Scott:
Welcome to the BiggerPockets Cash podcast the place we interview Jussi Askola about actual property funding trusts or REITs. Hiya, hiya, hiya. My title is Scott Trench and with me at this time is my MVP CFP, co-host, Kyle Mast.

Kyle:
Hey Scott. Good to be right here.

Scott:
All proper. Kyle and I are right here to make monetary independence much less scary, much less only for anyone else, to introduce you to each cash story and each sort of actual property funding or different funding as a result of we really consider that monetary freedom is attainable for everybody, regardless of when or the place you’re beginning.

Kyle:
Whether or not you need to retire early, journey the world, go on to make massive time investments in property like actual property or begin your personal enterprise or find out about new funding alternatives, we’ll show you how to attain your monetary objectives and get cash out of the best way so you’ll be able to simply launch your self in the direction of your goals.

Scott:
Kyle, I can’t be extra enthusiastic about at this time’s episode. Jussi is simply the right visitor to speak about REITs, actual property funding trusts. A publicly traded, in lots of circumstances, technique to get publicity to actual property. An asset class that’s been hammered over the past 18 months to the tune of like 30% throughout the board and simply perhaps presents an incredible alternative that we’ve been ignoring or overlooking right here at BiggerPockets. And wow, is that this man fairly sensible on this subject. It is a should pay attention episode.

Kyle:
100%. That is thrilling. This man is aware of his stuff and that is positively a uncared for subject in the actual property sector, so individuals are going to get rather a lot out of this episode. I’m excited for everybody to take heed to this. It’s going to be nice.

Scott:
All proper. Subsequent up is our cash second the place we share a cash hack, tip or trick that will help you in your monetary journey. And at this time’s cash second is deal with your well being, drink water, take nutritional vitamins, get in some sunshine, go to that annual checkup, get that exercise in. This will likely not look like a cash tip, however staying in good well being can save tens of 1000’s of {dollars} or a whole lot of 1000’s of {dollars} in the long term. You’ll earn extra money, you’ll have extra power, you’ll spend much less on healthcare, and also you’ll be higher trying. All issues that contribute to monetary success in the long term. So do you may have a cash tip for us? E-mail [email protected].
Jussi Askola is president of Leonberg Capital, a boutique advisory agency specializing in actual property funding trusts. Jussi additionally writes the primary REIT funding e-newsletter on Looking for Alpha, which I’m a subscriber to and follower of, and has a YouTube channel the place he discusses REIT information and funding concepts. Jussi, it’s so nice to have you ever right here on the BiggerPockets Cash podcast. Thanks a lot for becoming a member of us.

Jussi:
Thanks very a lot for inviting me. As I used to be telling you earlier than we began, that is my very first podcast ever, so I’m very excited.

Scott:
Superior. Nicely, we’re honored you got here on right here first and actually grateful. Would you thoughts beginning off issues by telling us a bit of bit about your self and the way you grew to become curious about actual property and investing?

Jussi:
I come from Finland. I used to be born in a household of actual property professionals, so I’ve been going from one building website to a different already from a really early age. I made a decision to enter actual property fairly early as nicely. Mainly throughout highschool I used to be already operating my very own small enterprise. It was an e-commerce enterprise, and I used to be incomes a little bit of earnings already from it, and so I purchased my first REIT at about 15 years previous. Already again then, I used to be very curious about actual property investing. I actually beloved this concept of having the ability to purchase a property with the financial institution’s cash, have your tenant reimburse it, and by the point your mortgage is paid off, you personal the property free and clear that has doubtless gained quite a lot of worth. However again then I wasn’t in a position to purchase actual property simply but as a result of the earnings weren’t fairly giant sufficient, so I purchased REITs as a substitute. And in order that was my introduction to REIT investing.
In a while, I went to review finance with a specialization in industrial actual property. It’s fairly frequent in Europe to specialize fairly early on already on the bachelor degree, in order that’s what I did. I additionally did the CFA curriculum. I handed three ranges. Then I landed my first job in non-public fairness actual property in Dallas, Texas. So I used to be there for short time, however ultimately I wished to arrange my very own factor, and in order that’s what I did.

Scott:
Superior. And may you outline REIT for the viewers? What’s a REIT and are there particular guidelines or variations between a REIT and a public inventory firm, for instance?

Jussi:
Sure. REIT stands for actual property funding belief. It’s basically an organization, an organization that holds quite a lot of actual property for the aim of producing rental earnings and it enjoys particular tax advantages, and so you need to fulfill a bunch of various necessities. Certainly one of them is that you should pay out 90% of your taxable earnings within the type of dividend, however there are lots of different necessities, and if you happen to fulfill these, then you definately don’t need to pay any company taxes. In order that’s the principle profit actually, of the REIT construction. They are often non-public. They are often public. In my case, I’m largely within the publicly listed REITs. However yeah, so briefly, that’s what a REIT is.

Scott:
Jussi, you might be an professional at analyzing and evaluating the prospects and potential, the returns, whether or not REITs are going to carry out nicely or not. How does one analyze the efficiency or expectations of a REIT? Will we take a look at the online asset worth of the properties beneath them? Will we take a look at the earnings? Will we take a look at a mix? How do you make these calls and the way have you ever developed the experience in making these judgments in regards to the potential of those alternatives?

Jussi:
That’s a superb query. I believe it’s vital to begin right here by remembering {that a} REIT is an actual property funding. Quite a lot of the issues that you’ll look in an actual property property may even apply to REIT. The very first thing that you just would possibly search for is what are the properties that the REIT owns, what’s their high quality, what’s their hire degree, what’s their occupancy charge. All these identical elements that we’ll sometimes be curious about as an actual property investor. However then past that, as a result of these are giant firms, you additionally want to research fairly a bit their administration. Is the administration good? Is it nicely aligned with shareholders? What’s their observe file? What’s the technique that they’re following? Is it actually creating worth for shareholders or are they attempting to extract worth for themself within the type of charges or salaries? Then the stability sheet clearly is essential, particularly at this time in at this time’s rising charge surroundings. So that you take a look at quite a lot of totally different metrics. We are able to talk about these a bit later additionally if you wish to in additional element, however issues like debt to EBITDA, the lengthy to worth. So briefly, you’re trying on the identical belongings you’ll be trying within the non-public actual property investments, however then you definately’ll add some extra parts. These are giant publicly listed firms.

Kyle:
Superior. So what’s the distinction between a REIT and a syndication funding?

Jussi:
A syndication will sometimes be a non-public car, so that you’re not going to have as a lot liquidity most often. They’re additionally sometimes going to be smaller in dimension, a lot extra concentrated. The administration will sometimes be exterior, which ends up in larger conflicts of curiosity and fewer economies of scale as a result of the sponsor will sometimes cost a charge primarily based on the property underneath administration in addition to perhaps a lower of the earnings on the backend, perhaps additionally some acquisition charges, some disposition charges and so forth. Whereas a REIT sometimes goes to be public. It’s going to be liquid. It’s going to be having fun with vital economies of scale due to its scale. The administration will sometimes be internalized, which signifies that the executives are working as workers for the REIT. They’re not incomes charges primarily based on the property underneath administration. As an alternative, they are going to be incomes salaries primarily based on the actual efficiency of the REIT, so it’s going to raised align the curiosity between the supervisor and the shareholder. So I believe that these are actually the principle variations and in addition the explanation why I want REITs versus syndications.

Kyle:
Nicely, that’s a superb segue to the subsequent query. We have been simply going to ask you, what’s the benefit of a REIT for somebody who needs to get into actual property investing versus perhaps direct funding in actual property? After which perhaps together with that, what’s a typical return? That’s laborious to estimate, I do know, however give an concept there and a time horizon for an funding like this too.

Jussi:
I may offer you a extremely lengthy reply to this query as a result of I actually take pleasure in this subject of REITs versus rental properties or syndications. I’m going to make it a bit shorter and we are able to then broaden on it, however briefly right here, I believe that REITs supply higher returns most often than non-public actual property. They’re additionally safer than non-public actual property most often. And on high of that, you additionally take pleasure in many different advantages right here as a result of it’s going to enhance, I believe, your way of life and in addition can help you actually focus in your profession. So briefly, higher returns, decrease threat, and it really improves your way of life, which isn’t at all times the case with rental properties.

Scott:
Oh man, pictures fired. Photographs fired on the rental property one. Find it irresistible. So let me ask you this. Haven’t REITs had a reasonably dangerous 12 months and a half, two years right here? And what would you say to the proprietor of perhaps some single household leases or duplexes out right here within the states that haven’t seen their properties come down by that a lot at this level? How would you make that argument to anyone who’s in that place?

Jussi:
You’re completely proper. REITs are down closely within the current previous. They’ve dropped by about 30% on common because the starting of 2022. And so over the brief run, you’re going to have time durations when non-public actual property goes to do much better than REITs, however over very long time durations of a number of a long time, I consider that REITs are going to do higher than rental properties and there are research to again this up. There’s additionally a powerful reasoning behind this argument, and we are able to go into this reasoning in additional element if you wish to.

Scott:
Completely. Let’s do it. That feels like a enjoyable subject right here.

Jussi:
Would you like me to provide the lengthy reply or the shorter one for this? As a result of I could make it actually lengthy and complete.

Scott:
We would like you to make the strongest case you may have and to nerd out to the perfect of your skill on the subject. That’s the enjoyable factor, and that’s the place everybody will get smarter.

Jussi:
So why REITs are extra rewarding than rental properties most often. Earlier than I dive into this, I believe it’s crucial to right some misconceptions which can be quite common on this subject. The primary false impression that I see on a regular basis is traders will assume that REITs are much less rewarding since you can’t purchase REITs with a mortgage, however this reasoning is mistaken as a result of REITs already leveraged investments. If you’re shopping for shares of a REIT, you’re shopping for the fairness and so it’s the equal of your down cost. REITs will then add leverage on high of it within the type of a mortgage or it will also be within the type of bonds, convertibles, most popular fairness, a lot of totally different types of capital to leverage your fairness, and so that you take pleasure in the identical profit as if you happen to have been shopping for a rental property. I’d argue that you just take pleasure in even higher advantages of leverage as a result of REITs most often would possibly get higher phrases than you might as a result of these are giant, diversified, publicly listed firms. Banks will probably be a lot happier to work with these than with a small rental property investor, which is often a riskier profile.
In order that’s the primary false impression to get out of the best way. Then the second that I see usually is that individuals assume that REITs are much less rewarding as a result of they have to pay their managers giant salaries, and so traders will assume that they’ll save these bills by taking good care of their properties themselves. And it’s true that REITs are paying tens of millions to their high executives, however as a result of they take pleasure in such a big scale, the administration price as a share of the full property is definitely going to be very small and far smaller than that of personal properties most often. Right here we are able to take the instance of Realty Revenue, which is without doubt one of the hottest charges on the earth, perhaps the preferred its administration price as a share of its whole property is simply 30 foundation factors yearly. For those who personal a rental property and also you outsource the administration to a property supervisor, it’s going to be much more costly than this. For those who do it your self and also you really rely what number of hours you spend on it, give some greenback quantity to account for the worth of your labor, it’s additionally going to be costlier most often.
Then the third false impression is on taxes. Rental property traders suppose that they take pleasure in the perfect tax advantages, that REITs are usually not even comparable, however as soon as extra, this isn’t actually the case for my part. I really pay much less taxes investing in REITs than in rental properties. And so rental properties are very tax environment friendly. I agree with this. An enormous a part of that is the non-cash depreciation, which lets you defer quite a lot of the taxes far into the longer term, however REITs take pleasure in very comparable advantages.
For one, REITs most often will retain about 30 to 40% of their cashflow inside the firm. Do not forget that the rule of 90% applies to taxable earnings, which is far decrease than cashflow due to non-cash depreciation. And so regardless of the REIT goes to retain, most often 30 to 40%, will not be taxed as a result of REITs don’t pay company earnings tax. It’s absolutely tax deferred. Then secondly, a portion of the dividend earnings is often going to be labeled as return of capital. That is additionally absolutely tax deferred. Then third factor to think about is that the portion of the dividend earnings that’s really taxed goes to take pleasure in a 20% deductible, in order that reduces your taxes even additional. After which fourth and last right here, REITs will sometimes spend money on decrease yielding, quicker rising properties like e-commerce warehouses, knowledge facilities, cell towers, and so forth. And so a bigger portion of the returns goes to come back from long-term development and appreciation, which as soon as extra is absolutely tax deferred. And if all of that’s not sufficient, you might simply put your REITs in a tax deferred account and defer the remainder of it. So there’s not a big benefit right here for leases regardless of seeing that on a regular basis in numerous remark sections debating this subject.
After which the ultimate false impression is I see on a regular basis rental property traders declare that they’re incomes 20, 25, 30% annual whole returns. In some uncommon circumstances this can be the case, however most often I believe that they’re merely miscalculating their returns. Warren Buffett grew to become the richest investor on earth by compounding at 20% per 12 months so I simply don’t purchase into it that your common rental property investor is doing higher than that by doing it as a aspect gig. I believe what’s taking place right here is that they’re miscalculating their returns in two methods. The primary and most vital is that they don’t seem to be accounting for the worth of their very own labor. They are going to spend numerous hours discovering the suitable deal, negotiating it, financing it, then renovating it, discovering the tenant, managing the property and so forth.
And actually it’s numerous hours that goes into it. For those who now determined that every hour is price $30 and also you deducted this quantity out of your returns, you’d see {that a} very massive portion of your return is definitely simply your labor. It’s not the return in your invested capital. And I believe you actually ought to deduct this since you may use all this productive time to work further hours at your predominant job or a aspect hustle or the rest. So if you wish to actually see the actual return in your invested capital, you should deduct this. After which secondly, I believe that traders may even generally make the error of their typical 12 months. The standard good 12 months, let’s say it’s 15%, 20%, the return in your typical 12 months, however in actual property you may have good years.
Let’s say you may have 5 good years, after which on 12 months six you may have some main bills as a result of you should reinvest in your property. This will likely price you one and even two years of rental earnings. For those who now calculate the typical return over these six years, your return goes to come back down fairly a bit. So now with these misconceptions out of the best way, we are able to talk about just a few analysis research which were made on this subject evaluating the returns of REITs versus these of personal actual property in addition to non-public fairness actual property fund. You wished to say one thing, Scott?

Scott:
As a result of we’ve quite a lot of actual property traders who’re in all probability like, “He’s type of proper on a few these factors.” I need to agree with you after which present a few different issues to your response right here for a second. So first, I need to see your $30 an hour of discovering a superb deal and lift you. I believe that with the intention to purchase a rental property responsibly, you should put in, and also you’ll discover lots of our traders do, a whole lot of hours of self-education. Just like the one which maybe people are consuming proper now listening to this podcast, which is efficacious time. Perhaps you’re doing one thing else or driving or on the fitness center or no matter when you’re listening to this. However that’s on high of the time that you just’ve simply described there. In regards to the greenback per hour worth of that point, I usually have thought that actual property’s a extremely invaluable exercise for somebody to get into once they’re maybe a decrease or center or perhaps even decrease higher center class, if that makes any sense. In these ranges. As a result of if you happen to’re a health care provider or lawyer, you’re in all probability not going to need to put in all these hours at 30, 40, $50 an hour relying on the way you worth that point at that time limit.
However it may be rewarding. Extra rewarding than many aspect hustles which can be obtainable to you in case your greenback per hour time is lower than that, for instance. And when you pay that worth to get into it for the primary 5 years and know the way to do all this, you’ll be able to then reap the advantages for the remainder of your profession. In order that’s one nuance I believe to your argument that I largely agree with, you see, round straight rental property investing. After which I need to offer you one problem and see the way you react to it on this. One of many issues that I take pleasure in, I believe is a bonus as an actual property investor with a portfolio right here in Denver over my competitors or my various selection in investing in REITs is the flexibility to have used and to proceed to make use of fastened 30 12 months low rate of interest debt that reduces my threat and perhaps amplifies my returns in a approach that REITs are sometimes not in a position to entry with the identical low threat and low charges. Would you agree with that as a possible benefit for the little man right here?

Jussi:
Undoubtedly. These are two good counterpoints and I agree with you right here. And I don’t need to sound right here as if I’m simply bashing on non-public actual property. I believe non-public actual property is a superb funding. I’m simply making the argument that I believe that REITs are barely higher most often for most individuals.

Kyle:
That is superior. We would like the listeners to get a problem and to suppose exterior of the field, and also you’re each relating one thing right here that everybody wants to understand what sort of investor they’re. What’s your hourly wage usually? What do you need to do together with your time if you happen to’re knowledgeable? Publicly traded REITs are by magnitude extra passive than something you are able to do by yourself in actual property. I imply that in itself … And we’ll get into these analysis research you have been referencing. I’d love to listen to about this subsequent. However that in itself, even when somebody have been to show I can do rather a lot higher if I do it alone in actual property, even with my hourly wage, even when they’ll make that case, for my part, you should do fairly a bit higher. As a result of if you happen to’re placing that a lot time and your assets into it and it’s solely a bit of bit higher, nicely man, that’s not price it if you happen to will be pretty passive with these publicly traded REITs.

Scott:
And to bolster Jussi’s level right here. These excessive returns, 15, 20, 25%, perhaps they’re being achieved by some actual property traders, but when so, it’s sometimes going to be within the first few years of the maintain and it solely will be sustained if you happen to’re persistently making use of very excessive leverage to these offers. And that perhaps is one other benefit that the little man enjoys over REITs the place they’ll really leverage a lot larger, as much as 75% LTV, with this type of fastened charge debt within the acquisition, 85 and even 95 to 100% if you happen to’re an proprietor occupant in these first offers. So perhaps that’s part of that as nicely. After which one very last thing I’ll additionally throw in there earlier than we allow you to resume your great ideas right here, Jussi, is the effectivity of the market. A listener would possibly argue with you and say, “Nicely, REITs are already priced appropriately as a result of sensible guys like Jussi are continuously debating the worth of these issues, however there’s quite a lot of good offers to be present in my native neighborhood as a result of I understand how so as to add a bed room or do the work there to create some worth on the upswing.”

Jussi:
These are three excellent counterpoints. I need to rapidly handle all three of them. The primary one was on the hourly wage, and I utterly agree with you that the extra you worth your time, the much less sense it’s going to make to spend money on rental properties. For those who’re a health care provider, you’re a lawyer otherwise you’re a busy entrepreneur that’s incomes a superb quantity of earnings via his personal enterprise, then in all probability shopping for rental properties makes much less sense. However then, yeah, in case your hourly wage is comparatively low, it makes extra sense. However even then, if you happen to actually calculated all of the period of time you’re spending educating your self after which discovering the offers, doing all of the work, even if you happen to valued your time at let’s say $15 per hour, I’d argue that the returns would change very drastically most often, and it turns into fairly a bit much less rewarding.
However right here you might additionally make the argument that if it’s work you take pleasure in, then it is smart and lots of people take pleasure in this sort of work. However then to your second level, and that is in all probability I believe the strongest argument in favor of investing in non-public actual property, and I actually personal some non-public actual property. This is without doubt one of the the reason why. You may actually use much more leverage. In some particular circumstances, I believe it is smart with some limits although. There are some limitations to it. However REITs, they sometimes don’t use fairly as a lot leverage, however on the flip aspect, they’re going to have entry to a a lot bigger number of capital as I discussed earlier. To allow them to use mortgages, they’ll use bonds, convertibles, most popular fairness. Sometimes, REITs may have a bunch of debt. Let’s say they may have a 40 or 50% LTV, after which they’ll add nonetheless a little bit of most popular fairness to leverage your frequent fairness much more. So that you’re nonetheless getting an excellent bump from all of that leverage as a typical shareholder of a REIT, even when it’s not fairly as a lot of that within the case of a non-public rental property maybe. After which your third counterpoint, that was … What was it once more? Are you able to remind me rapidly?

Scott:
I wasn’t counting all of the counterpoints. I want I may bear in mind too. I believe it was the hourly charge of time will be price it. After which the leverage.

Kyle:
The native neighborhood.

Jussi:
The native neighborhood, sure.

Scott:
Yeah. Environment friendly market.

Jussi:
Proper. The efficiencies of the market. I agree that there are inefficiencies within the non-public market, however I’d argue that this is applicable very a lot additionally to the general public REIT market as a result of while you consider REITs, they’re a little bit of an odd class as a result of they’re proper in between actual property and shares. And actual property traders sometimes don’t belief the inventory market, after which inventory market traders sometimes don’t perceive actual property, and in consequence, you may have fairly frequent mis-pricings taking place within the REIT sector. I’m a devoted REIT analyst and I specialize on this sector, however there aren’t really that many individuals doing what I’m doing, and that is a part of the explanation why I’ve this platform at this time at such a younger age as a result of there are simply not many individuals doing this. Most traders within the REIT section, they’re generalist funding corporations, generalist analysts them with comparatively little understanding about actual property.
And so not surprisingly, you may have mis-pricings happen. I may level to a number of examples of REITs and we are able to talk about this later which can be at this time priced at very giant reductions to the worth of their properties. So these are my three fast counterpoints to your counterpoints, which I believe are valued and excellent. There are just a few analysis research which were made on this subject evaluating the returns of each and the principle conclusion right here is that REITs sometimes outperform non-public actual property by about two to 4% per 12 months on common. And this will sound stunning to a few of you, however I believe it’s a consequence that’s very a lot anticipated as a result of REITs take pleasure in vital economies of scale of their administration, which we mentioned earlier. Additionally they take pleasure in vital economies of scale in all their different prices. Let’s take the instance of an condo charge right here that does a take care of a contractor in a particular metropolis to alter 100 carpets every year.
Naturally it’s going to get a significantly better charge with this contractor than you might as a non-public rental investor altering one carpet yearly. However this is applicable to essentially each price. They’re going to pay much less brokerage charges. Even their property taxes. REITs are going to have authorized group working for them full-time. They’re going to have the ability to battle the property tax hikes and so forth. In order that they’re in a position to be way more price environment friendly on each degree. Then REITs will sometimes additionally develop their very own properties to earn larger returns and create worth for shareholders. This requires quite a lot of talent and assets. Most non-public traders are usually not ready to do this themself. REITs have higher entry to all kinds of capital, which permits them to essentially make the most of some distortion available in the market. Typically they’re priced at a reduction to the NAV, they’ll purchase again shares creating worth for shareholders. Typically they’re priced at a premium to NAV. They will difficulty fairness within the public market, elevate it, purchase extra properties on the optimistic unfold, which then leads to development on a cashflow per share foundation.
What else? REITs have the perfect expertise working for them. That clearly helps. They’re in a position to pay them very generously due to their giant scale and it’s nonetheless very a lot price environment friendly. REITs may also enter different actual property associated companies to earn extra earnings due to their platform. To provide you an instance right here, Farmland Companions, which is without doubt one of the greatest farmland REITs, it has additionally a brokerage enterprise, so it’s going to assist some third events promote their farmland and earn charges. You as a shareholder, you take part in these earnings as nicely. So I believe these are the principle the reason why REITs have been extra rewarding prior to now in accordance with these research, and for my part it is smart.

Scott:
How about syndications? We’ve seen quite a lot of headlines within the final 12 months about syndicators. There’s quite a lot of social media people who raised some huge cash and constructed a giant title and constructed syndications, and plenty of of these are in hassle. Some are going to jail and others are going through lawsuits right here. Are we seeing these sorts of distractions and issues within the REIT house or is that extra restricted to this syndication or non-public fund market? The non-public REIT market?

Jussi:
Bankruptcies within the REIT sector, particularly for public REITs, are extraordinarily uncommon. And I believe we’ve had a handful of them over the previous 10 years, and while you consider it, it is smart that they’re uncommon as a result of most streets are conservatively financed. They’re broadly diversified. Typically, they’re going to personal class A properties, and so it’s fairly laborious to screw it up. There are some exceptions. The few bankruptcies have been mall REITs that have been over leveraged, and so it might probably occur, however it’s actually uncommon within the REIT sector. Contemplating the syndicators, it’s way more frequent as a result of there are a lot larger conflicts of curiosity and they’ll sometimes use much more leverage and they’ll even be concentrated. So once more, it’s fairly regular that this occurs. The operators, the sponsors additionally won’t be fairly as expert. Maybe they’re expert at elevating capital, however not fairly as expert at really investing that capital.
For those who ask me, I’d suppose that these syndications are literally the worst choice of all, if you happen to’re going to spend money on actual property, particularly these which were promoted closely by influencers who’ve questionable backgrounds in the actual property house. I believe that it’s a significantly better choice maybe to study it and do it your self than spend money on a few of these syndications that I’ve seen on-line. And I’m certain there are exceptions. This doesn’t apply to all of them. However some that I’ve seen on-line undergo extraordinarily giant conflicts of curiosity. They’re simply incentivized mainly to do as many offers as they’ll. Simply deploy the capital, whether or not the deal is sweet or not. They cost enormous charges, which can actually affect your backside line, after which they may use approach an excessive amount of leverage and so then they find yourself in these conditions that you just simply talked about.

Kyle:
Yeah. I believe you actually highlighted on one thing there that we need to be certain that we’re portray a reasonably, fairly image of publicly traded REITs, which is excellent. I imply, that is superior for our listeners to listen to this manner of investing in an actual property that doesn’t embrace a property with the sewer line breaking and also you having to spend three years of rental earnings to repair it. However we additionally must … Jussi, tell us among the dangers which can be on the market. I do know from my CFP background, among the merchandise that exist, they’re not all publicly traded on exchanges. There are non-traded public REITs. You’re speaking a bit of bit on excessive charge merchandise. There’s some excessive fee merchandise which can be brokered via dealer sellers. There’s different issues on the market. So if an investor is listening to a REIT to spend money on, it doesn’t essentially imply this publicly traded with a ticker image REIT, which it could possibly be, and there is also some dangers there, however perhaps simply hit on the largest dangers you see. If somebody’s like, “I must go down this avenue of actual property funding trusts,” what’s a purple flag they should be careful for?

Jussi:
Yeah, that’s an awesome level and maybe I ought to have clarified this a bit earlier within the name that more often than not after I’m referring to REITs, I’m actually referring to the publicly listed REITs, that are very totally different from the non-public non-traded REITs, that are, for my part … I imply I’d put them in the identical class because the syndications that I mentioned earlier. Typically, they don’t seem to be any higher. They exist in lots of circumstances for the principle goal of extracting charges from traders. They are going to be externally managed. They are going to earn a charge primarily based on the full quantity of property underneath administration. They may additionally earn acquisition charges, disposition charges that may incentivize them to commerce out and in of properties. They are going to attempt to elevate as a lot capital as they’ll to maximise their charge earnings, and that’s not within the curiosity of the shareholder or the investor most often. They may even use an excessive amount of leverage. There are commissions, as you talked about, additionally very often.

Kyle:
That’s an excellent superior overview of the dangers and I simply need to spotlight a kind of dangers a bit of bit deeper simply due to me experiencing it. The agency that I first began at … When somebody’s searching for a monetary planner, you need to search for a charge solely monetary planner. You need somebody who you’re going to pay, you already know what you’re paying them. And there’s quite a lot of merchandise on the market from insurance coverage to investments to non-traded public REITs that provide a fee to sure kinds of monetary advisors. And I assure somebody’s listened to this podcast who has been provided one among these by a “monetary advisor”. So if you happen to’re listening to from somebody who may probably promote you a monetary product, if you happen to’re listening to a few REIT, you should ask quite a lot of questions as a result of generally these … They’re referred to as non-traded public REITs. In order that they have the phrase public in there, which makes them sound like they’re traded on an alternate, however they’re non-traded.
So mainly the construction of them is the “advisor” that’s promoting it to you usually will get a seven to 10% fee for promoting you this product. And mainly they’ll offer you a timeframe of a possible liquidity occasion, and it’s often 4 to seven years or one thing like that, however it may be 20 years. It may be by no means if it was on the high of the recession, which I noticed a few of these offered to individuals they usually simply utterly went to nothing. However that is what Jussi has talked about. A few of these, they over-leveraged, they received too excited and the merchandise are created to make charges for the managers and make commissions for the individuals promoting them. Not that the individuals promoting them are dangerous individuals, however you simply must ask questions as a result of this can be a product that’s in workplaces of monetary establishments that you already know the names of and they’ll come up.
When you have any first rate quantity of internet price, these will probably be offered to you instead funding of some kind. So simply hold your ears open for that. What Jussi is speaking about are publicly traded REITs which have the size, have the low charges, that may actually be a passive funding, they usually have liquidity too. That’s one thing we haven’t actually touched on right here, the liquidity of a publicly traded REIT. It features basically rather a lot like a mutual fund from a buying and selling standpoint, if you wish to transfer out and in of most of those.

Jussi:
Yeah. No, you’re right. For those who’re shopping for a publicly listed REIT, it’s identical to every other publicly listed firm. It’s fairly straightforward to purchase the shares. It’s fairly straightforward to get out of it as nicely. For those who’re particular person investor, you in all probability don’t going to run into liquidity points with a public listed firm. However then there are these public non-traded REITs and with these, it’s fairly totally different. The most important one on the earth is one run by Blackstone. It’s fairly a superb public non-traded REIT really. It could be top-of-the-line. So by the best way, there are some exceptions. A few of them will be decently good, although I nonetheless in all probability wouldn’t spend money on them.
So Blackstone and its public non-traded REIT just lately run into this difficulty. It has a redemption plan that enables traders to step by step get out of the REIT in the event that they need to, but when too lots of them abruptly need to get out, then they’ve to only halt it and it’s not doable, and that’s what they skilled just lately. However liquidity with publicly listed REIT for my part, is a serious benefit. I really feel like quite a lot of actual property traders see it extra as a drawback as a result of it results in volatility at instances like we skilled now within the current years. However if you happen to’re a long-term oriented investor with a landlord mindset, you’ll be able to actually make the most of this liquidity then to choose up extra shares at closely discounted costs.

Scott:
So let’s dive into … All proper, we’ve outlined all the opposite options to the phrase REIT. If you’re utilizing the phrase REIT, Jussi, you’re speaking a few publicly traded REIT. Let’s speak about that market and good and dangerous inside the sector now that we’ve completely dissected the options within the panorama right here. The place are we at from a general standing available in the market? We talked about it being down. And the place ought to individuals be trying? The place are you searching for good and dangerous within the house at this level?

Jussi:
Yeah. It’s a really huge and versatile sector. There are over 200 publicly listed REITs within the US alone. There are additionally 30 extra international locations on the earth that now have REITs or REIT like entities. So it’s a extremely huge and versatile sector. And whereas I’ll sound like I’m very bullish on REIT and I solely have good issues to say about REITs, this actually isn’t the case in actuality. There are quite a lot of REITs that I’ll keep away from. Some which can be publicly listed nonetheless undergo administration points, regardless of most of them being nicely aligned with shareholders. Good instance from the highest of my head is a REIT referred to as World Web Record, ticker image GNL. It has enticing properties, however over the long term it has accomplished very poorly for its shareholders as a result of the administration has actually regarded out for its personal curiosity for my part.
Then there are additionally some property sectors that you just in all probability need to keep away from. Nicely, the obvious one which in all probability involves the thoughts of most individuals are workplaces. And myself, staying away from workplaces. The valuations could appear low-cost at this time as a result of they’ve come down fairly a bit, however if you happen to now account for all of the cap ex, the leverage and so forth, maybe the valuations aren’t that low-cost. In order that’s one sector to keep away from. There are some others as nicely that I’m not fairly as bullish. I don’t like accommodations fairly as a lot. I don’t like knowledge facilities. So there are lots of sectors that I don’t like. There are additionally some international locations that I’m not as bullish on as others. There are some exceptions of REITs which can be additionally approach over leveraged. At present, the typical mortgage to worth within the REIT sector is barely about 40%.
It’s even a bit lower than that. In order that’s very conservative, however some REITs have determined to tackle extra threat and at this time they’re paying the implications following the surge in rates of interest. So the dangerous stuff to search for actually is the mistaken property sector on the mistaken time. Then some over-leveraged stability sheet. There are some exception of REITs which can be poorly managed. After which lastly, one level that you just need to additionally think about is that whereas REITs valuation have come down rather a lot, there’s nonetheless some REITs which can be priced fairly aggressively while you account for the upper rates of interest at this time. And so whereas I’m bullish on the sector, it’s nonetheless one by which you should be very selective.

Scott:
What do you make of the truth that in quite a lot of industrial and multifamily actual property sectors, cap charges, the quantity of cashflow a property, the share of cashflow a property will generate as relative to its buy worth, are decrease than rates of interest in quite a lot of circumstances? Do you suppose that there’s quite a lot of room for these costs to come back down in quite a lot of these sectors, or ought to we be afraid of REITs for the close to time or is it a shopping for alternative as a result of it’s already down 30%?

Jussi:
I believe it relies upon closely on what’s your expectation for rates of interest within the coming years. I imply, one of many the reason why the cap charges haven’t moved that a lot within the non-public market I believe is as a result of most traders are predicting that rates of interest are going to come back down within the coming years. I believe it’s price remembering right here that the explanation why rates of interest have been hiked a lot is as a result of we’re coping with excessive inflation. I nonetheless purchase into the concept inflation was transitory. It occurred due to the pandemic, the stimulus. Then Russia’s brutal invasion of Ukraine clearly additionally made issues worse. However then we hiked rates of interest. Now inflation is coming again down. For those who add only for real-time shelter, I believe it’s already backed on the goal charge of the Fed of two%, and so do we want these excessive rates of interest for for much longer?
Anybody who makes predictions about rates of interest at all times mistaken. I’ll put that on the market, however I’d in all probability argue that it’s fairly doubtless that rates of interest will come down within the coming years. And if that’s the case, then maybe cap charges gained’t broaden fairly as a lot. Then one more reason why cap charges haven’t expanded a lot is as a result of hire development has been so sturdy in lots of of those property sectors. Inflation was sizzling, and so rents have been additionally rising, and so traders have been keen to sacrifice on the cap charge to get this development as a result of they might see the normalized ahead cap charges being fairly a bit larger as soon as these rents get hiked sooner or later. However sure, would I purchase an condo neighborhood in Dallas, Texas at a 4.5% cap charge at this time? I in all probability wouldn’t. However would I purchase a REIT that makes a speciality of tax and condo communities at an implied cap charge of 6.5% and even 7%? That’s way more enticing to me, and it’s because REITs are so closely discounted at this time.

Scott:
That’s an superior argument. Love that.

Kyle:
Sure. I believe you touched on one thing proper there. The habits of those publicly traded REITs behaves rather a lot … The buying and selling habits. I’ll say the buying and selling habits behaves rather a lot like a mutual fund or a inventory so far as emotional upswings and downswings. After which while you advise individuals to spend money on these type of issues, quite a lot of instances greenback price averaging is the easy, straightforward, lazy technique to make investments over the long run and a great way. And if you happen to’re doing these publicly traded REITs, while you’re investing in a mutual fund like VTSAX, an index fund, you see a 30% drop available in the market, what do you suppose? If you’re a extremely good investor and you’ve got a extremely good long-term time horizon and that’s your aim, this can be a storage sale.

Jussi:
That is the strongest argument in favor of REITs, particularly at this time. For those who go within the non-public market, you go purchase your rental property, costs are fairly excessive. You’re going to go to your financial institution, ask for a mortgage. Rates of interest are additionally actually excessive. However if you happen to at this time go within the REIT market, there are many REITs priced at enormous reductions relative to the worth of the non-public properties internet of debt. In late 2022, the funding agency Janus and Henderson got here out with a research that confirmed that REITs have been priced on common at a 28% low cost to the online asset worth. Since then, REIT share costs have come down a bit additional, at the same time as their rents have stored on rising. And that’s simply the typical. There are quite a lot of REITs which can be priced at even decrease valuations than this. So we are able to perhaps take an instance right here for example my level.
BSR REIT is a small cap REIT that owns a portfolio of condo communities inside the Texan triangle, so Dallas, Austin, and Houston, which you’ll in all probability agree has among the most tasty markets for long-term oriented traders as a result of there are quite a lot of development taking place in them. Hire to earnings ratios are nonetheless very low in comparison with different main cities within the US. And but regardless of that … And likewise, nicely, the REIT has a powerful administration group. They personal quite a lot of shares themself. They’re shopping for again shares at this time. They’re doing what’s proper with shareholders. They’ve a powerful stability sheet with an LTV of about 40%. And regardless of that, at this time they’re priced at enormous low cost to the online asset worth.
The NAV is about $21 per share. They commerce at about $12 per share at this time, in order that’s a 40% low cost. So that you’re basically shopping for an curiosity on this portfolio of condo communities at roughly … We’ve 60 cents on the greenback. And that’s very compelling to me. After which on high of that, you additionally get to purchase an curiosity in these properties and then you definately assume the debt of this REIT, which is generally fastened charge and has lengthy maturities, and so that you additionally get the good thing about these cheaper rates of interest of the earlier years, which you wouldn’t get if you happen to’re shopping for a property at this time within the non-public market.

Scott:
I believe that is superior. What a improbable factor to finish on there as a possible instance for people to go in and try. What do you do all day, Jussi? What’s your occupation proper now and the place can individuals discover out extra about you?

Jussi:
As you stated within the intro, I run a small funding agency that makes a speciality of REIT investing. It’s referred to as Leonberg Capital. We handle our personal capital, however we additionally supply some analysis providers. Actually three sorts. We’ve a e-newsletter referred to as Excessive-Yield Landlord that’s hosted on Looking for Alpha. We additionally supply custom-made analysis providers to bigger REIT traders like household workplaces, small non-public fairness corporations, after which we additionally present some consulting providers to some REITs themselves to assist them enhance the investor communications. In order that’s actually taking a giant chunk of my time on a day-to-day foundation. Investing is actually my ardour and enterprise usually is my ardour, and so I’m just about doing this the entire day. So on Looking for Alpha, as I stated, we’ve our e-newsletter referred to as Excessive-Yield Landlord. There’s a two week free trial if I can put a bit of plug in right here in case you need to entry my REIT portfolio. Then on high of that, I just lately created a YouTube channel. I created it earlier this 12 months, so it’s nonetheless comparatively small, however we at the moment are approaching the ten,000 subscribers. So if you happen to will help us move that, that will probably be actually appreciative.

Scott:
What’s it referred to as?

Jussi:
For those who sort Jussi Askola within the search bar, you’ll discover me, however the deal with I believe is askaskola. A-S-Okay-J-U-S-S-I. It’s the identical deal with additionally on Twitter, the place I’ll submit some each day information on the REIT sector.

Scott:
Everybody must go and take a look at Jussi Askola’s stuff. We’ll hyperlink to all of it within the present notes right here and you’ll go try the YouTube channel and Excessive-Yield Landlord. That’s the place I discovered you is on Looking for Alpha with quite a lot of the stuff you place on the market. Thanks for all the worth you add to the neighborhood and your very compelling arguments in favor of REITs at this time. It was a real privilege to study from you and I believe Kyle and I had a ton of enjoyable. So actually recognize it. Actually, actually respect your intelligence and the strategy you’re taking to investing on this sector.

Jussi:
Thanks very a lot, Scott. And to finish this, I additionally wished so as to add that after I was nonetheless in highschool, I used to be already studying … I believe it was BiggerPockets. And all through my school as nicely in a while, I’ve been very actively following your YouTube channel, all of the content material you place on the market and your web site. So it’s been an inspiration for me and so I actually recognize that.

Scott:
All proper, Kyle, that was Jussi Askola. What’d you consider at this time’s present?

Kyle:
It’s at all times good while you hear anyone they usually make you need to change your complete funding philosophy. He simply threw some nice stuff on the market that makes you actually suppose via, if you happen to’re an actual property investor and also you’re doing it by yourself or very immediately, the unimaginable advantages of not doing that, of doing it extra passively and letting extra professionals do it in these bigger funds. He simply has a depth of data that we simply completely took benefit of at this time and it was nice.

Scott:
Oh yeah. How are you going to not assist however go away at this time’s episode simply in whole admiration of Jussi. Who is aware of who’s going to be proper within the longterm 30 years from now, which goes to carry out which different approach, however what a extremely well-reasoned, well-crafted argument. What a transparent degree of depth and understanding and due diligence over years, perhaps a decade plus of simply, I’d name it an obsession that I received from him in understanding each intricate element of this market. The dangers, the places and takes, alternatives inside sub-sectors, how administration’s compensated, understanding debt buildings, all that type of stuff. I imply, this can be a true, true professional and I walked away admiring and actually respecting his argument although I’m on the opposite aspect of it as a single household and small multifamily rental property investor, personally. I in all probability will look into some rents … Or some rents. Into some REITs and like I informed you, I observe his e-newsletter and actually respect quite a lot of his evaluation.

Kyle:
Yeah. I believe that is simply an enormous profit to the listeners as a result of this matches a sure investor sort. Everybody has a unique aim, everybody has a unique life stage, everybody has totally different circumstances so far as what they’re doing with their time and REITs are … If you’re actually into actual property and also you need that to be a giant a part of your investments, that is one other nice technique to do it. And we touched on it a bit of bit within the episode so far as what your time is price, and that basically comes into play. I imply, throughout the episode I used to be continuously eager about horrible properties I’ve had the place I’ve spent quite a lot of time the place I shouldn’t have. I used to be simply two nights at one among my short-term leases, spending quite a lot of time there. I believe it was price it. We’re doing a giant renovation. Wanted to be there. However all these items are making me suppose and consider, and an episode like this makes … Whether or not you proceed to remain in your extra direct investing in actual property, that’s advantageous, however simply just be sure you take heed to an episode like this to present you one other perspective to be sure you’re making the choice that you ought to be making.

Scott:
And I additionally thought he actually dealt with my problem of, nicely, hey, if all the things’s down 30%, if that’s not a crash, what’s a crash within the sector? I believe over solely the long term, he’s received an excellent reasoned argument and within the brief run, hey, there’s only a crash within the sector. Perhaps it’s one thing to go and look into and p