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Alternative Ways to Earn Yield in Real Estate! - Part 2

May 30, 2019

Learn How to Invest in Student Housing

Special guest: Brian Nelson from NB Private Capital



What if I told you that you could own a property at USC? Make 6% on your money and then sell it down the road and make 50% capital gain? Now, I can’t promise that but, you know student housing has an opportunity for us, that we use for our clients all the time, and most of our clients hold student housing. We will talk more with Brian Nelson from NB Private Capital, and talk about why do you want to own real estate hard assets and why student housing in your portfolio. So, Brian, we were talking about student housing, again talking about the differences between regular real estate. One of the things that I was alluding to that we didn’t finish was, a lot of people think they own real estate Brian in a mutual fund, right? They say – well David I already have real estate. And, one of the problems with that, in 2008 I believe real estate funds were down about 40%. The problem with that is the liquidity. What’s called a liquidity premium, and when you own a real property, when the market goes down 40-50%, and you own hard assets, your real estate is not going to go down 40-50%, right?
So, have that ability to own a hard asset.

We are talking about student housing, we are talking about the benefits and the lack of cyclicality of that investment, meaning that we own property at USC, Notre-Dame when the economy turns around, or turns down. That we are probably closer to than not with everything that is going on. You know, it is the only asset that I can find that I like, that I’m not worried about the next recession. So, let’s keep going here Brian, talk a little further about what you guys do, the properties that you own. Let’s talk about the fund that you have, and I think go from there. And then about 1031 exchanges and how we can increase existing clients’ real estate and in having more performance.

- Yeah, I’ll be happy too. And just to kind of tell what you were talking about from 2008 to 2010, student housing was one of the only, if not the only real estate category, where values went up, between 08 notices. So just think about the heart of the recession that hit the real estate so hard. And here we have an asset that actual values are going up, a lot of people at the time thought – hey, this is a contrarian play this is what you do in the economy sours, and yet it continued to go up every single year since. But we are still finding markets where we haven’t seen that run-up yet. It is a part of our strategy, is to go find markets that we believe four-five years from now will be really appealing to a lot of the big groups you’ve talked about earlier: these endowment funds, and REIT’s that are really falling in love with student housing, but they are going to buy what they know, that a lot of big schools are the big markets and we are finding the fast-growing schools it’s here one tier two all around the country and we are looking for good buys on properties we think we can keep full or near full that cash flow really well, that will shelter all of the income. Which is great about commercial real estate and depreciation student housing hasn’t managed to be very friendly for depreciation. So, our model is to just really focus on 30 or 40 fast-growing schools where their barriers to entry, so demand growth is consistently outpacing supply growth, and we do two models. So, we will go out, we will find an individual property that we like if we think we can get it for 15-20% below market, get great loans. Typically, we will do agency financing so we get really inexpensive debt, and we will put these deals together. We will structure them to be available as an individual property for anybody looking to do a 1031 exchange, and it’s great so for a lot of folks on the 1031 exchange side, I know we will get into the details, but it is a great exit strategy for highly appreciated equity. So, if somebody’s owned a property in let’s say La Jolla for 20-30 years, the property is getting older, the owners are getting older, they don’t want to deal with the tenants any longer…This is a way we could sell that property for all the taxes and roll into 1,2,3 or 4 properties that are now income oriented, passive managements; you don’t have to deal with a tenant again, but at the same time you’re now collecting a really nice tax sheltered paycheck every month and not lifting a finger. So, that’s the value proposition. I think that’s a very well valued right now. So, we will go out, we will buy individual properties and then the second part of that is we created an LLC that we call the fund and that LLC will own about let’s say half a million dollars in one these individual properties that we bring out. It’s not 1031 eligible, but it is IRA eligible, so people just look into park $50K and looking to get some income on that, they can go into the fund and own a piece of several properties all around the country and be diversified as student housing right away.

- Yes, so let’s talk about the fund first and kind of recap. We have talked about we’ll get into depreciation and I wanted to kind of dummy things down, because people that are listening are totally different, some get it, some don’t. If you want to learn more about real estate and get a second opinion from me, David Reyes, and learn how we use real estate as an asset class to reduce the risk, increase your income, decrease your taxes, give me a call at 1-800-611-1967 or go to
So, I know we have been using your fund for many years, and the fund is currently paying what, 6 and a quarter right?

- 6.5

- 6.25, ok that is better than a thought. So, 6.5%, and although we can’t guarantee that, but that is what the fund is paying. We have to disclose, that is what the income is at this point in time. The good part about the fund is that we own multiple properties. I know you are in fund 3, which we are participating in, we are going to project on 20-25 properties, correct?

- Yes, correct

- So, basically the client’s getting the benefit of you know, I don’t know how many beds that would be? 20.000, I don’t event know. When a number like that you know it’s going to be up there. But the point is that the risk is relatively low as far a leasing risk, those type of things. Because you have so many beds, so many units, so many universities. Number two, we don’t have again the cyclicality of other assets. What would you think are the risks when you own student housing? The fund obviously is very diversified. I mean, in the fund itself, where would be the risk if you are owning 20 properties?

- Great question. And that’s really why we are so foolish on this category is we think the risk adjusted return is fantastic, and that’s even before you apply the tax benefit. I mean, after that we think it’s very unique and extremely compelling. And that is really what we think it’s such a great opportunity and it is just a matter of time before more institutions and REIT’s and what we call smart money starts getting into it. And they already are. 2014 student housing was a three-billion-dollar industry in terms of annual transactions. Last year was over 10.5 billion, but it’s we think he’ll be over 15 billion over the next 4-5 years. So, as it continues to musher and we think there are some really good buying opportunities. But I think the biggest risk, just like any business, I mean at the end of the day we are buying a business and you look at what can impact where your greater risk is, and that would be in the fund. You are pretty well spread out but if some of the individual properties couldn’t have enough revenue to cover their expenses and the mortgage payment, you know at some point in time, there is always a risk of foreclosure.

So, what we try to do, is find every way we can to prevent that risk. We’ll buy properties that have debt coverage ratio, this is probably detailed but, how many times is our net income per mortgage? We try to be at least two times and what that does is that gives us a really big cushion, so we can have a terrible year, 60% occupancy and in many cases still make all our expenses and our mortgage payment. So, we try to mitigate the biggest risk, but at the end of the day it’s vacancy what would drive vacancy. And if we buy really close to campus at a big school, it’s really hard to have vacancy that gets to the levels where you are at risk. While, there’s always going to be risk inherent with real estate, we think we’ve done everything we can to mitigate that. So, I think your more reasonable risk in the fund is that a set of 6.5 as our targeted income, we have a couple properties that are struggling so we reduce the income, and we might have an off year where we pay 5.5% for example. That seems to be the more realistically.

- When I sit down with clients all the time, we present this to pretty much all of our clients, just because it’s an asset class they have no idea about. They don’t realize the returns they can get in the 6% range and the tax shelter ability to depreciation that we’ve talked about and what will kind of expand upon a little more but. But it’s just an asset class to, when you talk about the fund itself, because it’s so diversified with these 20 properties and when you have you know a 2 bedroom apartment that has 4 kids, I mean just the math is, I always say things got the make common sense, if you have twice the amount of tenants in an apartment building, I think you are going to make more cash flow. I mean, that’s kind of the first thing when I talk to clients about it.
So, the fund itself is pretty difficult you know to have significant risk, yes if a property
or 2 or 3 are underperforming relative to occupancy, maybe the yield drops from 6.5 to 5.5. Whatever that is. But we are not talking about destruction of capital. So to summarize the fund; the fund is going to own 20 properties, I think you own 6 or 7 right now. It pays 6.5% yield, we get the potential of growth in the properties, and I want to make sure I don’t overstate but, it’s been on average probably around 50% capital gain. Is that a fair statement Brian?

- Yes, right. So, we’ve sold 10 properties and we are in the process of selling the ten to one that we bought dating back to the eleven years we’ve been doing student housing directly. And we’ve averaged about at 56% return on the ten that we’ve sold. Some properties are going to be more growth oriented and some properties will give you a little bit higher income. And so the fund will have a little bit of a balance of both, but we try to target just as you said about an 8 to 10% annual growth in addition to the 6%+, 6.5% income.

- So, you are probably talking in the mid-teens, probably 13,14,15 is what you’re shooting for. This have actually been higher but kind of like to underplay things. So, again to summarize things and again if you want to reach out to me, I’ll tell you how to do this. We were talking to Brian Nelson of NB Private Capital, so about student housing. How our clients are earning 6.5% on a diversified fund of 20 properties, a great way to diversify your portfolio. So, if you want to reach out to me and learn more about using real estate hard assets, real assets as part of your portfolio, give me a call at 1-800-611-1967 or got to

Hang on because we are going to talk to Brian about probably my favorite strategy, which is my favorite tax strategy ever, called 1031 exchange. For most of you that don’t know what this is, basically is a way to take a rental property that you have and make more money. This is David Reyes your retirement architect. Hang on, we will back with Brian Nelson of NB Private Capital.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial advisor.
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