102 Active Wealth, Passive Income Show 1 PM ET
Kris Benson, Chief Investment Officer. Reliant Investments. LLC
Kris Benson, operates the Reliant Saratoga Springs, New York office, and has primary responsibility for managing Reliant Investments, a subsidiary of Reliant Real Estate Management. Mr. Benson raises and manages the equity contributions for the Reliant portfolio’s expansion.
Mr. Benson, an executive sales professional brings a wealth of knowledge from his ownership and experience in the commercial multi-family arena. Prior to joining Reliant he worked for Intuitive Surgical, developer of the daVinci surgical robot. Mr. Benson graduated from the State University of Binghamton.
Bill Fairman (00:01):
Hello everyone and welcome to Passive Income Active Wealth show. I am Bill Fairman and this is Jonathan Davis. Wendy has taken the day off as half the company recovers from COVID. Our website and we are an active private lender, hard money lender loans as well. Our website is CarolinaHardMoney.com. If you’re a borrower click on the apply now tab, if you are an investor looking for a passive returns, click on the investor tab. Don’t forget to like share subscribe.
Jonathan Davis (00:51):
Hit the bell!
Bill Fairman (00:54):
Hit the bell! All that great stuff. Depending on the platform that you’re viewing us from, you can also ask us questions. We have a chat either on the right side or underneath the screen so as we get these questions in, we will answer them as we can. We have a great guest today and we’ll get into that in a little bit. Jonathan,
Jonathan Davis (01:21):
Bill Fairman (01:22):
I’m going to have, Oh, you went away.
Jonathan Davis (01:26):
Bill Fairman (01:26):
Don’t take him away. Jonathan is broadcasting from his quality home studio with a left side and right side brain just over his shoulder.
Jonathan Davis (01:40):
Yeah, right there. You can’t really see it. But everyone that walks in here, they look at it and they always laugh because they’re like, I wonder what side of the brain you are cause one of them just says, it’s like all these charts, graphs, things like that and then the other side is just, you know, splattered paint like, Hmm. I wonder which one you are.
Bill Fairman (02:01):
Well, I look at it and I think it’s a worst track desk,
Jonathan Davis (02:03):
Bill Fairman (02:03):
I can’t see it that far back, I guess
Jonathan Davis (02:11):
When you get over the age of 55, everything is a worst track desk I think.
Bill Fairman (02:18):
Thank you so much. Folks, we have a wonderful guest. Kris Benson, he is with Reliant Management and they are in the self storage business and you guys know how much we love self storage. It is recession resistant. I always like to say that. As Americans, we are more than willing to spend a hundred dollars a month for the next five years for a $500 worth of crap and your cramp is really valuable, you’ll want it heated and air conditioned as well. I can joke about that because, you know, I have really valuable $500 worth of stuff in a storage facility, myself. Kris, thank you so much for joining us.
Kris Benson (03:23):
My pleasure gentlemen. Good morning.
Bill Fairman (03:26):
So you’re in the Atlanta area, Roswell, Georgia right now, correct?
Kris Benson (03:33):
You got it. Yeah, just North of Atlanta about 20 miles.
Bill Fairman (03:37):
And give us a little bit of background on how you got into this industry in the first place.
Kris Benson (03:46):
Yeah, so my story is a little bit unique in that. My path was varied. I came from a whole bunch of different backgrounds. So my last real job was in corporate sales. I worked for a company called Intuitive Surgical. Your listeners may know them because of the DaVinci robot. That’s a pretty incredible piece of technology. And when I was about 30, I made the decision that I needed to do something different. Career-wise, was doing great making money, all the traditional measurements of success I was hitting, but I was miserable. My work-life balance was rough. So real estate was sort of the path for me to create that passive income and I started like many investors do we started with, you know, some multi-site small multi-family in the county that we lived in and we grew that portfolio until it became unmanageable and I realized very quickly, I hated that as well. We had duplexes and I think we ended up with 22 units and that was a nightmare. It wasn’t necessarily the managing of the properties. It was more of the people. We had like B minus type stuff and it was just terrible. It was soul sucking is the best way to describe it. So at that point I had heard, I wish I could remember if I heard it on a podcast or reddit but basically I heard big deals and small deals are the same amount of work you make. You just make less money on small deals and so that got me looking at larger multifamily. I mean, I understood that I could create passive income from it and we ended up selling the portfolio and long, long story short, we got into a ground-up development for 64 unit apartment community in a town not too far from where I grew up and that’s really where the light bulbs went off for me as far as starting to understand how commercial real estate works. And so we invested in a number of multi-family projects as passive investors along the way. About five years ago, I started looking at asset classes just because the cap rates, multifamily continued to compress and even now continue to compress. It’s pretty crazy with some of these projects are trading at, it’s pretty crazy what’s trading in self storage too but at the time there was a spread between what self storage was trading at and more multifamily was and so, I started looking into self storage first as an investor and that’s how I found reliant, I was an investor first and we just built a relationship, the managing partner, Todd Allen, and I just built a relationship and at one point he needed help on the investment side and scaling their platform and so that’s what we did. I joined forces with them about three years ago as an employee and we’ve been growing ever since and, you know, I would say the reasons we went to self-storage, there’s really three pillars that I kind of stand on with storage and you know, you hit the nail right on the head with one of them is, you know, the recession resiliency is pretty incredible through the great recession 2007, 8, 9, stores perform very well lost less than 4% of its value. If you look at the REIT. Performance, and it’s happening again with COVID, we’re certainly not out of this. We are recording this the beginning of November and, you know, I think we just broke a hundred thousand COVID cases in the US but so far so good in self storage. You know, people are still paying their rents and, you know, the demand for storage is still there. So it’s a nice procession, resilient asset class, and historically has performed very well. If you look at the last 25 years of data on the REIT side of things, storage has done just under 17% a year. So when you have that kind of historical performance and that resilience that’s really what drew me to the asset class.
Jonathan Davis (07:47):
Yeah. So often we hear, Oh. I’m sorry, Bill. So often we hear people talking about, you know, toilets and plumbing and I mean, it seems like no one starts in the self storage, they all have to feel the pain of the single family multifamily life and they’re like, man, you know, no plumbing, no electrical, oh this is going to be great. So, you know, you have a definitely unique story, but, yeah, definitely, I think a lot of people come from that space. You got to feel the pain before you get to the, the easier stuff, I guess. Is I would say easier, but definitely better.
Kris Benson (08:27):
I think it, it depends Jonathan right on the scale of which you’re operating, right? You’re replacing one thing for another. So you certainly there’s no plumbing, right? You know, we’re not going in and replacing hot water tanks in the middle of the night but storage is interesting in that it’s an operational business, kind of wrapped with a real estate play, right? So there’s a lot of churn in tenants, at least at the scale we’re operating, right? So we have 50 properties across the eight states, you know, it’s 30,000 units ish and what’s happening is tenants have 30 day lease, right? So you’re turning a big portion of your tenant base every month and so there’s a business attached to that, right? You know, active marketing, the people behind the desk are moving in, moving out there’s leases, going in there’s tenant insurance, there’s U haul truck rentals. So there’s all of that piece, which replaces what you’re describing, which is, you know, Hey, I’m going to clog a toilet at midnight but it’s a different business in that there’s that operational piece that people don’t really think about. Now, there are some people who’ve automated, all of that, right? On the smaller facilities where, you know, they’ve done some kiosks and there’s literally no employees and they just do like a call center but that’s not the model that we’re operating on. So you’re right, there’s definitely some, some value to how self storage is set up. But still a lot of moving parts.
Jonathan Davis (09:52):
Bill Fairman (09:54):
I was going to say that is the beauty of self storage. It’s a business, it’s not just a real estate and SBA and banks consider it a business. They will lend a higher loan to value on those types of properties, because it is a business. SBA, I mean, you can get 95% financing on a self storage if you’re using SBA financing. Now, is it a little bit harder to take, to get that type financing a little bit onerous, but that works out pretty well in the long run. I also liked the space because of the different revenue streams that you can create within that business as well, that you’re not going to get in multi-family for the most part.
Kris Benson (10:51):
Yeah. You’re spot on. There’s those ancillary income items that sometimes our value add play in when we go into a new facility as well, right? I mentioned, you know, you haul truck rental, tenant insurance, you know, in some of our proformas 10% or so of the income is coming from those ancillary income items so if an operator is not doing them right now, there’s upside for us, right? And many times if we’re going into kind of a mom and pop operator take facility with a value add play, we usually have that opportunity to add those revenue streams.
Bill Fairman (11:28):
Are you purchasing and then managing these, or are you partnering with existing businesses as well?
Kris Benson (11:37):
No, we’re vertically integrated. So we’re, we’re buying and managing, you know, Reliance, as I mentioned, we have 50 properties. We probably have about 140 employees. The majority of them are out running the sites. So it’s, you know, there are third party management companies that you can absolutely hire to run your facility, just like you could for, you know, a duplex that you owned in your town. Some of the REITs, the real estate investment trust, like, extra space and cube smart, they have third party platforms as well. So, you know, if you guys went out and developed a self storage property from the ground up, and you guys were developers and said, Hey, we’ll build this thing out, but we don’t want to run it. You can bring in a group like an extra acute come in and run it and there’s some private ones as well, but at Reliant, we’re managing what we’re buying.
Bill Fairman (12:28):
Jonathan Davis (12:30):
Bill Fairman (12:30):
Are you buying existing? Are you doing any developing?
Kris Benson (12:34):
I would say the majority of what we’re doing is existing assets. So our sweet spot really has been in the value add space, going into a cash flowing asset and doing something to force NOI appreciation. Sometimes that’s putting a shovel in the ground and building out an expansion. You know, it could be not an expansion of self storage where we have two properties right now that we’re doing an expansion of covered boat and RV parking. So we still have the storage, but on some of the additional ground space, we’re building out some, you know, canopy type parking for boat and RV. So our value add play really is dependent on that particular opportunity. We do a little ground up development. We were supposed to be in the ground one this year but COVID kind of threw a wrench in the municipality approval process and it looks like it’s not going to be until next year till we’re going to end up with some permits. So I would call us an opportunistic self storage operator. We don’t say, Hey, we’re a developer. Hey, we only do cash flowing assets. We’ll look at almost anything and then make a decision on where we think we can fit it into our portfolio.
Bill Fairman (13:44):
That just answered my next question. Which was, are you looking for properties that have expansion opportunities and larger parcels of land or the ability to purchase the land next door or that type of thing? You’re looking at the opportunity and if it’s there, great. If it’s not, then you’re either going to move on or you’re going to find other ways to increase the revenue or lower the expenses.
Kris Benson (14:12):
Yeah. Or we’re not going to buy it. I mean, I would say, you know, our acquisitions team is probably looking at 10 to 15 deals a week. You know, and we’re probably putting in one a month, you know, putting an LOI out. And in today’s environment right now, we’ve probably lost four deals that were in the best and final offer as you guys I’m sure are aware. There’s a lot of capital chasing deals right now and so, you know, cap rates are getting compressed and, you know, Blackstone just bought simply self storage of very large, a hundred property plus self storage portfolio last week for 1.2, or two weeks ago, for $1.2 billion. So, you know, it’s been validated from some of the larger institutional players as well. So there’s a lot of people knocking on doors saying, Hey, we want to get into self storage and so when you get, that prices go up good for sellers, tough for buyers.
Jonathan Davis (15:08):
Yeah. How do you all source the deals and, you know, make sure you maintain a solid pipeline, closing pipeline with so much competition right now? Are you all doing anything or you have some advice for people, what they can be doing?
Kris Benson (15:26):
Yeah. I mean, Jonathan, I think we kind of have some unfair advantages there Reliant’s been around long before I got here so they bought their first property in 2007 and then in 2010, the actual entity was created. So what I would say is we have a lot of relationships in the space, right? So probably similar to you guys when, you know, somebody is looking for a hard money lender, they know about you, same thing with Reliant. So we have a lot of good broker relationships, our reputation is circling in the marketplace. So generally, if we put out an LOI, we’re not going to retrade on it, right? So they know if we’re interested in, we’re going to pay the price that we put onto a contract. So, unless we find something egregious in the due diligence process. So, you know, we’re get a lot of limited look type deals that a project gets put out to two or three, a broker takes it to their two or three best clients and says, Hey, if you can get to this price, you know, the seller will sell and we’ll underwrite to those. We’re doing some active what I would call bird dogging or, you know, sales cold calling to ownership as well, to see if we can shake a few loose that way to a truly off market deal so it’s all of the above and then the list of stuff we’re looking at to, you know, so, we’ll, again, if somebody says, Hey, do you want to look at it? Our answer usually starts with yes.
Jonathan Davis (16:45):
Gotcha. I know you do a lot of like value add, what is the typical price point or size of the units of the properties that you all are taking down? Are they just kind of across the board or do you have a particular size and asset type or I guess size type that you’re looking for?
Kris Benson (17:03):
When you say size, you mean just from a square footage standpoint?
Jonathan Davis (17:06):
Yeah. So unit, square footage, you know, however you all run the metrics, just, you know, is there like that you’re honing in on or is it just kind of opportunistic, take what comes?
Kris Benson (17:19):
Yeah, I would say that there’s a threshold that makes sense for us, right? Because our operating platform is overhead, right? When we put our operations in place, there’s a cost to that so the facility has to be large enough or the opportunity has to be large enough to support that. I would say for us, you know, generally anything below 30,000 square feet, there has to be a significant expansion opportunity. You know, the average square footage of a self facility in the US is probably around 52,000. So, you know, we’re shooting for somewhere in there. Some are larger, you know, some are smaller, but it really depends on the particular opportunity but generally, I would say most of our facilities are, or what we’re looking at is probably going to be that 30,000 square foot threshold or above, or there’s a significant portion of land to potentially develop alongside of it.
Jonathan Davis (18:20):
You kinda want of, I’m sorry, Bill. I just wanted to pick his brain real quick. When you do a value add and you’re, you know, you’re doing an expansion opportunity, I’m, you know, let’s say someone’s a complete novice, they don’t know anything. What is like, if you’re buying a 30,000 square foot facility and you have the space to add another 30,000 square feet, what does that typically cost? You know, what does that look like for you guys or for anyone?
Kris Benson (18:49):
I mean the price per square foot, right, is going to be a hundred percent dependent on the market you’re in, right? If you’re in a big margin, primary market, that price per square foot is expensive. They also matter, Jonathan. Are you talking about buying the land? Is the price per square foot as well? I mean, you know, without land 60, 70 bucks a square foot for climate control building is probably in the neighborhood so I think, but that’s not to say if you’re in a smaller rural area and, you know, maybe you’re the contractor, you have a buddy who’s a GC that you could build it for a lot cheaper than that. You know, the interesting part, I’m sure you guys have heard about some of the retrofits that go on like adaptive reuse of some of the retail, dark boxes. So, you know, Kmart goes out of business Toys, R Us goes out of business. Those boxes, some of them have been redeveloped into self storage and the reason people look to those is because the cost per square foot to redevelop is a lot cheaper than building something out of the ground. So yeah, the biggest risk in the market right now is new supply, you know, new supply coming to market and so, you know, you just have to be thoughtful of what is the current supply, what’s the development pipeline look like, before you build that expansion, because, you know, if you have three or four facilities in your market that are all in lease up, they’re all trying to fill, well, then prices are going to get hammered, right? And everything is going to drop precipitously until people can get that occupancy right. So you just gotta be thoughtful of that as you’re looking to expand and understand what the demand really is in the market, or do your best to.
Bill Fairman (20:26):
Are you typically looking for about a three to five mile radius around the property is where you’re studying the, you know, possible clientele and the competition, obviously.
Kris Benson (20:41):
Yeah. So generally, you know, most people would say that one, three and five mile radius. Storage is really interesting in that it’s a micro-market game, right? It doesn’t matter what’s happening at the MSA level, right? So if I’m building in Atlanta or let’s say I’m building in Roswell, it doesn’t matter that Atlanta is growing, right? It’s really the one, three and five mile radius around your facility because if you think about storage, people aren’t driving to access storage, right? It’s either convenient to work or convenient to home. If it’s not an either of those, you know, there’s no good school districts, they’re not chasing specific amenities, it’s a garage. So, you know, people are going to basically do what’s convenient for them. So when we look at a market, what we’re trying to understand is that story and the one, three and five mile radius around the facility, you know, one of the things our acquisitions team does when we get a property under contract is we map every tenant in the facility so if there’s 500 units and they’re full, you know, we’ll get a map that shows the addresses of all 500 tenants and then you can understand like, what is the market that you’re servicing? Would it also helps is where is your risk if new development comes in. Because you generally know where the opportunity is for new development, right? You’re on a main thoroughfare, you’re looking for traffic count so if there’s a whole bunch of open land in a specific area and all your tenants are coming from there, you may say to yourself, well, that’s a risk for new development coming in. Cause if somebody parks one right here, that’s going to take all those people and keep them there, right? They’re not going to drive past a facility to come to us. So our story is, you know, our acquisitions team talks about building the story for the marketplace and that’s really what we try to do is understand, you know, demographic on paper, the one, three and five, but then also what’s actually happening within that market.
Bill Fairman (22:36):
Well, I know you mentioned you’re in eight States. Are there, what are the MSA is that you guys are kind of focusing on?
Kris Benson (22:46):
You want all of them?
Jonathan Davis (22:48):
Bill Fairman (22:48):
Just a general idea that the area, that’s all,
Kris Benson (22:53):
I’ll give you a high level. I mean, generally we’re chasing secondary and tertiary markets in those markets. So like, the last two properties we bought, one was in Wilmington, North Carolina, which I would say is, you know, probably a really small secondary market or an okay tertiary market and there’s no real hard and fast rules on what secondary what’s tertiary, but, you know, for us, we feel like that’s where the consolidation and the yield still is because there’s been a huge development cycle in self storage, mostly in the top 25, 50 markets in the country, right? So you think about your gateway cities, New York, Dallas, LA, Atlanta, there’s been significant development across the board there. So, you know, we’re always looking for the market where we feel like we’re in the path of progress, or it has its own story. Like the second property that we closed in the end of August is in a town called East Denali, Georgia. And I live here, I don’t know where it was. It’s right on the border of Georgia and South Carolina, small town, nobody, it would never show up on anybody’s radar but it’s right on Lake Hartwell, right? So there’s a whole bunch of recreational activity that gets pushed through there in the value add that we’re building, there is not storage it’s boat and RV parking. So this owner was, it was his only facility and he just never built it. And, you know, the demand is there but they just never built any of the pavilion style parking and so with that amount of traffic coming off, Lake Hartwell, which is one of the biggest freshwater lakes here in the Southeast, um, it provides an opportunity for some ally growth there. So, you know, that market level, I would say think secondary and tertiary markets cause that’s, you know, the second part of it is then you’re not competing with the REITs. You don’t have a public storage and an extra space and acute smart right down the road where, you know, if we go into Atlanta, they’re going to be everywhere. We are generally.
Bill Fairman (24:53):
Well, you also have to look at how the demographics are changing with COVID. You have an opportunity now for a lot of people can work out of their home and a lot of people are moving away from the gateway cities because of the expense of living there and that they can go into those secondary and tertiary markets, have a lot lower expense to live there and still be able to earn the same money because they’re still working for the same companies, they just happened to be working out of their homes now and I think that’s a good opportunity for him because those markets are going to continue to grow as people expand out of those bigger, more expensive, MSH and you’re able to pick up properties at a lower price because the cost of land hadn’t gotten up yet. Now with everybody moving, it may, but at least you’re in growing markets.
Kris Benson (25:56):
Yeah, we’ll see, right? I mean, pendulum has shifted or is shifting in one direction today. I’m kind of a believer that anytime the pendulum is pushing one direction, eventually it’s going to swing back and, you know, cities like New York city, it’ll come back, right? I mean it’s a question of when, and there’s going to be some pain in the short term, there’s no doubt about it, but you know, the draw of what makes a big metroplex. A big metroplex will return and you know, how people consume office space and those types of things certainly will be interesting to see how it plays out. But you’re right. Right now, there’s this push to the suburbs, or, you know, even tertiary markets because people have the flexibility to work anywhere and we’re certainly going to benefit that. I think everybody’s seeing that trend as well. Just the normal population trends, right? People are usually leaving the Northeast and coming into the Southeast, right? People accessing sun, lower tax basis, et cetera. So now all of those factors kind of help us decide, all right, is this a market we can see a reason to be in.
Jonathan Davis (27:02):
And I understand you all have a fund. Are you all actively taking investors into your fund? Is it closed? You know, what does that look like?
Kris Benson (27:12):
Yeah. So Jonathan, we’re raising capital in a vehicle. It’s called Reliant’s Self Storage Fund Two and best way to think about it as, you know, mutual fund of self storage property. So we’ll build a portfolio of properties and the performance to investors will be based off the performance of that portfolio. So, it is still open. We, those two properties, I just mentioned one in East Denali and one in Wilmington, those are the first two that went into it. Uh, there’s a third closing in the beginning of January and there may be a number of Lys out. Maybe we get none of them based on the way market is right now but the goal is to build out $50 million equity fund, probably somewhere close to seven to 10 properties and then we’ll close it in summer of 2021 is the plan right now.
Jonathan Davis (28:00):
Scott, can you throw up there the website, just so, is this the best website to go to, to reach you guys in, to inquire about getting into the fund is, what is it?
Kris Benson (28:13):
Yeah, reliantinvestments.com is probably the best opportunity to to learn more. There’s an Our Investments tab at the top and that’ll get you to more information on the fund and you can download the investment summary. There’s a webinar due diligence documents and then certainly, if you’re interested in are more, you can set up a call with us.
Jonathan Davis (28:32):
Gotcha. There’s no hyphen Scott, it’s just Reliant Investments. No hyphen. There we go.
Bill Fairman (28:41):
Yeah. Chris is the fund open-ended, close ended, evergreen, how does that operate?
Kris Benson (28:52):
It’s closed ended. So we’ll close it once we have the properties in place and then, extensively you’re in it until we sell it. So, you know, we projected to be a six year hold and if we’re selling properties along the way, we can’t add them back in, right? So it’s just that particular portfolio of properties and as we sell on, until we sell the last one, and then that fund would be closed.
Bill Fairman (29:18):
So one of the benefits of investing in a fund that holds properties is that you can get tax benefits to offset your gains. Do you wanna talk a little bit about that?
Kris Benson (29:36):
Yeah, for sure. I think that’s one of the big differences between, you know, just investing in a REIT and a publicly traded REIT and a privately placed fund is you earn your pro-rata share of the depreciation and for your listeners who may not be familiar with how appreciation works extensively, the IRS allows you to write off a loss each year you own the property because they assume that everything on the property is worth less next year than it is today. So, you know, my roof’s a year older, the siding’s a year older, all my fixtures and so they allow you to offset some of that loss and the upside to it is, as you had mentioned that you can offset the income that you’re earning from the property. So, you know, generally, for most of our properties in the early years of the fund and individual properties, your K one, so what you would get from us, even if you were earning a return is going to be negative. We try to do cost segregation studies on our more stabilized assets so that we can front load some of that depreciation and maximize the tax efficiencies but for your listeners who are, you know, generally interested in real estate, probably familiar with depreciation and this just allows you to get your pro-rata share of it through the fund.
Jonathan Davis (30:59):
Gotcha. And so most of our listeners may not be aware of cost segregation studies either. Can you kind of tell them what that is and how that plays into the depreciation?
Kris Benson (31:10):
Yeah, for sure. So most commercial real estate is depreciated across the 37 years schedule. So literally, if you just took one 37 of the value of the property each year, over 37 years at the end of that 37 years, your property to the IRS is worth $0. So what costs SEG does is extensively allows you to take items that depreciate faster than 37 years and you know, it’s a complex, the list isn’t complex, but how you do it is complex .there’s engineering firms that focus they’ll come out to your site and sensibly value, how much, you know, your landscaping value last this year and you can front load some of that depreciation. So instead of a 37 and a half year schedule, it’s five years. So if you’re going to own the property in a short term, it may not make sense to do that, but you can offset more income based off how cost side sidewards, you know, the thing to think about though, for many investors, if they have a W2 job, you’re not offsetting W2 income with K one passive losses, right? So K one is basically a W2 for an LLC. So if you’re in partnership with somebody at the end of the year, you may get a K one that reflects any income or losses from that partnership. Well, if I have a day job, let’s say I’m a doctor and I make, I don’t know, 500 grand a year, I make $250,000 a year, whatever it is. I’m not offsetting my W2 income with K one income, right? So if I show a hundred thousand dollar loss on K1, it’s not like I deduct that for my 250. And look, I’m not a tax professional. So everyone listening should talk to their own tax preparer but just so people understand because some people come to us as like, well, this is great. Just show me a lot of losses, cause I need to offset all this W2 income and that’s not how it works. So, you know, you can offset other K one gains, and again, confer with your tax professional but generally people like real estate because of the ability to offset the income it produces on its own.
Bill Fairman (33:19):
So basically at the end of the term, you’re going to get a capital gain? So those losses that you would be accumulating over time are really going to offset the taxes you’re going to have to pay on the gain when the property does so if you had no other K one income, correct?
Kris Benson (33:44):
It could, but you have to also understand not to get too far in the weeds with this, but whatever you’re depreciating, you’re going to read, the IRS is going to catch it up. So when you sell that property, whatever your basis is, right? And if you’ve written, let’s say you bought a property for a hundred bucks and you depreciated it down to $75. Well, the IRS, when you sell it, let’s say you sell it for 200 bucks. Now, the IRS instead of a profit of a hundred dollars, which you originally paid versus what you sold it for, you depreciate it to 75. So the profits $125 to the IRS. So they’re going to catch you up and say, Hey, your profits more than you started with. So that’s the downside and there’s some more sophisticated strategies that many really wealthy investors do. It’s called a 10 31 exchange, which differs your taxes and you can actually roll over your gains into another property with no taxable event so that $125 that I just talked about of profit, you can roll that into the next property and pay no tax on your gain and the strategy’s called deferred for a die. So you just keep rolling, keep rolling, keep rolling and then you die at passes to your state and you never pay tax on the gain and your depreciation clock steps up in basis, it restarts. So, you know, people get upset that Donald Trump hasn’t paid taxes. And you know, it’s because it’s businesses show so many losses while I haven’t looked at Donald Trump’s tax returns, nor do I choose to, but there’s probably a lot of depreciation in there that he’s showing on his properties and that’s offsetting his income.
Bill Fairman (35:23):
Jonathan Davis (35:23):
Bill Fairman (35:24):
I like that. You pass on your capital gains to your heirs. I’m just kidding.
Kris Benson (35:32):
Well, if you do it right, they don’t ever have to pay it.
Bill Fairman (35:34):
Right. Because it resets.
Kris Benson (35:36):
That’s the upside.
Bill Fairman (35:36):
When you pass away. So is there a, I’m assuming you have to be an accredited investor to get into your fund?
Kris Benson (35:44):
We do. So our particular vehicle is a reg D. It’s called a five 506 C offering, which means all the investors have to be accredited and verify to do so. So as part of the process for us, investors, you know, verify for a third party service, called verifyinvestor.com. So it submit tax returns or a brokerage statement, something that proves net worth.
Bill Fairman (36:08):
Now, one of the benefits of this this year is that the SEC has a widen the guidelines for accredited investors. So they’re allowing a few more folks in there that didn’t quite meet the income or the asset. I’m sorry, net worth box that you had to check. Scott was asking a question about the usual rate of return. We’re not going to ask that because you have to be an accredited investor to find out, but we can ask, is there a minimum amount, uh, to get in?
Kris Benson (36:44):
Yeah. So in fund two, the minimum investment is 50,000 via cash, or we do self qualified funds. So a lot of our investors use self-directed IRA or self-directed 401ks to invest in that vehicle.
Bill Fairman (37:00):
Listen, there’s a lot of people in private placements using their self-directed IRA and it’s a shame there’s only about 5% of the population that even utilizes or knows anything about self-directed IRAs.
Kris Benson (37:17):
That’s because the brokerage houses don’t make any money on them. There’s no assets under management fee to charge when people do self directed funds. So it really is. I personally have one, it’s an interesting way, if you’re not familiar, Google it, it’s an interesting way to deploy retirement funds in some alternative investment strategies, that your general equities based platforms.
Bill Fairman (37:46):
Well, you know, I obviously I’m biased because I’m in the real estate business, but I love investing in real estate because you’re actually investing in a tangible asset, not the promise of a company that is going to make a profit. And, you know, more based in the, because we are a lender, we’re based more in the single family, residential, small multifamily. We land on some small self storage as well. But, you know, again, smallish.
Jonathan Davis (38:25):
The are going to be under the, definitely under 3 million.
Bill Fairman (38:28):
Yeah. And that said, that investment is really a against itself. You’ve got income producing properties single family that we’re doing are typically going to be sold when the project is complete but, I don’t know. I always like to compare it to the gold salesman who says that, you know, gold has never been worth zero! That’s true, but you can’t rent your gold out. How are you going to make any money with that? And another saying that I love is the house doesn’t care, what it’s worth. You’re only concerned about the cashflow. So if you know, if your value goes down, who cares? As long as it’s cash flowing. And if the value goes up too much, then it’s time for you to sell it and get two of them that are cash flowing.
Kris Benson (39:27):
I think one of the best hedges in the market is debt-free single family housing, right? It’s always going to have demand. It may not move values may go up and down, right? And that cashflow amount may change but if you have the ability to be debt-free, you can’t. Extensively, you can’t lose money, right? If you’re in it for the long haul. And another quote that I love is everything’s a good deal in 20 years, right. If you think back, and I can certainly think back in my career, what stuff was worth 20 years ago versus what it’s worth today, you know, there’s no question, right?
Jonathan Davis (40:02):
I was, I forget where I was. There was this guy and he’s written a few books and, you know, he does the single family game and, you know, he’s kind of famous for saying, you know, gotten into this like 20, 30 years ago and the first house I bought, I paid too much money for and it’s the best asset that I have.
Bill Fairman (40:22):
Yeah. Cause you’ve had it for that long. I did differ with you a bit, Kris, on the leverage component of the single family. If you can get conventional financing still, and if you’re doing this, you’re doing it in your own name, not as a business, but you can get up to 10 loans or 10 mortgages. Conventionally, you’re paying as low as the rates are right now and you can get them fixed for 30 years, as long as you don’t over leverage those properties. If you can keep them at say 70% of market value or under, and you’re paying, you know, 20 years from now, you’re paying with, today’s dollar, which we know that’s going to be worth a whole lot less and that’s a great hedge as well.
Kris Benson (41:13):
Fair. It’s all kind of, you’re a hundred percent correct especially in today’s environment where interest rates are, the cost of debt is ungodly low. But it’s an interesting, you know, it’s always a part and parcel of a portfolio, right? And I would suggest to no one that you should invest solely in self storage although if you looked at my portfolio, I’m pretty, overweighted in self storage but it’s all just, you know, a piece in a parcel and you know, it depends. I have a few friends who look for kind of that, what is the safest thing I can do? Right? And look, debt adds risk, right? No matter how good the terms are, at some point it’s adding a risk to you so obviously the lower leverage you can put on, the less risk there is attached to it. So yeah. You’re you and I are correct. I kind of look at everything. This is me personally, is if it’s 5% or less, I’m using somebody else’s money because I can almost guarantee I can take my money and go get better than 5%.
Jonathan Davis (42:15):
Kris Benson (42:15):
So in today’s environment where interest rates are, there’s almost nothing I’ll buy with cash. I mean, it just doesn’t make any sense.
Bill Fairman (42:25):
On the other side of that, there’s something to be said for being able to sleep at night, knowing that the only way you’re going to lose it is if you can’t pay the taxes or the, or the insurance
Kris Benson (42:35):
Fair, I think we’re arguing on both sides of our mouth on this one.
Bill Fairman (42:37):
Yeah. I think the key there is make sure that you’re paying very little for the money and that you’re not over leveraging. That’s where a lot of people got in trouble in ’07, ’08 where they were highly leveraged on these properties and a lot of people were buying rental portfolios, not for the cashflow. They were buying it for the pre, for the appreciation, which is absolutely the wrong thing to do.
Jonathan Davis (43:07):
Yeah. I’ll get you in trouble real quick.
Bill Fairman (43:09):
Kris Benson (43:10):
I read a report this morning. Sorry to interrupt but a comparison between the Greek finance or the 2007, 8 and 9 downturn versus what’s happening in today’s marketplace, specifically with CMBS and, and the defaults in commercial mortgage backed securities and what I did not realize was that the peak of CMBS from 2007, 8, 9 was 2012. So the banks held on for almost three years before they started to basically release the blood in the streets, right? Where they said, okay, we can’t hang on to these assets anymore and in borrowers as well, and here what’s interesting is it’s happened so quickly, especially for retail and hospitality. The amount of borrowers who are starting to just push properties back is happening very quickly where they’re just saying, look, there’s no way. Like I owe, you know, two and a half times what this property is worth right now, I’m never going to get this back. You can take it Mr. Bank and it’s just that CMBS is built or the default is building up much quicker than it did in the last downturn so we’ll see what happens long-term but it’s certainly a different type of event, uh, this time around with COVID-19 .
Jonathan Davis (44:26):
Bill Fairman (44:28):
On the other end, it’s an opportunity for investors can come in and then reposition those properties, redevelop them into something that makes more sense for the current time. There’s still definitely a need for affordable housing and there’s a lot of hospitality properties that could easily be converted to that. Now, there are going to be people that are going to take it in the shorts, you know, don’t get me wrong, but that again, that’s always opportunities for other investors to come in and profit from it, but that’s kind of how the cycles work, right?
Jonathan Davis (45:09):
Kris Benson (45:09):
Bill Fairman (45:09):
All right. Kris, it was great having you on.
Jonathan Davis (45:15):
Very enlightening, thank you.
Bill Fairman (45:15):
Awesome information. Uh, love your business model. Like I said, we, we are big fans of self storage always have been.
Jonathan Davis (45:23):
And I found where that street was, that you said owned in our town here. So I drive by it every time I go to the Lake,
Kris Benson (45:32):
There you go.
Bill Fairman (45:33):
What’s the name of the road he was on? He didn’t look at street signs apparently
Jonathan Davis (45:39):
It’s just one of those off roads off of the main thoroughfare. So it’s, you know, you don’t pay attention to it, but it’s a it’s right there off the main road.
Bill Fairman (45:48):
So before we go, it’s reliantinvestments.com. If you’re interested in investing in your fund.
Kris Benson (45:57):
Yeah. You can definitely reach out to us through that. I’m fairly active on LinkedIn as well. It’s Kris Benson with a K. People can reach out to us that way as well but between the two, you’ll find it.
Bill Fairman (46:09):
Excellent. Well, good. We got Scott, just put the URL up for us. Kris, again, you were awesome guest. Thank you so much. Folks, we’re going to wrap this one up. Thank you so much for joining us for Passive Income, Active Wealth show. Our website is CarolinaHardMoney.com. If you’re a borrower interested in borrowing some money, then click on the apply now tab. If you’re an investor looking for a passive returns, click on the investor tab. Don’t forget to like share, subscribe and hit the bell! It’s been a great day, I only cough twice. We’ll talk to you next week. Thanks.