TBT: The Insider’s Edge to Real Estate Investing

Hello my friends. Welcome back to Passive Real Estate Investing where we dive into the world of real estate investing among other related topics. To help you with your real estate investing journey, today we’re doing something a little different. We’re going to take a trip down memory lane and showcase an important episode from the past on what we call our throwback Thursday episode. Now, whether you’ve been with us since the beginning, which goes back to 2015, or you’re tuning in for the first time, this episode is a must listen, we are revisiting one of our more popular episodes from the past, and believe me, what we discussed back then, whether it’s six months ago or six years ago, is just as relevant today. So sit back, relax, and let’s rewind the clock for this great episode. Enjoy. 

My guest today is James Nelson. He is the Wall Street Journal bestselling author of the book called The Insider’s Edge to Real Estate Investing. He’s also a podcast host, which I believe is of the same name. He is also a principal and the head of Avison Young’s Tri-State Investment Sales Group in New York City. And he’s had a career that has lasted over 25 years. He has sold more than 500 properties and loans totaling over $5 billion.

James is also a serial real estate investor, and he has launched two real estate funds with total capitalizations over 350 million. This might be an old stat, but you can correct me on it and has many accolades, including being named the number one broker at Avison Young Globally, a Commercial Observer’s Power 100 CoStar’s Power Broker, and a REBNY, he’ll have to explain this one to me, Deal of the Year award winner. And he regularly lectures at Columbia, Fordham, I believe it is NYU Wharton and his alma mater Colgate.

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Throwback Thursday Episode (The episode originally took place in the year 2023)

This episode is part of our Throwback Series and may include references to older content such as web classes, events, promotions, or links that are no longer active or available. While the conversation and insights still hold value, please note that some information may be outdated.

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So with that, James, welcome to the show.

Marco. Thank you so much for, for having me on. And yes, that was so great to spend the last hour and hearing your story. And just thank you for all the incredible content that you put out there and share for the real estate community. So, th this is, this is a lot of fun to now be on your show. Yeah,

No, it was a blast and it’s great to do these back to back ’cause it just feels seamless, like it’s just going from one to the other <laugh>. But, you know, I, I tried to cover as much as I could in, in introducing you. It was kind of the bio I constructed. As I mentioned to you before. Why don’t you take, you know, a minute or so and just tell us a little bit more about yourself so you can kind of flesh out what I’ve either missed or skimmed over.

Marco, that was perfect. And yes, as, as you mentioned, I’ve been doing this for over 25 years, and I know you are also a lifelong learner, and that’s something that I certainly love about this business is every day we’re, we’re learning things that, that are new. But look, I didn’t know about real estate when I got into it. I was an English major at Colgate. I didn’t even know real estate was a thing. I was very lucky that the founder of Massey LER Realty Services was a Colgate along. They gave me a shot and started off as an investment sales broker, which is still what I do today. I sell apartment, buildings, office, retail development, industrial, pretty much everything except hotel. We have Avis and Young has a hotel business as well. But I’ve been doing that all along and I was very lucky early on my career to have the opportunity to invest in real estate and understand all the benefits that you talk about. And so that’s been an incredible thing, was involved in two real estate funds as well that you mentioned. But the real passion, again, I love giving back, I love sharing, and I’m hoping that someone’s listening to this today and will inspire them to, to jump in as well.

Yeah, it’s great interviewing people like yourself that do like to educate and talk about real estate and the benefits of it and how to get involved in it at any level, you know, just to share what we’ve learned and the successes that we’ve had and carry it forward. So this is great. You know, I I have kind of a wide range of thoughts, topics, and questions that I want to ask you. So I might be a little scattered here because I know you talk about a wide range of things. I’ve heard you speak a little bit, you know, online in various platforms from YouTube and whatnot. One of the things I heard you say, I don’t know if this is in your book, but you talk about real estate investing as an investment opportunity. You compare it to the stock market. So, Hmm. It might sound like a just a basic or trivial question, but why, in your opinion, is real estate a better investment opportunity than what most people invest in, which is the stock market?

Yeah, it’s a great question, a great place to start, and it’s why the name of my book and yes podcast is the Insider’s Edge to Real Estate Investing. So as everyone probably knows, if you get inside information when you’re trading stocks, not only can you not do that, that’s a great way to end up in jail. So the point is, when you’re investing in the stock market, everybody has access to the same information, whereas, and it’s a very efficient marketplace where you can go and you can buy us a share today, you can sell it within minutes later, right? As we know, real estate is not that type of efficient marketplace, okay? But where there are inefficiencies, there’s opportunities. And a lot of what the book talks about, a lot of what we’ve discussed and with other incredible investors have told me on my podcast is that by having that insider’s edge, that expertise, right?

You talk a lot about focusing in on an asset class, understanding all the drivers for demand, and having that knowledge that the competition does not have, and then having an incredible team to execute on that opportunity, you will be able to outperform the market. And look, I also learned this very early on in my career when I saw two properties that sold on the same block and one went for almost 30% more than the other. And I asked the question, well, why is that? Well, one of the properties we went out and we widely exposed to the market and we got multiple offers and drove up the price and the other property sold off market. And maybe that owner said, well, hey, I’m saving myself a, a brokerage commission. But again, left millions of dollars on the table in that instance. So that was a lesson to me early on that there are inefficiencies in this market that you can take advantage of. Yeah, that’s

Really true. If you look at the housing market, just real estate in general, it’s very fragmented. There’s not even take the MLS, you know, one of the most fundamental tools that all real estate agents and brokers use is still to this day, very much localized. There’s such an incredible amount of fragmentation in this industry, which to me just presents great opportunity if you can identify, you know, where the opportunities are. Is, is that a fair statement?

Absolutely. Yes. And, and many of the times, especially on the commercial side, owners decide not to let their brokers post the, the property on multiple listing sites or the brokers just choose not to do it. Right. That might be a, a separate conversation. So, but yes, I mean, there are tools out there to effectively market commercial property like you would residential and the various multiple listing sites, but for every one of those that properties that sell on those platforms, there’s plenty that sell quietly and without a, a marketing effort.

Yeah, it’s interesting. So let’s talk about real estate investors a little bit here. You know, ev everybody is, you know, on a, a path or a journey, every investor starts somewhere and you know, they’re either fast tracking it or not, but everybody has a journey. And we just talked about the stock market. So I think a lot of people start off their investing journey in the stock market, but we both know there’s so many different types of asset classes out there. It’s not just about stocks and it’s not just about real estate. In your opinion, or maybe, you know, you’ve done some research on this, what types of assets do people typically have through their investing journey? Obviously they start somewhere and they focus on whatever that may be, and then, you know, they expand or branch out into other things. What, what have you noticed or what, what has your experience been?

Yeah, so Marco and I, I know you speak to the benefits of diversification and, and believe me, this is not my pitch to take everything you have and put it into real estate investing, but what I will say is that when you do invest in real estate, you become kind of the, the master of your own destiny, right? And if you choose to be able to, to whether you actively or passively invest, I I think in many cases you have more, more control over your destiny and what you’re investing in. So I think again, what’s a great investment theme. Wherever you invest is what you know, okay. And whether that’s, you know, the Peter Lynch strategy of investing in the market or making your real estate investments, I think most people, what, when you do think about, and for those of you listening right now, who’ve yet to make your first investment looking in your own backyard is probably a great place to start because you already know the geography, you know the area, you know what works, what doesn’t work, where there’s a need.

And you certainly see trends. And so I think it’s really important to study in and whatever you invest in to take the time and become an expert. And there, there is that expression, jack of all trades, master of none. And I, I will tell you, Marco, when I started off in brokerage before I could start picking up the phone and start calling up and down the block, they said, okay, timeout, you’re gonna spend the next three months, which is tough for a fully commissioned broker to hear, to say, okay, timeout, <laugh>, do the work first. You’re gonna study this neighborhood, 50 blocks of it, you’re gonna get to know all the property information, you’re gonna learn the sales comps, you’re gonna learn the leasing comps, you’re gonna understand where are condos selling for zoning changes, what’s going on with any infrastructure that’s coming, and really study the area.

Okay? Now, I promise you all, if you do that, if you study a specific area, and I’m, I’m talking about really doing the work. I physically walked every single block, took notes on the property observations. You do that for three months, you are gonna know more than most the majority of professional investors out there. And I found that as a broker, even three months in the, the business and being very green, I could run circles around other brokers when it came to market knowledge. And so that is super important. So, but regardless of what you invest in, become the expert, the way you do that is you really spend the time and the effort, and I’m not just talking about doing research online, like really pounding the pavement.

If we carry that forward to the individual real estate investor, how important do you think it is to have that level of knowledge as a real estate investor? I

I think it’s super important. I think it’s what makes real estate such an attractive asset class is that you can touch and you can feel it. And I think there’s, I mean, today, and, and I know sure, sure, we broker sales every year where we get these sight unseen investments and sure it happens. But I think that if you are actively investing, you have to go see the property and walk around and take a look because you notice things, you learn things if you’re a passive investor, and, and Marco, I, I know you teach a lot on this and we both agree that having a great sponsor, a trusted sponsor, mm-hmm <affirmative> who has done that level of work and diligence, then you are putting your trust on the, the sponsor still might be a great idea to say, Hey, can we go walk the property together? I realize that might not always be practical, but whatever it is you’re doing <laugh> the work either on the area at the property or the sponsor.

Okay, well, let’s zoom out for a minute. You know, we’re talking about a very micro level at the moment, boots on the ground. If we zoom out and we just look at what has been going on with housing, you know, let’s talk about real estate trends. What is your opinion of what is going on in terms of housing, housing trends? We’ve seen mortgage rates jump up to 8% plus, you know, on on the residential mortgage side. What do you think is in store for us going into 2024 and maybe for the next year or two? I, I guess I’m asking you to look in your crystal ball, but base what you’re gonna say on trends that you’re seeing going on?

Sure. So having done this for a while and seen a couple cycles, what I would observe is back in oh 6, 0 7 in that huge runup, and you probably remember, you know, back then, you know, we saw the same three or 4% cap rates, but investors were willing to borrow money at six, 7%. So they had no problem taking on negative leverage in hopes that there was gonna be this huge run up in values and rents. And there was for a certain period of time until things froze up. And obviously in 2009 during the great financial crisis, that didn’t play out so well. So I would say most investors today are very focused on their stabilized yield on costs. What return are you solving for? And even if you’re getting in at a five and change cap rate today, if you believe that when you put on, you know, your permanent financing, and that’s gonna end up, you know, depending on to, we could talk about when we’re filming this, this show and when it will air, but assuming that maybe today you go borrow five-year money in the mid six high 6% range, I would say that most investors are solving where they at the very least, are neutral if not getting positive leverage.

But Marco, what I really wanna talk about in where I see this market going and why I wrote the white paper, why I think this year is gonna be the best buying opportunity since 2009 is look, as a broker, I will tell you I am the amount of inbounds that we are getting off the charts. We have valued more properties in this year than we’ve done in any previous year. Although we are being very selective on what we take on because, you know, look, we’re saying this is what we can deliver in today’s market. So we’re being very disciplined. But I will tell you a lot of what is driving these requests is we have clients who have loans coming due, okay? And you know where I’m going with this, they have equity in their deal. If you asked them a year ago, yep, I got conservative leverage on the property, I’ve got 60, 65%, but now they’re going back to their lender and not only have rates gone up, so okay, yes, it’s gonna be more expensive to borrow, but the additional factor when we look at that debt service coverage ratio is that you’re gonna get less proceeds.

And so what now these borrowers are being faced with is having to do a cash in refi. Many of these borrowers do not wanna do that or have the ability to, and that is going to force a lot of opportunities. So Marco, one of the things I talk about in my book, which is more important now than ever, is what is the seller’s motivation? Why are they selling Mm-Hmm, <affirmative>, okay. And if you’re calling the broker and you know, they’re probably not gonna volunteer, you know, Hey Marco, my client here is under tremendous financial pressure. I might not volunteer that, but if before you buy, if you’re not going to check what the debt is on that property before you go make your bid, you’re making a big mistake. Because first of all, you need to make sure there’s equity in the deal. And fortunately for, you know, most multifamily, again, there tends to be equity in the deal. It’s just, again, they’re under pressure because they do not have the ability to, to refinance where they were today. So, sorry for, that’s, that’s a really long answer, but hopefully a couple observations on what we’re seeing in the market today and also where the opportunities are gonna be moving forward.

Yeah, that just tells me that there’s gonna be a lot of opportunity or potentially a lot of opportunity coming up in the multi-unit space, like the commercial space because those mortgage loans have terms and they’re forced to refinance every, whatever, three to five years. And so they’re getting squeezed now with unfortunately higher mortgage rates that they’re gonna have to back into on the residential side, you know, maybe we can touch on this for 15 seconds. On the residential side, if you’re fortunate enough to be locked into a 30 year or even a 15 year fixed rate mortgage at a an attractive rate, doesn’t have to be rock bottom. You’re okay. ’cause You’re not being forced to refinance. I’m just wondering if you think this will apply in any way to the residential space, like the one to four unit residential real estate space, because they’re not forced to refinance because they don’t have the same term requirements as as the commercial space. So I see opportunity on the commercial side, all kinds of opportunity coming up on the commercial side, which is great for brokers like yourself and investors who are looking to diversify into commercial. But do you think it has much of an impact on the residential side?

Yeah, Marco, for the, for the reasons that you gave, I would agree that I don’t think as much because not that there isn’t or wasn’t long-term debt available for commercial. I think a lot of investors, when they’re doing commercial, their mentality is, okay, I’m gonna go buy, improve and then sell. And so I only need this five-year loan. Whereas if you’re buying a home, you might say, okay, well this is the home where we plan to spend the foreseeable future. So, you know, may maybe it’s, it’s a couple extra basis points, but let’s lock in 30 years. And a lot of people now are very grateful that they, they did that. So yes, I, I think those who have long-term mortgages at cheap rates, that’s gonna keep them in their homes longer, which is why, I mean, you would say, well, okay, the borrowing costs today to buy a home, if you’re, you’re doing an 8% jumbo, that should theoretically put downward pressure on pricing. But let’s not forget it’s about supply and demand. Yeah. And because so many people are sitting not moving because they don’t wanna give up their cheap mortgages, you know, that’s gonna keep the limited inventory there, keep prices up. So yeah, I I would say it’s definitely a different dynamic when it comes to commercial versus residential.

Are you seeing the same type of supply side constraints or supply chain challenges on the commercial side as we’re seeing on residential? Because there’s, there’s tons of demand and not enough supply in the residential space. When I say residential, I’m referring to, you know, one to four unit. Yeah,

Yeah, it’s, it’s a great question. And when we talk about commercial, we can talk about the different asset classes, multifamily, retail, office development, industrial, so, you know, hard to paint the market with one brush. But what I would say is, if you look at total listing inventory and what’s out there, again, it’s hard to say what’s out there because a lot of this stuff’s not publicly offered or, or on, on MLSs. So I, I think that would be tough to give you that step. But what I would tell you anecdotally, based on what we’re seeing is that, again, we’re getting a lot of inbounds, we’re getting a lot of requests to list and sell property, but we’re being very selective about what we take on. So our offerings right now are less than maybe what we were seeing in a market that was a rising market where brokers will say, look, I’ll take on this opportunity, even if it’s an aspirational seller, right?

I’ll take that on because the market’s hot. I might get lucky where, you know, hopefully if a good investment sales broker today is saying, okay, I really need to be disciplined with my time because time is my most valuable commodity. And the whole idea of, you know, promising a seller a huge price, we call it buying the listing, you know, that’s, that’s not a great recipe for success. So my sense today is there’s actually less inventory out there, but hopefully the inventory that you are seeing is, is certainly more vetted and it’s more in tune with pricing today.

Yeah. I always like to say, you know, if someone asks me, is now a good time to invest in real estate? My answer is always yes, <laugh>, you know, I, it doesn’t matter what interest rates are, mortgage rates, because I, the way I look at it is this, it’s not so much when to invest, it’s where to invest. There’s always opportunity out there. There are always deals to be found. Do you feel the same way?

For sure. And I, I do think that although th this upcoming year and the opportunities that are gonna be forced opportunities, you’re gonna have long-term owners who may have never sold. And you’re gonna see product that you haven’t seen in, in decades come up. And that’s, that is a function of time. That being said, I don’t think if you wanna be a good long-term investor, I don’t think that you kind of jump in, jump out. ’cause If you go on the sidelines, guess what? The brokers stop reaching out to you, right? If they don’t see that you’re active, you’re not serious. You’re not actively bidding, right? Yeah. You’re just out of the mix. So I think it’s very important to stay in the game. And I also think, again, to go back to what I was saying earlier, seller’s motivation, right? Because if you find the seller with motivation, and yes, we talked about financial challenges, but it could be an estate sale, it could be a partnership dispute, right?

Divorce, these kind of things where an owner says, look, I need to sell for a market clearing price. And if right now what’s happened, and here in New York City this year, all investment sales across the board, we will have less than a third of the dollar volume of the 10 year average. Okay? So yes, you could say, well, the sales market, there’s, there’s not a lot trading and happening. Well, it is supply and demand and a lot of the buyers and sellers for that matter are just waiting on the sidelines. Right? But still, there are opportunities that have to trade. And if three quarters of the buyers are on the sidelines and you are the one buyer who’s out there and you’re working and you’re making bids, and you find that seller who says, look, I need to transact. And they’re looking around and saying, I’m not seeing a lot of options, you’re gonna find that it’s gonna actually be much easier to transact.

Yeah. So if inventory’s pretty tight in the commercial space and even more tight in the residential space, you’ve partially answered this question, but how does one go about finding what I’ll call the best real estate investment opportunities out there today?

So it’s really about relationships. And Marco as you know, this, this is a business about the people and those relationships that you establish Mm-Hmm. And cultivating relationships with investment sale brokers, and I talk about that in my book, is really important. And it’s not like on the residential side, when you go buy a home, you commit to one residential broker, you sign up with them, they show you around town, as you know, when you wanna buy commercial, you have to speak to multiple brokers, right? And so it’s really important to cultivate relationships with the active brokers, not just because they can give you incredible market intel, see what’s going on out there, but also deal flow. And the way to do that, especially if you’re listening to this right now and you’re new to investing, it does take time to earn that credibility. ’cause What you don’t wanna do is go in and promise that sales broker in that market that you’re looking to buy, that, Hey, I’m coming in, I’m ready to buy.

You’re, you’re taking their time, sending opportunities, but you’re not ready to act. Right? So it’s important, I think, to be transparent always and come in and even if it’s, Hey, I’m new to investing, I’m learning the market. I’ve got some great capital partners and I don’t wanna take up too much of your time, but I’d love to get your thoughts on the market and what you’re seeing out there. And when I get more serious, you know, again, I don’t wanna waste your time, but when I’m ready to present an offer, I want you to know that it’s gonna be real incredible. Right? And I think if you’re upfront, you’re gonna be able to do that. I think also realizing that relationships are all about a two-way street. And so just don’t expect for that broker to call you. I have found that the best investors out there, they call me up <laugh> and they say, you know, James, what are you, they’re not just waiting for my phone call. They’re saying, okay, what are you seeing out there? And then maybe they’re also, you know, giving me a tip. Maybe it’s, Hey James, I just saw this deal off market. It’s not for me, but you should call the owner. They’re gonna sell, right? Think about that. Right now, you’re going out of your way to help that broker. So think about, and, and I talk about the same thing when I talk about having a great mentor. Think of relationships as a two-way street. Really important.

Yeah, for sure. You mentioned brokers and team members and whatnot several times. Do you have tips for people listening today on how to build the right team? I I talk about this quite a bit myself. Mm-Hmm. <affirmative>. But, but I think team is incredibly important. ’cause You can’t do everything yourself, nor can you be the be all end all in all the things that need to be done to successfully find deals, vet them, invest in them, close on them, fund them, all that stuff. So what would your tips be for building that right team?

Yeah, I totally agree with that, Marco. And the first thing I would say is if you find one great team member, and it could be an attorney, it could be an investment sale broker, it could be a mortgage broker, you find a great person. They surround themselves with other great people. In fact, I’m part of an organization called the Real Estate Services Alliance. And what we do here in New York is we handle every aspect of the real estate transaction. And we are all trusted, vetted professionals. But even if you’re investing in a city and they don’t, you don’t have a, a local affiliation like that, again, you find one great practitioner, oftentimes they’re gonna be able to introduce you to other people. Okay? But what makes a great professional as opposed to just their trustworthiness, their, you know, their style of doing business, it’s really their expertise and their knowledge.

And that’s why I say if you’re gonna invest in multi-family, let’s say in New York City, which is our rent regulation is very complicated. <Laugh>, okay? Understanding the difference between fair market rent, stabilized rent control, and even if an owner says it’s fair market, is it really fair market? So if you’re thinking of just going to your family’s general practitioner who did your trust in, you know, estate, that’s probably not who you wanna deal with. You wanna deal with a transactional real estate attorney who handles multi-family sales. Furthermore, you’re gonna want a landlord tenant attorney who specializes in that space to vet the leases and help you do your diligence. Okay? So the key is specialization, right? And that is really important to gaining the insider’s edge and having success in investing.

Yeah, I agree with you a hundred percent team is such an important factor in anyone’s success, business or real estate or whatever it may be. So now, I don’t know if this was a part of your book or not. I connected it to you somewhere along the line. But you talk about steps to basically up your game, call it dramatically up your game, you know, when you’re in a lucrative real estate market, you can filter that out. Do you have any comments or what I’ll call 10 steps, forget the 10, but steps to dramatically up your game when it comes to investing in real estate?

Well, I, I do have steps as I know you do too. And the way the book is built is sequentially how you go about deciding where you’re gonna invest, building out the right team, how you find the opportunity, how you execute on it. So it’s very sequential. Yeah. But as far as asking the question about how do you, and you know, if we, we wanna go to take a page outta Grant Cardone’s 10 x or Tony Robbins, like how do you make these massive leaps? And, and what I would say is that, and, and we could first address what holds I, I think we both agree what holds a lot of people back. And you might be listening to the show right now and saying, Hey James Marco, this sounds great, but I don’t have millions of dollars in the bank. And I still have a lot to learn.

And I think we both agree that yes, education is really important, but let, let’s talk about that financial piece ’cause we’re not ignoring that, right? And so for those of you who are listening who are not independently wealthy, what I would say is a great way to make that quantum leap in commercial real estate investing is, first of all, you gotta find the great, the, the opportunity, right? You find an incredible opportunity off market. People don’t know about it has a story, right? All the things we talked about. And not only that, but you are an expert in that area and you understand why it’s a great opportunity and you have the business plan to unlock the value. Okay? Now what, okay, now you can go find a trusted partner who has that experience that you can team up with. And we’ve, we’ve talked about this before, could be even sweat equity.

Look, I don’t have the deposit money or all of it to put down, I know you’ve done this. I’m, I’m hungry, I’m looking to do more of these, you know, you’ve done great things in your career. Let me go find opportunities and let me earn sweat equity. And I can sit with you in the general partnership. And you can go out and you can help find passive investors if that’s what you’re looking to do. But finding that partner that you can leverage their track record and their experience can help you really go and execute on a very large scale opportunity. But again, it starts with the opportunity. So again, what do you bring to the table? You bring to the table the opportunity and the expertise to go along with it.

So when we’re talking about deal sources, you know, be it a partner or a syndicator or turnkey real estate provider, you know, like my company is or whatever it is, how are you vetting the person or the company or the source of your deal potential deals? Like what is important to you? How do you, or what do you recommend people do to vet the source of those deals?

Yeah, and I, I know we had a, a great conversation on this and it is so important I think for me to have that personal connection. And again, you find that you put yourself out there and whether it’s going to one of your conferences and you surround yourself and you get, when you really see someone face to face and you have that interaction mm-Hmm. And you get to know them and then you start establishing connections on multiple levels. You find things you have in common, you start building your network and that trusted source and then you start to build and expand from that. And I’ve found that a lot of the investment opportunities I’ve seen have not been from that inner ring, but the next ring, right? And so I think that’s really important to have that, that link, right? Because I think just diligence, seeing someone online and just kind of taking a look and seeing what’s out there, I really try to, to connect more on a personal level.

And for me, I think what makes for a great sponsor for you passive investors out there and thinking about who do I invest with? You really wanna get a sense of that person’s track record and what they’ve done over time. And, and look, I’m, I’m not saying don’t, you know, invest with an emerging sponsor, everybody has to start somewhere, right? But the benefits that I know we’ve talked about of dealing with that, that experienced sponsor is look, not all deals are gonna be home runs, right? We know things change. I mean just look at what’s happened over the last couple months, right? And the question is not has every single deal that this sponsor done been a home run? The question is what did they do to mitigate those challenges? And when things for the deals that did not go well, how did they deal with them? Did they do right by the investors? Did they do everything they could to try to salvage the opportunity? And a lot of that just comes with with experience. Experience.

So as we kind of start to wrap up here with a few questions, whether it’s connected to everything we’ve talked about or not, what would you say is the number one thing that someone should look for in looking for a great real estate deal? What’s most important?

I think, and, and I fully agree with you, Marco, now, now I’m gonna expand beyond just one thing because I think your premise of finding really well located real estate and really doing the focus on demand drivers, I completely agree with you there because when you say it could be a great real estate deal for the numbers, but the surrounding neighborhood isn’t there, or maybe it’s going in the wrong direction, right? There’s nothing you can do with that business plan that’s gonna help you sidestep the macro. So I think I would agree with you there that that is paramount. What I would sprinkle on top of it is, okay, once you’ve identified that incredible area and that deal, I really, as you could tell, and as I’ve said that seller’s motivation is such an important piece to the equation. Yeah,

Definitely. You mentioned my premise, you know, some people are listening to this and they’re wondering, what were we talking about? ’cause That was actually, you know, on your show you interviewing me, what I had mentioned, just so people have context here, is for me, you know, the market is certainly important. There’s reasons to be fundamentally speaking, reasons to be in a particular market, whether it’s, you know, Manhattan or where I live here in Southern California or you know, Indianapolis, Indiana. But there’s the fundamentals. But then, you know, you start focusing on the, the areas or the neighborhoods, that’s where your property is rooted and you can’t change that. So a, a good deal in a great neighborhood is fantastic. A bad property like that, bad deal in a bad neighborhood’s bad, a great deal in a terrible neighborhood is gonna be, you know, catastrophic at some point because you can’t move the property.

It’s rooted into the ground. So for me, you know, the neighborhood is certainly a heavy weighting for me. But then ultimately, you know, I wanna underwrite the deal just like you do with any other piece of real estate. You look at the numbers, you look at the condition and all those other things. So anyway, you know, I just wanted to give the audience some context ’cause when it comes to what do I look at in underwriting or finding a great real estate deal, yeah, the numbers are important. Yeah, the market’s important. Yes, the neighborhood’s very important to me. It’s a collection of things. But if all the boxes are checked, hey, you know what, I think I, I found myself a pretty good deal and I’ll continue to do my due diligence and investigation. But if things aren’t getting checked, if the boxes aren’t getting checked, there’s a lot of other deals out there I can look at.

I don’t have to be married to one of them. So, but you know, just to complete my comment to what you were saying is this, I put a lot of emphasis as, you know, James on the neighborhood, you know, a property can be fixed up if there’s deferred maintenance or distress, you can turn a not so good deal into a good deal or a great deal. What you can’t change is the location, the neighborhood. So for me, I put a lot of weight in that when it comes to finding a great deal. So I dunno if you have any thoughts. Location, location, location.

Yeah, it really is question location. So it is very important. It really is. You know, ’cause the land is the land and you know, you could tear down a single family home and build a, an apartment building on it and away you go, you have a better deal. So anyway, if someone is looking to diversify their portfolio in terms of real estate, what thoughts or strategies maybe would you share with someone listening to this today on going down that road or diversifying their portfolio? What should people be thinking about and doing?

Yeah, so I think first of all, you have to assess what is your time and commitment that you can devote to this. And we talked about the differences of should you look to be an active investor, a passive investor. And then I think you really have to look at your risk profile and understand where your comfort level is. And yes, multifamily is generally considered the most conservative asset in that you have a 50 unit apartment building and one tenant vacates. There’s always gonna be someone else who will, will wanna live there at a certain rent. Whereas if you go and you search for the highest yielding retail deal in some tertiary market, the value of that real estate might be completely propped up in that tenant. And you know, even the biggest tenants we’ve known sometimes go out. And so what happens if that tenant vacates, you know, there’s risks. So I, I think you need to figure out your comfort level and what you wanna balance there as far as the risk versus return. And I talk in the book also about, you know, if you do wanna get a little exposure, say to retail, which in the right locations I think could be complimentary to residential, you can go buy a mixed use property that has apartments with a, a store on the ground floor.

Is there any right or wrong to being all in on residential real estate, one to four unit versus being all in on larger medium to large residential commercial properties or having a, a mix? I mean, there’s probably no magic formula.

Well, yeah, so I would say, and, and Marco, I I would agree that starting off with a one to four family and owning your residence and, and I know there’s others who say don’t do that. You, you know, you’re, you’re competing with other end users out there who pay premiums. It’s not investment grade properties. So if you, if you’re renting out a two to four family, you know, you’re competing with other people who just wanna live there and they probably aren’t looking at numbers as carefully as say an investor would in a 10 unit. So can you get a higher return on a 10 family? You probably can. But that one to four family, let’s not forget, and this is where we give the disclaimer that we don’t give tax advice and check with your accountant. But look there, there’s certainly programs out there. We can get very favorable financing for one to four families, certainly for first home time buyers.

And then look, when you go and sell that property, if that property was your primary residence and you’ve lived there for over two years and you make a gain, you have an opportunity to take profit right up to a certain extent tax free, right? As opposed to investment property where yes you can do a 10 31 exchange and you can defer into a like kind property and defer those capital gains. But you know, look the, in a perfect world, I think yes, you’re owning your own residence and I, I think, you know, one of the first, when I went out and bought a second home, I bought a three family and I lived in, we had a place to stay on the weekends and collected income from the other two. And that was great. But also, you know, if you’re really looking for stronger cash flow, I think buying a larger unit count can definitely deliver that. Yeah.

Yeah. What you did with your three unit living in one of them is called house hacking. <Laugh>.

<Laugh>, that’s right. I didn’t even know that was a thing back when we did it. But yes and

No, it’s, it’s a great strategy for someone getting started. I mean if you can afford to get financing for three or fourplex live in one of them and then rent out the other two or three units and build equity that way, or at least live rent free, you know, you start to grow your wealth. Last quick question and then we will wrap it up. A lot of the stats I’m looking at in the commercial space are showing that there are a lot of permits that have been pulled in building residential properties like multifamily and apartments. Is that concerning to you or should that be concerning to real estate investors in markets where there is potentially an oversupply of residential living space, whether you’re investing in one to four unit or, or even commercial. Like do you think that’s gonna be a problem in the future?

Well, so Marco, we, we could probably spend the next hour on this, but <laugh>, what I would say is yes under understanding supply, right? And pipeline is absolutely important, right? And we can start to talk about things like zoning and yes, there are some states where zoning is very flexible and developers say, I love developing here because I can build anything I want. Well then, yes, after you’ve built your project, then so can the person right across the street from you. Whereas there’s some areas like New York City that yes, we have as of right zoning, but our, there’s very little available land and it is very difficult to build, in fact, right now. And not to get too technical for your audience, but really the only way because our real estate taxes are so high here in New York is that a tax abatement is required to build our tax abatement just phased out.

Okay? So this year we are projected, there’s only permits pulled for 11,000 new housing units. Okay? That being said, the city and Rebny, the real estate board of New York says that we need 530,000 new housing units to keep up with demand. Wow. So we’ve built 11,000 units this year and we need 500,000. So you do the math, how long it’s gonna to take us to get there. So take it a further point. Okay, so I told you we have rent regulations. So we have 3 million housing units and a third of them are frozen in rent regulation, where those units are for the most part frozen. So that puts even more pressure on the fair market rents. So if you don’t have enough housing being built and you have a bunch of the housing that, that is in the rent regulated program, what do you think that’s gonna do to the remaining fair market units?

So the, these are the kind of things, and hopefully this is helpful ’cause and it’s very specific to New York, but look, if you’re looking to build an LA or Dallas or Bay, a two four family in Cleveland, you need to be asking yourself the same questions. And yes, it is tracking supply and what is your competition and what are the barriers of entry and what are the incentives to build and what does that look like and what is demand and all the things that you speak to. So there, there’s a lot of factors, but yes, <laugh>, the question that you’re asking is certainly important to consider before you buy a property to understand what the competitive landscape looks like for the future. Yeah.

Wow. That’s crazy. I didn’t realize the housing deficit or demand in your area was that much. That’s crazy. I mean, look, if you’re a real estate investor, you own property today, you’re in a good position ’cause you have tons of tailwind and you’re in a great position. But if you’re just getting started, you know, that’s, you know, obviously a bit of a challenge. So, but at some point you still have to pull the trigger, start investing, get on the equity train, you know, start investing, whether it’s owning single family homes or you know, partnering with people on commercial or syndicated deals, whatever it takes. You know, if you’re not in the game, you’re not gaining anything. So you just have to get started at some point or just keep growing and keep going. Well James, I appreciate you coming on. Tell our listeners how they can follow you, get in touch with you or get more information.

Well thanks Marco, and this has been awesome. Really appreciate it. I hope it’s been helpful to your audience. So I built jamesnelson.com. It’s my name, but it’s not about me, it’s about you. So I built this site to help investors gain that insider’s edge. My social handle is James Nelson, MYC. So you can find me on LinkedIn, Instagram, Twitter, and yes, as you mentioned my book and my podcast, you can find all about that at jamesnelson.com. So appreciate your asking great stuff.

Well, James, I appreciate you coming on. This has been a good 40 minutes and we’ll look forward to keeping in touch with you.

 hope you enjoyed this week’s throwback Thursday episode. If you haven’t already, remember to subscribe so you don’t miss out on a single episode. If you have a question about real estate investing or finance, simply go to passiverealestateinvesting.com and click the Ask Marco button. . I read all of them, I reply to many of them, and sometimes I cover them on the show, and I’m gonna try and do more of that. So, I am going to encourage you to go to passiverealestateinvesting.com and submit your question for Ask Marco.  Lastly, help us share the show with other like-minded people that you know who can benefit from it as well. Just visit us on your platform. Most of you are on iTunes and leave us a rating and review. I would greatly appreciate it. I read them all and I will thank you in advance. And that is it for today. Thanks for listening. I will see you on our next episode.

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