REI INK

Q&A With Strategy Investment Group

Mike Jordan takes a practical approach to profitable investing, focusing on strategy and diversification.  When Mike Jordan, founder and president of Detroit-based Strategy Investment Group thinks about his greatest successes, the first thing that springs to mind has nothing to do with real estate. It has to do with kidneys. “My father is still around at 83 because I donated my kidney to him in 2011,” Jordan said. “Idid it for myself. I love having him around.” That type of practical, forthright action is typical of Jordan, who has been active in real estate since 1999. He started Strategy Investment Group, a private investment company specializing in the purchase, renovation and resale of single-family residential (SFR) homes in Detroit and the surrounding suburbs, in 2001. During that time, he has had plenty of chances to apply his no-nonsense approach to the industry and to develop a real estate investment philosophy that stresses diversification. “I love real estate, but I know you have to diversify in order to really have the stability and security in your portfolio that most real estate investors are seeking,” Jordan said. “Fortunately, there are a lot of ways to diversify within this industry and keep the advantages that come with owning and optimizing real estate and real estate-related assets.” REI-INK sat down with Jordan to talk about his investment strategy, his business philosophy and his longtime dedication to doing business in his hometown of Detroit, Michigan. How have you diversified your own investments and those of your clients while staying in the real estate sector? A lot of my clients are passive investors, so they really rely on Strategy Investment Group to present them with good investments that are reliable, predictable and will generate good returns. For that reason, we focus on acquiring properties at deep discounts, identifying the right strategy for that property during the acquisition process, and then immediately deploying the strategy to create a good asset for our investors. This is a diverse process in itself, since we might renovate a property and then place a tenant, “wholetail” the property—which means fixing some very basic things and then reselling at a discount once again—or renovate the property for a long-term strategic hold of some other nature. While we are known for our work on the SFR side of the business, we also purchase and renovate multifamily properties, purchase nonperforming mortgage notes and work with private lenders to help them deploy their capital in a very secure, predictable environment. To my way of thinking, you can have an extremely diverse, economically insulated portfolio without ever diverging significantly from this industry. In my case, Strategy Investment Group has also diversified by expanding, at our clients’ request, into property management as well via Strategy Properties. As both a borrower and a lender, what do you think is the most important quality of a borrower in this industry? I tend to think along the lines of “The 5 C’s of Lending.” If a borrower meets all five of these requirements to my satisfaction, then I would expect to qualify for the loan. My 5 C’s of lending are: Character. Will the borrower pay? Capacity. Is the borrower able to pay? Cash Flow. Does the borrower have (or will the borrower have) cash flow to pay principal and interest when the project is done? Creditworthiness. Does the borrower have a history of paying? Collateral. How viable is the asset being used to secure the loan? When I make loans, I also ask the sometimes uncomfortable, but very important, question: If the borrower gets hit by a bus, what happens to my capital? If the answer is unclear or unacceptable to me, then I don’t make the loan. What do you wish every real estate investor knew before getting into a passive real estate investment? I wish that more passive investors had a better understanding of the importance of capacity. Most real estate investing companies like mine have a certain amount of bandwidth. When that capacity is reached, we cannot do any more deals until we finish the ones we started. A company that will admit it has a waiting list and tell you what types of properties it absolutely must acquire in order to make investors’ capital work as promised is a far better bet for a passive real estate investor than one that operates on the premise that the sky is the limit. In most cases, the limit is much lower than the company has indicated, and the passive investors pay the price when that too-ambitious attempt to scale backfires. For example, if I tell you that I have just purchased 4,000 houses and that I plan to do so every month from here on out, you probably should not invest with me. There is not a solid reason to believe I have the capacity to handle that rate of acquisition because last month, and the month before that, and the month before that, and so on, I was doing between 20 and 50 deals a month. On the other hand, if I tell you I need a loan so I can acquire 25 more houses, then you absolutely can feel confident making that loan because you already know I have the capacity. What is your strategy going into the next 12-18 months? We are going to continue to concentrate on the city of Detroit and the suburban areas around Detroit. We have been in this market for years, and we expect it to keep expanding. This area of the country is extremely downturn resistant, especially in the rental sector, so we buy “defensively” by purchasing homes at steep discounts and then either wholetailing them or renovating them and placing tenants in them. These properties are in areas where people want to live, with good schools, low crime and high rental demand, so we feel confident that our strategy of persistent growth and having about 60 purchase agreements in the pipeline at any given time is

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Risk Mitigation Isn’t Just For “Risk Managers”

Risk mitigation starts with originations, continues through relationship management and lending, and merely “plays out” if a loan starts going sideways. By then it can be too late … It’s often been said, “The time between economic recessions in the United States is like a baseball game, one inning for each year.” Whether you agree or not, it’s hard to argue the current economic recovery has gone into “extra innings” since the Great Recession technically ended in late 2009. That said, despite not just one but two yield curve inversions in 2019 (the classic “canary in the coal mine” for an impending recession), there are many key barometers indicating that the next recession—even if it’s just over the horizon—is not imminent. We continue to enjoy record low unemployment, positive wage and GDP growth, generally modest inflation (occasional spikes driven mostly by higher energy costs), strong housing demand and a record stock market. So why should we be more vigilant than ever about managing and mitigating risk? Shouldn’t we all be making hay while the sun shines? Yes, the last 10 years have been great for real estate investors—possibly the best ever. This, in turn, has attracted a lot of smart, innovative capital and new, tech-driven ways of delivering it, making this very much a “borrower’s market” today. The space has also witnessed a lot of new “efficiencies” that make underwriting, funding and servicing loans easier and more “customer friendly” than ever before. As a result, borrowers—especially those with experience, strong net worth and liquidity—enjoy a variety of attractive, convenient financing options. The problem is, it’s getting harder to find good deals with viable exit strategies. And no matter how efficient capital markets have become (we’ve already seen several unrated securitizations for REI loans in recent years), demand—and therefore loan liquidity—will always outpace the supply of quality deal flow. The U.S. housing shortage, driven by historically low interest rates coupled with a limited and therefore rising labor and material costs, has been well-publicized. Despite this, other than large “build-to-rent” master-planned communities and other portfolio or “consolidating” transactions, investors and lenders are naturally compelled to take more risk just to generate the same or even lower returns. All that indicates we’re in a market at or near its peak. The challenges investors face finding good deals combined with an abundance of aggressive (or, shall we say “less than acceptably risk-adjusted”) borrowing options is creating a perfect storm of narrowly profitable deals using higher leverage. All this is a recipe for “significant near-term dislocation.” Risk and reward will always find a way to rebalance, sometimes painfully so. Risk management (i.e., evaluating and forecasting risk) and developing tactics and strategies to mitigate risk must be everyone’s responsibility. Now more than ever, an ideal risk management culture starts further upstream during general marketing and originations and merely continues through underwriting and the end of the loan lifecycle. Marketing Actively manage solicitations and marketing/advertising (human, digital and everything in between) toward the most desirable regions, products or borrower types based on your long-term credit risk strategy. Do not focus on the highest potential immediate volume, lest you’re left “holding the bag” when the music stops. For example, if you want seasoned borrowers, don’t troll through “expert forums” and platforms where new(er) or lesser experienced investors are more prevalent. Make it clear you value client experience and financial wherewithal., Discourage riskier, less seasoned leads. This sounds easier than it is, for the lure of volume and what appear to be attractive gross yields often result in adverse selection—this is a time-tested truism. Originations Despite all that hard work generating new leads, don’t become so committed to “closing the deal” that you avoid red flags or spend too much time trying to fit the proverbial square peg into the round hole. If a deal doesn’t work (i.e., a borrower clearly isn’t qualified, property values look questionable or debt serviceability and recoverability/exit look challenging), it’s better to give a quick “no.” In that case, either introduce them to another suitable borrower or decline the opportunity outright.  Encourage them to keep looking for a better deal and to come back next time. No one likes to waste time and, rest assured, your erstwhile borrower will appreciate your candor and refer you to others who may be a better fit. Being thoughtful and direct “pays it forward” in numerous ways. Underwriting Stick to your underwriting standards. Don’t find ways to bend criteria or make exceptions just because you can sell them to your credit committee or financing partners. For example, if you’re traditionally a fix-and-flip lender who lends up to 90% of cost (or 75% of after-repair value) to borrowers with at least three successful transactions at 12% and 2 points, stick with that and focus on delivering a superior, consistent customer experience. Be responsive and collaborative, suggesting ways borrowers can become more profitable, better project managers or more efficient builders. Really dig into construction budgets to help ensure projects are viable and you are not otherwise funding into a default. Treat the borrower’s precious resources as if they are your own, and help position them for mutual success, even if that means less leverage or occasionally passing on an opportunity. All of this mitigates risk in the long run. Servicing Don’t give borrowers a reason—legitimate or not!—to blame you for projects going sideways. Poor loan servicing can often create an unrecoverable downward momentum that will only increase the risk of loss, let alone profits. Rather, help borrowers by promptly responding to requests or funding draws or simply “working with them” as unforeseen circumstances arise. Don’t burden them with artificial constraints (e.g., sticking to hard-and-fast construction completion dates even in the face of unexpected but understandable delays such as bad contractors and permitting challenges) when sensible flexibility can yield a much better outcome for everyone. Put differently, don’t be a source of frustration for good, honest, proactive borrowers working hard to harvest their investments and pay you back … they’ve

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Avoiding the Money Pit

Assessing and maintaining investment properties in growing portfolios In the classic 1980s movie “The Money Pit,” Walter (Tom Hanks) and Anna (Shelley Long) are house-sitting a New York City apartment owned by Anna’s ex-husband. When he suddenly evicts them, they decide to purchase a home and think they are getting a great deal on an estate outside the city. It soon becomes apparent that the purchase was too good to be true as the house falls apart, drains their wallets and, ultimately, destroys their relationship. What Walter and Anna failed to perform was proper due diligence before agreeing to purchase the estate. They did not assess the property’s condition and paid in more ways than one. While Walter and Anna bought the property to make it their own home, real estate investors also need to do their homework when purchasing properties for their portfolios and then continue to manage them throughout the leasing cycle. Managing rental or investment properties takes a lot of work. From getting the property rented by qualified tenants to executing the lease and collecting rent, it can become very time-consuming. Often real estate investors hire property managers or management companies to coordinate these day-to-day tasks. Equally important is ensuring the property itself is a profitable asset and subsequently maintained so it remains in marketable condition. Whether you own a large portfolio of investment properties spread across the country or a few local ones, properly maintaining those real estate assets is key to maximizing their value and your potential bottom line. You may want to consider a third-party property services company that can accommodate all your inspections and maintenance needs throughout the purchasing and leasing processes. Property Service Firms When engaging a third-party property services firm, determine whether it has flexibility and can handle any size portfolio—from one property to a large portfolio. And if you own assets in different areas of the country, a national property services firm with a trusted reputation for quality and consistent results is your best bet. Many real estate investors seek opportunities to expand their portfolios to outside markets and often buy properties in bulk. Having a property services company in place can help put your mind at ease. You’ll know the proper services will be completed to ensure you have made the right investment. This includes inspecting properties before purchase and completing due diligence assessments. Due Diligence Assessments The biggest risk in attaining an investment or rental property is current damage as well as susceptibility to additional damages. Issues like vandalism, tenant neglect or natural occurrences can affect not only the property’s profitability, but also be expensive for you to remedy. Investing in real estate can be a big risk. Mitigating those risks can be very difficult for growing investment firms. Performing due diligence will help you determine the profitability of the property you plan on purchasing. A comprehensive property inspection or assessment from a trusted third-party service provider is necessary to determine if the purchase makes good business sense and fits within the parameters of your current needs and portfolio. Knowing if the property is a good investment from the beginning and completing reoccurring assessments, to managing tenants and turnovers, you have to ensure you are getting the proper services to protect your investment. To keep the properties in your expanding portfolio in compliance, some of the key routine assessments and maintenance services you should employ include required landlord inspections once a dwelling is occupied and turnover services between tenant occupancy. Routine Inspections Services It is important to continue to keep an eye on your properties while they are leased and occupied by tenants. This is something that often can be overlooked, but your property services company can ensure you stay on top of it through routine service options. These inspection services are helpful for tenant turnovers, move-outs, lease renewals or monthly check-ins when the tenant owns a pet or has any other custom parameters in their lease that require regular assessments. The property services company will send a qualified field inspector to your property, document exterior and interior conditions, inform you of any damages and, if necessary, provide bids to remediate any damages in order to restore the property to a livable condition. These results include a written report on the condition of the interior and exterior of the property and detailed photo documentation. It also includes reporting on issues such as occupant neglect, infestation risks, roof damages, water intrusion and the presence of mold. Your property services company also should perform a listing inspection to check on a property that is for lease or sale. Be sure to get documentation of your agent’s or property manager’s services, including placement of signage and marketing materials. A qualified field inspector will do an on-site assessment of a property to verify it is in marketable condition. For an interior inspection, the inspector can either schedule a showing or attend an open house to also document the interior condition and cleanliness of your property. Operational Efficiencies Employing a property services company with national reach will aid in your operational efficiencies overall. Results will be consistent, and properties will be maintained in a uniform manner by qualified, local professionals. For example, a property services firm can help create processes for streamlined turnovers and non-emergency maintenance services. They also can be effective for completing eviction services and junk removal at properties that need cleaned out. To ensure you do not get trapped in a “money pit” and bogged down with unexpected expenses like Walter and Anna, creating these operational efficiencies will maximize the value of your real estate assets and safeguard your bottom line. Due diligence inspections and regular assessments and maintenance will keep the property profitable and minimize losses within your portfolio.

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Zoning Isn’t Your Problem

Looking at the potential issues a project may face and taking the steps to minimize them early will help keep you on budget and on schedule. When developers, investors or builders look at a new project, everyone knows to consider the zoning and the entitlements necessary for the project to happen. What often gets pushed down the priority list, or not thought of at all, are the corollary issues that may have a bigger impact on the project than the zoning itself. It is not enough to simply confirm that an appropriate zoning district is available and apply standard estimates for timing and costs for processing the applications for those entitlements. There is almost always a zoning district that will accommodate the desired use. But the zoning district itself is not what poses the greatest threat to the ultimate approval. Instead, it is often politics; neighborhood opposition; the property’s history; general, comprehensive or specific plans (where applicable); or even traffic concerns. Any one of these can derail your schedule, budget or both—and in a big way. You don’t haveto leave them up to chance though. Each one can be researched and planned for well before any money goes hard. Politics One of the first steps in considering the viability of any project is having a meeting or discussion with the local elected official of the district where the project is located. This may be either a councilperson or county supervisor—or the most influential—if the local elected officials serve at-large. This meeting isn’t about just giving a polite heads-up. Local elected officials must balance a complex and interwoven pile of issues, agendas, goals, stakeholders and problems, many of which were inherited, all while trying to responsibly reflect the desires of their constituents. Many factors that won’t turn up in any research but are within the elected official’s realm of responsibility can impact your project. For example, there may have been significant  community discussion about the property you are looking at, and plans laid for it despite it not being owned or even tied up by the jurisdiction or community. That is something you need to know before making an application for a project that may be completely different. Elected officials themselves may have plans for municipal projects that are not yet on paper but will impact your project. These kinds of projects may range from large open space plans to significant infrastructure upgrades or studies in progress for specific area plans. They may also have strong personal preferences on certain aspects of development that can be easily incorporated into a project early on. You must also consider the interrelation of the elected officials’ interests, concerns and agendas. The balancing act elected officials must perform and the fact they may be elected by different demographic groups can put them at odds on various issues. Analyzing how this will impact your project is a critical component of the research you should be conducting before committing to a project that will require city, town or county approvals. Neighborhood Opposition You’ve likely seen a project get absolutely destroyed by opposition from neighbors, neighborhood organizations, or other interested and organized parties in the community that may or may not be geographically close to the project. Of course, you believe your project will benefit the community. It very well might, but it is difficult to foresee how everyone in the community will view it when you cannot know what is tinting the lenses they are viewing it through. What may seem like an obvious and eminently appropriate change of zoning from a technical, professional and societal perspective may seem like the end of the world to neighbors or community groups. Often, such opposition is due to misconceptions, miscommunications or fears associated with past experiences. As the applicant for an entitlement, you are often unfairly greeted with distrust and skepticism rather than the benefit of the doubt when it comes to the quality of the project, true intent and willingness to communicate with the community. Likewise, the community often forgets that projects like yours are the only way cities and counties improve infrastructure, build roads, extend utilities, construct and maintain parks, and generally create progress and growth that is a critical component of a healthy city. With a good project, neighborhood opposition can almost always be overcome through communication and open dialogue. Most often, community outreach involves treating the community as one large group and hosting multiple public meetings, conducting focus groups, sending surveys and attempting to identify and solve problems. That may be appropriate in some cases, but there are rarely issues in a community that apply across the board. Embracing a multifaceted approach that includes research, required notification, meetings with key players and individuals and continuing communication is much more effective. At the earliest stage of your project research, you should investigate the history of neighborhood opposition to projects in the area. Your zoning consultant should have some idea of the larger issues in the area, but specific research should be done to identify projects in the immediate vicinity that have had significant neighborhood participation—both positive and negative—to identify key issues and players. City or countywide research can also be helpful if the project is more unique and there are comparable projects elsewhere in the city or county. This research does not need to take forever or blow out a budget. You can often find and identify issues quickly. The jurisdiction will typically have requirements for public notification and outreach that you must conduct. Follow up with all responses from this step. Either identify the issues and work to resolve them or thank the respondents for their support and request they voice that support in an email or letter to the jurisdiction, or better yet, attend a hearing. When someone supports a project they likely will not participate in the process unless they are asked. However, you can be sure that folks who aren’t happy will engage. It is important for everyone’s voice to be

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The Economic Bubble is Hiding in Plain Sight

Investors, beware and be aware—constriction is coming. We are so far into the longest economic expansion in the history of the U.S. that just about everyone—no matter how bullish on their particular market—is stuck in a waiting pattern. Currently, our economy, our country and, arguably, our housing market are all subject to an array of uncertainties, including: COVID-19 (the novel coronavirus that first appeared in Wuhan, China) and its impact on global health and the Chinese economy. The 2020 U.S. presidential election. Cybersecurity threats, including the recent Equifax breach that compromised the data of an estimated 145 million Americans. A volatile stock market. A looming housing affordability crisis. Inflation. Student loan debt. Overall consumer debt. The list goes on and on. Despite the uncertainty, the economy and investors are not behaving as most would expect. They are behaving as though we are in the middle of an economic expansion rather than riding high on what can only be called a bubble, to put it bluntly. Investors who fail to acknowledge and react strategically to the presence of this bubble will fall hard in the next 12-24 months. Do not be among those who simply shut their eyes and refuse to acknowledge that sooner or later, the end of this upswing is coming. I tend to be a pretty unpopular guy when I say we are in a bubble or that the economic expansion is barreling toward the end of its life. I understand. No one likes to hear that the “good times” are almost over. Our industry does, however, gradually seem to be accepting that an eventual economic downturn—or at least a leveling off—is realistically inevitable. 3 Things to Know About the Bubble When it comes to the next several years and our economy, there are three things every investor and small business owner must realize: 1)  Real estate market cycles have historically been twice what “conventional wisdom” says they are. Looking back over 200 years instead of just 20, you will see that the biggest market cycles for real estate are not seven or 10 years, as most people think they are. Rather, they are about 18 years. Counting from the crash (2007 or 2008), you can see we are sitting right on the 18-year threshold as we enter 2020. Keep in mind that not every recession is exactly like the one we just went through—most recessions are not 18 months long! In fact, the average length is 11 months, and the two prior to the Great Recession lasted nine months (the savings and loan crisis of 1990-1991) and eight months (the dot-com bust). Although some economists are warning that the present extended boom will be followed by an equally extended bust, the odds are against this happening. Why? Because the Great Recession was a result of a combination of negative behaviors in two of the pillars of our country’s economic stability: the housing market and the financial markets. While some may argue that not everyone “learned their lesson” after the housing crash and financial meltdown, most of the problematic, institutional behaviors that led to that crash have since been remediated. Takeaway // Not only is it unlikely the next downturn will last as long as the last one, but it is also unlikely it will stem from the same weaknesses in the system. 2)  The next downturn is unlikely to hinge on housing. Supply and demand remain (and likely always will) the most influential factors in the life span and nature of real estate cycles. For this reason, the next downturn and economic cycle will be different from any other correction when it comes to real estate. More than ever before, regional real estate performances will diverge from one another. Some areas will rise significantly in value while others fall. This happened to a limited degree during the 2008 housing crash, particularly in areas of the country like Dallas, Texas, which had not experienced the astronomical appreciation rates the rest of the country had leading up to the crash. When the market fell, the Dallas market softened slightly and then proceeded to go on the tear it is still experiencing today. By comparison, Boston went through a major upswing prior to 2008. But by 2009, houses were selling for half their former value. Likely, the next downturn will certainly affect the housing market and real estate sector, but it is unlikely to be caused by the housing market. This means that different facets and tiers of real estate will react differently. It is far more likely that a recession will disproportionately affect higher tiers of the housing market, driving owners in those brackets downward to lower-cost residences, than send the entire housing supply plummeting in value. Looking into my “crystal ball,” my best prediction is that if you invest in areas with price ranges between $300,000 and $600,000, these will be the properties most likely to go “on sale” during the next downturn. By comparison, highly populated areas with homes under $200,000 will continue to rise in value because it is nearly impossible to build properties at that price point in today’s market. Upper-tier properties have been overbuilt, and lower-tier properties are undersupplied and in high demand. Takeaway // If you can buy homes under $200,000 in areas where there is any type of job stabilization, you will be in prime position to build your portfolio during the downturn and benefit over the long term from your foresight. 3)  Inflation will be part of the equation. Although the Federal Reserve seems determined to keep interest rates low for as long as possible—probably until after the presidential election—it will eventually be impossible to continue to postpone inflation and an economic correction. When interest rates do normalize and we see 6% or 7% interest rates once again (which are still quite low by historic standards), the affordability of the midrange properties I mention in #2 will diminish greatly. Takeaway // Lower-tier, affordable housing will be the hottest “ticket” in

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CBRE Group, Inc. Named Top Real Estate Brand in Lipsey Survey for 19th Consecutive Year

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CBRE Group has been named the top global brand in commercial real estate by The Lipsey Company. This is the 19th year in a row CBRE has achieved this recognition. CBRE’s development services subsidiary, Trammell Crow Company, was the top-ranked development company for the third consecutive year. Lipsey is a training and professional development firm specializing in commercial real estate. It has surveyed commercial real estate professionals on their perceptions of the industry’s leading brands since 2002. CBRE has been ranked No. 1 every year Lipsey has conducted its survey. The survey is open to U.S. and international professionals, including property owners, investors, lenders, occupiers, brokers and property managers. Earlier this year CBRE was the top real estate company on Fortune’s World’s Most Admired Companies list and was ranked #13 on Barron’s list of the 100 Most Sustainable Companies in the U.S.

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