JF1348: Starting A REIT & Helping Others Invest In Manhattan with Jesse Stein and Janine Yorio

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Jesse and Janine started a REIT in NYC to help everyone be able to invest in real estate, even as little as $100. Unlike most opportunities for investors, Compound allows everyone to invest in Manhattan real estate, not just accredited investors. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today we’ve got Jessie Stein and Janine Yorio. How are you two doing?

Janine Yorio: We’re doing really well, Joe.

Jessie Stein: Hey Joe, how are you?

Joe Fairless: I’m doing well, and nice to have you two on the show. Well, their company has just launched a REIT focused solely on Manhattan residential properties. I think that’s pretty darn interesting enough for us to talk about, and we’ll spend the majority of our time doing some Q&A about that. They’re based in New York City, New York, and their website is CompoundNY.com. With that being said, do you two wanna give the Best Ever listeners a little bit more about your background and your current focus?

Jessie Stein: Sure. I’ll start; this is Jessie. I started my career as an equities trader in 2005, and I decided I wanted to get into real estate. Having made the transition from pushing a button and investing millions of dollars at a time to real estate, I started to realize how difficult it was to get a transaction process, and how difficult it was for the average person to invest in real estate.

Having grown up in New York and having worked in New York for a couple decades, I always had a vision of making investing in New York City something that is easy to do and that everyone could do. So what we’ve done at Compound is form New York residential so that everyone can invest in Manhattan residential real estate for as little as $100.

Janine Yorio: Joe, my background is similar, but not entirely the same. I come out of the real estate private equity investment world. I worked for a firm called North Star Capital for about eight years, where I managed a portfolio of about 200 million dollars in real estate investments, and I’ve also worked on different kinds of real estate investments at all points in the capital structure: commercial, hospitality and lots and lots of multifamily. Then I was the head of acquisitions for a hotel company that also did a lot of condominium development in New York, and Los Angeles as well.

So we built Compound specifically because we saw a [unintelligible [00:03:08].00] at the intersection of real estate investment and millennial investment trends, and we saw that fund flows into ETFs had increased dramatically over the last several years; in fact, they were up 24% last year alone… But there aren’t really great real estate-backed ETFs where a person who has a thesis can invest systematically. And given that we’re based in New York City and we’re both most familiar with the New York City residential market, we felt that was an optimal entry point into this sector, so we created a [unintelligible [00:03:37].09] investment vehicle specifically designed so that people can invest in Manhattan housing, which is historically one of the best-performing real estate asset classes and geographies, but also one of the most inaccessible. So unless you have several hundred thousand dollars or even a million dollars to buy an apartment, it’s very difficult to gain exposure to the Manhattan residential market, and that’s why we built Compound.

Joe Fairless: What do you do and what does Jessie do?

Janine Yorio: My title specifically is CEO, so I run the company and I’m primarily involved with setting the strategic direction for the company and leading our fundraising activities. At our core, we’re an asset management company, so we’re always capital-raising from consumers, institutions, and then at the operating company level we’re funded by venture capital firms. So a lot of my time is spent doing investor relations on all fronts.

Jessie Stein: I’m involved more in the real estate investments and operations aspects of the business, analyzing different neighborhoods that we’re looking to invest in, individual apartments, apartment buildings, and really designing an investment strategy.

Joe Fairless: Jessie, with identifying different neighborhoods, are we talking about all the burrows of New York City, or are we just talking about Manhattan?

Jessie Stein: We’re just limited to Manhattan.

Joe Fairless: Just limited to Manhattan. Here’s a dumb statement, and then please take me behind the woodshed for making this statement – it doesn’t matter where you pick in Manhattan, the price is gonna go up, so why do you bother putting a lot of research into which neighborhood to invest in?

Jessie Stein: I don’t think it’s necessarily wrong, in one respect, but our real thesis is about buying at value… So yes, there’s definitely correlations between different neighborhoods as far as which direction prices are moving, but we’re also focused on micro-level catalysts at the neighborhood level that might add value. If you go back 20 years ago, you probably would have been better off investing in the Lower East Side and Soho, as opposed to the Upper East Side or the Upper West Side. Now, prices have gone up in every neighborhood, but the returns have varied.

We start at a very natural level – we go down to the neighborhood level and then we go building by building and unit by unit to try and identify both trends and individual attributes that we think would be catalysts for greater appreciation.

Joe Fairless: Some of those micro-level catalysts would be what?

Jessie Stein: At the neighborhood level it could be a public-backed development project. We were just looking today at a neighborhood in the Lower East Side called Corlears Hook, which is a small neighborhood that’s not very well known, and the city is building a new ferry terminal there. So it’s a neighborhood that doesn’t have great public transportation right now, but the new ferry system will allow people in that neighborhood to get to Wall Street in under 10 minutes, mid-town in about 15 minutes, so it’s a real game-changer for the neighborhood.

At the building level it’s every attribute that any real estate investor would look at, and at the end of the day it’s gonna come down to supply and demand, it’s gonna come down to buying units and properties at below replacement cost and figuring out where the added value is going to be.

Joe Fairless: Are you all buying buildings, or individual units?

Jessie Stein: We’re buying both. In New York there’s a limited supply of single-family homes. There are townhomes, but those are typically five million dollar plus…. But the single-family home market in New York City is condominiums, so we’re focused on buying individual condominium units; we’ll also look at townhomes, we’ll look at small apartment buildings, new development… So really, anything that qualifies as residential is something that we’re interested in.

Then from an operational standpoint, our management team, our background is not just in general real estate, but also in operating individual apartments and apartment buildings in more creative type ways – for example co-living and short-term rentals… So we have some creative strategies in order to increase revenues in some cases, or operate units in non-traditional means.

Joe Fairless: And that was my follow-up question – so ways to add value, ways that you all add value… You mentioned co-living and short-term rentals; what are some other ways.

Janine Yorio: Number one, we look to create value when we buy, so we’re looking to find unique buying opportunities, either because they’re off-market, they have some complexity to them that an individual investor might not be able to underwrite or to endure; we are also going to tap our personal networks, which are quite deep, to find transactions that are not being widely marketed.

Then on the operations side we are looking to be very strategic about our use of leverage, which will impact our returns, and also to partner with strategic marketing agencies, for example Compass, who’s doing our marketing and leasing, to help us better rent out the units and to keep them occupied, which is a big driver of return as well.

Joe Fairless: Okay. Specifically within maybe the complex transaction – can you give us a complex transaction that you all did that others said “No, thank you” to?

Janine Yorio: First of all, we should clarify – we haven’t actually made investments yet; we are at the point where we are exploring investment opportunities and actively negotiating.

For example, there is an apartment unit in a relatively new condominium development that had historically been operated as a swing space in the building, and the building manager was using it as a fitness center. So there is a lease in place that terminates in the relatively near term, but that’s the kind of thing that an end user wouldn’t be able to deal with, because they might need a place to live. So since we are opportunistic and we can buy things that have some complexity to them, we’re able to price that and to handle the fact that it may not become available for 6-12 months.

Joe Fairless: Just to educate myself and the Best Ever listeners on the timeline for creating a REIT, and then when you buy the first property – can you just tell us all the things high-level that you’ve been through, and just like the high-level milestones that got you to this point?

Jessie Stein: Yes, sure. So we spent most of the last year going through a very extensive SEC qualification process. In order to offer REIT shares to the general public and to use general marketing and solicitation efforts, you do need to register with the SEC. We also were approved by FINRA for this same offering… So we’re just undergoing right now our capital raise, and this first round of capital is up to 50 million dollars.

The way that the offering works is that it’s an ongoing rolling offering. So as we raise capital, we can use that to begin to acquire assets. So we don’t have to raise 50 million and then go out to buy apartments; we can begin to acquire portfolio as we raise capital.

Joe Fairless: If you’re backed by venture capitalists, aren’t they the ones bringing the capital? Or are they backing just the infrastructure and your salaries?

Janine Yorio: They are backing the technology company and the operating company, but they’re not investors in the REIT.

Joe Fairless: Got it, got it. So they helped you get to this point for a piece of the action, and now the company needs to then go bring in investors for this particular business model?

Janine Yorio: Correct.

Jessie Stein: Right. Compound is the management company of each of the REITs, and the Manhattan REIT is really our first of what we believe are going to be many offerings, all based on the [unintelligible [00:11:15].06] investment strategy that’s specific to a major market in an asset class. So the Manhattan product might be followed by a Miami product, and a San Francisco product… The various options are endless at that point, but right now we’re focused on getting the Manhattan product off the ground.

Joe Fairless: Okay, cool. Congrats on getting it to this point, that’s incredible!

Jessie Stein: Thank you.

Joe Fairless: I’d love to touch on a little bit more the ways that you’ll be adding value, because it’s almost an oxymoron – New York City real estate value-add investors… [laughs] So you mentioned co-living, short-term rentals, off-market deals, deals that have complexity to them, and Janine mentioned that example. Can you give maybe a couple additional specific examples of how you add value?

Jessie Stein: I think we’re not really positioning the REIT or us as a management team as value-add.

Joe Fairless: Okay. I thought I heard that earlier, my bad.

Jessie Stein: No, we will try and add value whenever appropriate and for each unit individually, but what we’re really providing here is exposure to Manhattan real estate, which has been basically inaccessible for the majority of investors ever.

If you think about the returns, you’re starting with the base returns of the market – the beta – and then our management team will add some alpha component to that, whether it’s through a specific value-add strategy, or just through our ability to source investments… Whereas Janine noted earlier, some of the added value might be on the acquisition side, where we can acquire an asset by 5%, 10%, 15% below what we think the market value is, although there may need not be a specific strategy during our hold period to add value, we’ve in effect added value by buying well.

It’s really the exposure to Manhattan… The same way when you’re looking to buy an ETF – you’re making that investment to gain exposure to a specific investment strategy. That’s really what we’re selling. An added bonus for that is that our management team is capable of making intelligent investments and operating each of these properties the way that it needs to be managed, but it’s that beta level exposure that is the big play here.

Joe Fairless: At what amount of that 50 million will then be enough for you to then go buy your first deal?

Jessie Stein: We can start buying properties at a million dollars.

Joe Fairless: And with the approach that you all are taking, is it a certain period of time that you think each project will last? Or they just get grouped into the fund and the investor dollars make a certain amount?

Jessie Stein: Right. It’s structured as a perpetual vehicle, so unlike a private equity fund where we’re raising capital now and we’re gonna hold for five or seven years and then sell, we’re gonna give investors the ability to decide when they exit. Once we raise the 50 million dollars of this initial tranche, our intent is to list on the New York Stock Exchange, on NASDAQ, so that your investment in this REIT, the New York residential, will be liquid. And you can determine when you wanna make that exit. That may be on your personal circumstances, whether you need money or not, or if you think the market is overheated.

So we’re building a portfolio for the long-term. We’re buy and hold investors, we’re gonna continue to grow the portfolio, and really give the liquidity and the ability to sell (that decision-making) to the individual investor.

Joe Fairless: And Janine, why the decision to do a REIT versus just have one-off private offerings?

Jessie Stein: I think even though we have the specific investment strategy of Manhattan, and of course, that’s not really geographically diversified, it is important to diversify from the asset level, because you never know what’s gonna happen on a single building level, and there’s a lot of economies of scale that we can create and build in a portfolio of Manhattan residential properties, both on the investment side, on the operational side… And then of course, there are the tax benefits of operating as a REIT.

We’re small right now and we’re just beginning to raise capital, but we envision each of these REITs that we bring to market being billion dollar REITs that trade on the New York Stock Exchange one day.

Joe Fairless: The scalability certainly sounds like it’s there, and then some, with the REIT versus one-off private offerings, right?

Jessie Stein: Yeah, exactly.

Joe Fairless: As of today, what’s been your biggest challenge?

Jessie Stein: One of the challenges that we have in marketing this is people who are unfamiliar with the Manhattan market feel like it’s in this boom stage, and that it’s expensive and that we’re buying at the top. The reality is that the market has been very weak for the past three years, whereas prices have come down more so in this corrective cycle than even during the financial crisis.

So we didn’t necessarily try and time the market here when creating this product, but we got very lucky, because the market is weak; it’s a very strong buyer’s market, there’s a lot of opportunity out there for us… But there’s still this perception, because Manhattan is relatively expensive, that it’s this boom market that’s always flying to the sky and you’re always buying at the top of the cycle. It’s really just in educating the investors who aren’t that familiar with the Manhattan market what the current environment is.

Joe Fairless: Based on your team’s experience, what is your best real estate investing advice ever?

Janine Yorio: Never sell. [laughter] No, buy and hold Manhattan for the long-term. That’s my personal experience… The apartment I bought when I was 24 – I spent $229,000, and I sold it a year later for $386,000. I just saw it hit the market again this year for 1.1 million dollars, so I wish I had never sold it.

I know that I happened to marry into a family that is from the New York City area, and all of the real estate investments they’ve made almost accidentally have gone on to become very, very valuable and huge stores of wealth, without actually doing anything to them. So that’s one piece of advice – if you can get a piece of Manhattan, hold it and don’t sell it.

Joe Fairless: Within your business model, do you sell properties? Or do you just hold them in perpetuity?

Jessie Stein: We don’t have to hold them, but building a large portfolio is right now the strategy. We’re certainly allowed to sell individual properties, but we don’t have a defined hold period for any investments that we make.

Joe Fairless: Would you 1031 if you do sell?

Jessie Stein: We can, sure.

Joe Fairless: Would that be the approach, that way you defer the taxes? Or is there a different approach, since it’s a REIT?

Jessie Stein: No, in a lot of cases we may decide to do a 1031, and one of the benefits of being a REIT is that we can acquire properties through an UPREIT contribution, which is an alternative to a 1031. There’s a lot of people in Manhattan that own investment properties, whether it’s an individual condominium unit or an apartment building, and what we do is we can offer them an alternative to a 1031 where they can contribute their asset in exchange for operating partnership units, which are basically shares, realize the same tax benefits as a 1031, diversify their holdings, and convert their interest into a property, into a liquid security.

Operating as a REIT we’re very tax-focused, so on an asset-by-asset level we have a lot of flexibility and we’ll do what’s best in order to either defer or eliminate taxes.

Joe Fairless: We’re gonna do a lightning round. Are you two ready for the Best Ever Lightning Round?

Jessie Stein: Let’s do it!

Joe Fairless: Alright. First, a quick word from our Best Ever partners.

Break: [[00:19:10].06] to [[00:19:57].17]

Joe Fairless: Okay, best ever book you’ve read?

Janine Yorio: Best ever book I’ve read?

Joe Fairless: Yup.

Jessie Stein: The Fountainhead.

Janine Yorio: Oh… If we’re going cheesy, Gone With the Wind.

Joe Fairless: [laughs] Best ever deal you’ve done?

Janine Yorio: I was involved in buying the Hard Rock Hotel and Casino in Las Vegas, and I lined up the financing for that, and that was pretty damn cool.

Joe Fairless: That’s a lot of fun.

Jessie Stein: I did a bulk condo deal in Miami just before the last cycle, which turned out to be a great deal.

Joe Fairless: Yeah, Hard Rock still wins on that. She beat you. [laughs] What’s a mistake you have made on a transaction?

Janine Yorio: Legal fees. I am so cautious about using lawyers, and waiting to bring them in until you really need them. Getting the business people to negotiate the deal as much as possible before you hand it off to lawyers, especially in New York City, where lawyers charge a small fortune. You can eat up a lot of your return on the deal before you even close with legal fees if you’re not really careful. That’s something I see young people make when they first start out. It’s a mistake you make one time, and you never make it again.

Joe Fairless: Best ever way you like to give back?

Janine Yorio: I like to mentor young people in my industry. I think there’s nothing more gratifying than seeing people’s professional careers grow and developing a really rich relationship with the people who have come under your wings.

Joe Fairless: And how can the Best Ever listeners get in touch or learn more about your company?

Janine Yorio: They should visit our website at CompoundNY.com, or follow us on Twitter at @GetCompound.

Joe Fairless: Awesome. Well, I just loved interviewing you two. You’re playing at a very high level, a level that a lot of people aspire to, and I’m grateful for our conversation… Learning how the process (or some of the process) for how to create a REIT, and some of the things you’ve been through – at least the timeframe; we didn’t really go through the process, but at least the timeframe… And then how you’re structuring your business model, how you are focusing on Manhattan real estate. Yes, there will be unique ways that you acquire, but really it’s the access to the real estate that your REIT is focused on.

Thank you for being on the show. I hope you two have a Best Ever day, and we’ll talk to you soon.

Janine Yorio: Thanks, Joe.

Jessie Stein: Thank you, Joe.

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