[Note: To follow is an excerpt of an interview with Michael Anderson, Managing Member and Founder of Salt Lake City-based RealSource, a leader in multifamily research and tenant in common deals [www.realsource.net/bestoftimes]. To listen to the show archive or download an MP3, go to www.IncomePropertyInvestmentTalk.com/102908.]
Mosca: More than one expert in the news media has said this is the worst of times for real estate companies and investors and it was, for some, but not for those who play in the multifamily arena. Charles Dickens aptly wrote, "It was the best of times. It was the worst of times. It was the age of wisdom. It was the age of foolishness." And that summarizes the situation today. Investments in multifamily properties are typically solid and stable opportunities when they're made on the right properties in the right markets and at the right times. They are far less cycle sensitive, and are therefore perhaps less volatile than other investment opportunities. Can you talk more about multifamily and the RealSource model?
Anderson: Multifamily has traditionally been considerably more recession proof than any other form of real estate investment simply because people need a place to live always. In a recession, housing affordability is taken off the table. If people cannot afford to get into that starter home or to stay in their current home, they look to rental property as the solution for those living needs. Today, we are probably seeing the very best of times as far as an increase in rental demand, the predecessor of pushing income and thus the value of multifamily real estate.
Mosca: Why are these the 'best of times' for RealSource clients and transaction affiliates?
Anderson: The RealSource business model is to always operate in the 'best of times.' The trick is knowing the markets realizing the 'best of times' versus markets that are not doing as well like those in high demand and are overbuilt. There are markets throughout the country that continue to have positive job growth, increasing demand, and those are the areas that you want to invest in so your money grows and operates in the 'best of times.' That's the RealSource model: go where the demand is coming and make sure that you are positioned well to get real estate assets.
Mosca: What is the key to finding that right market?
Anderson: Fundamentally, it's always about job growth creating stronger economic conditions and an ancillary workforce that serves economy booms. Our success since 1989 has been in consistently identifying those markets before the competition, and investing there ahead of everybody else. That requires we have sound economic models but also a lot of 'shoe leather.' I'm sitting in a market right now of 400,000 people that's created in the last two years over 48,000 jobs. You can imagine the impact.
Mosca: Your RealSource model helps real estate entrepreneurial investors get into markets where jobs are ready to explode or ready to move forward and other factors that lead to a strong economy. Are there other tools and resources that the institutional guys have at their disposal that you bring to the entrepreneurial investors?
Anderson: Entrepreneurial investors typically do not possess the ability to hire an economic staff and pay for the research that tracks of 363 MSAs (metropolitan statistical areas as defined by the federal government). The RealSource model provides that to them and the tools and technology to keep those investors connected to their properties as if they were able to manage them directly themselves. I think those two factors are the things that the entrepreneurial investor is missing versus the institutional investor. That's what RealSource brings to the table.
Mosca: How important are relationships within the RealSource model and did they play a part in your new Tenant in Common opportunity? (Kent Anderson, RealSource Equity Services and Stan Hanks, RealSource Commercial have joined the show.)
K. Anderson: We are really excited about the property and were able to get there through some of the relationships that we have in the Houston MSA. They are on track to add about 110,000 new jobs this year and are the number one job growth market in the United States. Once we get a deal, then we need to get the financing to make it work. It is hard for 1031 investors to get financing let alone the non-recourse financing Stan was able to secure from his relationships.
Hanks: In today's market, as an investor buying an income property, you would always want non-recourse financing which means that the lender can go after the property as their only recourse, barring the 'traditional 'carve outs' like environmental issues, fraud or other unusual circumstances. RealSource Commercial strives to get non-recourse financing for its investor clients. Today, that type of lending has almost dried up. This one we're looking at right now, the loan will be non-recourse in the mid-17 million-dollar range.
Stan: How are you able to secure non-recourse if the market is almost dried up?
Hanks: We have no 'silver bullet.' It's a challenge. Fortunately for us, we've been able to use our existing, and new, relationships with strong lenders that we work with around the country. This current TIC is a Freddie Mac deal. I'm working on a $1.4 million cash-out, refinance on a student housing project. While it didn't fit Freddie and Fannie criteria, we are still going to end up in the mid-sixes on a five-year, fixed deal, with 30-year amortization. Lastly, an e-mail yesterday from one of my lenders said, "I think we're going to be able to start lending to you. We just were approved for $1.5 billion from the bailout." This lender plans to open up and start lending again. That's good news for all of us.
Mosca: What kind of returns are we talking about?
K. Anderson: First, it is important to understand that not everybody can get into tenant in common projects. For the most part, you have to be an accredited investor. We also help non-accredited investors self-direct their IRA funds into real estate. Note that the funds do not go directly into the deal because IRA holders cannot borrow from their accounts so we set up an intermediate entity to make it possible for them to self-direct into a deal. Most IRA investors I've talked are excited not to lose money let alone earn a sizable return of an internal rate of return of somewhere between 20 and 25 percent a year. This is better than what we're going to see for a while in terms of cash flow and appreciation. This one is a real golden opportunity.
Mosca: What is your golden nugget?
M. Anderson: We are probably heading into the very best opportunities you'll ever see in your lifetime as far as investment options out there. Stop listening to the national news, start looking locally, realize that there are great opportunities for you throughout the country and if you're confused where to invest, give us a call. We'd be happy to help you get pointed in the right direction.