In this week's episode of Industry Focus: Financials, Jason Moser chats with Fool real estate mogul Matt Argersinger. Matt explains real estate investing as it stands for individuals today -- how crowdfunding picked up steam and opened the market up, the shifting regulatory climate, and more. Tune in to learn how you can get started in real estate investing no matter what stage of investing you're in, whether you're seasoned and accredited or just starting out with your first few stocks. Matt shares some stocks to watch, industries that are looking pretty cheap today, where in the U.S. the real estate markets are hottest, and more.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Jan. 13, 2020.
Jason Moser: It's Monday, January 13. I'm your host, Jason Moser. Joining me this week on our Financials show, we're going to talk a little real estate today, folks. We're going to get 2020 kicked off talking a little bit about real estate and what one of our real estate experts here sees on the horizon. When I say real estate expert, you know I'm talking about Matt Argersinger. Matty, thanks for being here today!
Matt Argersinger: Thanks, Jason! It's been a while.
Moser: It has been a while, but that's for good reason, right? I mean, you're out there working a little bit of a different angle here with The Motley Fool, now. No longer my stock guy partner in crime. You've been at it with millionacres.com and our premium service there, Mogul, for the better part of a year now.
Argersinger: Yeah, it's a different beat. I've always loved real estate. I've been a real estate investor for a long time. It's been a big part of how I invest. So I was thrilled and excited when we had the opportunity to launch our own real estate brand here at The Motley Fool. We're just getting it going. We have a premium service called Mogul that Jason just mentioned, which is doing way beyond our expectations in terms of member interest and excitement. All good things. Glad we're finally exploring a different asset class.
Moser: Yeah. I've been excited to be even just a little part of watching how you built this out. Joined you for a couple of the marketing campaigns along the way. We had that day we spent down at Nobu in Washington, D.C. Those are the types of investments that you're hunting out and finding. It's not conventional, probably, for most of the folks out there familiar with our Motley Fool Universe. We're generally stock heavy. But bringing this new asset class to a base of investors that was hungry for it, I think that the results don't surprise me at all, that people have been so interested and that you've been doing so well, because I've watched you hone those real estate chops over the years, and we got the right guy for the job, I think.
Argersinger: Oh, I appreciate that, Jason. Yeah, we were sat down at Nobu. For those who don't know, it's a famous Japanese restaurant. They have a nice restaurant in downtown D.C. And Nobu happened to be one of our recommendations. So we were sitting in the restaurant that a lot of our investors actually own equity in, which is an amazing thing. It really speaks to where we are with real estate investing. What we just talked about wasn't even possible five years ago. But the JOBS Act, the rise of crowdfunding, which I know we're going to talk about, it's enabled individual investors to really invest in real estate for the first time. And it's incredible. I feel like I've said this before, I feel like we're in the early- to mid-90s stage of real estate. If we go back to stocks, that was the rise of the internet, discount brokers, a lot of individual investors for the first time were able to buy and sell stocks very cheaply and easily. We're almost at that stage with real estate.
Moser: Yeah, I'm glad you said that, because that's the feeling I've gathered. You mentioned crowdsourcing. I thought a fun way to kick off the discussion today would be to take a question that I recently fielded from someone on Twitter. You have to love this handle: It's from @drunkthanos on Twitter. Asked me personally what my thoughts were on CrowdStreet. CrowdStreet is not something I've ever used, but from what I can see, it essentially is in that crowdsourcing real estate space, which is very similar to what you are doing with Mogul. So talk about the last year, and what you've been able to do in building the service. It feels like the implications of crowdsourcing in real estate have on the whole been positive.
Argersinger: Absolutely. I love the question from @drunkthanos. Crowdfunding is what we do in Mogul. It's what we're tapping into. We're big fans of CrowdStreet. We sourced a lot of our deals from CrowdStreet. They're the leader in this real estate crowdfunding space that we're talking about. What they're doing over in CrowdStreet and other portals -- there's RealCrowd, RealtyMogul, a lot of your listeners might have heard of Fundrise, which is a big brand in this space as well. These platforms are portals, are raising capital for real estate investments. So real estate developers and sponsors go to these portals, list their properties, and try to raise capital. And that's really been a game-changer. It's because of regulation changes, because of technology. And so, CrowdStreet happens to be a leader in the space that we've tapped into to enable our investors in Mogul and Millionacres to invest in a lot of very interesting deals.
And it's only getting bigger. I mean, the number of crowdfunding portals out there for real estate and private business in general is just exploding. And the universe of deals, because developers are getting more comfortable -- in the past, if a developer tried to raise money for a new development or to recapitalize an existing property, they'd tap into the institutional capital, their networks, they'd go to the country clubs and tap into the wealthy investors there. But now, they're realizing, "Wow, there's a huge individual investor base out there that is hungry to invest in real estate. And now, we can do it cheaply and effectively, efficiently."
We'll talk about a couple of deals. We talked about Nobu. We'll talk about a few more. But the opportunity, the universe of deals out there, it's only getting bigger. So it's getting more and more exciting. And you can, at your laptop, if you want, these days, you can invest in an office building in Chicago, an industrial building outside of Miami, Florida, if you'd like. The opportunities are just huge.
Moser: Well, and breaking down one of the biggest barriers to real estate investment, which is capital, right? It just traditionally has been prohibitive for most retail investors simply because it requires a lot of capital. We didn't have that buying a share of real estate, so to speak, at least it wasn't as accessible as it is today. So then, it feels like, at least, that just continues to create more demand for people looking to invest in that space. And ultimately, over time, that demand creation in theory should continue to keep those prices going in the right direction.
Argersinger: Yeah. You mentioned, in the past, you'd have to be a very wealthy investor and have to be ready to put $250,000 or $500,000 to work in a single deal. Now, the investment minimums are down to $50,000, $25,000, even $10,000 in certain cases, so it's much more accessible now. In a lot of cases, you still have to be an accredited investor. But that's changing as well. If you go to Fundrise, for example, you can find private real estate deals that are for nonaccredited investors. It's really exciting.
Moser: "For the cost of closing on a home, you too can now own a share of Nobu." [laughs]
Argersinger: That's pretty close.
Moser: Let's talk about, then, particular themes. Because we're right here, the beginning of 2020, and real estate is always a fascinating space. There's so many different ways to invest. Is there a particular theme you think is shaping up here for 2020? Do you feel like this is going to be the year for the healthcare REIT? Or do you feel like this is the year for restaurants? What themes out there are shaping up for you that you're excited about?
Argersinger: Yeah, two themes in particular that I think about in 2020 and we're going to be taking advantage of in Mogul and Millionacres is just, I think retail is an interesting space right now. We think of retail as just being this downtrodden, terrible place to have put investment dollars, especially in real estate. And that's true.
Moser: It's in the middle of a massive disruption.
Argersinger: It is. So I think we all know that in the United States in particular, we had too much retail square footage everywhere. Too many malls, too many shopping centers, so much more square footage than we really needed, given the number of consumers and dollars that were out there for spending. And so the spaces have been decimated. You've seen retail stores close. We saw the news from Pier One Imports yesterday that they're closing half their stores. And that's just going to continue.
But what it's created now is that you have what I think are tremendous values now arising in the space. To give you an example, the average cap rate, nationwide cap rate, for retail real estate -- essentially, I'm going to throw this number out. The higher the number, generally, the cheaper the asset is. Well, in the retail space today, you can find deals that have cap rates between 7% and 9%. Generally, that's pretty value. For comparison, a really quality office space or a really quality multifamily apartment building, or, say, a Starbucks in the city, you're looking at cap rates at 3%, 4%, 5%. And now, you can go to retail and find cap rates in the 7% to 9% range. So I'm starting to see value in the retail space.
I think there's going to be ways to take advantage of that space. I'll just throw out a couple ideas, ones we've recommended in Mogul so far. One is called Seritage Growth Properties (SRG 1.03%), SRG. This is formerly a Sears, Kmart company. They've spun this out. It's really focused on reshaping those spaces and making them more service-oriented retail spots, more experience-related spaces. That is one where I think you can take advantage of some of the shift we're seeing for -- if you think about the customer today, we're not spending so much on things. We're not going out there. We can get things on Amazon or wherever, Walmart. But we're going out for services, we're going out to eat, or we're going to get our hair and nails done, we're going out for experiences, like we're going to go to the movie theater or to places like Top Golf and things like that.
Moser: And that experience is far less commoditized, right? I mean, it is more unique in most cases.
Argersinger: Absolutely, absolutely. I think that area of retail is very interesting to me. The other area in retail that is also compelling to me is, there's a company called STORE Capital, which we've also recommended. Warren Buffett happens to be a big owner of STORE Capital.
Moser: Heard of him.
Argersinger: Yeah, he's done pretty well. They specialize in these single-tenant, triple-net-lease properties. Think of your like Wawa, gas service stations, or, your Home Depots of the world, where there's a single tenant, single asset, where there's a lot of demand, consistent, driven demand to those properties. So that's another idea where I think you can take advantage of.
So I like the retail space. One subretail real estate sector I'll throw out really quickly is the rise of student housing, privatized student housing. If you think about it, the universities are not really interested in being in the room-and-board business. It's costly. It's costly for students. It's expensive. It creates a lot of headaches, it distracts from what the university is trying to do, which is just be running a university. And so you're seeing this trend toward privatization of student housing, particularly with big universities. Think about University of Texas, University of California, Berkeley, University of Florida, where there's tens of thousands of students, and you're talking about tens of thousands of rooms and dormitories that need to be managed. And so, American Campus Communities (ACC 0.23%), ticker ACC, is a company, it's the leader in the private student housing space.
Moser: ACC, I mean, that's like the best ticker ever for what they're doing, right?
Argersinger: That's totally right. Great track record. Great management team. Pays a nice 4% dividend yield. But you've got a lot of growth built into that. That's a big trend that's only going to continue to get larger.
Moser: That's terrific. You know, I hadn't thought about it. I was down at Wofford, my alma mater, recently. I saw they were building some new housing on campus. It's a small school, but housing was always a bit of a challenge, just because it is. I think to your point, it's totally outside of their scope of what they're trying to do. That seems like just sort of a hassle to have to deal with. So rather than deal with it, bring in some expertise, let them take care of that problem for you. I mean, it makes a lot of sense.
Argersinger: In most cases, we're seeing the apartment rents that students are paying are much lower than what they would pay for university housing. And the university benefits from getting a master lease agreement with the private student housing owner. They don't have to worry about insuring the property, paying the taxes, and doing all the maintenance and things like that. It's all outsourced. And so they just get a nice rental check from the landlord, and then the landlord then rents to students at a much lower price. It's kind of a win-win for both clients.
Moser: For sure.
You mentioned Top Golf there. I don't know, did you see the news? Sounds like Top Golf is going to go public.
Argersinger: I did notice that.
Moser: Getting their IPO roots set there. That could be an interesting one.
Argersinger: Strike while the iron's hot, literally.
Moser: Yeah, absolutely. Good one.
All right, well, hey, listen, so, the president of the United States gets to offer up the State of the Union, right, every year, right? The State of the Union. You offer up the state of the industry, your State of the Union, in your weekly commentary in Mogul and with Millionacres. So give us your current state of the industry, Matty. What's going on?
Argersinger: Well, that's right. And with real estate, the state of the industry is, I think you always have to go with the location, right? Real estate is such a location-based asset. There are places in the United States that are doing pretty well. I would say, if you look at places like the Southeast, for example, especially what I would call secondary cities -- not to disparage cities, but, secondary cities, something like Raleigh, Charlotte, even Atlanta, Georgia, Jacksonville, Florida, for example. A lot of population. A lot of income flows going to these cities. Why? Because generally, they're trending away from larger, more expensive cities in the Northeast, and they're going places where taxes are lower, where jobs are plentiful. And so, when I think about where the big capital is, where the big investment opportunities are with real estate, I'm looking at those kind of places. Texas is a great example. Nashville, Tennessee, is another great example. It's just where people and jobs are flowing. I like to say: Real estate follows people and money. And those tend to be the places where people are going, and they're taking their incomes with them. And cities like New York, Chicago are seeing an outflow. They're seeing the opposite.
Argersinger: L.A., yeah. And affordability is a big driver of that as well. It's just so expensive, not just for people to live, but corporations to do business in these big cities. And so they're continually finding cheaper, better pastures elsewhere. So that, I think, will continue to be a theme.
On the industrial side of real estate, which has exploded in recent years, I also think that's going to continue to be a really big place of investment. If you think about distribution centers, warehouses, even small manufacturing facilities, we've got this e-commerce world we live in right now. Industrial properties that are, say, within 10 miles of major city centers, near transportation hubs, another really good place to invest.
So stepping back a little bit, overall, real estate's doing fine. In most markets, demand and supply are meeting, and there's a nice balance. Vacancy rates are relatively stable. And like you, like, I'm sure, a lot of us, it's hard right now to see any sort of major downturn on the horizon. The economy seems strong. Interest rates are low. Relatively stable. So I think real estate is a good place to be, just like I think stocks are a good place to be for the long term. We take the same approach in Mogul and Millionacres. We're long-term real estate investors. We're not flipping properties. We're not watching HGTV. We're looking for opportunities where we can put capital to work for three, four, five years, hopefully longer.
Moser: And we get a lot of HGTV in my house, Matty, not going to lie.
Argersinger: Not going to lie, it's on a lot in my house as well.
Moser: Well, you tossed out a lot of really great names that are available to investors looking for options in the public markets there. But in your service, you recommend to invest in a lot of private commercial real estate deals. Any highlights in that area that you'd like to share with our listeners today?
Argersinger: Sure. Well, we mentioned Nobu. I'll mention a couple more. Actually, we just a few weeks ago invested in an interesting opportunity right in our backyard here in Alexandria. There was an office building roughly five minutes from Fool HQ here. The developer is going to convert the office building into a multifamily apartment building. That's going to require quite a lot of money and capital, but it's going to bring much-needed more apartment units to this region. You know that Amazon HQ2 is ramping up. They're building some major buildings over in Crystal City, which is just a short drive from here. That's going to really create a lot of demand in the area. Of course, here in Northern Virginia, there's also a big military and federal government-centered tenant base who are always in need of apartments. So that's an interesting opportunity. It's going to hopefully pay us about a 15% annual return. It also happens to be in an opportunity zone. So you can take advantage of some really nice tax benefits as well by investing in that property.
And then one more that we just closed on yesterday. For any listeners who live in Florida or may have visited Jacksonville, the Wells Fargo Center, which is the iconic building in that city skyline, that just came for sale. so we invested in that as well. The developer is going to redevelop some of the common spaces, lease up some of the vacant spots, hopefully re-sign Wells Fargo, whose lease is coming up in a few years. They're one of the biggest tenants in the building. Really excited about that opportunity to own a landmark building in an amazing location, right in downtown Jacksonville, right on the St. Johns River there. Jacksonville, many listeners probably have never been there or thought of Jacksonville as an interesting place, but it's actually one of the fastest-growing cities in the country. The population has grown 15% over the last decade, and it's a place where a lot of businesses are moving as well. Really excited about that opportunity as well.
Again, all these opportunities I'm pointing out just weren't even possible for individual investors as little as five years ago. And now they're possible, and we're recommending them in Mogul.
Moser: Good stuff. OK, listen, real estate, I think, is one of those areas of investment that probably scares a lot of people away for a number of reasons. We've talked about the prohibitive nature on the capital side, right? I mean, if you've been through the closing of a home purchase or even inquired about a loan for a home, then you see your fair share of esoteric language, and you're trying to make sense of what means what. It's just not the easiest thing to navigate. And what we've stood for here at The Motley Fool for a long time is trying to make this un-understandable world of investing understandable, right, demystifying it, whether it's the stock market or real estate.
So it does seem to me that there's this divide between understanding private versus commercial real estate investment. I've worked in both a little bit, and I've seen the differences there. And obviously, I mean, you're focusing very much on the commercial side. But I mean, do you feel like there are clear benefits in investing in one versus the other? Or do you feel like there's a more diversified approach that makes sense for investors?
Argersinger: Well, I like all real estate. And so whether it is your private home, or whether it's a private commercial property, or whether you're investing in a REIT, they're all so different. So my focus has been on the private commercial side. And what I'm looking at here is I'm tending to look at single-asset, single-tenant, or multitenant properties. And so when you do that, you're going away from the world of REITs. Your average REIT can have dozens, if not hundreds of properties in its portfolio. And so then it becomes much more an analysis of the management team, their track record, the overall asset class they're in.
With my work, what I'm looking at when I'm looking at a single property is, OK, what does the tenant roll look like? How strong is the tenant base? What's the weighted average lease term of the tenants in the building? Generally, the longer, the better, right? You want good, paying tenants there for as long as possible, and hopefully they sign new leases, they extend the leases. I'm looking at capitalization rate, cap rate, which I mentioned earlier, which is a quick way to gauge how pricey the property is. I'm looking at net operating income. Just like we look at net income or operating profits at a public corporation, net operating income is simply the rent revenue or any kind of revenue the property takes in, takes out all the expenses to maintain the property, and that's generally your NOI.
So it's similar to equity analysis in a lot of ways. But there are some different metrics that you tend to look at. And you have to really dig deep into a property's history, tenant quality, and developer track record, things like that, to make decisions. For the past decade, it's been a learning process for me. But it's something that's going to become a lot more obtainable as we explore the asset class more, individual investors get into it. And I'm excited. We do a lot of teaching. If you go to millionacres.com, we've got plenty of articles there that go into some of the basics of commercial real estate investing. I encourage anyone listening who wants to learn more, go to millionacres.com. And then, of course, if you'd like, we have our Mogul service, which is our premium service, where we have a whole Real Estate 101 education section that we built out that goes in and teaches you how to analyze commercial real estate. It's pretty exciting stuff. So again, like you said, The Fool is really about demystifying these concepts and educating. We love giving great investment advice, throwing out ideas, but ultimately we're trying to teach people how to be better investors. That's exactly what we're trying to do with real estate over at Millionacres.
Moser: You mentioned something that prompted this question in my mind. I mean, to be clear, you and I both have histories as landlords. We've done that landlord -- you may still be doing it, I'm not sure.
Argersinger: I am still doing it.
Moser: OK. I did it for seven or eight years and I thought, "You know what? That worked out well, but I think I've washed my hands of it." I'm not sure I want to do it again. But who knows? I mean, I'm still a relatively young guy. So maybe something else comes up. But one thing I found, and I'm sure you would agree, is tenant quality is so important. I mean, it's one thing to try to price your real estate right and get your properties filled. But if you're getting your property filled with crappy tenants, that's like short-term investing. That's like trading, right? You're sacrificing the potential long-term gain to fill this short-term void. Bad tenants can be really problematic down the line. I mean, I wonder, do you have any way, I mean, maybe not personally, but within the service or the way you look at some of these real estate deals that you're doing, do you have access, at least, to be able to try to assess tenant quality at all? Or is that something you've got to go with what they're telling you?
Argersinger: Well, it gets a little tricky if you're looking at smaller properties where it is a very obscure tenant. Maybe it's a small business. It gets easier if you're looking at, say, an apartment building, where you know the history of the apartment. Say it's got 100 apartment units in it, and it's got an 85% occupancy rate. And you know that, obviously, some tenants are not going to be great, but generally the building might have a good track record, it's easier.
And then you're hoping, if you're looking at office buildings, maybe large office buildings, you can see some tenants, like Wells Fargo, like I mentioned -- well, obviously, it's easy to know that Wells Fargo is a credit-quality tenant. They're probably going to pay their rent, on time. So that gets easier. But there are data resources out there that we use. REIS is one. JLL. They provide really good, in-depth tenant information that you can dig into and look at their credit history, rental history.
Like anything, though, investments are leaps of faith. If the economy goes bad, or if a particular tenant runs into trouble, and they stop paying their rent, well, then you've got a problem. Then you've got vacant space, and you've got to do your best to re-lease that space as soon as you can, to hopefully market-rate rents. That can be difficult. So there are challenges. But you absolutely nailed it. Tenant quality, whether you're your own landlord like we've been or you're looking at a large office building, it's critical work.
Moser: Yeah, yeah, absolutely. All right, well, listen, I don't want to take up too much of your time here, but we are an investing show, we're stock guys. You're still a stock guy, Matt.
Argersinger: In my heart.
Moser: Let's give our listeners something that you are watching in 2020, some ideas out there that you're going to be giving a close eye, a little extra attention, you think maybe have some potential?
Argersinger: Well, I mentioned the retail space. I threw out a few names there. There's one that we just recommended in Mogul. It's called EPR Properties (EPR 1.29%). Pretty sure no one's ever looked at this company. The ticker is EPR. It's a REIT that -- speaking of Top Golf, it's focused on experiential properties, so properties that are providing great experiences. Think about Top Golf or ski resorts or things like that. So a place where people go to have experiences. And this one has been well managed for a long time. Pays over a 6% dividend yield right now. And that just gives you an idea of how beaten up the real estate space can be. Because you don't really find dividend yields like that. But in this case, that dividend is fully covered by the company's cash flows. This is one that Matt Frankel, who I know is a frequent guy on your show --
Moser: My partner in crime here.
Argersinger: There you go. He's been following this company. He's the one who recommended it for us. And, by the way, he is my partner in crime when it comes to REITs in Millionacres and Mogul. Love Matt, he's really smart, and he just brought this idea for us. I love it. I invest in all our own recommendations for my own personal portfolio, so I'm going to be buying this one as well. But I think this one and American Campus Communities, ACC that I mentioned earlier --
Moser: Yeah, that's a good one.
Argersinger: If you're looking in the public space, those are probably two of my favorite REITs right now.
Moser: Eating your own cooking, Matty, I like that. That's a Foolish fundamental, I say.
Argersinger: Of course.
Moser: All right, folks, well, if you have any interest in learning more about the real estate space, make sure to check out millionacres.com. You'll see a plethora of great content over there from our guy Matt Frankel, from Matty Argersinger, and from a number of other contributors over there. Matt, hey, listen, thanks for coming in this week. Don't be a stranger. All the best to you.
Argersinger: Thanks, Jason! You bet.
Moser: All right. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Today's show was produced by Austin Morgan. For Matt Argersinger, I'm Jason Moser. Thanks for listening, and we'll see you next week.