesn't mean that you can only buy a 2 or $300,000 property if you know how to bring on the right partners and if you know how to raise capital and you have the right banking relationships, that 100 $200,000 contribution could get you into an asset that's 2, 3 million dollars. So I would say lack of capital has got to be one of the number one things that hold people back from investing and saying, look, I'm just going to wait till I'm in a better place to jump in. And in the meantime, yes, they're fueling their retirement account every year, which is a nice thing to do. But you start looking at how much you're putting into the stock market, which goes back to my earlier point that, look, you're you're then relying on someone else, you're relying on the markets as opposed to really taking control of your destiny.

Yeah, I think that's the best guideline I've heard so far that you should be ready to part with whatever you put in. As far as risk guidelines, I just think that's excellent for starting out and you mentioned it can be that goal of income producing. So as far as time commitment, I'd like you to talk a little bit through the commitment level I guess that we're looking at with real estate investing, for example, someone who wants to get started. Are we saying this now becomes my full time job? Not necessarily. Should it be a heavy side, you know, gig that I am expecting to spend most of my weekends? And what sort of time commitment are we looking at?

Well, look, it's really what you make of it. And if your objective for listening the show is just to understand the general principles of investing in real estate. You want some exposure, but you don't want to do the heavy lifting. Most of those people would fall under the audience of being a limited partner. Meaning you are going to just provide the capital then yes, you are putting your trust in a sponsor, a general partner who's going to be doing the day to day real estate activities. But let me be clear, real estate is a hands on business. If you're going in there, you want to be the general partner. You know, you want to certainly be in the position where you're bringing in outside capital, you're promoting off other people, that they're going to be expecting you, that even if you have a day job, that this is still a top priority to you. And yes, it does take a lot of time. And there are ways that you can have professional third party managers collect your rents, pay your expenses, but they are not going to care about the asset the way you should should. You know, you really need to be thinking, looking out for your asset constantly. You have to be there to make adjustments, make sure that it's running properly and also look where the opportunities are as far as the time that's required. And listeners might not like this answer, but I think when you're starting off, I mean you have to be able to dedicate the time and it's not even on the actual acquisition. And yes, there's plenty of time, but the amount of research and the amount of time to really understand the dynamics in your market is really, really important.

Right.

And we'll talk in future shows about starting off in your own backyard. You already have an advantage you already know the neighborhood, but you need to understand the principles in the market. If you have a retail store that's sitting there vacant, you need to understand, you know, who's the best retail leasing broker to handle that, that store, what type of leases are happening, what are the conditions in the marketplace, how do you deliver this space? What kind of concessions do you have to deliver to entice a tenant to come there? These are all market driven. You can't just sit there and expect that someone else is going to tell you this. I mean, as the investor, you need to do the research means you have to pound the pavement, both physically as well as doing the research online. You know, you should be visiting all the competitive properties. You should know what apartments are renting for and not just going online, like walking apartments. As a, you know, a prospective tenant, understanding what, you know, what apartments are renting for in the market, how are they configured? That is the time that is invaluable, right? To really understand, you know, where are the opportunities, right? Because on the show we talk about how to reposition properties, how to unlock the true value. And the way you do that is understanding your market inside and out. You know, I started my career, my brokerage career at a firm called Massey Nackle. And they were, and I give a lot of credit to the founders, Paul Massie, Bob Nackle, they had an incredible business plan where they took the city, they divided up into territories. So I had a 40 block territory that I covered in Chelsea. My job was to know every, everything about that market. Now, I graduated from Colgate in 1998, grade school, but I was an English major. I can tell you I knew zero about real estate. Nothing. Nothing at all, right? And so I came in as green as possible. But I will tell you, Rachel, 90 days of studying a market, walking every single block, looking at every building, every trade, understanding zoning changes, new developments that were taking place.

Okay?

After three months, if you put me up against a veteran who was 30 years in the business, I guarantee you that I knew more about that market than they did. Because most brokers and most investors are generalists. Okay, what's the expression? Jack of all trades, master of none. That's what applies here, right? So look, you certainly need to understand the fundamentals of real estate investing. And if you listen to the show, this is going to give you a huge advantage. But, you know, go take a course on underwriting. You know, if you're in the New York area, you can take courses at nyu, you can take courses at Fordham. There's online courses. There's a program called Adventures in Real Estate, which I've heard is really good. You're going to need to understand the basic fundamentals of how to underwrite properties.

Right?

And you know, this show, the book that we're working on together, this is going to teach you the general principles. But, you know, we need a textbook 600 pages long to go through every single piece. So, you know, again, it's going to take. This is a very long way of saying there's going to be a lot of time taken, Rachel. But it's really at the front end of this, right? Because you are going to need the fundamentals to understand, you know, how to underwrite property. But what's most important is really understanding the market. And by the way, that is where you can get the competitive edge.

Okay.

Because when you know that market better than anyone else, you know, if you're down in Miami and you know, some of the hottest parts of town that are just about to, you know, really, you know, pick up in value, you know, you're seeing that because you're there every day. You know, the investor who's flying in from New York on the weekends, you know, they don't know, right. They're not going to have that inside track. And so again, remember kind of that story back when I was at Messi Necklace, spending that time, you know, to learn that neighborhood. And I bet if the listeners, if you picked a neighborhood you liked in an asset class, I guarantee if you spend that same 60, 90 days and really work it to understand, you're going to be in an incredible position to not only find opportunities, but then know how best to capitalize on them.

I love that. That's so concrete too, that time frame and even that area you talked about. I have to ask you a quick follow up before we move on. So when you say walk and work in the neighborhood, what are we referring to? Is it everything from knocking on doors, talking to people reading the newspaper and obviously were hitting the pavement? I'm just curious if you could go through a few factors that you used when you were working the neighborhood.

I am really, really glad you asked that question because I think in this day and age, look, there's incredible access to information right online. I use a data provider reonomy, so a little plug for them. You know, I can go online, I can learn everything about a property, all the metrics on the property. I know the square footage, I know the zoning, I know the air rights. It's not going to give me the Rent roll that, that I would have to either get from the owner or the broker handling. But I know the property taxes. I can look at what's filed there. I can see, I can see the block. I mean, we all have Google Earth now. Although I will tell you oftentimes those photos are pretty dated, right? And so you might think you know, a neighborhood. And sometimes I'll say, okay, let me check out this neighborhood. Let me see what it looks like. Let me do a Google stroll. I'm going to kind of, you know, I'm going to hit the advance button here and kind of see what this looks like. And then, you know, you see a couple boarded up stores because maybe they took the shots in 2020 in the depths of the pandemic. And now, you know, you go down to the block in person and there's people out on the streets and you know, an outdoor cafe that's just opened up. So, you know, for those reasons alone, it's essential to walk the properties. But, you know, this is an in person game. I really, you know, the idea that real estate's a commodity or that you can just buy sight unseen, you know, you have to go there. Because when you go there in person, you see things. And you know, Rachel, you're absolutely right. You got to talk to people in the area, you know, and I tell you, sometimes my best sources of information are the superintendents, the person sweeping the street out front. They know more about that block than you do. I guarantee they know who's coming, who's going to, oh, hey, what's the story with this owner? You know, I see that, you know, looks like, you know, that this apartment, you know, the building's not really taken care of or, you know, a lot of lights are off here. What's the story? Oh, well, you know, you know, the patriarch passed away. I think the kids are going to sell it. I mean, you'd be surprised. You know, the kind of information once you start talking to people up and down the block and, you know, you want to get a sense of what's going on and you know, sure, most listings are online, but when I'm walking up and down the block, especially if I'm looking at a, a vacant retail space, maybe I'm looking at valuing a building with vacant retail. I'm looking for signs in the window, you know, retail space for lease. And then instead of just seeing what's online, I call the broker and I say, oh, I see you have this space for lease. Tell me about it, you know, and you know what, what type of activity you're getting? What are you asking? Oh, yeah, we just leased the space. Oh, great. Can you tell me who's the new tenant? What, what, you know, what's going to open up here that's going to be great for the block. What kind of rent did you get? What kind of concessions, what kind of increases? Now, not all brokers are going to be overly generous with information, but, you know, again, you talk to enough people, that's your, you know, that's the information that you can't go to. Going back to our conversation about stocks, I mean, I can punch up any stock and I can tell you their PE multiple.

Right?

That's easy. That's, you know, public information. As far as what lease just got signed across the street. You know, sure, there's big data sources out there. They might pick it up, but they might not have all the details. They might tell you what the asking rent was, they might tell you what it rented for, they might tell you the term. But do you know, if they had to give the restaurant six months free rent, do you know how much work the landlord gave? You know, that's why, you know, and they've tried these I buying services where there's an algorithm that tell, you know, the tell Zillow where to buy. You know, it's difficult enough to get that right for a home, let alone investment property. That's why, Rachel, I think I'm going to be doing this for a while. I don't think I'm going to get replaced by a computer anytime soon. Or maybe that would be a good thing. Maybe my wife would thank technology for that. But what I would say is real estate is a complicated asset because the information is not readily available, but because it's difficult to get that information. That's why it makes it so attractive as an investment opportunity, because not everyone has the same information. Said another way, the more information you have, okay. The better investor you will be.

Yeah. That's awesome. James, I love those tips. And I've heard you talk before about the place or the fact that this marketplace tends to be opaque, inefficient, which I think sometimes come across to our ears as negative. That's a good thing. But the way you just explained it, I think makes it easy to see how you can actually take that and use that to your advantage.

Rachel, I got to add one more thing. I don't know if it was one of the things you want to ask, and if so, you're doing a great job. But Were you going to talk about off market listings versus on market? Because this is also a huge opportunity and I just want to make sure our listeners understand how that works. Is that something we could talk about now?

Yes, that's absolutely perfect. Let's jump in.

Okay, good, good. Okay. So in most markets, okay. And this is where commercial really differs from residential.

Okay.

Residential brokerage, I would make the case, is a very efficient marketplace.

Right.

It's, you know, most, you would be the rare exception if you told me you were buying a home and you were not working with a broker.

Right.

Even though you could go to Trulia Zillow in New York. It's street easy, you can find the listings.

Right.

But understanding, you know, how to, you know, differentiate and what to look for and negotiate. The seller has a broker, you have a broker.

Okay.

But I would guess that 98% of residential real estate is listed by a broker. And if not, you know, you know, the residential brokers call them fizbos, for sale by owner. That rare percentage of those owners who sell direct, they think they don't need a broker because they think they can post it online.

Okay.

But, but the point is these listings are online and available right on market.

Okay.

So commercial is, is different.

Right.

Because in many cases, you know, first of all owners, some owners say, look, I'm willing to hire a broker, but you know, I'm hiring this broker because they're going to bring me a buyer. You know, they don't need to tell the whole world about it. You know, they, they've got their customers. And so, you know, there's, there's, there's, there's a lot of different levels here in the hierarchy of how commercial property is sold. And I think it's really important for the listeners to understand. So let's start with exclusive sell side representation. Okay. That is when an owner has hired a broker and that broker's job is to tell the whole world that the property is for sale.

Okay.

And that's, you know, what I've been doing my whole, almost 25 year career. So when I get hired by an owner, unless of my clients as James, we got to keep this confidential. Just make a couple phone calls on this. I don't want the world to know there might be some privacy issues, there might be some, some reasons with the tenants, they don't want it out there. But the most part, James, I got a vacant building. Let the whole world know. Great. I'm putting on all the multiple listing services. I'm putting on costar. I'm putting on LoopNet, I'm putting on Property IDX, I'm putting out through all my social media channels. We've got a great investor list that we send it out to. We're very broad with the information. Okay, that is a widely marketed process. A lot of buyers would say, james, I don't want to buy a widely marketed process because if you're telling me, you know, thousands of people know about this, you're going to get a, you know, a dozen, two dozen offers, I'm going to be competing with everybody else. Now I can make a case of why it's still a good idea to buy a listed property. Because yes, in that case, I'm the seller's broker. But I also really, and I'd like to think my reputation, our team's reputation of brokers is that we present the information, it's vetted, it's a real opportunity. Sometimes I tell buyers that it's better to be the last buyer in as opposed to the first buyer because we've explained, you know, the market. Sometimes sellers expectations are way above market and sometimes we need to educate them through a process. Sometimes it's just, you know, getting that phone call from that, that broker at the right time that it's available. So, but that again, on the hierarchy is the most broadly widely marketed. Okay, then you've got the exclusive right to sell, which is it might not be an exclusive agency, meaning that, you know, this is one broker that you've said, okay, you can go sell my property, but I'm going to retain other brokers as well. I want to leave my options open. Those brokers are going to go out and reach out to their 5, 10, 15 buyers. You know, maybe instead of a universe of 10,000 buyers, maybe they're reaching out to 100 buyers. But the owners are still, you know, retaining one or more brokers to go out and do that. Okay, So I think between those two buckets in New York, that's probably about two thirds of the way the properties are sold. Amazingly, the other third is what we would call off market.

Okay.

Now off market goes into different categories as well. Off market doesn't mean that there's not a broker. It just means that that seller says, okay, I'm not signing up with any seller's broker. I'm just going to give this out to a couple brokers that they want to show buyers. Great, I've got, you know, buyers are calling me directly and a lot of what we're going to talk about on this, this, this show is how to approach those owners directly as well. There's no law. There has to be a broker, but, you know, meaning off market. It's not on the market.

Okay?

Now some of those opportunities you might, when you first hear this, everyone says, oh, James, I only want to buy off market. And there's plenty of buyers who still say that. Oh, well, if it's off market, then, you know, the world doesn't know about it. That means that I'm going to get a great deal. Well, maybe not, right? Because maybe that opportunity hasn't been vetted. Maybe that seller's expectations are still way out of line and they haven't been educated yet. But I think more of a reason is sometimes when you're approaching that off market deal, you know, maybe you are coming through a broker and saying, hey, the broker calls you and says, rachel, I got this great deal. No one else knows about it. Come take a look at it. You give me an offer, you know, you're all ready to go. And then you call back and say, james, did they accept my offer? What's going on? Oh, sorry, they sold it to someone else. What do you mean they sold it to someone else? I didn't, you know. How did you not know, Rachel? I don't know. You know, I don't have control of this. That's not my listing. The seller went and sold it to his next door neighbor and he didn't even tell me about it. So, you know, I get a lot of feedback from investors who tell me they waste time chasing these off market opportunities, you know, or things come up where, you know, James, this property doesn't even have a valid cfo. It has all these violations. Why didn't you tell me this? Well, you know, the reality is if a broker is handling something off market, they're not going to take the time and effort to vet every little piece of, you know, aspect of that property like they would if they retained to put a professional marketing book. They're saying, well, hey, if the seller's not going to retain me, I'm not going to do a ton of work on this. I'm just going to make a couple calls, throw things against the wall and see if things stick. But again, there's opportunities both with on market and off market. And there's all different kind of versions of that. But it's really under. It's really important for our listeners to understand when you're looking at an opportunity, what is the competitive landscape?

Right?

And because none of these examples I gave you, none of them are the Nasdaq.

Right.

So none of these are, you know, open bidding platforms for everybody to see. Unless if we're talking about an auction platform, and I neglected to mention that I would. If you, if you're looking at the hierarchy, you know, if you're talking about an auction process online and we market, we do a lot of business with 10x as well, that's for everybody to see.

Right.

So you see all the bids live, they're coming in there. You know, they, they have a list of hundreds of thousands of prospects.

Right.

And so, you know, that's one other way to look at it. But it still is not a situation where, you know, you're going to be bidding against the whole other world or investing against some giant, you know, pension fund who makes a major position in a stock that you didn't know about until the day after you invested in it. So it's a very long way to kind of talk about this process. But, Rachel, I think it's important for people to understand because there are, you know, if you look at this scale, certainly real inefficiencies that start to exist, certainly when an owner doesn't have professional representation. And those are the opportunities. And there's no rule that a seller has to pay a market price. And they just put it out there. Those are the opportunities. Where? Many times. We'll find out where. And I'm going to tell you about, in a future podcast about one of my early investments where my client, after he signed a contract, could have flipped the contract for almost a million dollars more.

Right.

Because he found that great opportunity off market. And the seller just said, hey, I don't need a broker. I don't need to put it out there. You know, this sounds like a good offer. So I'm sorry to ramble on, Rachel, but it's. I think it's important for people to understand the marketplace here.

Not rambling at all. I think those are essentials. James, I'm glad you went through those. I find that significant that you're saying that third of the market is off market. That's really significant. I have to ask, when we look at different locations, does it tend to be like that in New York and everywhere, or are we saying one of the first steps is to research and see how things are in your area? If there's a lot of off market or not necessarily?

Yeah, it's a great question. And it is certainly dependent on the marketplace. My good friend Bo Bury, who wrote the book Multifamily Investors who Dominate he actually tracks every single transaction in his market. He believes that in his market, almost 90% of transactions are brokered and 10% are off market. So there, you might say, there's not as much of an opportunity to go in and buy these properties that aren't properly represented. When I say a third in New York City or off market, this is an estimation that I'm giving no one. It's very difficult to track, and I wish I had that stat. But there's not even a place, Rachel, where you could go to, you know, some of the publications out there, the Real Deal, for example, used to track, okay, how many sales did this brokerage firm do? How many sales did this brokerage firm do? And then, you know, these are the sales that are unaccounted for, and we have no idea who brokered them. And it could have been, you know, it wasn't one of the big brokerage firms because they share all their sales, but it could have been some mom and pop broker, slash insurance broker who put two people together. It's really hard to know. So that third off market in New York City is more anecdotal. But I will tell you, a lot of that inefficiency happens as you go into the boroughs. I mean, New York City is a massive city, right? We've got 250,000 properties in New York City. Manhattan is heavily covered by the brokerage community. Everyone wants to sell properties in Manhattan and even downtown Brooklyn, Williamsburg, I mean, these are areas that are just crawling with brokers, right? You go further out, whether you're in the Far Rockaways or Kew Gardens or even up in the Bronx, you're not going to see as many brokers out there because the dollars aren't as big. And a lot of our listeners, Rachel, are probably looking to make an investment in the $1 to $3 million range. They're probably not buying in Manhattan. They're probably buying in, you know, in the Bronx, where, you know, there's new neighborhoods that are emerging. Go check it out. Right now, everybody that they've just put in four new subway stations in the Bronx, okay? And I am telling you, if you look around those subway stations that are opening up, you're going to thank me in a couple of years and say, James, you know, you were right. You told me about this great. You know, you know, these neighborhoods that are now suddenly that much more accessible to Midtown. But look, there's not going to be a hundred brokers that are up there canvassing every single property door to door. So you know, again, it's, it does vary by neighborhood, even within the city, but there's certainly a lot of these off market opportunities. It's certainly not like residential, which again is a very efficient marketplace.

Awesome. That's so helpful. You're inspiring too. I'm ready to walk the streets with you, buy up those properties. So I know we started this conversation talking about investing different types of investing, stocks versus real estate. I'm curious when it comes to expectations with real estate investments, what you tell people, especially those who are just starting out, who are saying, I'm thinking of doing this, maybe I'm diversifying in this area, maybe I want to make a substantial commitment to real estate investing. What can I expect long term? You know, I know we see all sorts of statistics that you can look at. Average rates of return over extended periods of time. Not necessarily that, but I'm looking at in general, what are long term expectations that you tell these newcomers.

So I hate to give this answer, but it really depends. And it depends first and foremost of what are your objectives.

Right.

And if you go and listen to my podcast and some of these investors who really built up their portfolio by trading at a very, when they were started going, they didn't have a lot of working capital. So what do they do? They'd buy at a good price, they do a quick fix it up, they'd flip it, they'd go exchange it into another property and they would just keep going. Every time they'd exchange, they would do something larger and larger. And so if you said, my goal is to try to amass the biggest portfolio, usually, unless if you're telling me that you're independently wealthy, you're going to need to do that by churning through properties early on. And so to do that again, there are some friction costs, certainly with selling, the brokerage fees, but also the transfer taxes, the legal, you know, you're not going to get very far if you're buying and you're just selling for a 10 or 15% profit.

Right.

So you're going to be looking to make, you know, large moves, large gains that you can continue to capitalize on by using that 1031 tax free exchange, by deferring those gains into your next investment. So that's how you know, if you listen to my show, I would say that's how the majority of investors have gotten started, is by churning early on to really get some good working capital. And then once they're in the position where they can start building on a portfolio, the American dream, if you Will is really owning those cash flowing properties, right. And if you read my friend's book, Terry Moore's book, Building Legacy wealth, he does an incredible job of explaining, you know, the benefits of long term cash flow. It's very tax efficient. When you're leveraging, you're borrowing money from the bank, you know, your rents improve. But you know, especially if you take a long term mortgage, it's being paid off over time. You know, over time you are, you know, buying, you're letting the bank buy the building for you, if you will. So, you know, that is, you know, if you're, if your long term game plan is just to fix and flip, you know, that is not a great way to create true legacy wealth.

Right.

Because you have to keep doing it right to, you know, to make that profit. Whereas the goal is really to have that, that cash flow. And again, we're not sitting here talking about 20x returns and I do some VC investing and sometimes you get lucky and that's amazing. I mean, we're not talking about these mega grand slams. And so when we talk about equity multiples, like a three, four times return is a really good return. That's usually over a three to four year period. But for most cash flowing properties and depends if you're buying multifamily and one of these southeast markets right now that are as hot as possible or retail, mom and pop retail, I mean, you could be buying in at that cap rate of anywhere from 3% to 7% or 8%.

Right.

But as long as you can borrow money from the bank at a lower rate, that's really where you're getting the benefit, right? Where you're getting that, that positive leverage, right? Because that's the gold. So that the cap rate, when we solve for that, that rate of return before debt service, that tells you the type of return that the property is delivering. So Rachel, if you buy $1 million property and it's throwing off $100,000 of NOI net operating income. So taking that gross revenue, subtracting the property's expenses to get that $100,000 a year, you're getting a 10% return. That's pretty good. I used it because it's a simple example. But what gets really exciting is then if you can borrow money at 3.5% and then you look at what your equity is doing for you and the type of cash on cash return. So you take that net operating income and you subtract that debt service and that is your cash flow at the bottom. And so if you look at what equity you have in the deal and you divide that by your cash flow. You know, again, as long as you're borrowing money for cheaper than the property's cap rate is delivering, you're going to see that cash on cash return grow. So if you can get a high single digit cash on cash return right out of the gate, that's a great place to be. Especially, you know, now where inflation is starting to crank up, you know, because your rents are going to, you know, continue to grow with that. It's a great place to be. So, again, a super long way of answering your question that there's different ways to do it. But if I had to guess, I think most people getting into it would be looking to kind of make some early hits by buying, improving, reselling, growing that portfolio and then starting to hold. And once you hold, refinancing those assets, pulling out money to go buy more properties.

Right.

And then really using the power of leverage.

Exactly. I appreciate your honesty too, when you say it depends. I think that also helps us lead into some of those other discussions we've had with the value of research, getting on the ground, you know, putting in the time, and then you can reap the rewards as well. One quick follow up from what you just mentioned. Do you usually list tax advantages as an opportunity with real estate investing, or do you find that that tends to be not as much maybe of a big deal as sometimes it's played up to be?

No, it's one of the most attractive parts of owning real estate. That being said, it's not something that I advise clients on. In fact, quite the opposite. I make it very clear that I am not certainly an accountant. I'm also not an attorney. I don't play one on TV either. No, but it is. The tax treatment is so specific to your individual situation, how you structure the transaction.

Right.

And so, you know, we talk about having the right team before you go invest, having a great accountant to understand the benefits of real estate. I've talked about the 1031 exchange. That's as far as I know, available to everybody.

Right.

So that, that doesn't have to, that doesn't mean how you're actually, you know, filing your taxes. And it does, that being said, depend on how you're structuring the transaction. So, you know, that's where you're gonna have to speak to your attorney as well. So, you know, as a, you know, an llc, you know, which is how most people buy properties, a limited liability corporation, that LLC can go buy another Property right. Together. But if a couple people in that LLC say, hey, well, I want to buy this and I want to buy that, and, hey, I want to cash out, that does not work for an llc. So I should probably should roll back the tape and say, Even with a 1031, you're going to need to speak to an accountant, you're going to need to speak to an attorney. But things about depreciation, you know, these are things that. That's why there's advisors in place. You want to have the right team in place. You want to deal with an accountant and with an attorney who have other real estate clients in your market.

Right.

So you don't want that generalist attorney who does, you know, they'll do personal injury, they'll do this, they'll do that. Estates. No, you want a real estate transactional attorney who can tell you, really help you get under the hood and help diligence a property. And you need an accountant who really helps you really structure the transactions in the right way and make sure that you're doing everything by the book.

Excellent. That's so straightforward. I think I was looking at, for closing, wondering if we have an example we can share with listeners that, you know, can serve as an inspiration or how you can really get a great return from real estate investing. We could go through an example. Or if you want us to point. If you want to point us to someone else, that'd be fine, too. I know you mentioned this book. Anything in that area.

Well, I'm going to suggest that everyone goes back and listens to the podcast I did with Jordan Vogel. I think I entitled his podcast Just Do It. And Nike hasn't called me yet for ripping that off. But Jordan was a very savvy investor. He's got a great story, and he did not just wander into real estate. Let me be clear. He had certainly an advantage for five or even 10 years. He started working as a managing agent. So he was working third party. He understood how to run properties. Right. He had a very, very strong organizational background. He then worked for another sponsor who was going out buying deals. So then he watched the other another sponsor complete transactions. Then he said, okay, I'm ready to do this. I've got a partner. We're going to go buy properties. And I think what's so amazing about his is he talks about that first transaction that he bought, and that was certainly going back, putting things on the line, and this is the money that I have. And at some point he wanted to jump in and he wanted to go big. And his message was, just do it. We can all talk ourselves out of reasons why this doesn't make sense to do it. And he said, nothing's perfect, right? And by the way, you talk about other books that have been written, Terry Moore makes the same, you know, point in the book. There's no asset that's perfect. There's always going to be issues. That's like, no properties are alike. That's what makes this interesting, right? And you're going to have to have problems you're going to have to figure out to solve for them. It might be tenancy issues, it might be paperwork issues, it might be renovation problems. But he said, look, you certainly do your survey, you do your research, but when it's time to go for it, you jump and you go for it. And he said, and Jordan has bought over 70, 80 properties in his career. He says, james, even today, every time I win, right? Which is, I got the deal, I signed it, I have buyer's remorse the next day, every single time, I say, oh, my gosh, I overpaid again. I can't believe it. Every single time. Because think about it. If you won, you were the one who paid the highest price. But now, granted, it's the right kind of asset. It's the right timing, okay? And he had an incredible run. But I just think it's amazing, not only his conviction, but his attention to detail, how to operate, and then how he raised an incredible investor network. He's very loyal investors who've repeated with him time and time again, so much to the extent that he ended up aggregating them into a huge fund. And we're talking about hundreds of millions of dollars of real estate that he assembled. And it started with one deal, right? So it is definitely possible. I mean, Jordan is one of the smartest investors, and you're going to hear a lot of great stories. You go back and hear these podcasts. I mean, even the first podcast that I did ever with Bruce Ratner. This is the developer who built Barclays arena.

Okay?

And eight spruce by Gary. I mean, we're talking about 50 of some of the largest developments in New York City. And he started by cobbling together $25,000. Granted, was in the 1960s or 70s. At the time, it was a lot of money, but again, he pulled that money together. So there's a lot of inspirational stories. And I think what they have in common is that, again, they were willing to make that jump, to just have that conviction, but they did the research, they did the work. They knew what they were looking to buy and they were really able to bring other investors along with them to back them.

Thank you for those suggestions. I think those are great ways to learn and I really appreciate your time today and I very much look to forward forward to our next discussions where we'll dive more into different types of property, making that leap into real estate investing and then the steps that follow. Thanks so much, James.

Rachel, this is awesome. This was a lot of fun and I really hope that our listeners got a lot out of this. And I love hearing about success stories and comments. And when you reach out to me, whether it's LinkedIn or if it's Twitter, Instagram, however you're connecting with me at James Nelson nyc. I love hearing the stories. It really inspires us to do this. I'm passionate about it. I know you are as well. And so we're looking forward to continue the dialogue here. And I couldn't be more excited about this book that we're working on. So again, this is your host, James Nelson, Real Estate Investing live from New York. And until next week, I'm going to have one more plug. Check out James Nelson.com I have been telling you all I built this site for you. That's where you can find this podcast, the show notes, the exclusive video series, and a lot of other great stuff. Until next week, thank you as always for listening.

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