AIPIS 42 - Coastal and Luxury Property Update with Alex Jansen

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Welcome to the AIPIS show for accredited income property investment specialists and those who desire to be. This is your host, Jason Hartman where we talk about increasing your income, your productivity and just generally having a better life while serving your clients better with America's most historically proven asset class income product. We have a great interview for you today and we will be back with that in less than 60 seconds.

It's my pleasure to welcome Alex Jansen to the show. He is CEO of Coastal Properties Group International and founder and president of Janssen Coastal Properties Group. And we're going to talk about the investment market in Florida and some other places and talk about hedge funds and what they're buying and what they're selling and what they're doing and get some insights there. Alex, welcome. How are you doing?

Great, thank you.

Good, good. It's great to have you. You're coming to us from the Tampa area, is that correct?

That's right.

Fantastic. Well, tell us a little bit about the vibe in your market now and what's going on, what, what investors, what buyers are saying and are they in the accumulation stage still? Are they starting to unload anything yet? What's going on out there?

We're definitely still in an accumulation stage at this point. Pretty much for the last two to three years. We've seen a dramatic pickup in investor activity to the point where we've seen several hedge fund groups come in with specific criteria to purchase investment grade properties with certain returns in mind and large dollar amounts have been put behind these funds with that purchase in mind. The actual individual investors had quite a tough time actually competing against the funds to pick up enough properties sort of in their own personal criteria.

And what kind of properties are they buying? What's their target property typically?

I mean the funds are looking for single family homes and then on a three bedroom, two bath, two car garage in good neighborhoods. They're looking for a long term buy and hold strategy. When they started this endeavor a couple years ago, they had a target return of 12% based on rental income. They've since had to drop that amount to about 9.5 to 9% because values.

In the area, because values have gone Up, So.

The prices always increase faster than the rents. In most markets, rents are the lagging indicator. But explain that return to the listeners if you would, Alex, just to make sure we're all on the same page with what you mean by rental return.

Sure. So sort of the net return that the fund is looking for is in that 12% range. Init. If you have a property that may have been $100,000 to start, the fund is typically going to need to collect somewhere in the $14,000 to $15,000 per year range and then back out taxes and insurance, which takes them back down to about $12,000.

And so there's no debt service in that equation. And what is the typical price range of that property?

Back a few years ago, it was about 100,000. Now, unfortunately, we're creeping up, or fortunately we're creeping up to $150,000. 100 to 200 is where a lot of these properties are falling.

And are those year round rentals or are those vacation rentals?

The funds are typically looking for annual rentals. They tend to shy away from the vacation market.

Yeah, and I agree with that, by the way. Do you agree with that?

Yeah, I mean, if you have a strict criteria and you can find the properties that are going to bring you those returns, it's certainly the way to go. And certainly a lot less maintenance from the perspective of having to manage all the various tenants that you would on a rental property. Rental properties can bring a higher return, but also there's more risk.

Well, when you say rental properties, you mean vacation properties, right?

Vacation rental properties.

We're all talking about rental properties here. So the funds, what is it like to work with them? I mean, my company works with some private equity groups and some hedge funds and it's been interesting to see how they operate and their willingness to pay or not pay prices, et cetera. I just want to get your take on that.

Yeah, it certainly has been interesting. They have very, again, strict criteria that need to fit their model and specific demographics that they look for. So in essence, to work with a group like that, you really need to come up with an engine, so to speak, that comes through the data because certainly there are thousands of homes available and calling that down to your top, say hundred that might actually match their criteria. So a lot of spreadsheet work to figure out which ones truly fit their model. And then it really comes down to writing a lot of offers. We're writing for these funds at times 40, 50 offers a month and maybe 10 are actually panning out. So There's a lot of work that goes into it, but there are still properties that meet the criteria. But again, they've had to loosen up their criteria to make this work.

And do you find that they're willing to pay the price or do you find that they're really holding out to negotiate and grind the seller down and get a lower price?

One of their criteria is not to pay any more than what they perceive to be 95% of market value. So their criteria is to make sure that they get it at 5% of their market. So they certainly have an upper threshold on these properties. They have values that they assign. They rely on us to provide comparable properties so they can come up with their numbers. And that's part of their due diligence period is figuring out are we at 95% or below. So some of the ways they accomplish that is.

The short sale market is making offers on short sales. The banks are at times more forgiving on the short sale front to offer or sell properties on the market. And these hedge funds, they've actually gone as far as creating management companies that will come in and execute the renovations of the properties. So they're willing to buy properties that are not perfect and make the repairs necessary, which is another way that they're able to buy properties under market.

Yeah. And when you say management companies, you mean contractors that are doing the fix up work, right?

Correct. Which that is correct. And then in turn they have actual rental management that they have sort of a centralized source that takes care of all their properties for them.

Let me just tell you my impression why I asked you that question, Alex. It's because I find that they're not too picky on the prices. They just want to deploy money quickly. And we'll find that sometimes they kind of overpay. You know, you say 95% of what they perceive to be the market value, which is an interesting statement. But do you feel that they're getting really good deals or that sometimes they're, they might be overpaying or just getting a basic retail deal?

We've seen scenarios where we feel that some of these properties, because oftentimes we may be representing one fund and then some other groups are representing others, and our fund may not get it. At that point we see who ended up buying it down the road. And yes, we feel that there are people that are overpaying just because they're trying to snap up a large volume of properties and they feel the market will continue to increase. So they're kind of at times paying A little more than.

What we feel they should. But their thought process is that the market will continue to recover so they'll be in good shape on a going forward basis. So we definitely are seeing some of that happening.

Right, right. Anything else you want to say about the funds before we leave that subject, like Blackstone, et cetera?

Well, the fact of the matter is they let the foot off the gas for a little bit over the last three to four months, but they brought new funds into the, into the mix and are back actively buying again.

So why the slowdown? Were they just becoming uncertain about the market? Maybe the Fed tapering? Well, the threat of the Fed tapering, which they probably should have done in my opinion, but just print more fake money, who cares, right? Kick the can down the road. That's sort of the attitude of government nowadays. Why the slowdown? Do you have any thoughts on why they took the foot off the pedal for a while?

I think they were starting to see a lot of competition from the retail side. You know, the retail investor buyer was wanting to get in the market as well, so they were driving prices up faster than what was customary. So you had the funds competing at the retail public and so that was making it difficult for them to compete. So they sort of let off for a little while. A lot of retail buyers came in and got what they needed and I think they feel the timing is right again where they can compete again where the retail buyers are not quite as prevalent as or the competition isn't as tough as it was six months ago. And everybody saw the market increasing and the activity was extremely high, the volume that is, of transactions. So I think they decided to step out for a little while and now that volume has actually gone back down again and I think they think it's a good time to get back in to compete.

Yeah, interesting. So you have sort of, if I perceive this correctly, please correct me if I'm wrong. It's kind of two sides to your business. You have this investment side that we've talked about and then you have this higher end property side of luxury homes. Is that correct?

That's correct, yeah.

So let's talk about the fun stuff for a moment here. The luxury side of the market, what's happening there? It's been rather surprising this cycle compared to other cycles that I've seen in the past. It definitely feels like the rich are getting richer and maybe fewer in number compared to having a large middle class. But the luxury side of the market is. I mean, there are people out there with a Lot of money buying some beautiful properties, aren't there?

There are. And I'll give you one surprising fact. In our area, there were more million dollar plus properties sold, waterfront properties in 2011 than there were in 2005 when the market was at its hottest ever. So the wealthy are seeing opportunities, seeing depressed prices and are acting on those. Of course, we've seen the stock market rise very nicely over the past year or two. So the wealthy, they're doing well, so they're rewarding themselves with fine properties and they've been wanting to make moves for years, but it just didn't make economic sense. They didn't feel we'd hit bottom yet. But our opinion for the luxury market was that bottom was somewhere in that 2010, 2011 timeframe. And that's where we saw a huge influx of luxury buyers accessing the market.

And when you say luxury, what is the average sales price? There's that you're talking about in your luxury market.

Across the United States, it's typically around a million. In our market, it's closer to 750.

Oh, so that's not that expensive really. I mean, you know, I thought you were going to say four or five million dollars and up. You certainly have that in your market, don't you?

We do, we do. It's a smaller percentage of the market. It's probably 20% of the luxury market. If you go to West Palm beach, of course, you can't touch anything under a million for the most part.

Right, right. What's the cost per square foot typically on these luxury properties?

You know, for a million dollars, what kind of square footage are you getting?

A couple hundred dollars a square foot to 2 to 300 is A, is a safe number. And if you go ultra luxury with the best of the best finishes, you know, you can, you can get into that five to six hundred dollars square foot range.

Right, right. What are some of the most expensive markets in the US you're typically looking.

At your Manhattans, your la, Beverly Hills, San Francisco. Those are sort of your, your top markets that are at the forefront. And West Palm, of course.

Yeah, right, right. Do you think that this will continue? Do you think that we're on a real recovery? Or do you think we should be cautious that there's another shoe yet to drop here and maybe another bad cycle coming up?

That's interesting you asked that question. I get that question a lot.

I think we're on to a sustainable recovery. I think the largest difference this go around is that buyers are not leveraging themselves. The way they did back in 2000 through 2006. The banks are certainly much more stringent with their lending practices. And frankly, in our area, we're still at about 60% of the transactions are cash transactions. So bank loans don't even come into play more than most of the time. So as a result, and when they do, again, the person's been very well vetted. So, you know, barring any disasters, I think we've got a good five to ten year run here.

Okay, you're pretty optimistic about it now. Do you see that happening, Alex, in all segments across the board? Like the rising tide is just floating all ships, or do you think that it's more geared toward the luxury market? I mean, are the wealthy going to stay wealthy and keep increasing their wealth, or is it more of a bread and butter market recovery, A middle segment or just is it kind of rounded out?

I mean, all indications we're seeing is sort of a rounded recovery. So, you know, the luxury market is strong again.

Probably the slowest market for us right now is that home that falls in the 500 to a million range. Under 500 is moving nicely under 200. You can't keep on the shelf. You know, we're seeing bidding wars again and multiple offer scenarios all the time. But that 500 to a million for single family residents in our market is the slower one of the group, although still doing better than average. I would say.

Talk to us just for a moment before you go, if you would, Alex, about the impact of insurance over the last five years or so. Insurance has just become even more than five years. I guess Katrina would be a landmark to think about there. Insurance has just become a really big piece of the real estate puzzle. Whereas before Katrina, say, I'll use that as a demarcation point, insurance wasn't that big a deal, but now it's a big deal. I mean, insurance is a problem. It's a challenge, isn't it?

It is. And if you're looking to invest in properties, that's probably one of the first things that should be investigated is what you're up against from that side of the house. Because it's been sort of all over the media. The flood insurance issue is a big one. It looks like there's some relief on its way. There's no timeline yet, but probably by the end of the year, early part of next year, our flood woes will be sort of put off. But in essence, with flood, we've seen people in this area and we're kind of ground zero for the Flood insurance debacle. Pinellas county per capita has more waterfront homes than any other county in the country. We have seen rate increases in certain properties when they're sold, going from say let's say a $3,000 a year flood policy to anywhere, 30, 40, $50,000 a year flood policy. So that makes it completely unsustainable, especially for a finance buyer. It throws their ratios off and they won't qualify for their bank loan any longer because the insurance rate is so high. So it's the kind of thing that help is on the way, but properties really need to be. Well, the details need to be done to know what you're getting yourself into when you're buying in the coastal areas. For sure.

But you said that help is on the way. I mean, from where cometh this helps? Well, I wanted to sound a little biblical there for you.

Yeah. So the current bill that was presented yesterday is the Homeowner Flood Insurance Affordability act, which is going to put off this, what was called the Biggers Waters Act. The premise behind the Biggers Waters act was that a number of people were being subsidized if their home was purchased or built prior to 1974. They had subsidies and the rate was artificially low based on the risk of property. These pre1974 homes are built on the ground level, sometimes only 5ft above sea level. And when the storm rolls through like Katrina, you can talk about 15 to 20 foot storm surges. So that house is completely submerged and basically totally destroyed. So as a result, the rates need to be quite high. So they've been subsidized for all these years and the flood insurance program is at a deficit at this point. So the Diggers Waters act was going to remove those subsidies when a home is sold or if a policy lapses or anything along those lines. Well, once that happens, your rate goes from, like I said, 3,000 to 20, 30, 40,000 to get you in line with the actuarial rates that are currently in place. So.

And what price property is this? Give us what's the price of that property that has that kind of fee to attach to it?

That's the crazy part. It could be a beautiful home that's, you know, a million, two million.

Yeah, I mean if you say, if you say the property is, you know, three, four million dollars, I'm not going to think that's that bad. But what is it on the low end?

The real issue is, let's say it's the non waterfront property that's across the street from or even 10 blocks down the road that still is considered in the flood zone. And that could be $175,000 home that gets hit with $30,000 flood policy on an annual basis.

Wow. Oh my God.

That is just significant.

That is significant is an understatement, my friend. That's huge. Yeah.

So that's where this new homeowner flood insurance affordability act that's been proposed is going to delay the flood insurance issues for up to four years and then they're going to supposedly do an affordability study on each property to see, okay, does that make sense to have a $30,000 floodplain on a property that's only worth 175,000? So that's the program they're trying to implement to still subsidize those less expensive properties and figure out a way to still make them affordable where a mortgage could be had and insurance is still possible to contain.

Very interesting, very interesting. Well, one last question for you. Just some advice for the trade, Alex, if you would, any advice for practitioners out there for real estate people to more effectively work with investors, to sell properties to investors, to get more investor clients, Anything along those lines?

Well, I would say the number one important factor in working with investors is knowing all your numbers. Investors are typically quite savvy and that's the number one thing they look at is making sure the numbers are going to make sense. So be well educated on the factors like insurance, taxes, things that are coming down the pike. From that perspective and making sure you do your due diligence on the property before you present it to the investor as well as due diligence on the neighborhood, is that going to make sense? Do the rental periods, are they conducive to the type of investment this investor wants to make? If someone wants to invest in vacation properties for weekly rentals but come to find out after the purchase that the community has a six month minimum rental period, that doesn't make for very good vacation rental property. So I think it's really just if you're an agent or if you're somehow representing investors really knowing all the facts and figures involved so that you can provide them with the value add information that they're looking for so they can make an informed decision and a good investment grade purchase.

Good advice, Give out your website and tell people where they can find you.

Certainly you can go to www.coastalpgi.com so that's coastal G as in Paul, g as in george.com and feel free to have a look around there's some very unique properties there and we'd love to hear from you.

Fantastic. Well, Alex Jansen, CEO of Coastal Properties Group International, thank you so much for joining us today.

Thank you.

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