Alternative Ways to Earn Yield in Real Estate


You know, what makes a firm different than another? I think that is a big problem in our industry, kind of everyone seams the same. Whose advisor, retirement planner, wealth manager… And, the reason I use financial architect at our firm it’s because we build plans; estate planning, tax planning, retirement planning, social security… That’s a huge component, kind of the umbrella of what we do. But really, when you get down to what people care about the most initially is their investments.

And what I call the traditional portfolio, most of you have a pretty basic portfolio of stocks and bonds. I can look at you blindly and probably tell you what you own as a percentage of stocks and bonds. And is usually somewhere between 50%-60% stocks and the rest bonds, 40-50% bonds.

The problem with that portfolio is #1 bonds basically earn 0% rate of return for a decade, so the bonds have been a big drag on your returns. But what is more important, is that the risk that is in a portfolio like that – now advisors, brokers want to call that a balanced safe portfolio, and is far from that. There are all these words that are used that make you feel secure, that really you shouldn’t.

So, one of the basic things that we do that is very different, is what we call beyond stocks and bonds. And 2008 is a perfect example. In 2008 every single asset class fell, we call it diworsification. Let’s say you are diversified: you own every sector, a 100% stocks, whatever you own, a bunch of mutual funds, large-cap, small-cap, mid-cap value, whatever it is I can tell you the average stock in 2008 stock fund lost about 30%. The market was down 37. You had international emerging down 40%. That the only thing that you made money was bonds, that was 5%. So, that was carnage. If you owned a balanced portfolio stocks and bonds you lost about 30% at the lows. So, my question to you is: is that acceptable?
With the portfolio that you have, is that acceptable?

That’s what you have. So, one of the biggest differences is just experience over time and doing this for over 2 decades. Went through 2000 and I just asked myself “there must be a better way to do this?” So, we have modeled our firm after kind of an endowment model. How would you like to build/invest your money like 23-billion-dollar endowment like Yale? And what they do, which I’ve learned from, is they use other assets besides stocks and bonds. They will use real estate, they will use other alternative investments. And so, we have kind of taken that lead and said “hey, how can we build portfolios this way?” To where we can help no only to reduce risk, but really over time increase return.
I will give you an example; during the tech wreck, they call, from 2000 and 2002, the market lost about 40%. Let’s say you had a $100K invested in 2000, by 2002 you had $60K left.

Now if you invested with Yale, with their endowment portfolio – they own about 30% stocks and very little bonds, they own real estate, some other non-correlated, non-stock and bond assets – they were up 41% in 2000 when the market was down 10. They were up 9% in 2001 when the market was down 13. They were up 0.7% in 2002 when the market was down 23%. If you had a $100K invested during that same time frame in the market, or with Yale, with your own portfolio, you will have about $60K. You had $100K less 40, you have $60K. With the Yale portfolio, you will have had $164K. I mean, that’s life changing, it’s huge. I’m not saying we are going to build your returns like the Yale endowment, but the point is, is that we are going to build portfolios the way they are built. Because we use other asset classes besides stocks and bonds.

And today we are going to talk about real estate, because real estate is a big one. Real estate is one of the basic portfolio’s strategies and that we use. So, let’s just say instead of having 60% stocks – 40% bonds portfolio, you had 30% stock, 30% bond, 30% real estate portfolio, I can tell you right there you have cut your risk in half or more. Now we are going to be more sophisticated than that, but the point is, we are talking about hard assets, something you can feel, you can see. Because when we own real estate, we get cash flow. Right? We get income. We get some tax benefits from that as well. And hopefully have an appreciation.

We are very blessed to have a gentleman that I have been working with several years now. Brian Nelson, he is the CEO, president, top dog of NB Private Capital. They manage about $500 million dollars of real estate, of student housing. And I am really picky about real estate. The value of real estate, both industrial, retail, class A office, are all just through the roof. It’s hard to find value in good yields. So, I am going to welcome Brian, and Brian are you there?

I’m here

– Perfect, perfect. I am glad we’ve got our wires together, not crossed. You sound good! Are you in Orange County?

Yes, I’m in Orange County. And I feel more sophisticated just listening to that intro, you did fantastic.

– Well, that’s why you are here. You are piece of our endowment portfolio, of our less risky portfolio. And you know, I want you to introduce yourself and talk about your firm. But one of the main reasons that we use Brian, his firm, two things: we will talk about the portfolio that he runs and why we use him and all the benefits, and then we will talk about 1031 exchanges, for some of you that don’t know what that is. But very, very important.
So, Brian, just kind of tell us about your firm and what got you into student housing, and what the benefits are of student housing. Why somebody should listen to us? Talk about this

I think a lot of it is just what you started off with. So, when you sit down back in 04-05 I was coming out of MBA school, I had a series 7 license and I started talking to investors and finding out what they were looking for. They were very consistent; those who are very affluent or just looking to put their money to work. Very consistent, they wanted something stable, they wanted to sleep well at night, they didn’t want to worry with the morning news cycle, how that impacted their portfolio. So, they wanted the stability, but a lot of folks were looking for income, and they just had a very difficult time finding good income producing assets, that also will grow over time, and everybody wants to tax shelter, especially here in California. A penny saved, is a penny earned.

So, you sit there, and you talk to people, and you start building that portfolio like you do, where you trying to get this – ok, well this are really tax friendly, and this is really growth oriented. But what if you could find stability income, tax shelter and growth in one asset? And what if you can find that asset had an economic anchor, like a major university, some of the most stable institutions of the world. And, college enrollment has shown no correlation to economic real estate cycles over the last 40 years. So, here you have something that offers all these benefits. It’s a brick and mortar asset, and it’s diversified away from the economy and away from the rest of the portfolio and is anchored by something like the university of Notre Dame, or San Diego State, or UCLA, you know it’s been around for hundreds of years, it’s not going anyway. That is what got us in the student housing. We fell in love with the balance of benefits because it resonated with what everyone else is looking for but having a difficult time to find. And it also had that ability to perform, especially when we hit recession, because if you know more and more kids are now going back to school. That is really what got us into student housing in 05-06, and it was really what it brought to the table in terms of benefits.

– So, tell me, one of the biggest things, what do you consider the difference between let’s say somebody owns a real estate mutual fund, from a risk basis, and student housing? Some of your property: USC, Notre Dame, Old Miss, some of the properties you own. What would you say the biggest difference will be?

Well, the biggest difference is the lack of cyclicality right of the bat. And a lot of people their first knee-jerk reaction for student housing, is well, what did you do during the summer? Kids go home for the summer. But what happens is, those markets that you mentioned, are so tight, and it is so hard to find real estate close to campus, so that’s part of the answer.

Picture a university that has been around for a couple of hundred years, and inherently find that amount of space around campus. But 7 out of 10 students will prefer proximity to campus, is the number one thing they look for. So, you have this predictability of – ok well, if I am within half a mile to campus, I’m going to typically stay full year in and year out, as long as that school stays around, they of course have all been around forever. But what I like about the new model, is somebody’s market is so tight, that we only require 12-month leases.

What happens now is we all know students, the school will start end of August or early September, that’s very predictable. We will spend all off season January, February, March, pre-leasing for next school year. So, what typically happens is students will sign-up to have a 12 month lease, so even if they go home for the summer, we are still collecting rent and all this properties, and we will typically have the property pre-leased 2 or 3 months before the school year even begins. So, we are always producing revenue, constantly.

It’s a very efficient business model. Unlike a retail, if the retail type tenant leaves, you going to go out, hire a broker, pay him or her a big commission, put in tenant improvements. Then you got to sign a 10 year lease and every year that goes by, that’s one less year on the lease. It’s way different with student housing. So, it’s a much more convenient and friendly model. And then what we do is that we charge by the bed. So, if we have a property that has 500 beds, we have 500 individual leases and because we have that flexibility, we get the parents to guarantee the lease. Our tenant isn’t the 20-year-old student who has no idea what a FICO score is. It’s mom and dad, and mom and dad typically own homes, they have great incomes. And then we have 500 moms and dads, so our co-revenue source is really well diversified. And so, I think of all of those things that factor into that, really make student housing pretty unique.

– We are going to take a brake Brian and I want a talk more specifically about the fund, because you have a diversified fund that we really like that owns about 20 properties. Talk about individual properties, also talk about how to exchange from existing real estate into student housing or why we want to do that.

This is David Reyes, we will back here in a minute with Brian Nelson of NB Private Capital.