Season 2, Episode 28: From Real Estate to REITs

May 11, 2022

Welcome to Season 2, Episode 28  of Meet the Expert® with Elliot Kallen!

In this episode, Elliot Kallen brings on Janice Colby, Janice Nugent, and Derrick Beckwith to discuss the housing market, real estate, and real estate investments. Tune in for everything you need to know about the buying and selling process, real estate trends, and how inflation affects your real estate investments. 

Janice Nugent

Janice Nugent has been a Certified Mortgage Planner Specialist for over 11 years in order to help every client achieve financial freedom, build wealth, and experience their life dreams by implementing intelligent mortgage, cash flow, and home equity strategies. 

Janice Colby

Janice Colby holds a degree from Indiana University and has been a licensed real estate agent since 1999. She has won the Keller Williams Top Listing Agent and Top Producing Agent multiple times while also remaining in the top 5% of sales in KW Danville. She has also won the Hadassah Woman of the Year award.

Derrick Beckwith

Derrick Beckwith is a VP Client Portfolio Manager with Easterly Asset Management. Before Easterly, he worked in business development for asset managers with both public and private market solutions including 40 Act funds, SMAs, CTA’s, hedge funds, private equity, and interval funds.

What is your real estate niche? 

Elliot Kallen: Good morning and good afternoon, everyone. I’d like to welcome you to another episode of Meet the Expert. We have a themed focus today on real estate, making money in real estate, buying a home, financing a home, commercial, residential, second homes, whatever it is. If you’ve got questions about real estate we’re going to answer them, and we’re going to provide resources for you as well. I’m excited about this. 

We’ve got three experts and if you need to reach us I would love to have a conversation with you. Let me begin by welcoming our three guests, Janice Colby, Janice Nugent, and Derek Beckwith. Welcome, everyone. 

Let me start with you, Janice Colby, if I could. You’re with Keller Williams and you’re local, Janice Nugent is local too, and Derek is a national guy in the real estate-investment-trusts world. 

Let’s start with buying a home. We’ll talk about financing and how that happens. And we’re gonna go back and forth. Derek, we’re gonna introduce you as we go along because you’re going to teach people how to make money in a real estate-investment-trusts world. Don’t worry if you don’t know what that is. We use it when we build portfolios, and you’ll know what it is before you go get your next cup of coffee. 

So, Janice Colby, let’s start a little bit about you. There are a million realtors and seems like every county and everybody’s looking for good Realtors, solid realtors, people that know what they’re talking about. People that have their best interest at heart and not just the interest of the transaction. I also love that after speaking with you, Janice, you’ve got a niche and your niche is your strength. So, tell us a little bit about your niche before I get to my first question.

Janice Colby: Well, Elliot, I get a lot of people who have lost a family member.  They might be a parent or might be a spouse. One of the issues they have is that now they need to sell the house, and they have no idea where to start. So often I get calls that say, “Janice, what do we do? How do we go ahead and sell this property and get it moved along so that we can go ahead and settle the estate?” 

I’ve had a lot of families come to me who are out of state. I’ve had people who are as local as my neighborhood, and I walk them through that process. Fortunately, I have 22 years of experience as a leading agent in Keller Williams in Danville. And so, I have a reputation throughout the community as someone who can get it done, and get it done with the least amount of stress possible. 

Do you need an attorney or trust to use your services?

Elliot Kallen: Great. So, your niche is dealing with people who have died. You deal with lots of people, I know that. You have to, but it’s the people that died and now the next generation is taking over the home. That’s your niche. Great. You feel that you do it better than anybody else out there, and that’s terrific. So, for the people that are listening to this, do they need to hire an attorney to get to you? Do they need to have a trust to get to you? Or can I just say, “Help me with mom’s house?”

Janice Colby: No, they don’t need to have anything to get to me. They can start with me because what I will do ( and I’ve done so many of these) is I can walk them through the process. If they need an attorney then we’ll be able to ascertain that fairly quickly. If the parents or the spouse had had a will or a trust then we’re more than likely in much better shape, but I’ve handled probate cases too. 

Whatever resource we might need I have in my toolkit which helps the individuals move on so they don’t need anything. All they need to do is give me a call and I will be able to walk them through it. 

Because Elliot, this is usually one of the most stressful times in a person’s life. They’re grieving. They’ve just lost a loved one. They don’t know where to go. They don’t know what to do, and they don’t know where to start. I’m a good place to start because I have a very soft touch and I can go ahead and guide them through the process.

How can people navigate today’s mortgage market?

Elliot Kallen: Great. So we’ll get back to that. I want to get into the financing of homes, then buy your home, your first home or a second home, whatever it might be. But let me just tell you some of the news of the day that affects the mortgage rates. It’s going to be the news of the entire year and that’s inflation. 

The Federal Reserve is tightening credit and they’re going to tighten credit throughout the year. Whether we get three interest rate hikes or five interest rates or rate hikes, they’re gonna tighten credit. For that world, that means that the mortgage rates that we’ve seen will probably be the lowest we’ve ever seen in our lifetime and they’ll begin to get their wits back to normal. Normal is like five or six percent and that’s considered exorbitant today, but that’s really what it’s been for them. If you take out the 1970s and early 80s, that would be normal. It’s hard to make money but that’s going to happen. That’s the driver on mortgage rates – inflation.

So, we just finished a year and pushed seven percent inflation in December, six percent overall. It’s amazing what’s going on. I’m giving raises out of eight, nine, and 10% to my employees. Not because I’ve got the cash flow to do it but because that’s what the demand is and they want to stay in front of inflation. From the employment market, we just had a mediocre, disappointing jobs report from ADP. There are 10 million job openings right now in the United States, which means it’s such a competitive market. 

For me to hire, I’ve got to fuel inflation. I’ve got to be part of that. And I’m living in a world where January was a terrible stock market return. We have to build and build. We’re fueling inflation and making it harder to get mortgages, even though we’re paying more money so they can buy a home that much faster. So it’s a funny thing that we’re kind of messed up here and backward. 

Janice is a mortgage broker. She’s a certified mortgage specialist here locally. What we’re saying Janice, is what are you seeing in the mortgage market? How somebody is looking to buy a home? How do they when there are so many convolutions on how to make this thing work? What do you recommend?

Janice Nugent: Thanks. I appreciate you talking about the people you care about so much. As a mortgage planner, it’s really important to make sure that somebody’s mortgages align with their financial goals now but what that also looks like up the road. 

That’s why we plan for first-timers. It is tough, right? It is extremely tough. But you know, you also have the rental market that has increased over 12% since last year. So because of inflation, you’re also paying higher rent fees. 

The questions are:

Do you want to pay your landlord’s mortgage for another five or 10 years?

When do you want to start the process of looking and are people willing to learn and be educated?

 

They understand what it’s like tax-wise for them. They understand where they’re gonna save money. They understand where their interest rates gonna be. They understand that they may need gift funds from mom and dad or grandparents. They may need to do something outside the box. I currently have four clients both are the two sets of married people. They’re going to buy a duplex together so they could buy a multi-unit property and have their own space. They can afford it. You got to just think sometimes outside the box.

That’s what I love to do. Educate them on when they can buy. It may not even be now but sometimes we work with clients, six months or 12 months down the road to get them ready. There’s nothing better than handing somebody the keys to their first home. 

Do you have to be pre-financed or pre-approved to buy a house?

Elliot Kallen: Right. Well, I want to get back before I ask Janice the next question, and I’ll get back to you Derek in a moment. Let’s assume we’re not buying our first home. Let’s make me the target market. Right, which means I’m buying the next home. I’m going into a bigger home or going to a smaller home. I’m gonna get back to Janice Coby on how to do that in a moment. From a financing standpoint, I have to be pre-financed and pre-approved – Is that correct?

Janice Nugent: That’s correct. For a real estate agent, somebody like Janice Colby even to take you out to look they want that pre-approval, right? They want you to have all your ducks in a row. So when you go out there, you not only know what you could afford, but we also know on the back end if we have to sell your house first. Or, if we can use something like bridge loans where you don’t have to sell your house first. You can look for something, secure it, and then put your house on the market. It depends on this the income and strategy that we use, but there is a way to do that.

How many years should we finance?

Elliot Kallen: Do we finance five years? 15 years, 30 years, 25 years? Do we look at everything or are we just looking at the traditional 30-year mortgage?

Janice Nugent: Now, when interest rates were as low as in the twos, it didn’t make sense to look at adjustable loans. But now that interest rates are going up, we look at adjustable loans. Most importantly, people aren’t going to be in their house for 30 years. They’re most likely going to be in their house for maybe 10 years. So that brings some options about mortgage planning, right. 

What happens with your children?

Do they have to move into a better school district when their kids are ready to go to school?

What are your college savings plans that they have? What are their retirement plans?

 

You know, so we work all that into the conversation and that can be overwhelming for people. But, the beauty of it is that it brings up a conversation. It brings up thought solid thoughts that they have to have in buying that house and knowing they’re going to move from maybe their first home into their next home, and it starts with that mortgage planning questionnaire.

Can you walk me through the process of upgrading or downgrading my house?

Elliot Kallen: Okay, so let me go back to Janice Colby on this one, and I’m going to be the target market if I could. I own a home here in Lafayette, and I want to upgrade or I want to downgrade one of the two. So represent me for a moment on both sides of this coin if you want Janice. I’m the seller.

Walk me through the process of what’s now going to happen. I’ve been living in this home for some time. It’s got some paint chips and carpeting that is a little bit dirty. We work on it. We live here. It’s not a perfect home here. Of course, it’s still a buyer’s market here in Northern California. Although I do believe we are slowly making a transition. Assuming it’s a seller’s market. I do believe we’re slowly making a transition to the buyer’s market. Traditionally that’s caught every seven years. 

I know that from buyers to sellers we’ve had the longest bull run for sellers that I’ve ever seen in my life. That’s inevitably going to end here within higher interest rates, but walk me through me as the seller. Then, for my next house, it’s me as the buyer upgrading or downgrading – large or small. It doesn’t matter because probably the situation is the same. Janice, would you mind doing that?

Janice Colby: Absolutely. Elliot, the first thing we would do is we would get together in person. I’d love to chat with you and your spouse since there’s a spouse involved. What I want to do is make sure I understand what your goals are. 

What kind of home do you want?

What are the things you’re looking for?

Have you been approved by a lender?

That is critical because the more you have gone through the approval process, even if possible getting underwriter approval, that’s going to make it a lot easier for us to understand how to get you into a contract on a new home. 

Now if we are going to be selling your house, I’ll talk to you about walking through your house, looking at all the advantages, and how I can optimize the sale of that house so that you can get the most money out of that. In some cases, it may need a little refreshing. So if you need refreshing in the house, if you need paint if you need carpet cleaning, I have all those resources. But better than that, at Keller Williams, we have a program called Keller Offers where we can finance the improvements to your house to make the house shine so you can get the most money. 

Now if you don’t want to do any of that, great we can work with that as well. But this program allows you to get an interest-free loan on the house to do the improvements. Then, once the house is sold, that gets repaid. Also if you’re looking to move into a property one of the things we will do is try to get you in as quickly as possible, but it’s also possible you might need to hang out in your house for a little while. I’m very successful at getting rent backs for my sellers. So that’s a standard we’re seeing in the market right now. Because sellers might sell, l but they don’t have a place to go. We will make sure that the transition is smooth and that you don’t have to move twice.

What are REITs?

Elliot Kallen: I’m house rich, cash poor, right? So, I can get an interest-free loan and redo my house? Get ready to sell including staging? Well, that’s great. I haven’t heard of somebody doing that. So I hope everybody’s listening to this has also heard that too. 

Alright, so we brought Derek on because besides your primary home, (and we work in the world of investments) people invest with us. They trust us with their money. We are the trusted advisor. But in portfolios, I can’t put your primary home in a portfolio. That’s where you live, that’s where you pay, that’s where you raise your children. Maybe that’s where you grow old and whatever happens to you, but we want to include real estate as a sector besides your primary home and investing.

So that opens up the world of REITs – real estate investment trusts. Derek is with Easterly Asset Management out of Boston and their specialty is public real estate investment trusts. Derek, enlighten us what is that? What’s the difference between private and public? Why am I using you at all in my portfolios?

Derek Beckwith: Yeah, so thank you, Elliot. Publicly-traded REITs, real simply are the companies and corporations that own and operate commercial real estate across several different sub-sectors. So, one of the biggest benefits that we see and historically that have played out for folks within their portfolio and their asset allocation. There are three biggest benefits of investing in real estate.

First is going to be diversification. It’s going to be more diversified versus your traditional equities in fixed income holdings.

Secondly, is going to be income. These real estate investment trusts produce income for clients.

Then lastly, total return. 

I was looking at the numbers last night historically, the market, broadly speaking has returned about 10 and a half percent per year for investors over the past 25 years. That number jumps up to 11% per year over the last 35. So, within a client’s asset allocation or portfolio mix, we think those benefits are something that provides a good return stream in income to eventually help clients meet their ultimate goals and deeds. Whichever they may be in, with you and Prosperity, you have those conversations with clients to figure that out.

What’s the difference between public REITs and private REITs?

Derek Beckwith: The biggest difference is going to be the REITs that we invest in day trade on stock exchanges across the globe. Just like a stock, right, one of the biggest benefits of that is you can just click it, purchase it, and you get instant diversification immediately and then intraday swing. Now in the private market space, that’s a little different.

There’s going to be a little lag time with regards to purchasing and selling. Then the other benefit of being listed is that performance-wise because you have Wall Street oversight and analyst oversight, things like that. They have historically outperformed the private space because of some of those reasons.

What’s better: REITs or rental properties?

Elliot Kallen: So if I was buying my primary home, I’m using these two ladies over here. If I’m investing in real estate outside of the second or third rental property, the forefront whatever businesses. I want REITs. Why do I want REITs over a rental property, or I don’t? Are they different?

Derek Beckwith: I think it depends on your timeframe and with regards to liquidity. One of the benefits of being a publicly-traded REIT is you’re not going to have the wind up to purchase and sell. It’s not like you can sell a rental property tomorrow. So, one of the reasons that folks invest in publicly-traded REITs is that not only you’re going to get exposure to real estate. 

There’s traditional real estate. Most folks think of industrial, real estate office, residential, what have you. The space itself is very dynamic. What I mean by that is outside of those traditional sectors, there are sub-sectors that most folks don’t even have exposure to or even know about. 

Think things like data centers, or cell towers are a life science and lab space. And so by investing in a strategy like ours or the public real estate market space, it’s going to allow you to get access in an allocation to all these different property types. Many of which have their diversification benefits within an overall real estate portfolio. Lastly, the other thing with the liquidity provision is if you want to sell you can sell today, and there’s no lag time. It gives you a little bit more optionality with regards to building out an overall wealth plan for a client, depending on what exactly their goals and needs are.

What should I know before buying my first home?

Elliot Kallen: That’s great, Derek, and we’re gonna be circling back to you guys to understand where the trends are, how inflation affects us, and stock market gyrations. What happens to the portfolio or stock market with gyrations which doesn’t affect the private market because there’s no daily liquidity. It does affect the public market. If you didn’t understand what I’m saying, you will in a few minutes on that. 

I want to go back to Janice Nugen if you’re going back to your primary home. I brought up rental real estate and different ways of financing it. How do I finance creatively? How do I expand into the California rental market or maybe it’s I’m too late on that? Maybe I should have bought it 20 years ago but not now. That’d be just too high. Or maybe I’m just too old. One of the two. There are so many ways to invest in rental markets from financing and zero money down to 5% money down, to VAs to 3% down, to the traditional 80/20. So now I want to buy and I want to expand. 

I’m not a first home buyer, maybe I am still because it doesn’t matter. Give me what am I looking at as a buyer before I go to Janice and say “buy this for me.” What do I have to make sure of? My money’s all lined up and maybe there’s this family money, maybe there’s no family money? Maybe my grandfather’s gonna give me a loan or maybe just give me a gift. What do we do here? 

Janice Nugent: As you consider when someone’s buying their first home, they have a lot of options, right? As a first-time buyer, you may be able to do something with it as little as 5% down. Now, you know, compare that to investment property. If you want to buy an investment property you’re going to need at least do 20 to 25% down. 

So the question would be:

how long do you want to live in your home? 

Let’s say you have owned this home before and you want to buy another property. If you want to upgrade or you know maybe you want to downsize, you want to find something that’s best for you, for your needs. Now, you have the option of holding on to the property and making that your first investment property. Then you’re buying another pre-primary residence. You have a load of options there. You can go up to your 5% down. You can have your 80/10/10. Then that property that you already know the bones of, you already know the basics of what it means up the road. That could become your rental property. 

What does that property look like?

How much could you get for rent for that property per month?

Then we look to see what your current mortgage is to make sure that you’ve got some passive income. That is the perfect way for somebody to become an investor because they’re going to depart their residence and move into a new place for themselves, leaving this place you know.

You know everything, right? You basically know all the expenses, you know what your mortgage payment is, and you know what the property taxes are. That’s an easy way for you to become an instant investor because you’re going to buy the next property and depart that one. Does that make sense?

Elliot Kallen: Can I do no money down? Can we do that anymore? Because I know Vegas blew up and Phoenix blew up. Being one of Derek’s competitors seems to own all of Phoenix.

Janice Nugent: The only way that you can do no money down now is if you are a vet and you have a VA loan. That is 100% financing. Other than that, you’re going to put some skin in the game. That’s why you’re seeing so much equity right now when people buy. People are coming in with significant down payments. So you can put as little as 5% down. Most people put in 10%. They can do an 80% first, a 10% equity line, and then come in with 10%. Then you know the good news is if you’re going to be a new landlord, we get to use that new rent that you’re getting on the house that you’re departing. We get to count that in your debt to income ratio, which is helpful.

 

Can you walk me through the process of selling your parent’s home after they’ve passed?

Elliot Kallen: Janice Colby, I want to go back to what you started with which was talking about selling mom and dad’s house. Maybe it’s in a trust and maybe it’s not him. Maybe I have an attorney, maybe I’m the executor or my brother’s the executor. If it’s my family then it’s a grieving moment. It’s such a difficult time because I’ve got to move mom to a nursing home. I could speak to that personally because we had to do that you know. 

My mother and father made us promise that we would never move them to a nursing home. I remember that conversation. Then as my dad got sick, he died in a hospital. She had said I can’t take care of you anymore. I need to move you to someplace. She bawled her eyes out because had to break her promise. It was a horrible time. He died within days of that. But then, she came out to visit me when my twins were one and had a stroke while we were driving into San Francisco. This poor lady who had already gone through so much, who’s an Auschwitz survivor. We tried in-home nursing and a part of the brain had died. It was horrible. Eventually, we moved her to a nursing home and then a second different nursing home. We were just beside ourselves.

Then, we had to find a realtor. And this was across the country. So, it wasn’t just here down the street because I’m an east coaster. You could tell because I still say coffee talk. We had to do that and that was complicated. We have to find somebody we trusted. You can see how hard this is. Because you know some of California has a mom and dad that live in Walnut Creek and have lived there for 40 years.

Some of them live like me in New Jersey, outside the New York area and it’s just as complicated. We don’t know what to do so help me walk me through this. Because we were all beside ourselves and she was alive still. Eventually died in a nursing home, but we had to sell that house, create a liquidity event and do all that. So help me walk me through this.

Janice Colby: Okay, well, the first thing we do is we talk about how the family wants to transfer the house. In other words, if they’re looking at selling this property, do they want to fix it up? Do they want to sell it as is? I’ve had family members who said, “I’d be so embarrassed to sell mom and dad’s house in the state that it’s in. We want to completely remodel it.” And so I handled a $250,000 remodel for this family. They were out of state and they insisted they wanted this house to sell for top dollar. They wanted to go ahead and completely remodel it. 

Conversely, I have handled homes where the family has said, “We don’t have the bandwidth to do anything. We can’t possibly go ahead. There’s mom’s stuff in the house. We don’t want to handle it.” I had one set of sisters, when I walked into the house the parents had been hoarders. We had to go ahead and bring in an organizing company to work with a family to go through all the belongings because there was no place to sit in the house. There were stacks of things everywhere. So I’ve handled all of that. It just depends on what we’re walking into. It depends on is the house already emptied. Have you taken care of mom’s stuff? 

What I would advise is the first thing to do is for the family to go in and take everything out of the house. Do they personally want everything? After that, I can handle it with my resources either through an estate sale, or we can go ahead and go just have everything donated and send the donation forms to the family. 

Then, we look at the house and we say, “What kind of shape is this house in?” I strongly recommend that anytime we sell even in a seller’s market, we get inspections so a buyer knows what they’re looking at from the get-go. Then after that, we say, “Here’s how we can get the house in an updated condition.” 

What are your goals? What would you like to do? As I said, I have handled everything from the $250,000 remodel to one client I’ve completely remodeled the kitchen. They lived in Connecticut. They never even came to California to see what we did. I sent pictures updating them all along the way. I got them $95,000 above what we had completed in a remodel. So, there are a lot of ways to go about it. 

Each situation is unique and has to be handled on an individual basis. I’ve done it pretty much all, so whatever we need to do, Elliot, we can do that. It’s an individual situation.

Elliot Kallen: So at my most difficult time or somebody’s most difficult time, that’s what you do. We call it behavioral finance. We’ll call it behavioral real estate.

Janice Colby: Yep, I’ve heard rabbi, part priest, part marriage counselor, part grief counselor, I’m all in.

How can I make sure my real estate investments won’t be half empty buildings?

Elliot Kallen: Like a Costco apple pie. There we go. I want to kind of shift into making money again on real estate and that’s what this is all about. Whether it’s my primary home, my paying the getting the best mortgage, that’s what we’ve done with Janice and Janice here. 

Let me go back to the trust world, actually the real estate investment trust world, if I could. So, Derek is with us and he’s from Easterly Asset Management out of Boston. I’m looking outside my building here which is a beautiful building here in San Ramon California, and half of it is empty. I think the landlord corrected me it’s only 42% empty. There are a lot of empty buildings and so if I’m going to invest in the real estate investment trust world, which is what you’re doing is a collection of real estate. I don’t want things like office buildings. I don’t want strip malls. I want all these things that never go out of business like the evergreens the nursing homes, the sanitariums, the “I don’t understand” data centers. 

I guess that’s what happens with Google and Amazon and Facebook is they use these data centers and they’re not going away. I guess cell towers are really good until we come up with no need to have cell towers, and I don’t know the new technology like 5g phones and things like that. But how do I make sure what you’re buying from me is something that’s not going to be 40 or 50% empty in years to come? 

Derrick Beckwith: I think that’s, you know, like any other market. Like I said before, it’s a very dynamic and diversified market. And within the real estate space, there are going to be winners and losers. Some of these trends have been turbocharged since COVID. So the Amazon effect is something that we saw at our firm, you know, years ago, and that just got kind of put on steroids here during the pandemic, right. 

Are you going to want to own traditional shopping malls and retail? Probably not, because brick and mortar are going to be impacted negatively because of that. On the flip side, there are industrial REITs, which are last-mile distribution, and those are the folks in which you’re going to package on your door. Which one of those packages goes through one of those industrial REITs facilities? And so their business has skyrocketed because of that, like you said, in the data center space, so not a lot of folks have access or exposure to data centers naturally.

But think of the internet of things like autonomous vehicles, what have you. There are only six publicly traded data center companies out there today. And so what that means is with data and data consumption growing at about a 25 to 35% continually in the growth rate, which was the latest estimate from Cisco, there is secular demand for certain types of brands out there. 

While on the flip side, as you said, there are going to be rates that are going to continue to be negatively impacted. They’re going to be the risk that you do not want to and so, shameless plug, you’re going to want a manager that understands the market and can do the underlying due diligence for you and for your clients to figure out which REITs are going to be the ones in which you’re going to want to own for the next five to seven years in which you’re going to be the best one switchboard. As you said, it is a broadly diversified market, and there are going to be winners and losers this year and for years to come.

Are real estate trends helpful?

Elliot Kallen: So years ago, people always said you should be investing in real estate trusts that buy apartment buildings because they never empty. You should be investing in real estate investment trusts that do student housing because that’s 100% demand for student housing all the time. Is that still a trend out there? Are you finding trends like that helpful?

Derrick Beckwith: Yeah, one of the biggest challenges within the apartment space is there’s a geographical aspect as well. So if you’re in a secondary market, say if you’re looking at apartments in Detroit, would you want to own apartments or buildings in that type of environment? Probably not. Fast forward and look at like Miami or if you look at Scottsdale, Phoenix, or Austin, Texas, the opposite may be true. 

It really comes down to a company by company level. That’s where you need somebody that can do the due diligence, and sharpen their pencil to look at the company itself, its cash flow, and its balance sheet. To see if they’re a worthwhile investment moving forward. I’d say one of the bigger trends that we’ve seen Elliot, outside of the data space in the cell tower space and 5g rollout has really been life sciences and lab space. 

I used to live in San Diego. Scripps was down there and we continue to see this campus explode and this is going on across the country. Now pre-pandemic, they had a structural growth trend because think of the aging baby boomers, and all of the demand that was going into pharmaceuticals and things like that research that goes into those types of those things. Fast forward to COVID.

That’s only super sped that up. So you know, there are pockets within the overall real estate space that we continue to see great opportunities and not only domestically in the US, but a lot of these trends are globally as well. We can provide access and exposure to clients to get in front of some of these, what we feel are, second the growth opportunities that have you know, are in the early innings now in a way to come.

Does inflation have a positive or negative effect on REITs?

Elliot Kallen: So one more question here, Derek, and that is the world of inflation because it’s going to be a pressing issue all year for all of us here. It could put a damper on the entire economy as the Federal Reserve tightens credit, and we’ve all been around in 1987 or 2000. When things were damp in 2008.

Recently, there’s a whole generation that has not seen that. So this will be new for a lot of people here, but inflation has affected the real estate investment trusts world. Is it a negative or positive effect?

Derrick Beckwith: Again, there’s nuance to this. So in some instances, it’s a positive effect. Realistically, if you take a 30,000-foot view, I was looking at this last night, historically going back over 30, 40 years now, in a rising rate environment REITs in general, have had a positive total return 88% of the time. Now breaking that down, why would that be the case? So these REITs are backed by real assets, they own physical real asset buildings themselves, right? Secondly, they have tenants that are paying them cash flow. The majority of these leases are in terms that they have with their tenants and have CPI escalators within them.

So the biggest determination of positive or negative performance in the free market is going to be GDP growth because that usually depends on or determines the demand in which these property types may have or may not have.

What does GDP growth have to do with REITs?

Elliot Kallen: Can you explain what that means, GDP growth?

Derrick Beckwith: Gross domestic product growth, economic growth within any economy. So rates are correlated. So they move in the same direction as positive GDP growth about point 8% of the time. So 80% of the time. If we have positive GDP growth in any economy, rates are going to be positive.

If we have negative GDP growth, they’re probably most likely going to be negative at the same time. They’re more related to the federal report than they are to the rising or shrinking stock market. They’re more related to the overall economic growth within the economy.

office building real estate

If I’m a sophisticated buyer, what should I be looking at from a finance point of view?

Elliot Kallen: Okay, all right. Well, that’s why we put them in portfolios for diversification. So now, Janice Nugent, let me get back to you. There are so many ways to finance. When the majority of people do not buy the home for cash, although there’s a silly trend out there are people knocking on doors that just happens in my house, and saying I want to move into Lafayette. Here are x dollars of cash what you sell me your house and like I have to just shake my head like this is happening. 

There’s a lot of family money out there and there’s a lot of money from offshore, particularly China that’s was coming to California. I imagine that trend is going to start slowing down also. So from a financing standpoint and inflation. You know, again, I’ve been around with when 14 fit. I think my first house is a 14 or 15% mortgage in New Jersey. Nobody wants to have a 14% mortgage and you don’t want to have an escalating mortgage that could do that. Maybe I should just get a mortgage as interest-only and figure out what to do in five or 10 years. 

Tell me how to go if I’m a buyer. I’m a sophisticated buyer. I own a home I’m ready to go to the next home. I’m gonna stay in California and upgrade. Tell me what I should be looking at from a financing standpoint.

Janice Nugent: That’s a great question. For right now, if you know that you’re going to stay in your home for X amount of years and you know that there’s going to be deferred maintenance or work that you need to do, you can simply do a cash-out refinance. You can take advantage of the fact that you’ve just gained at least 20% of equity over the past few years. You can use that equity in a cash-out refinance. When you do that. The mortgage interest that you pay could be tax-deductible and that’s going to help you as far as affordability. 

Most importantly, you’re going to plan ahead if you’re in a situation where your discussion is about taking care of your mom. I’ve got my mom who’s going to be 92 next month and we’re going to sandwich generation. We have kids in college, and we have my mom at home. We’re doing whatever we can with our home to make sure that it’s comfortable for her and that it’s at acceptable for her that she’ll be able to get around as she ages.

There are a lot of people that don’t know what to do because either they have just gone through a divorce and they don’t know if they can keep the house for their kids or if they have to sell. They don’t know you know if someone dies, or they’re in a place where they have to age in place of their spouse, so a lot of women out there have never even touched on what’s going on with their mortgage. 

When they lose their spouse, for whatever reason, they don’t even know what to do. They may have a mortgage. They don’t know what the mortgage company is. They may have never filed taxes. They have no clue about you know what they could do with their mortgage, they have no clue even who to make the mortgage payment to. 

For the people out there, get educated. Don’t just let one spouse be the finance guru of our family. Get to know what we’re doing. Put your ducks in a row whether it’s divorce or another scenario. That’s really where the education piece comes up. 

But there’s a lot of options out there for people if they know they’re going to live in that home, and they know they have some work to do. You can finance it at under 4%. Most importantly, you’re going to leave that money in the bank that you’re investing for them, right? If somebody’s getting an interest rate of 4% but they’re gaining 8% on the money you’re making then why not take advantage of that low cost, interest rate, and finance that.

That’s the perfect thing for somebody to do that has all these costs. You know, I walk around my neighborhood through all of the pandemics there are so many people that are putting on new roofs, getting a new furnace, or a new HVAC. If people are working out of their home they may need to expand a little or they may need to turn a den into you know maybe something where their kids can homeschool if needed. Or maybe you’re working from home. This is your office and you need a quiet space. There are a lot of things you can do with the equity in your house.

How do you help women who are divorcees or widows?

Elliot Kallen: Great. Janice Colby one of our niches at our firm is divorces or widows. In that case, we have great relationships where we understand what’s going on. In your world, that means that these people are gonna have to sell that house, or downsize, or they’re going to get a lump sum of cash to upgrade. How do you help this select group of women that are also fragile because they lost a spouse or they got divorced, or it was what we call a no-fault divorce? But they lost a divorce and they’re not really in a great place themselves.

Janice Colby: Well, first of all, what we do is we look at the house and we say okay, where when did this event happen? In other words, if it’s a death in the family, if someone has lost a spouse, one of the first things we really need to do is establish value on that house at the date of death, so that we know from a tax perspective, what the gain might be. So we talked through the financial piece, but oftentimes I have spouses who are deciding they want to stay in the house. They want to go ahead and do some improvements, and I counsel them about what kinds of improvements they can make that will benefit them going forward without breaking the bank. So there are a lot of different ways that I counsel them. If they decide they want to sell it. 

Sometimes they have to sell it to pay off a spouse that they’re divorced from. So I walked through that process with them and say, let’s list the house. What improvements do we think we can make if we can’t make improvements? Then let me help you at least maybe get some refreshing done to the house like some paint, some cleaning? You’d be surprised how much I call it put lipstick on a pig. I’ve done that before in this seller’s market. It’s one of those situations where sellers are willing to overlook some of the blemishes on a house as long as they know what’s going on.

Elliot Kallen: Great. Well, we’ve been talking about real estate. Those are really good answers. I mean, I’ll tell you what I’ve learned in the last 35,40 minutes here. And that is that, Janice Colby, that if I am somebody that wants to, I know my house has updated and I don’t want to put any money in it. I don’t want to dump it out to some organization where it says we buy your house for cash and they come in with some 50% of what I want to offer but I feel like I’m stuck so I’ve got to accept it. And that’s why they do it because they could turn around and do it so quickly and make that 50%. It’s my money and I just gave my house away. 

So I’ve learned I can go to somebody like you, Janice at Keller Williams, and you can help me. Then I learned from you, Janice Nugent, that there are about 4,000 different ways I can do the financing when I’m working with Janice Colby by the house and that’s really great. Derek, I’ve learned with you that the real estate trust world is a diversified world. It belongs in portfolios. It’s correlated to the quality of the economy and not so much to the quality stock market. This means that even when we do have a little recession, it’s a tight time, and just ride it out.

Maybe it’s a buying opportunity for everybody here and that look for a real estate trust, that is not buying strip malls or not buying shopping centers or maybe even office buildings like ours, but they’re buying things that take data centers, nursing homes, hospitals, and medical centers. They’re just evergreen, and they’re gonna keep making money. Did I say this properly, everybody? Yes, good. 

What should someone do if they want to learn more about REITs?

Elliot Kallen: Let me just go back to you Derek, and I’ll let you since I went to you last in the first round. Let me go to you first on the last round here and that is – if somebody wants to understand more about investment trusts or if somebody wants to get invested in them, how do they do that? What do they need to know?

Derrick Beckwith: I’d say first and foremost, the best resource is they’re going to find you, Elliot. He knows this space. We talk about this space all the time. Then, just one quick plug for I think a great educational website if you’re interested in learning just more general education and data on the real estate investment world is neri.com. A great resource for folks if they’re interested in learning more about the investment space in real estate. Then outside of that, I’d obviously point you towards Elliott because he’s been doing this a long time and knows exactly what he’s doing with prosperity.

Did you enjoy this episode?

I’d love to answer any questions you have about the real estate market and how this can fit into your investment portfolio. Call or email me anytime.

All my best,

Elliot Kallen

925-314-8503

Elliot@ProsperityFinancialGroup.com

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