On Friday, September 22, the Norris Group proudly presents its 10th annual award-winning black tie event I Survived Real Estate. An incredible lineup of industry experts will join Bruce Norris to discuss perplexing industry trends, head-scratching legislation, and opportunities emerging for real estate professionals. All proceeds from the event benefit Make a Wish and St. Jude Children’s Research Hospital. This event would not be possible without the generous help of the following platinum partners: HousingWire, Coach Fullerton, Coldwell Banker Town and Country, PropertyRadar, the Apartment Owners Association, the San Diego Creative Real Estate Investors Association, InvestClub, Las Brisas Escrow, MVT Productions, Inland Empire Real Estate Investment Club, Realty411, and White House Catering. Visit www.isurvivedrealestate.com for event information and tickets.
Episode Highlights
- When did Bill join the real estate industry, and what made him want to join?
- What is the cap rate level at, and is this a surprise to him?
- What areas are Bill and his brother investing, and where do they plan to invest next?
- What is the definition of a bubble, and could there be one happening in the rental space?
- What is the common denominator between interest rates and raising rents?
- How has the realtor world changed in the last 5 years?
- Do realtors view sites like Zillow as potential partners or competitors?
Episode Notes
Bruce Norris is joined this week by William E. Brown. Bill is a realtor from Alamo, California and is the 2017 president of the National Association of Realtors. NAR is the voice of real estate and America’s largest trade organization, representing over 1 million realtors involved in all aspects of residential and commercial real estate industries. In 2013, Bill served as NAR’s vice president; and prior to that he has served in many other capacities and received many awards during the past 35 years. He is a second-generation realtor who has been active in organized real estate for more than 35 years. He is the founder of Oakland Based Investment Properties, a division of family real estate business founded in 1964 by his dad William H. Brown. Here, they focus on the sale of existing apartment buildings to both institutional and private capital investors.
Bill is not only a realtor, he is also an investor, and this is not a normal combination. He started by doing apartment brokerage; and for the last 7-10 years, most of their efforts have been investing in personal accounts. Last year he and his brother started a company along with his friend where they do syndications. Right now is a good time to be doing apartment investments since this has been a hot ticket for the last 7-8 years.
Bruce asked Bill about his dad and what he did in the business. He said his dad started out as an insurance salesman. Back in those days they had a debit where they would walk once or twice a week from door to door in a designated area to sell insurance. He wound up being the number one man in his company, and eventually he figured out that he wanted to work for himself. He figured real estate would be the best way, so he turned the debit he had into what could be called a farming area. He started farming with this and opened his own company.
Bill got the real estate bug from him and joined the industry in 1976. From 1976-1980, things are cranking for those in California real estate. Oddly enough, so were interest rates. By the time you get to the early ‘80s, you are dealing with an interest rate that is completely crazy. Bruce asked if apartment buildings were still a big piece of what they were doing. Bill said he started off doing homes, and he worked with them for about a year or two. He got a listing on an apartment building, and he liked this better because he is more or less a numbers person. He never turned back when he got involved in apartments.
It was interesting how Bruce talked about interest rates because the topic comes up a lot now, especially with their members and clients. He remembered buying his home in 1979 with a loan at 9%. He had to refinance it two years later, and his first refinance was at 19%. He remembered being happy to get an interest rate at 14%. Even if rates went up a little bit over the next couple years, they were still historically low. Bruce as a realtor he has charts, and this is one he would point out to them. It really doesn’t matter if it is 3 ¾ or 4 ¼, it is still on sale. The interest rate portion is ridiculous.
Bruce had a similar story. He wanted to be a full-time investor at 28 years old, had already paid off his home, and had refiid it at 17 ½%. This was not good. Another reason he was interested was you were in a product type in the early ‘80s that got a big boost because of some tax law changes in 1981. Afterwards, they took it back. Back in 1986, tax reform did a lot of different things, including accelerated depreciation. They had a lot of buyers who took advantage of this since it was available on the investment. The market actually started a year later in 1987, and the market went into the tank. That was what they were reminding Congress and the President about since they want to make drastic changes to mortgage interest deduction. They want to tangle with tax changes, and they are reminding them what happened with the real estate market in 1986 when drastic changes were made back then. Prices went down, but it was a nightmare.
This is why Bruce brought this up. He was in the front row during this change. You go from 1981 to 1986, and all of a sudden you end up with a crisis on your hand and an enormous amount of losses. They have a negative deficit they are trying to figure out, but one of the things that has always been near and dear to Bruce is homeownership. He got married at 17, so it was three years before he had a chance to own his own home. He was saving about $20 a week in a can for a long time, and the whole time it was a priority. One of the things that plays out later in life is your stability whether you own a home or not. This is one of the dangerous things right now. It does not seem like we have the emphasis like we used to have. When he was in his mid-20s, owning a home was his only goal. When you look at statistics, the net worth of somebody 65 and older who does not own a home is around $30 grand, maybe even less. The net worth of somebody who does own a home is ten times this.
Bill has spent most of his life involved in the decision process and helping others see real estate as one of the key factors for stability and the American household doing well. This is not only the case financially, but also in general as well. In terms of stability, they want to make their neighborhoods and cities excel. It extends past the financial benefits. Bruce has been a buyer and seller of many hundreds of homes since then, but he remembered the Saturday after it closed him mowing his own grass for the first time. This had a big impact on him since he felt like a man for the first time.
In 2006 Bruce wrote a 400-page report called “The California Crash.” In this report, he said houses had a chance of going down by 50%. When you author a document like that and live in an expensive home, it might be a rational thought to sell it since you know you will save yourself a half million dollars. One day Bruce tried to be a renter and called up someone who had a really cool house available for rent. Bruce told him he was not his typical renter and would pay him in advance. The guy then asked if he had any pets, and it was at that moment Bruce realized why he owned a house and did not care if it went down by half. He did not want anyone to ever have to ask him those questions again. As a homeowner, he is in control and gets to paint his house whatever color he wants and have a pet. He has had good financial success owning things, but it gets right down to him wanting control of doing whatever he wants to do.
Bruce asked Bill if he is surprised at the cap rate level that is still interesting buyers at this point. He said it depends where you are. Bill and his brother have been living off their cash flow for the last 7-10 years. He does not really do brokering anymore unless it is for a friend who is also a client and needs something done. To him, cash flow is the most important thing. About 7-8 years ago, they sold the Bay Area. In the last deal they did, they sold a building in Oakland for a 3 ¾ cap rate. They have been investing in Portland, Oregon. When you combine what they did here with the fact that rent control has constrained their ability to raise rents, it is frustrating. Rent control does not help the people it is intended to help. You can go through the buildings in Oakland and see the tenants driving Lexus’, Mercedes, BMWs, and paying 50-60% of what they market would be. They couldn’t raise the rents, and it could be destructive.
They have been investing in the Portland area and are about to get into Seattle. However, cap rates are much better in the Bay Area. Bruce asked Bill if he is concerned about where they are at currently. Bruce spoke in front of an Apartment Owners Association 6 months ago, and the audience is usually 300-400 people. On this day, it was 600 people lined up along the walls, standing room only. He was surprised and said they were either really excited or really concerned. One person stood up and asked if there was going to be a bubble in the apartment valuations since that is what most of them owned. He said he is not really an apartment person, but he can get to the answer quickly by asking one question. He asked how many of them would buy their own apartment building at its current cap rate. There was a roar of laughter.
Bruce said the definition of a bubble is when you have no one willing to make the next decision although it is the valuation. This is why Bruce was curious as to whether Bill thought we were in bubble territory in some areas to where it no longer makes sense. He said we are close to it. In Portland cap rates are going down to close to 5%, and they are seeing some of them slipping into the high 4s. The problem in the Bay Area is you find a lot of people paying a 3 ½ cap because they can hopefully raise the rent, then in 5 years someone will pay this for the property and make some money. This is evasively going on right now. In Portland, the real question is how long rents will keep going up and whether there will be a bubble. Will Portland beat an initiative that would have allowed rent control, or will they come back next year and be successful?
The ability to raise rents and interest rates go hand-in-hand. Bruce said what is interesting is Riverside has had a tremendous growth in rents, but the income has not matched this. Bruce asked Bill what his experience has been in which these two numbers no longer make sense for the majority of people. Do they try to become buyers or relocate to some place that is less? Bill said that unfortunately, what is happening is those renters are having to move further away from their job in order to find affordable housing. This brings up another issue of production. A lot of cities in the Bay Area have put these fees on the builders that make it almost impossible to build.
There is a scenario in Oakland where you can get up to $27,000 per unit on impact fees. If a builder can make sense of those numbers and pass it on to renters, the only people who will be able to rent the apartments on people on the upper end of the income spectrum. We have to find a way to build affordable housing so the teacher, fireman, and policemen can live in or close to the areas where they work. He knows someone who works at Stanford, and she literally commutes 3 ½ hours to work and 3 to get back home.
Bruce and Bill next touched on the realtor world and how it has changed in the last five years. He wondered if there role has changed and if it will change even more going forward. Bill said it absolutely will. Technology is playing a big part, and the agents are really up on their market due to technology. They are able to present to buyers and sellers information that is up to date and accurate. What we are seeing now is the growth of teams. The high commissions splits that brokers have to pay to retain the successful teams are constraining their profits. This is something that is very important on which to keep your eyes open. Also, the local, state, and national governments would say with the swipe of a pen that they have the ability to either help or disrupt the market. Bill encourages realtors who are involved to get involved to protect property rights and the ability to do transactions. As was mentioned earlier, we need to protect the ability of builders to build affordable housing and rentals.
The Norris Group would like to thank its gold sponsors for supporting I Survived Real Estate: First Lending Solutions, Guaranteed Rate and Nathan Chabolla, In A Day Development, Inland Valley Association of Realtors, Jennifer Buys Houses, Keller Williams Corona, Keystone CPA, LA South REIA, Michael Ryan, New Western, North San Diego Real Estate Investors, Northern California Real Estate Investors Association, Orange County Investment Club, Pacific Premiere Bank, Pasadena FIBI, Pilot Limousine, RealWealth Network, Rick and LeeAnne Rossiter, the San Jose Real Estate Investors Association, San Francisco Bay Real Estate Networking Summit, Sonoca Corporation, South Orange County Real Estate Club, Spinnaker Loans, Think Realty, uDirect IRA Services, Westin South Coast Plaza, Wilson Investment Properties, Inc. See www.isurvivedrealestate.com for event information
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