#107 Investing Success in a High Cost of Living Area, ft. Vincent Chan

Foreign. Welcome to the Passive Income MD Podcast where we talk about creating your ideal life through multiple streams of income. I'm your host, Peter Kim. If you enjoy hearing about this stuff, make sure to hit subscribe so I can bring it to you every week. Now let's get on with the show. Hey everyone. This is going to be a fun interview. You're going to enjoy this. We're now talking to Vincent Chan. I'm going to read his bio. He is the chief operating officer of a real estate investment firm called Christina. They've been active for 45 years in the Los Angeles area. We're going to talk all about these things. He started his career as a CPA with Ernst and Young, and now he took all that experience, brought it over to the real estate side and he's been involved in some of the largest publicly traded real estate companies out there. He joined Christina seven years ago as the CFO and now he's the chief operating officer, really to help build that company in this really desirable location called Los Angeles. Right. And we're going to be talking about high cost of living areas and how to invest well here. They obviously have a track record in this area. Hey, Vincent, how are you doing?

Doing great, thank you, Peter, how you doing?

Yeah, did I, did I introduce you? Okay. I mean, is there anything else that you want to add to it? And do you go by Vincent or Vince? What's better?

No, Vincent's fine. Vince is fine. Either one, no problem.

All right, so tell me a little bit more about Christina.

Yeah, yeah. Christina is a Malibu based real estate sponsor and manager, like Peter said, operating for 45 years. And we focus primarily in the ultra prime submarkets of Los Angeles. Los Angeles is a huge, huge, you know, county. And the west side region is the area that we focus in and that includes like Beverly Hills, Brentwood, Century City, Malibu, Santa Monica, Silicon Beach, Westwood and West Hollywood. It's kind of the coastal cities, you know, the more affluent demographics in L. A and you know, great strategy and management team, track record and experience, sticking to our knitting. You know, we don't venture outside of marketplace. You know, people want to go to other cities. But we just stated what we know and we've been doing this for, gosh, 45 plus years through numerous real estate cycles. So during the good times, the bad times, you know, since 2018, everything's been good going up, but now we're at kind of the end of a real estate cycle. So I think the challenge now is what do you do to reposition your Portfolio. And, you know, one thing, we haven't had any investment losses, and that's, you know, multiple real estate cycles. So we're very experienced in one location, and that's what we do.

I mean, that's awesome because a lot of the groups that I talk to, even the ones that I've invested with, they're always kind of moving their markets to kind of go along with yield. What's hot, what's overpriced, where opportunities are primary markets, the secondary markets, the tertiary markets, they tend to move. So I've noticed a lot of the market has moved to areas like the Southeast and things like that. But you guys have remained on the west coast, on the west side, which is actually close to me. So I know that area really well. Like, why? How have you guys been able to be so successful? I mean, it's hard to kind of wrap it up in one, one sentence, but have you guys been able to be so successful by staying in this market, which is traditionally known to be a tough one to be in? Because I know that most people say when they want to invest, they want to move to all these other areas. Like, how does it work for you guys?

Yeah, I mean, that's one of the things about being in one location. You have boots to the ground because, you know, every street is different. You know, if you try to go to a new marketplace, you know, unless you have boots in the ground, you're never going to know, like, the best side of the street, north side, east side, west side, because they're all so different and so unique. So I think by being an expert in our marketplace, give us that advantage. You know, other people can come here, but they don't know the cities. There's different, like, entitlement rules. So knowing the local government, you know, the different kind of legislation is so crucial. And knowing every single property and who owns it is also very critical too, because, you know, our. One of our strategies, you know, being successful in L. A is that, you know, we only buy when others are forced to sell. So that gives us a good kind of margin of safety. We can buy at discount and we're not paying, you know, retail prices. You know, if you go to another marketplace, you know, using a broker, and you pay and compete with other people. So that's one of our advantages is again, the experiences and the relationships we have in la. One of our strategies, it sounds kind of morbid, but we're looking for people. Is it death, a divorce, a partnership dispute, a bankruptcy? Because those are the ones where People need liquidity and those are the best deals to buy. So I think you can do that in any marketplace. But if you spread yourself out too thin, you're never going to be affected. So these relationships are important to us. And just knowing again, every single block in the city is really crucial.

All right. I mean, are you still seeing value there today versus like earlier on, like you maybe like 10 years ago where it seemed like, oh, you know, all real estate prices seemed amazing. Everyone's worried about this whole bubble that's happening or that they see, like what are you guys seeing in the marketplace right now, especially in a high cost living area like Los Angeles?

Yeah, you know, we have this theory too. I know it's never a bad timing. Like, you know, great real estate, you know, there's always going to be cycles, but, but if you buy right and you buy at a discount and you have a long term outlook on things, you know, you're definitely going to win. It's a slow and steady race. You know, tortoise in here, you know, real estate is slow and boring. But if you have again, a long term outlook on great real estate, I mean, this trophy location, these, these properties, you know, people come visit LA all the time and they want to live here. I mean, the best weather. So there's always going to be demand for the product. You know, you go to the other tertiary cities, there's so much vacant land, they can always build and build and build and eventually there'd be too much supply. You know, Louisiana is supply constrained. The last undeveloped parcel of land was in Playa Vista. So in order to make money here, you got to buy something, tear it down and redevelop it. So, you know, we don't have the risk of oversupply. You know, it's limited supply in L. A and again, the weather and the lifestyle, there's always going to be demand for this product.

Got it. Okay, so what kind of properties are you guys looking at? Just so people are clear in terms of asset classes? You talk about places to live, apartment buildings, do you guys venture into anything else or is it primarily apartment buildings?

You know, we're pretty much product agnostic. You know, long as it's within our geographic borders, we don't care if it's multifamily, retail, office, commercial, you know, long as a way to make money. Because location is key and you can, you know, one of our strategies is kind of a multiple exit strategy. So we'll buy something. For like example, we buy a post office, but we see a Vision where, oh, we can develop it into a multifamily apartment unit. And so again, having the vision and the creativity is all about the location. So if it's a desirable corner, there's many ways to make money. Mixed use retail, it's all based on kind of what we think is the highest and best use. So we don't want to limit ourselves to a box because if you stay in one asset class, you can't be flexible with trends. So we're definitely open minded and location driven.

Now looking at this, as an investor, you talked about the supply and the cap supply which is a great thing for investors I think to think about. You talked about these products that you're able to buy at a discount. You talked about these longer term holds. What are we looking at in terms of years for you guys to be successful, to make money for yourself, for your investors? What kind of long term holds are you guys looking at?

We always joke around every time we sell a property, we can never buy it back at the same price we bought it for. So you know, the biggest fortunes in real estate are made by just owning great real estate for generations. I mean look at the Irvine company. You know, Donald Grant is probably the richest man in America because he just owns all of Irvine and he never sells it. So these are kind of things where that's how you make a lot of wealth. It's kind of like the oil well, if it's a good property, it's going to have great returns for generations and generations, you know, couple that with tax benefits and you know, it's, it's a no, you can't lose. You know, one of our strategies is to return our capital back to our investors, you know, within seven, ten year time period. And that way they still continue to own the properties and they have all their money back. So the returns are, you know, we call them infinite. But let's talk about that a little.

Bit if you don't mind. I've talked about the term infinite, you know, returns and infinite investing. But, and you guys are actually one of the groups that actually really practice that and that's like part of your model. So can we talk a little bit about that, dig into what that looks like. And you mentioned that you try to get people their return of capital within 7 to 10 years. So what does it look like if somebody invests some money upfront, like what's happening behind the scenes to get people back their, their initial investment?

Yes, a great, great example here is our first offering called Christina real estate investors one know it closed in 2014. It bought seven assets, pretty diversified. There was like, let's see, four multifamily and there was one post office and one development project. And we basically sold four properties. We continue to own three properties. We refinanced five of the properties. So basically all the distribution we gave out to the investors were from refinancing proceeds, which, as you know, are tax free because you don't pay taxes if you didn't sell the property. It's no capital gain. But when we decided to sell the other three properties or four properties, a lot of it was sheltered from all the accumulated passive losses from depreciation. And those that invested in subsequent real estate offerings from Christina didn't pay taxes on those sales either. So within seven, 10 years they got all their capital back and they still continue to own three properties and paid very little taxes. So that's the way to compound your wealth is kind of the tax deferral program as well. So we're very tax efficient at the same time. So again, strategy is long term, you know, quality properties in great AAA locations. So there's little risk of, you know, default or a little risk of over, you know, competition. It's like a AAA bond, you know, if you can get good returns with high quality assets, you know, you mitigate your risk. So that's always been our kind of focus is the west side. We know it's resilient. We know that there's always buyers for the marketplace during the good and bad times. Because if you're out in a very tertiary market and things dry up, where are the buyers? La there's always going to be institutional buyers. It's always going to be a place where people park their wealth. And so we've done this for 45 years and we've studied it very carefully. That's why you don't leave.

Okay. So if somebody invests and they get their capital back through, you know, you've had some sales, you've had some refinances and things like that. And you say they still own some of the properties moving forward, like, what do people expect from that point? They're just getting cash flow like every quarter and just like till the next point where you guys decide to sell those properties down the line or what does that look like for people in terms of investors after that point where they've had the return of capital?

Yeah, the way we look at it, they still continue to receive the tax depreciation from those properties. We're looking for a good time to sell in the meantime. Like I said, they do generate cash flow and we're looking at ways maybe to reposition to even further the value too. So again, our philosophy, let's give back the money back, let's have them continue to own great properties. And we're always looking for highest and best use. And real estate is slow, so things evolve over time. So what was good five years ago could be different seven years from now. Retail is evolving, office is evolving. So you got to go with the evolution of things too. Real estate transforms constantly, so there's always a better use. Maybe not now, but down the road. So again, our goal is just to maximize the highest and best use of each property.

I mean, when Vince talks about infinite returns, I think people may have been, they may have watched previous podcasts or us talking about this before, but the concept is that you get all your return, you make an investment, you get all your return of your capital back, and you're able to take that now. You have no more money invested in the deal technically, even though you still retain that stake in the deal. And so you continue to get distributions of profit based on that, but you're able to take all of your initial investment and move it onto something else if you want. And so that's why it's kind of known as that infinite return, because again, you don't have any more money in that deal. It's already out of there. You've gotten your money back, but you still have the equity stake in that investment and you continue to make returns, hopefully for years and years and years and that sort of thing. Right.

Especially with the tax benefits. Right. Because that might tax free. I'm thinking about you have more money to reinvest too. And again, our generation generational wealth is owning real estate for as long as you can. You'll pass it on to your heirs. It's the gift that keeps on giving. So. So, you know, it's one of those things that you want to accumulate over your lifetime is, you know, instead of collecting like art cars, you know, collect real estate. It's funny.

Talk a little bit about the contrast between, you know, there's different models out there for different operators and sponsors. There are ones where they go in and they essentially try to flip these properties. So they go in and maybe they'll buy a bunch of properties and kind of quickly renovate and get out within three to five years. And then you as an investor get in there, you're able to, obviously maybe there's not a lot of cash flow in the beginning, there's some cash flow near the end, and then there's a big sale at the end and they go turn these things over. And that's really not your model. But can you talk about a little bit about the. Just so for compare and contrast. Why you think maybe, you know, your model differs from the other and there's maybe some pros and cons to that.

Yeah. So, you know, one thing about la, there's so many trophy locations. So we have a property that's located on the beach. Implied array. It's literally on the sand. That's, that's a very rare asset to own. So if you own something like that, why would you ever want to sell it? You know, it's one of those properties that are very hard to get. So it's one. It's like in Rodale Drive, right? Like, if you have a great asset, why would you ever want to sell it? Another example is like we just bought this property, Largemont Village in Hancock Park. It was owned by, you know, family member and they passed away after 100 years. They didn't reinvest in the property and now we own it. And so we renovated the property and they were getting like two bucks, you know, a month per square foot, you know, and when we renovated it, we're charging 10 bucks a square foot triple net too. So you can see how like, that's an asset that's irreplaceable. So if you have that in your portfolio, you know, do you want to sell it? If you have a great asset, you know, there's no reason to sell. So. So we have that long term outlook. But again, if someone comes and offers us more than we think it's worth, you know, we'll definitely sell it to them. But there's certain assets that you just want to own forever and pass on to your heirs. So that's our kind of long term outlook. We want to buy properties that we want to own forever. But again, when a good opportunity comes to sell it, you know, we would definitely entertain that offer. Got it.

What if somebody comes to you and says, look, I can, I can invest in this type of sponsor investment. Again, they're doing a quick in and out. I'm going to get my, you know, potentially get an IRR of 20% or return of 20 or these kind of things. Like how do you, how do you talk to someone like that when they're saying, you know, you're comparing maybe your product and what you guys are offering versus somebody who's investing in The Southeast, or they're quickly flipping these things and they say I can get a 20% return. Like, what do you, what do you say to that?

Yeah, I mean, everything goes in cycles. I think everyone can say that after 2008, but people got to be very careful, you know, higher rate of return. Also you have to take on greater risk, you know, so it's like you just got to be kind of cautious. If it's too good to be true, it probably isn't. You know, we own real estate just for the sake of the tax benefits. I mean, that's, to me, only quality assets that keep on giving is like an oil well. So those are kind of things that we look for, we're working through about multiple invested capital that we are irr, because that could be manipulated very easily just based on timing. And, you know, I've been around long enough too that you can get stuck going to the bag during a downturn. And, you know, we haven't had any losses on our investment. So that's one thing people got to be careful with, is that the higher the return, the greater the risk.

Yeah, I mean, that absolutely makes sense. Risk and return. Talk about risk, adjusted return, how they're correlated. I think that absolutely makes sense. You know, what do you. What kind of mindset should, like an investor have when they're looking for an investment like that in terms of what their expectations are for in terms of returns and cash flow and creating, I guess, wealth in the near future and then also the long term. I'm just curious because again, it's such a different product, I would say, or a different type of investment than many of the other ones that we see in the multifamily class today, and especially in the, you guys being in the high cost of living areas, I think it's pretty fascinating. But again, what kind of expectations should someone have? Kind of looking into that.

Yeah, I mean, the expenses I have personally, because I invest in all of our offering is just knowing that you own ownership interest in a building. So I can drive around la, and gosh, I own a percentage of that building. That building, that building. And I'm proud of that building too, because it's a property, you know, in a location that, you know, I love. So to me, just knowing that you own something tangible in a great marketplace, you know, again, it's la. You know, there's a lot of things happening at the Olympics, coming, at the World cup, coming. So it's always going to be around. You know, we don't have the fear of it depreciating, you know, it's not going to go obsolete. There's always going to be more room for growth. And so just knowing that you have an asset that will just appreciate over time. Just like your house, right? Anyone that bought a house gets huge appreciation over the last several years. But think about if you can get, have a tenants in that house that are paying your rent and your mortgage. I mean that's to me, if you have no money into it and that's the best thing, just owning real estate, it's again, it's like collecting art, collecting cars, but collecting real estate, to me it's like Monopoly. You know, you want to own great locations on great streets and just own them and just collect rents, you know, for a lifetime. So again, it's the quality of the marketplace that's so important. I think you just want to, you know, you want to own quality assets. There's, there's different marketplaces but at the end of the day you got to have pride in what you own. And to us, you know, real estate as you know, has the best tax benefits. So if you can get those rewards, you might as well own something that you're proud of. So is, there's definitely a tangibility. And talk about returns, I mean, we've averaged double digit returns too since inception too. So you know, we do make money in LA and a lot of it is our strategy, just buy, buying, right. Holding for the long term and looking how we can reposition it to make more money. Because you know, there's a term value add everyone talks about, you know, we look at value bot you want to make money on the buy. I mean, to me, once you do that, you kind of have a nice margin of safety so you can survive anything. But at the end of the day, again, it's just knowing that you're only something of high quality. And so that's why we stick to west la.

Got it. Considering the times right now in the market cycle and obviously Christina has been around for, they've been around for 45 years, they've been around for a lot of these cycles and ups and downs. So what's changed in your strategy then? Right now as we're kind of on these in a place where a lot of people feel like we're at the end of a cycle or near the end of the bubble, like what are you guys doing that's different in terms of your strategy?

One thing we're doing, we're interested in a new product for the first time, you know, We've had a very kind of, we call it the kind of long term strategy, kind of event driven distributions. But based on some feedback we've heard from our current investors, there are a lot of investors that just want quarterly checks in the mail. Passive income, as you kind of preach.

That's awesome.

And it's something that we never, that's something we've never really done in the past because we're very more into long term. But you know, we do realize that people do want to supplement their salaries with cash distributions every quarter. So we have new product we're rolling out just for that. And the only difference between our old product and new product is this one will have no debt. So instead of paying the bank, we will pay our investors every quarter. And that is one thing we're trying to do to kind of mitigate risk. You know, without debt, there's no interest rate risk, there's no repayment risk, there's no foreclosure risk. So for the conservative investors that just want stable yield, that compete with the bonds, this is the best kind of alternative. Because one, you get equity upside. We believe Los Angeles will continue to appreciate in value over the long term. You get tax benefits and you get a coupon that's very comparable to treasury and it's backed by again, high quality assets. We're not buying these small tertiary market, we're buying very high quality trophy locations. So it's backed by a very high quality, like a AAA kind of bond, but it's AAA location. So to us that's a way, you know, if you want to rebalance your portfolio, this is a great way to mitigate risk as well.

Got it.

Okay.

So if I have this clear, you guys are buying properties with no debt on it, just to be honest.

Yeah. So we have two offerings and one will be with debt because you can enhance your, your returns with debt. As you know, you can buy a larger portfolio and get greater tax write offs, but there's an element of risk that goes with it too. So the other offering is the exact same thing, but with no leverage. So we'll just pay all cash. And again, instead of paying a mortgage every month, we'll be paying distributions to our investors every quarter.

I think that's really interesting that you guys are able to do that. What about with inflation going on that you're hearing about? I'm sure people ask you that all the time and I always like to hear people's answers on that. How is inflation and with everything that's going on right now, high rates of that, how is that affecting the real estate that you own? How is it affecting the deals that you're looking at and just kind of thinking about real estate in general?

Yeah, I mean, it's one of those, I view inflation real estate as a inflation kind of hedge because at the end prices will go up, rents will also go up. So by owning real estate, hopefully you can keep up with inflation. You know, it's one of those other assets where other asset classes, you know, you can't compete. So I think I look at it as a safety net for inflation. And in the one that we do have debt, if you can borrow, right, as inflation goes up, your cost of borrowing goes down if it's fixed. So there's advantage of that as well. The only risk we see is that if we do development, yes, the supplies will go up, but as long as the rents and the values go up higher than what you're paying for things, you'll be in the money. But it's definitely something. I feel more secure investing in real estate than I do with stocks during inflationary periods.

I mean, I think this, this talk has been really enlightening. It's really cool to again talk to somebody that is investing in a high cost living area because so many times we hear you can't do that, you can't make money in those areas. Obviously you guys have a track record of doing so and it's really interesting to learn more about your model. And actually as an investor, it's actually important for us to see and know that it's possible and, and see what groups are doing and kind of strategies are out there. So I think that's been really fun for me to hear from you. So I really appreciate your time and share your expertise on that. If people want to find out more about Christina, wanna find what our opportunities might be out there for, for, for them. Like where was the best place to do that?

Yeah, we have a website, it's Christina LA dot com. So C-H-R-I-S-T I N A L A dot com used to be Christina development, but we shortened to LA because it's such a shorter and also that's what we focus on is la. So it makes it very easy to kind of remember Christina and la.

Yeah, on the website they can reach out to you.

Yes, definitely. Or they can contact me directly. You know, I can provide this information afterwards.

All right, cool. Hey, this has been a great talk. Thanks for your time. I hope people got a lot out of it. It's a lot of really fun talking to you. Hopefully we can continue the conversation again. I'm still fascinated by this all and what you guys are doing again. Really impressed by everything you guys have built and your track record and look forward to getting to know you more. So hey thanks Vincent. Thanks so much for your time and let's talk again soon. Okay?

Thanks Peter.

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