As the “maturity wall” begins to hit asset prices, the commercial estate market may have a rocky year ahead. But market stress can create opportunities for contrarian investors.
Edward Fernandez, president and CEO at 1031 Crowdfunding, joins Andy Hagans to discuss his “all-weather” investment strategy, and why a rocky market doesn’t faze him.
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Episode Highlights
- Ed’s assessment of the current macroeconomy and commercial real estate market.
- How the “maturity wall” is already starting to hit asset prices (even if this has been underreported by the media).
- The places where Ed looks to find attractive deals in the current market.
- An overview of Ed’s all-weather investment strategy, and why he isn’t afraid of a “rocky” real estate market.
- Why Ed believes the old model is broken in real estate deal fundraising, and where the future growth will come for real estate asset managers.
Today’s Guest: Edward Fernandez, 1031 Crowdfunding
- 1031 Crowdfunding – Official Website
- 1031 Crowdfunding on LinkedIn
- 1031 Crowdfunding on Twitter
- Edward Fernandez on LinkedIn
About The Show: WealthChannel With Andy Hagans
Learn about wealth and investing from the world’s leading experts. Host Andy Hagans conducts in-depth interviews to explore the topics that matter most, to protect and grow your wealth.
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Episode Transcript
– [Ed] Because, you know, we have relationship with brokers who have relationships with Fannie. And Fannie’s started to take back some of these assets now, where you wouldn’t think that was happening, right? And so, you just have to have the relationships to understand what is happening, because, look, the media is not going to put it out there.
[music] [Andy] Welcome to the show.
I’m WealthChannel co-founder Andy Hagans. You know, the commercial real estate market in 2024 is not for the faint of heart. Interest rates are still at a multi-decade high, and the Fed recently signaled that they’re not going to be cutting rates, most likely, in March. So, there’s plenty of stress and dislocation in the market. But of course, stress always creates opportunities.
So, where are those opportunities right now, and what are the risks that real estate investors need to be aware of, especially if they’re investing in real estate in this market environment? Joining me to answer these questions today is Ed Fernandez, President and CEO at 1031 Crowdfunding. Ed, the last time we spoke was in March of last year.
We spoke in depth on how real estate investors can use the 1031 exchange. That episode, by the way, that’s been one of our most popular episodes on our show.
– What?
– Yeah. So, well done, and thank you.
– Thank you. Thanks for having me again.
– So, you were, yes. You’ve been a hit with our audience, obviously.
– Awesome.
– And, you know, one thing I love about you, Ed, is you’re always frank. You know, you’re honest. I like that. I’m almost honest to the point where I offend people sometimes, but I love honesty. And we were talking before we hit record, and you’re actually a real estate bear. So, I want to talk about that, because most people, that’s not intuitive, you know, the CEO of 1031 Crowdfunding is a real estate bear.
But why don’t we just start off, I want to start off with a big question, which is, what is your view of the current macro economy and the real estate market?
– Well, so, as far as the macro economy, like, I you, know, we just noticed yesterday that UPS just, you know, laid off 12,000 workers, right? And we’re going to see that continuing to happen, because companies are trying to cut costs. So, you know, as far as real estate is concerned, you know, you mentioned that I’m a bear, but the real estate market, because of all these loans coming due, banks are going to have to make decisions whether they’re going to modify and work out these loans, or just take the keys back to these properties, and we’re seeing a lot of that going on.
Obviously, if you’re a portfolio bank, you’re going to hold on to the asset, but when you come to CMBS-type stuff, that’s not their thing. They don’t hold on to real estate. So, we’ve seen huge opportunity in taking those assets off their hands, paying back their loans, and creating a great IRR for the future.
– So, you’re talking about that wall of maturity, right? And it’s [crosstalk].
– Yes, sir. That’s exactly [crosstalk].
– I’ve got to tell you, so, we have, you know, all these loans that were, these were riskier deals done, whatever, two, three, four years ago, five years ago, when, you know, prices were, asset prices were higher, interest rates were very low, but these were shorter or mid-term loans. I don’t know the technical term, but they’re basically coming at the point now where, you know, they’re going to need new loans.
– Yes, sir.
– They’re going to need to refinance, and those are going to be at higher interest rates. But I’ve been hearing about this wall of maturity, a maturity wall, I’ve been hearing about it for over a year now. And, like, I have this metaphor in my mind of, like, a train going along, and just smashing into this wall, you know, and just, like, this big crash.
And I’m like, “Well, wait. I’ve been hearing about this crash, but where’s the crash?” Like, I still, I haven’t really seen it in asset prices to date, you know?
– Yeah. Well, so, and that’s a great point that you’re making, right. But we’re seeing it now, right? It’s starting to trickle in. Because, you know, we have relationship with brokers who have relationships with Fannie. And Fannie is starting to take back some of these assets now, where you wouldn’t think that was happening.
Right? And so, you just have to have the relationships to understand what is happening, because, look, the media is not going to put it out there. It’s an election year. The media has got to paint the picture of whatever they got to paint the picture of. I’m not trying to get into this political aspect of everything. But at the end of the day, on the ground, there are assets being turned back to the bank due to this interest rate reset.
And it’s happening today. And that’s why we’re bears, because that creates huge opportunity for those who know how to take advantage of it.
– So, you referenced Fannie Mae. Could you go into a little bit more detail, then, about, you know, what would be normal behavior for them? They wouldn’t normally take [crosstalk]
– They want to keep going. They would take it back, but they don’t want to hold the asset on their books. That’s not what they do, right? So, they’re not…now they’re trying to… So, they have brokers, that have relationship with Fannie, and those brokers take those assets out to the open market, right? And so that Fannie can get their loan paid back. They don’t really care what the value is.
They only care about what the loan is getting get paid at, but some of these assets are about 20% to 30% greater in appraised value than what the loan is. So, if you can get your hands on those assets, as soon as you close, you’re up 20% to 30%, and then some of these assets could be, like, 60% occupancy. If you get that up to 85%, 90% occupancy, then you’re creating a 2X, 3X multiple on an asset that you can turn around in 18 months.
– Got it. Okay. And, to your point, because it’s an election year, some of this stress, you think the media just doesn’t want to report it?
– You haven’t heard about it. Right? I haven’t heard about it. Right? All I hear about is I hear about home prices, I hear how millennials can’t afford to buy a home, I hear about there’s no inventory. Right? I hear about the NRA, I hear about homebuilders, but I don’t hear about commercial real estate and what’s going back to the banks.
– Well, you’re right that, I mean, that is one story that is in the media, that is a negative story, I think. I’m a millennial. You know, I’m guilty, you know. Try not to judge me. I know my generation takes a lot of probably deserved…
– A lot of heat, yeah.
– Deserved. I would say deserved, in many cases, right? But it’s not a good thing that home prices are totally unaffordable for people in my generation, that are, you know, with family formation, trying to start their families. Is that going to ease, or is that just, are we going to be, like, you know, Europe, a lot of these countries in Europe, where it’s like, if you save for 30 years, you might be able to afford, you know, a tiny little one-bedroom condo or something, and then you got to pass that down to your kids, because you’ll never get another…
Is that what we’re headed towards as a country?
– That, you know, so, you know, I was doing some research for the show, and what I found is that home prices are down 18%, from their highs. Now, with what’s going on with interest rates today, if we do have a soft landing, right, when it comes to a potential recession, we have a soft landing because of the inflation, it’s projected that home prices on existing homes would go up about 13%.
So that’s worse for you, right? On new homes, they’re up by 5%, but by the end of the third quarter of this year, another, they should be going up another 19%. Another bad thing for millennials. Why?
There’s no inventory. If I have a 3.38% interest rate, and even though I may have made double my money on my home, I’m not selling my house to go into an interest rate at 6.5%, 7%. Why would I do that? My mortgage payment is higher than what it is today. I might as well just stay here, remodel my home, right? Take, get a HELOC, pull cash out of my equity, remodel my home, then make it exactly what I want it to be, instead of moving into something that I wanted it to be.
And that’s what’s going on, and that’s why there’s such a lock-up in houses. So, you know, some of my young guys here… I’m going to throw a nugget out to the audience. I told them some of my young guys here, like, 20, 25-year-olds, they’re like, “I want to buy a house.” I say, “Here’s what you’ve got to do. So, you’ve got to find somebody who owns their home, all cash, and wants to sell, right? So, you do a seller finance.
You tell them, ‘Look, I’m going to give you today’s price today. Because you know the market’s going to change, the price is going to drop a year or two from now, but I’m going to lock in your price today. You give me a promissory note of interest only for two years. Here’s your down payment. I pay you your monthly payment. If I default, you take the home back.
So you’re a win-win situation, Mr. Seller. You get a high price. And if I don’t pay you, you take the house back.'” But for a millennial, in two years, you can refinance, and it’s easier to refinance an asset than to purchase one. Because you’re already the owner. So, now I’ve got these young guys around here, looking for seller finance, so they can lock up their own homes, before the market changes, because, if interest rates drop, prices are going to go up, and you’re out of the market again.
Right now, you’re out of the market because of high interest rates. Interest rates go down and prices go up, you’re still in the same situation, so take advantage of it now, for those sellers who want to lock in a high price today, and they’re willing to do seller carry.
– So, Ed, I think what I’m hearing is, interest rates, at some point, go down, which would, in theory, all other things being equal, would make housing prices more affordable again, except, as the interest rates go down, that’s just going to make the asset prices go up. So, essentially, my total monthly payment, if I’m, you know, putting 20% down and buying a home the way, you know, most typical people do, that might net out to be in the same monthly, payment, right?
– Right. Correct. It’s absolute correct. So, you have to take advantage right now, where there is no buyers that can qualify, right? So, a seller is going to carry the paper, because they don’t have a lot of people putting offers in. So, you come up, and put an offer in, give them a good down payment, they carry the paper. You’re in.
You’ve got your home. Interest rates drop. You refinance, you pay them off. Touchdown. You win.
– Got it. Well, but it sounds to me like, then, the housing crisis, that’s never really going to improve. I mean, it’s sounds like I’m darned if I do, I’m darned if I don’t.
– It is. We’re so behind on building houses. Affordable housing, right? So, you can get affordable housing in areas that you probably don’t want to live in.
– Right.
– Right? That’s where affordable housing is. But if you want to live on the beach, and you want to live in the suburbs, that’s not affordable housing. Good luck. But yeah, we have a problem with affordable housing in this country. I know we talk about, we made a left turn. I don’t know how we got here, but we’re here.
– Well, I think, for investors, you know, I know commercial real estate, home-buying, two different subjects.
– Yes, sir.
– But with the economy, I do think, with the macro economy, all these things are interrelated. And so, back to interest rates for a second.
– Yes.
– We know they’re going to go down sooner or later, right? The Fed has signaled, not likely to go down in March. But, they’re going to go down this year. That’s fair to say, right, Ed?
– I would agree, yes.
– So, what does that then do to commercial real estate? Why are you a bear on commercial real estate?
– Well, so, what’s going to happen is that, you know, as interest rates go down, that’s going to compress cap rates again, right? Cap rates are loosening up. So, what I mean by loosening up, let’s say an apartment building was a 5% cap two years ago, okay, it could be a 7% cap today. Okay. So, interest rates go down.
Now you can make deals work. More money gets pumped into assets, in the buying aspect of it, cap rates start compressing because values are going up. So, if interest rates go down, we’re going to see the real estate, commercial real estate market, start heating up again. Except for office. Office is a whole other different animal. It’s got its own issues, but all those other asset types, we should see it heating up on those assets.
– So, then, you know, do you think it’s a good time to buy them? I mean, that, you know, all things being equal, if you can get financing, presuming that you can get into an asset, if cap rates are likely to compress, the next…
– Yeah. I mean, we don’t… we buy ours all cash. Right? So, if I buy something all cash, I don’t need a bank. I don’t care about a bank. But then I can pull my dry powder out, later, when interest rates go down. I’ll refinance.
I’ll finance the property, pull my cash out, and take advantage of other opportunities. So, yeah, I think it’s a great time to buy if you can. Especially if you have relationships with some receivers that are holding on to assets that they don’t want. They just want their loan back. That is a huge opportunity, and that’s why we’re bears. I like the bear situation, because if you’re rich, this is where you become wealthy.
– So, you’re, I mean, really, what you’re talking about, or at least what I’m kind of hearing, reminds me of Jimmy and I, we went to a family office conference. This was about a year ago, a little over a year ago. And what we were kind of soaking up from everybody was, like, this is the time to have dry powder, and be patient.
And now what you’re talking about is, for some of these ultra-wealthy family offices, or other wealthy investors, they have been patient, and they have had a lot of dry powder. And I, Ed, I have a hard time being patient. I have a hard time… Like, if I have cash in my, you know, checking account, I’m like, “I want to put this to work. I want to earn the return,” but that can be very, very foolish. Real estate, that’s what is so frustrating to me, is when you’re on the sidelines, you’re looking at asset prices, and I’m going, “I know in my gut this pricing does not make sense, and the market is not going to stay here, but it’s like a snake digesting a big meal.”
It just takes time, you know, for the meal… And that’s where real estate is.
– Yeah. That’s exactly right.
– It’s like, it’s like it took 12 or 18 months for this to all kind of get digested, and now it’s worked its way back to the pricing. Is that kind of what’s happened?
– Yeah. No, you’re absolutely right. It takes a little time for the effects of the interest rate to kind of trickle through the economy, right. Even though interest…let’s say the Feds drop interest rates tomorrow, it’s going to take six months before we see the effects of that. Right? So that, and these lulls, of what’s going on with the Feds, because right now, the Feds have already indicated that they’re not going to do anything in March, but we know, moving forward, we’re going to start seeing quarter-point cuts.
That’s going to start heating up the market again. So, right now is the time to take advantage of high interest rates. You know, one of the things I, you know, I’ve been in the real estate market now, what, 24 years, give or take. Right? But I wasn’t in real estate in the 1990s, ’91, ’92. Opportunities at that time weren’t cash flow driven, they were IRR-driven.
Internal rate of return, time value of money. So, you really didn’t care if the deal cash-flowed or not. That’s not what you were buying it for. You were buying it for that big pop. That’s what we are today. We’re here for that big pop. So we have to change our mindset, because we’ve always been steady-Eddie, sleep-well-at-night, cash-flow type stuff, right?
So, now we created an opportunistic fund, where we’re just IRR-driven. So, we take the money and we look for those opportunities, in 18 to 24 months, where we can get a 2X, 3X multiple, cash out, do an exchange, defer the taxes, and keep going. And that’s the mindset today.
– And I want to circle back in a minute to this opportunistic fund, because it’s one of my favorite words as an investor, and as entrepreneur, it’s one of my favorite words, opportunism. I hope that speaks well of me, you know. [crosstalk]
– Yeah, no, hey. You’re, you know, you’re a millennial, but you’re, like, you know, you’re, like, just an odd duck. You’re outside of that, you know?
– I’ll tell you what, Ed. My dad, he owned a used car dealership, and growing up, I got to see entrepreneurship, real-world entrepreneurship, like, on that ground level…
– That’s great.
– …and I’m so glad I had that experience growing up.
– That is, that, because nowadays, that’s not happening. So, kudos to your dad.
– Yeah, no. I’m very fortunate in that. But I want to talk about that opportunism philosophy in a second, but one thing I have to ask about, though. All this is predicated on interest rates will be cut. And then, ideally, we have the soft landing. Are you pretty sure we’re going to have a soft landing, or is there a material chance that we get a hard landing?
– Well, there could be a material chance, you know. I don’t have a crystal ball. If I was, I wouldn’t be on talking to you. I’d be playing a lotto ticket, and, like, sitting on some beach somewhere, or going to Monaco, watching that fun, or something like that, right?
– Yeah.
– But, just think about…
– But you kind of have to, I know you don’t have a crystal ball, but you might act differently if you think there’s a hard landing coming versus a soft landing coming, right?
– Yeah, I don’t…you know, the economy is a…it is a part of investing. It’s not everything. Because if, look, when Jerome Powell gets on the TV, you better have liquidated your stocks, okay? Because as soon as he gets off, the market’s going down, right?
So, I mean, that’s like investing with emotions, right? It’s irrational, right? Not disciplined. We don’t invest that way. So, okay. We have to take a stand. We can’t, like, you know, be Doctor Jekyll, Mr.
Hyde, right? Oh, you know, two-faced, right? You can’t do that, or you’re never going to get anything done. So, we take the stand that we believe there’s going to be a soft landing. Here’s why. It’s an election year, right? I mean, we’ve got this presidential election coming up.
If there isn’t a soft landing, so what? We buy all cash. I don’t have a loan. Who cares? I’ll wait, right? If it’s a hard landing, okay, fine. Whoopie.
I’ll wait till the soft landing comes, refinance, and get my money back.
– This reminds me, Ed, of, there’s this portfolio model called the all-weather portfolio.
– Okay.
– Right? And the idea, I think it’s, if I remember correctly, it’s, like, 25% gold, or hard assets, and certain percent cash, stocks, whatever. And yeah, you know, but the idea of the all-weather portfolio is, like, I don’t care if it’s raining. I don’t care if it’s shining. I’m eking out a positive return year-by-year, and then there’s some years where it’s going to be like, “Whoa. I really made, I made three or five years’ worth of return in this one year.”
That kind of sounds like what you’re talking about, is, like…
– Exactly.
– All-weather real estate investing.
– Yeah. We don’t really care what’s happening. As long as we buy the asset right, we buy it from the right seller, we buy it all cash, we can sit and wait until things pan out, and then react.
– I love that. Well, speaking of all-weather real estate, you know, I think my impression from a lot of real estate sponsors and asset managers, last year was a tough year, or a bad year. I mean, is that fair to say? Is that…?
– For us, it wasn’t a bad year, it was a slow year. I would use the term “slow year.” Because there wasn’t a lot of equity moving around, right. A lot of investors are like, “Whoa, well, you know, I don’t know.” But, for us, you know, keep in mind, our business is driven by deferral of taxes, i.e. 1031s.
– Right.
– As long as transactions were happening, we were still moving equity in a good clip. So, I’ll say, I think we dropped by 30% from 2022, right, in equity. You know, so, okay, big deal. We’re going to make that up this year.
– Yeah. And, I mean, actually that’s not that big of a slowdown.
– No, it’s not.
– So, when I said a lot of asset managers, you know, maybe had a bad year or slow year, I wasn’t talking about you guys, Ed. I wasn’t talking about you, Ed, just to be clear. But I just think, generally in the industry, it was kind of that year to take a breath. And, you know, you see it in real estate more broadly, where you see people saying, you know, “I was a real estate agent, but I’m changing careers. I was a broker. I’m changing…”
I mean, it’s just, it’s a part of the cycle.
– That’s how [crosstalk] Yeah. Well, I can tell you this. My payroll went up 200% last year.
– Okay.
– When people are supposed to be letting people go, we were hiring, because we were gathering the right talent to anticipate what’s to come.
– So, I like that. So, I mean, and this is what I mean by, you know, you’re a little bit of a contrarian, or, you know, we can call you a bear. In another, in a different way, I might say you’re a bull, but in a year where a lot of asset managers had kind of a slow year, you guys launched your first REIT. Is that right?
– Yes, sir. Yes, sir.
– So, tell us more about the REIT. What’s the thesis in this specific REIT that you launched?
– So, we launched the REIT to give investors opportunity to get out of the volatility of the market, right. Since the Feds have been dropping their bonds, volatility’s happening every day, like it should be, right? We also did the REIT so that we can capture assets that we already own, so that we don’t have to go and buy assets that we really don’t know what’s going on with them.
So, we have a portfolio, right, of assets, currently today, that have investors in them. And those assets now become REIT food. Right? So, we know how they operate, right? We have the GAAP accounting on it. We know the operator is doing well. Why liquidate that asset into the open market and give somebody else that opportunity?
Why not take and contribute that asset into the REIT, right, where that’s growing NAV? So, those are the purposes why we created that REIT.
– So, that, just to hone in on that a little bit, that’s really interesting. You know, in other areas of private equity, with, like, roll-ups and things like that, the idea that you make acquisitions… I’m not talking about your assets, but where you know where the skeletons are in the closet, and it’s like, you know, it’s like, it’s not an unknown unknown.
It’s a known unknown or whatever. You know, the idea that there’s risk in any transaction, and if you know the asset pretty well…and, again, talking about other contexts in private equity, but, like, if you know the owners, if you’ve done business with them before, if you’re familiar with it, you’re de-risking that acquisition…
– Yes, sir.
– …before it even happens. And so, it’s like, even if you pay the fair market price, compared to this internal asset versus this external asset, we can dramatically de-risk it if we have that “inside information,” because you’re never going to have that level of solid information that you have as an operator, as an owner of the asset, you know, as the current owner, right?
– Correct. You’re absolutely correct. So that’s what we do. So, we create products, right? Those products are for exchanges. Those exchanges come into that product. That product is doing well.
Well, those exchanges want early liquidity after two years. We can give them the option, and say, “Look, we’re going to contribute this asset. It’s a great asset we want to contribute to our REIT. What do you want to do? Do you want to come with us into the REIT? Do you want to do a 1031 exchange on your own?” And so, we call these assets that we’re buying prior to putting them into REIT, “REIT food.” So, we’re already systematically setting up the success of the REIT by buying assets two years prior to contributing.
– Understood. So, that’s an interesting strategy. Now, is that, when you referenced, you know, opportunism… And again, to me, that’s not a four-letter word. Like, that’s music to my ears. Is that what you’re talking about, the REIT, or is, do you have…
– No, I’m talking about a whole other different fund, right? So the REIT is a steady-Eddie, sleep-well-at-night, you know, non-correlating assets to the equity market. If you’re tired of volatility, you can come and do this. But the opportunistic fund, which is in its current development right now, is to take money and go after these assets that have been returned to the banks, pay the bank off their debt, buy those assets, right, and create that multiple, when this soft landing does occur, and when interest rates do drop, those values are going to go up.
And so, it’s an IRR-driven type model.
– When you say IRR-driven, can we unpack that? So, is that essentially saying, “We’re buying this asset. It may or may not cash flow this year, or maybe even next year. That’s not the point. The point is, there’s going to be a capital gain in year three or four that’s going to more than make up for the relative lack of cash flow.”
Like, is that what that means, or, like…?
– Yeah. Yeah. So, yeah.
– I guess, could you spell it out for me? [crosstalk]
– Yeah. So, I’ll give you an analogy. So, if I go to Vegas, and I put $1000 down, and I’m playing blackjack, right, and I win $1000 on that hand, that’s 100% IRR, right? Because my money wasn’t out there that long, but I doubled it, in one hand. But, if it took me 10 hands to get that $1000, that’s a 10% IRR. So, my point is, is that the faster my money comes back to me, my higher my IRR is, right?
That’s what I’m talking about. So, what we want to do is we want to take this money, we want to buy assets, and we want to turn it around in 18 to 24 months. And look, those assets could be REIT food as well. Right? We know the asset. We turned around the asset. So we have multiple buckets that create REIT food, and the goal is to drive NAV.
[crosstalk]
– I see. Yeah. And so, so then, when you’re IRR-driven, that’s, like, the velocity or the timing of these capital gains. It’s like, if I can buy an apartment building and then sell it later for a 20% capital gain, that’s great. But if it took seven years to realize that 20% capital gain, that’s not a great IRR.
– That’s bad.
– On the other hand, if I turned it around in 18 months, and especially…
– That’s, boom. That’s touchdown.
– Got it. So, this is interesting. It feels to me like there’s different markets, you know, and obviously, in markets, there’s sectors. So I don’t want to over-generalize. But it feels to me like you’re not running away from risk. You’re understanding the risk, but you’re almost running towards the risk, because, like, in some markets, you can get paid very handsomely if you’re willing to accept the risk, right?
I’m, like, thinking back to the financial crisis of 2008, 2009, where the market was down by, you know, got cut in half, essentially, and it felt very risky. But for investors who were willing to run towards the risk, rather than running away, and selling at the lows, that’s the worst thing you could do, actually saying, “You know what? While everyone is scared, this is actually the perfect entry point.”
It turned out it was, right? If you think about, if anybody got in at 2008, 2009 and those lows, talk about a great time to… So, broadly speaking, are you saying this is the time to run towards the risk? If you have cash? If you have cash?
– Yeah. Anytime… I call it the “Chicken Little syndrome.” Anytime anybody thinks the sky is falling, that’s when I run into it, and start purchasing and buying. Because, at the end of the day, it’s cyclical, right? It may look bad right now. It may feel scary.
But that should not determine whether you should invest or not. Because that’s an emotional response, right? The facts is, it’s not going to stay here. The sky is falling. Everyone is running. Everyone’s panicking. Everyone is selling.
Well, if you have money, buy, buy, buy. That’s what we do.
– And is that where we are right now? I mean, is it [crosstalk]
– That’s what I think. I think the sky is falling. People are reluctant to buy. People are reluctant to sell. People are scared of their jobs. People are scared of this election. Right?
There’s a lot of… there’s a war going on in Israel. Right? There’s so many… There’s a war going on, and Iran is bombing our guys, right? There’s so much going on that people go, “Well, wait a minute. Let me wait to see what happens. Let me see who’s the president. Let me see how this war in Israel happens. Let me see if interest rates really do drop.”
By then, you know, it’s too late. So, you’ve got to..
– Because then the uncertainty, then, is gone, right? And so then…
– Yes. Then everybody, now, now everyone, we can call it herd mentality, right? Everyone comes in, and everyone’s doing the same thing. Opportunity goes away. Right? We thin the herd. We want to be the ones where the herd is thinning, and take advantage of opportunities now, for the future.
And it’s going to come. It may come in a year. It may come in two years, may come in three years. Who cares? We’ll sit and wait, but we’re going to buy, buy, buy until that event occurs.
– Yeah. And you know what I reference, you kind of cringed when I referenced it, but, you know, you see real estate agents, you see real estate brokers, they’re kind of a little, the past year, some of those folks have been, they’ve left the industry, you know.
– Yeah. Sad.
– Which, on the one hand, it’s, maybe it’s sad. I don’t know that it is sad, but it’s more just, it’s a healthy correction, right. It’s kind of setting the stage for the next leg of healthy growth that, maybe is how I would describe it. You know, it’s this…
– Yeah. It’s a hurricane.
– Exactly. We’re all, we’re talking about the herd mentality, and I love that concept, because to me, that’s, like, the heart and soul of value of investing, of entrepreneurship, is finding that niche, going against the grain, taking the risk that no one else wants to take. Outside of just running, you know, going into real estate this year, which feels scary, where else do you see the herd mentality within real estate, even where maybe people are fixated on the wrong thing, or they’re missing the big picture, or, you know, even within some of these sectors, do you think there are some sectors that are real hot right now, that are popular, but that are setting folks up for a trap?
– Well, let me…if I can answer that question within my industry, and I think I’m more qualified to speak within my industry. Within my industry, there’s been certain ways of raising equity. And the way you raise equity is through the financial services industry, through RIAs, through independent broker-dealers, wire houses, etc.
So, sponsors create products, and they distribute it through those financial services industries. Well, those guys are dying off. Okay? You go to the conference, all these guys are older than dirt, okay? They’re dying off. Okay? What happens is, when they die off, what happens to that equity?
How are you going to start raising equity? So, that’s herd mentality, to me. So, what do we do? Well, everyone is after the high-net-worth investor. Everyone’s after the accredited investor, the qualified investor, right? What about the small investor? The 20-year-old, the 25-year-old, that’s delivering pizza?
That maybe may work on UPS, who’s driving a truck, that wants to get involved in real estate, that has $500? That has $1000? But there’s nowhere to invest, because as soon as those poor guys pick up the phone and call me, what do I got to tell them? “Sorry. What’s your… Oh, you’re not accredited? I’m sorry. Can’t help you. These investments are only for the rich people. You can’t participate.”
Well, then, why not create products? Because we’re very good at the bookings, right? We’ve got the accredited investor down pat. But what about in between the books? What about the smaller investor? Why aren’t there products out there that are created for those small guys? So that’s what we do.
Right? We’re creating apps, where you can just swipe, right? The money moves from plan into this portfolio, you can choose a portfolio, so that the smaller investor can get exposure of real estate like the large investors. And so that’s what I talk about, the old ways, herd mentality. What we’re doing is I’m reading this book, called “Blue Ocean.”
We’re creating a blue ocean.
– So, I mean, you’re absolutely right, and it’s really, with the regulatory change and the legal changes of the past 10 years have opened up passive real estate investing, beyond just publicly-traded REITs, but other types of passive real estate investments, to everyday investors, you know, to the pizza delivery driver, etc.
Do you think… Well, I’m just kind of thinking through this in real time. I was going to ask you something like, is the everyday retail investor able to really, you know, quantify the risk, or analyze these type of investments? But Ed, to be honest with you, I talk with accredited investors and advisors all the time, and I’m like, let’s be honest.
Most of the high-net-worth people investing in this wouldn’t know their tail from a pro forma.
– They’re not the sharpest pencil in the pile, okay? Put it that way.
– Well, it’s just, if you’re not a true professional, doing these pro formas and underwriting, it’s pretty hard. I mean, what’s your advice? So, forget rich versus poor. To me, it’s more, do you underwrite this stuff regularly or not? Because if you don’t, that’s information asymmetry, right? Like, if you and I are looking at the same deal, you’re going to have 100 times more insight on that deal than I am, right?
Like, I might have a little dumb, folksy wisdom there, whatever, but at the end of the day, I can’t really calculate these, the numbers. I can’t calculate, you know, how the property will cash flow, or not. The IRR, you know, that whole strategy. I would need someone in the industry, with your insight, your inside information, frankly, to even look at the deal that way.
So, how do non-industry folks, how do they vet this stuff? How do they, you know, find funds, and kind of sort out the good from the bad?
– Well, so, we’re going to provide a lot of that information, right. But a lot of that information is going to be on the app. And so, when you choose a portfolio, that portfolio is going to break it down, and we’re going to try to simplify it as much as possible, because there are terms out there that people don’t understand, that if you try to explain it in a dialogue, in a written…it’s like Chinese.
So, you know, we want to keep it simple, stupid. Right? The thing is, is that, look, if you find you have a small amount of money, that doesn’t materially change your life if you lose it, it’s worth the risk to take an opportunity, and that’s called opportunity cost, right?
How much money have you lost to get an education? I can tell you how much I’ve lost, a lot of money, to get educated, okay? Because if I’m not breaking my knuckles on an engine while building a car, I don’t know how to build a car. I could read how to build a car. So, for an investor, there are losses that have to occur in order to get educated, and so that when you become educated, you do not have those losses, you start making gains.
And that’s what this opportunity is about. It’s not about, “Let’s make you a millionaire,” like you see all these influencer. That’s all crap, “Let’s make you a millionaire.” It’s, let’s get you educated, so that you can become a real estate investor. Is it going to be perfect?
Absolutely not. But at least you’ll be educated to see things and look things differently when you do have the money to make material investments, other than just this $500 that you might have lost.
– Ed, I think you’re exactly right. I mean, I even think about my own career as an investor. I was never that interested in the real estate market until I became an LP at a multifamily fund. Now, all of a sudden, I care about cap rates in multifamily. Same thing with oil and gas. I never cared about price of oil.
It’s like, you know, whatever. I care when I’m filling my car with gas, but other than that, I don’t care what oil costs. LP in an oil and gas fund, suddenly, I care about the price of oil, so it’s like, you have to be willing to risk a little bit to get skin in the game, and now, all of a sudden, you have that motivation to educate yourself, right?
– Correct, correct. That’s absolutely correct. And, you know, another thing I was thinking is that, you know, the SEC is thinking about changing the accreditation status. Right now it’s $200,000 per individual, $300,000 per couple, and a million-dollar net worth. What if that changes? Now you’re not accredited anymore. You used to be, and all these products out there are geared to that suitability standard?
Right? What happens to the equity, as a sponsor? Does your equity go down? Does your raise capacity go down? Well, you’d better start creating products that can get non-accreds, because if the SEC changes in a couple years, the accreditation status, all those people that were accredited and no longer accredited.
And that’s where we’re going.
– You are forward-thinking, Ed. I mean, is it…is that where the growth…? I mean, I know that you deal with all kinds of investors, from retail, you know, the pizza delivery driver that you referenced, all the way up to family offices and ultra-high-net-worth, and you deal with everybody, right? Is that where you see the growth, then, is on that retail level?
– Yes, sir. Absolutely. That’s exactly where it’s going to come from. Because, you know, everyone’s doing the status quo, but if the federal government changes the accreditation status, it’s going to cause people to scramble, and people in my space, right, because our job is, we raise equity. We create deals, and we raise equity from accredited investors.
But if you change that status, now… You cannot… you have to be reactive. Right? You can’t be reactive. You have to be proactive, right? The last thing you want to do is be reactive, and now everybody’s just passed you up. So we’re being proactive, even though that hasn’t happened.
But if I can create products, through the regulatory environment, that allows me to get, let’s say, a Reg A+ DST, that allows non-accredits to kind of invest in a 1031 exchange, and no one’s done it, and I’m the first one doing it, touchdown. I win.
By default. I win.
– That’s opportunism, right there.
– Yes, sir. Yes, sir. Yes, sir.
– I love it. I love your candor, your honesty. And I love the all-weather philosophy. I mean, and I think, honestly, that’s something every investor can and should take to heart. So, we’re almost out of time, but before I let you go, I want to ask, where can our audience of investors go to connect with you, or to learn more about 1031 Crowdfunding?
– They can go to www.1031crowd, like a crowd of people, not a crown, funding.com, and one of our financial representatives will get right back to you and discuss any opportunities that you need.
– Awesome. Thanks again for joining the show today, Ed.
– You’re the man. Thank you so much for having me, man. [music]
