This week’s radio guests are The Norris Group’s very own Bruce and Aaron Norris coming to us from Florida. As part of their Florida seminar, they decided to add some new chapters, and they had no idea how far down the rabbit trail they would go on one of them.
Episode Highlights
- What is the Florida real estate market like compared to Florida?
- How hard is it for California investors to switch to their Florida hats?
- What are people choosing to do with the properties they bought ten years ago?
- Which Quadrant are we in right now, and how does it compare to the other quadrants?
- How much has changed in the market since Bruce’s last report he released?
- How do opportunity zones work, and which city is in one that you might not have suspected?
- Who will be featured on this year’s I Survived Real Estate panel?
Episode Notes
They began by talking about the Florida boot camp and how they are meeting with all these people and reviewing their portfolios of things they hold. Aaron asked if a lot a lot of people are looking to exit things they purchased in 2009 and 2010. Bruce said yes and that the best scenario for anybody that comes to Florida is they have an equity position that came out of buying fairly at the right time, in California for example. If they bought low after the crash, anywhere between 2009 and 2012, they probably had a very similar base and cost. That then could have easily tripled. A lot of times when you were getting a good deal, it was also matched with a fair location. It made sense to keep, but that’s the kind of inventory that has problems during a downturn of any kind in real estate. It goes vacant more often and gets filled less easily. If it’s already done its job, I.E. gone up, then exchanging it to something that’s new and in a decent location was attractive Bruce. This was the whole brainstorm of others who would likely do the same thing.
Aaron said he was attracted to this model, especially with the rentals that he bought since this is his first full cycle. Having owned things from the 1980s and one from the 90s, it’s not just that he has some problems with areas. He has a condition issue with a lot of repairs that need to be done. On the last one he sold, the budget was $25 grand, and that quickly doubled. Thinkgs worked out, but it might not have worked out so well if he had waited. He did that a year ago, and then one rental sold for three brand new homes in Florida. That’s a really weird journey. On one property in California, it was renting for $1325 and then turned into three rentals that rented at $1325. New inventory in better areas almost doesn’t make sense.
You don’t have to be a rocket scientist to get the math of that, especially when it comes to the lack of hassle with new homes. The Leesburg example would be the longest one that Bruce has. He has owned those for about two and a half years. That morning, he received two typical texts. One said his current tenant who has run the lease that has run its course is signing up again for a new one. You don’t have an awful lot of vacancies. People sign up again, get to raise the rent a little bit, and stay stable. That’s been a nice experience.
Some of the feedback Aaron has gotten from people looking at the price point they are building at is that it’s not the 1% rule. If it rents for $1,000, they want to be buying it at $100,000 all in. They can find that in Florida, and they’re welcome to do that. It won’t be in a location Bruce would want or a tenant that he would want, and that’s and that’s the difference. Bruce ended up with a $70,000 purchase that turned into a $280,000 sale in Moreno Valley. It’s a head-scratcher on both ends. It’s not supposed to be $70 grand, but that area really doesn’t deserve a $280 price either. That’s where it was when Bruce sold them. He kept in mind what his basis was, which was $70 grand in this new home in Florida. As a matter of fact, you know to spread that out because Bruce bought a couple of them. Your mindset is that you can forget about that rule because you have the inventory you want for literally the rest of your life.
There definitely is a difference. They have had a few people that have wanted to come to Florida just to watch what they go through. They get a 200-page book with everything from endangered species to specific issues that are very local to what they’re building and why, and the strategies that they may deploy. A lot of people are coming with equity, and they’re having a very different conversation with those people versus people that are wanting to start their rental career. They say they just want to put 20% down, and you’re hesitant. You would be better off doing that then not doing it. You have interest rates that are very favorable, but you also will be absent cash flow by and large. If you have the expectation that you’re going to buy something for two hundred and it’s gonna be worth $250 in a year or two, that’s not Florida’s history.
Aaron asked Bruce if it is hard for California investors to take off their California hat in Florida. He said yes, and he has had experience with that himself. He has been in other states where he learned that lesson. Now, after a few times, he understands why he is here. Texas was a complete success for him. When he 1031 exchanged around 2005/2006, he did that with the expectation of avoiding California’s damage. He lost money on 100% of the Texas purchases that he made. But here’s the reverse of that. He bought them for $120 and netted $110 at the sale. If he had three of them, he only sold one California house for $300 grand to get those houses. Mike Cantu flipped him on this one, and it was $90 grand. All that money came from the house. When he came back with the money, he bought a commercial building that he still occupies that sold for $950-60 grand, and they bought it for $318. That was the journey. He didn’t care if he lost 10% on each of those homes.
Aaron said this protected him from damage. He asked Bruce about the home he bought, and he said it went down to $50. He was thrilled with the idea that he got out at an approximate peak, got in Texas when it didn’t blow up in price during that time frame. He rented everything fine, but his goal was just to let prices die here and take advantage of that, which was what he was able to do. Through this, Aaron has learned how much of a buy and hold investor he likes being. Flipping stresses him out. When he talks to people on the phone, he tells them he is here for the cash flow and for the long term. He is not expecting to sell these things in three years. He could sell them in six, but having new inventory compared to the older things he owns has been a much nicer journey, especially with what they’re building. If you upgrade it right, you’re doing it right going in. You build with retail in mind, not a rental. If you come into specific markets and you’re looking for the low price leader, you’ll find them, but the finishes are also included. This includes the Formica and the carpet throughout the house. It’s a very different feel from what they’re building, so it’s been really fun to see the strategy. This is Aaron’s third time out to Florida. He has owned out there for over a year, and it’s been interesting.
Ultimately, it changes your velocity of how your tenants leave or stay and the ability to get a certain amount of rent. It changes who your tenant would be. If you have a new home that actually looks like it wasn’t built as a rental with a base of everything, then you can have a good tenant stay.
In Florida, they are in the slow season right now. It’s funny seeing how light the traffic is. Some areas triple or quadruple in numbers because of tourists. Matt MacFarland and Amanda Han were two people Bruce and Aaron knew who was visiting Florida, and she was suffering from the humidity. You can always tell who are the people from California. It was cooler in March, so Aaron did not remember having to roll down the windows so he could look both ways at night. The humidity is so bad that you’re sunglasses fog up. You think it will get better, but it only gets worse. This week has been in the mid-80s, but it has been raining every day. When they were there in December and March, it was beautiful weather. It was 70 out and only a little cool, but he had swim trunks on and a T-shirt while locals were walking around with their parkas. It’s definitely different than California.
[00:09:08] They have their Bootcamp going on this week, and then the next big event is in September called Cashing In On A Boom: Creating Value In A Tight Market. People on the mailing lists will get a mailer with all these events coming up. This is a little bit different. If you’ve followed that event, you will know we’re still in Quadrant 4. There’s been a lot been going on on the market lately. Bruce released another report earlier this year, so Aaron wondered if much has changed in how he thought this would all play out. He said no and that year over year we’re actually one or two percent ahead of last year’s pace. When you get that at the end of August when those numbers come in, then typically they’re stable and then they start going down. It will be very interesting to see if we have any upside at all in the next phase. You’re talking about really low interest rates. With all the things that are in place in California, we shouldn’t be talking about a break-even market. We should be talking about a 20% upmarket, and we’re not.
Interest rates are going down again. Aaron jokingly asked Bruce if he was going to write a report called “I told you so.” Bruce said he is going to hug the interest rate chart when it gets to 2. One thing about writing, which Aaron has helped Bruce do, is you’re putting it in print. California Crash is a bold statement when you’re at a market that is booming. When you write a 2 percent mortgage rate on there, it looks like Bruce lost it. But, it’s probably going to happen.
About three years ago, Bruce told Sean O’Toole he was going to write a report. When he asked Sean the title, he asked him if he thought he was completely nuts. He came back and said he was probably right. Bruce texted him a couple of days ago, and he confirmed you are probably going to see that 2 percent. He says it’s one prediction that he wishes had not come true because it spells some bad things. What’s interesting about this is an 800 decline in the Dow. It grew, and the 30-year Fed fund reached an all-time low in history. We have pretty full employment, so the big problem is what they’re talking about on the TV. They are talking about all the different financials that the Fed is going to be forced to lower half a point in September right before I Survived Real Estate or three quarters in one shot. You’re at a market where you have to ask what do when you actually have a recession. It has more to do with what’s going on outside of the United States and outside of real estate, but it still can have a big impact.
There’s a lot of weird stuff going on right now, including the trade situation with China watching Hong Kong. You also already have negative interest rates in some countries. 25% of all the world’s currencies are in negative territory. Banks are paying you to take out loans and asking what a negative interest rate is. You’ve never heard of that. Let’s say you bought a 10-year T-bill 10 years from now, the Fed would say “OK, you bought it ten thousand dollars worth of them. Here’s $9,950 back. Congratulations.” What that says is that’s how scary of an investment environment it is in other places. What’s going on is you get a lot of foreign dollars buying our 10-year T-bill from a yield of 1.58 today because it’s safer than what they have. They have negative, so it’s a very big spread.
Quadrant 4 is a booming market, and it’s going from a flat to a boom market. Quadrant one is going from a peak to a flat while Quadrant 1 and 3 are our shorter timeframes, transition timeframes. We are closing in on the end of 4, which is good to know because there are certain kinds of inventory you don’t want to keep or you don’t even want to try to flip. That’s part of when Bruce does presentations now. If you’re going to deal with California and flips, make sure you have a two-solution property. Don’t start specing a $4 million home in Orange County starting today. That’s going to take a year and a half. It has about a $600 plus day timeframe.
That’s what the Q4 is really going to look at. It’s creating value in a tight market. We’ve also got some really interesting players, particularly the iBuyers. For the first time this month in the Norris Group’s newsletter, Aaron has been following every buy and sale transaction from the four iBuyers with more entering the market. It’s the CarMax model applied to real estate; and at least here in California thus far you’ve got Zillow Group, OpenDoor, Offer Pad, and Redfin. Those four are competing in some markets like the Inland Empire. Up in Sacramento, you only have OpenDoor, but they are spending a lot of money. It may eat up some of the deals. Originally they thought that maybe they wouldn’t be going after heavy rehabs, but Aaron doesn’t know if that’s the case now. He’s seen them do some pretty heavy rehabs, do a beautiful job on that, and then stage. Then, you have somewhere it looks like they are backing off a little bit while Zillow and OpenDoor are trying to buy up as much as they possibly can.
He doesn’t know if investors are going to let people load up on these things, although some of the investors have flipped to them. With the investors who specifically come out to Florida, they pit them against each other. They have rentals in the Inland Empire, they get four offers, and they take the highest one. They were more than happy with the price that they were given. Aaron and Bruce, being investors, get the all-cash and flexible, especially when you’re dealing with a 1031 exchange and you can have somebody flexible on the timing. That is an unusual thing. It’s a strategy, so Aaron has been talking a lot to realtors as well about what they have to do. One of the things they’re discussing in Quadrant 4 is opportunity zones. The accessory dwelling unit chapter took Aaron a long time last year to build, and he had no idea the opportunity zone chapter was going to be this intense. They’re working with an attorney with the crowdfunding lawyers and Amanda Han with Keystone CPA. They’re really digging into it.
Part of the problem is that the IRS and the Treasury haven’t finished the regulations, so they’ve still been in the listening period getting feedback. However, the opportunity zones themselves have been discovered. During his research, Aaron found out that the entirety of downtown Riverside is in an opportunity zone. He has interviewed entrepreneurs downtown that he knows are buying buildings downtown. He has interviewed people who are opening businesses downtown. He interviewed the Economic Development Agency for the city of Riverside, and there’s a real sense that they don’t know what to do with it. You can make gains from anywhere. If you are really big into stocks and you’ve always wanted to get into real estate, this is an opportunity for you to take the gains from the stock market, and the timing is good. You might be able to exit the gains and bring it into real estate in a tax-deferred manner. You still have to pay taxes, but this is a long-term play. This came out of the Trump Tax Bill in 2017, and it created this opportunity to where you can invest in an opportunity fund. As long as those funds go into designated opportunity zones, which are typically lower-income areas, and you invest in the long term, there are tax benefits if you hold it for five, seven, and ten years. In addition, it gets better as you go along.
Aaron said it’s been interesting doing all these interviews. He has even been talking to the state of California. The guy that was running the consortium of California entities involved in making it happen left in March. Aaron can’t find who replaced him on the Web site for California Opportunity Zones. Nothing’s happened. He has heard rumors that there’s not one opportunity zone project actually in the works, which he doesn’t believe, but people think that you have to create some big S.E.C. regulated fund. Literally, you have to create an entity, an LLC, and a register. It’s a one-page form with the IRS, so an individual could do it, create a multi-member LLC, and then talk to your CPA. That’s one of the reasons Aaron is working with an attorney and a CPA. These opportunity zones are in Florida where they’re building. It’s also a 1031 exchange opportunity. If you get stuck in a 1031 exchange that’s going to blow up, this might be able to save your bacon on some of that so you don’t pay boot.
Another interesting thing is you can hold back the equity and then only park the game. If you’re looking to cash out what you put in California and then take the gain by itself, you can do that and split it off. If you have a free and clear property, you can exchange the gain into the opportunity zone and take your cash home. Another thing Aaron learned that Amanda told him is that you can take new construction as long as there is not a certificate of occupancy on the new construction accounts. If you’re in a really tight time frame and you wanted to build something new but don’t have enough time to go through the journey, you can buy something as long as it is not CO’d. There’s a lot of opportunities that people don’t know, and it’s a ticking opportunity. If the government doesn’t extend it by the end of this year and your money is not placed in an Opportunity Fund, you miss the seven-year opportunity. This is one thing they will cover in great detail. They’re going to update people on accessory dwelling units and where we stand.
There was an update on August 12th. Some things have changed that are not investor-friendly, so the owner-occupancy bit hasn’t changed. That’s a real bummer. They got rid of the five-year completely, so cities will still be able to say that the units have to be owner-occupied, which is just a shame. You’re really taking all real estate investors and not wanting to do it because you would have to find somebody who would want to rent the primary and the other home. It might be more of an opportunity for flippers who are really good at design and do a good job on placement. There are some LA and Orange County investors who have good luck, but this might not work in a San Bernardino market. Bruce said it certainly takes a lot of the quantity out of the market, and that’s silly because that was the intention. They wanted to create affordable housing and rentals.
They will talk about this on September 14th. Subscribers get a heavily discounted rate, and if you’re new you pay for a subscription. They will only cover four or five chapters out of the 60 plus hours. This is just their opportunity to update and for people to ask questions live. People who attend for the first time and become a subscriber there end up having access to the 60 hours. They get the quarterly newsletters and webinars that the Norris Group does as well as other cool events. That’s coming up September 14th in San Jose. It only comes to San Jose every other year. If you’re in the Northern California market in San Jose or San Francisco, they would love to see you.
Next is I Survived Real Estate coming up September 27. Bruce is really excited about that because it’s two weeks after the next Fed Fund meeting. They’ll be able to discuss either a quarter or half or three quarter percent decline of the Fed funds rate in the middle of what’s been a pretty long boom without signs of a real recession in the U.S. So it’s really interesting, and they have very intelligent people on the panel. They have Sean O’Toole, who has been on the panel almost every year. He doesn’t always like to be on the panel and can sometimes be a little shy, but he also doesn’t like to be the bad guy. He loves certain topics, and that’s what’s great. Talk about peering into the future. It’s fantastic to be able to ask him the tech stuff that he’s he’s aware of and his son is up to also. John Burns just sent Bruce an email asking him what happens if you can borrow money on real estate at a negative rate. That is a weird thought to go home and get paid to do it. Bruce thinks it was tongue in cheek because he knew it was going to go down. Bruce thought he could refi the money, collect extra cash flow on the payment from the bank, still rent it out, and then have all that money to do something else with it. That’s the nuttiest thing. Aaron wondered what our hard money rates are going to look like if that happens.
John Burns is back on the panel this year. He’s been really supportive. He consults all over the globe on things like the National Builders and Wall Street REITs that handle the rentals, so he really has a very unique perspective on the builder side and what’s going on in the market. He is one of the speakers at the Maulden event, which is world-class. Also back is Doug Duncan, the Chief Economist of Fannie Mae. Aaron is always surprised what he gets away with on the panel and what he gets to say considering he works for the federal government. It is so nice that he’s able to say what he really thinks you know without restraint. It sure seems like he’s been one of the people that have been able to say things.
Aaron has been working on some speakers for over a year. When they’re trying to find out what this event is and finally slow down and understand what we’re doing, they’re concerned that they’re not on the panel with all other people from their industry. It’s really fun to see the interesting mix. Aaron always tells them how this group loves data and candor. If you can do both, give it to us down and dirty, and you can be funny.
What’s great about it and what has happened over time is that the panelists often are repeat people. They have learned to feel comfortable with each other, and it has gotten freer. People are saying some things that they probably wouldn’t have said four years ago. Now, they feel more comfortable discussing certain topics. They bat it around, and that feels fun to Bruce. This is a smart crowd too. Now that they have gotten to understand The Norris and how they create this, it’s been fun. An important thing to note is that they are not going to be streaming this live this year. It’s way too stressful, and it always doesn’t work so well and people have a bad experience. They will produce it on Amazon Prime, YouTube, and the radio show afterward. They going to really focus all of their time and attention for the 400 people to attend live.
One person on the panel this year who is new is blockchain technology expert Mark Lesswing. He was the longtime chief technology officer, and he’s been on the radio show before talking about blockchain. This is the technology behind cryptocurrency. Aaron is not so interested in talking about cryptocurrency as he is the blockchain technology and the real estate industries it will disrupt. Major banks are investing in this technology, and it’s a security play. When you have as many issues as we have going on in the market with security, even going to the Consumer Electronics Show, Aaron was really surprised how much they have been pushing the innovation without pushing security. That’s going to have to change in the next couple of years. There’s just no way around it. As 5G truly enters the market and driverless cars are coming in, you better have security because you can’t have governments being able to shut down driverless cars because they can log into cars. We have to figure it out. That’s why Aaron wants to introduce this topic despite it being a little advanced. Hopefully, there won’t be too many I’s cross, but he’s excited to at least introduce the conversation a few years ahead.
Also on the panel is Jim Park with the Mortgage Collaborative. He’s the CEO there. Speakers they have had in the past they really liked included David Kittle and Gary Acosta. This is the first time they have had Jim Park on the panel, and he is also getting one more. Aaron has really been trying to get the iBuyers on, but it’s been really hard to land them. For one, they’ve been really busy, and some of them are in the semi-stealth mode, which has been a little bit frustrating. They don’t want to be as open about their buy box, the model that they’re implementing, and all the markets they’re going into. It feels like the fear of missing out when everybody’s doing it because everybody else is doing it, so they feel like they have to.
When you look at the business models of places like Zillow that launched their mortgage company this year Dot Loop that was introduced at I Survived Real Estate last year, the Norris Group learned that they’ve been trying to control the closing process with Title and Escrow. If they buy your house, you’re going to enter the Zillow brand and you will never touch another real estate brand for the entire process. That’s a lot of power, and you’re not making the money on the buy. You’re making money on the services and the downstream. This is the first time that people fully realize the model that they’re doing. None of this is recession tested, and Zillow came out this month and lost a lot of money. Whether Wall Street will stick around if there’s a recession and that number keeps popping up is interesting. Bruce suggested possibly John Burns’ clients. Aaron has been a negotiating with four, and he has landed one, but he might have a scheduling conflict, so they’re waiting to see.
Finally, on October 19th they have the Cutting-Edge Financial Tactics Brunch. This is by far the most sophisticated thing they do all year. It’s not basic. If you want basic, check out the past events on Amazon Prime. If you’re an Amazon member, you can view it for free. Every year they have a 1031 Exchange expert, a CPA, an attorney, and themselves. They always hear people say to talk to your attorney or CPA. That’s why at this event they have everybody on panels so they can beat out some really advanced estate planning topics and get the honest, California specific answer to the right thing to do. Aaron really loves this event. It’s very well attended. This year they have Kaaren Hall with uDirect IRA, Dino Champagne with Asset Preservations Inc. as the 1031 exchange expert, Matt and Amanda with Keystone CPA, and Harry Barth with Barth Calderon Attorneys. It’s a really great lineup, and it will go fast and dirty. Every speaker has about 20 minutes, like a TED-style. This is an update, the changes that happen this year, and the biggest mistakes they see investors making. The second half of the day is beating out more sophisticated topics and taking live questions from the audience.
Bruce has never failed to learn a lot every time they do one of these. Sometimes it takes Aaron a few times to hear it. Sometimes your brain isn’t ready to receive it until it’s ready to receive it. The entire event does not all end up online. They will tell people to ask them personal questions, and they don’t mind if they feel comfortable doing it, but they don’t always post the more personalized questions until later. You can view the rest online if you don’t attend the live event. It’s a very low-cost event, and there’s a discount for two people. If you sign up before September 1st, it’s even more discounted. It’s $55 for two and includes brunch and valet parking. It’s basically free, but they have to know the amount of food that they need to prepare for it. And if you are a subscriber, they take you to lunch afterward. They take you to Magiano’s down the street to hang out, all on them. There is no education involved, it’s just networking. All those events are on the web site. If you have questions, you can call the office or check the web site, and they hope to see you around.
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