[Note: To follow is an excerpt of an interview with the professional team at RealSource: Kent Anderson and John Schmelzle, Equity Services and Kerby Petersen and Sean Gove, Client Advisors. To listen to the show archive or download an MP3, go to www.IncomePropertyInvestmentTalk.com/020409.]

Mosca: With most, if not the entire brokerage marketplace basically leaving tenancy in common or postponing their efforts in 2008, RealSource continues to be successful with tenant in common investments by placing investors into offerings, into opportunities, and this reflects a significant part of your business model. What is enabling RealSource to be so successful at a time when others are either backing out or postponing this particular part of their business model?

Anderson: It is a little eerie to watch some of the big names out there in the business back off over the last several months. RealSource is able to find deals because of our market approach. We have several economists on staff including a Ph.D. where we work on a model that has been developed since 1989 to help us find those markets that are at the right time and the right place and to find those deals within that market. In working with John Schmelzle and others, we are able to find much better deals than what many of our peers have been able to find, which makes our deals very attractive. While it is true there is not as much cash and 1031 money available, we have deals that make sense.

Schmelzle: In the past good sources for our investments were from our existing network of brokers and management companies. In the past, that was the preferred way of finding deals. However, now that the market is changing the better way to go through the process is to go through a bid process. A lot of the change is a result of a difficulty in obtaining financing. Fortunately, we have a very fine mortgage brokerage arm at RealSource and they do a great job finding us favorable debt not typically available to the majority of apartment owners.

Mosca: Can you explain how the company has been successfully put investors in the right place at the right time since 1989?

Petersen: The research of our economist. We research the 363 metropolitan statistical areas or MSAs each quarter. During those quarters, we are finding out where growth is going, where job potential is going, what new jobs and opportunities are going in, plus we are checking on inventory and the ability to raise rents in the certain markets that make economic sense. Then we are micro-marketing that down into very specific submarkets within the large MSA. That’s where we get the majority of growth and economic improvement on the property, rents, and the ability to have occupancy at 100%. We get down to the specific micro-market within a market to help our clients reach the best value possible.

Gove: The key is being really specific in a market. For example, we all know that where we live there are specific areas that are performing better than others. Every market is very similar to that. As client advisors we can add value because we are talking to property managers and the local brokers on a daily basis. We get a good feel for market trends, rents, concessions, all within a specific submarket of a larger market. That’s where we add value.

Mosca: Let’s talk specifics. Can you give us a quick overview of the tenant in common offering available to investors right now?

Anderson: It is a rather large, 264-unit Class A apartment complex in southwest Houston. We like this area for quite a number of reasons. Job growth is doing incredible things for the occupancy on this project that was built and completed in 2007. It leased up rather quickly and despite not granting concessions, they have been able to maintain occupancy since the mid ‘90s. The other thing we like about it is that it’s the right type of property. Lastly, we’re getting terrific terms on a non-recourse loan. Those are two reasons it is forecasted to do so well; job growth and the incredible loan we were able to get on the deal.

Schmelzle: It is in the Fort Bend submarket of Houston. It’s one of the fourth largest housing markets in the United States so it provides you exit liquidity. It’s one of the only markets in the United States that has shown year after year job growth but at the same time, Houston historically has gone through some periods of rebuilding. Right now I believe there are roughly 17,000 additional units expected to the Houston market as a whole, or about three and one-half percent of the current inventory. When you’re entering a market like Houston, you have to be really diligent on what submarket you go into. That’s what our economic staff does, it pinpoints what submarkets outperform others. In this case, we determined that the Fort Bend submarket, which is Fort Bend County in the southern part of Houston, has historically outperformed Houston as a whole. In this case, we were put in contact with a large national developer that was finishing up a project and had an interest in selling it. We were able to lock in a rate and our loan application in time. The asset is 95% occupied, is a brand new community with resort-style amenities, and sits on a scheduled four-lane highway connected to the US Highway 90. While we are seeing 95 percent occupancy, there’s going to be a lot more traffic generated to this property over the next few years and that’s ultimately what is going to allow us to increase rent and maintain traffic at the property.

Mosca: Why is important for investors today who are holding cash, equity, and IRA funds and are sitting and doing nothing because they are scared of the Bernie Madoffs of the world to get off the fence and invest?

Gove: One of the main thing investors are worried about is risk. Consider, if the economy continues to fall and everything went bad, and the property is unable to perform. What will happen to you as an individual investor financially? Is the bank going to be able to come after you? A nonrecourse loan states that an individual investor is not liable if the property does fail. The bank has no recourse to come after an individual investor’s asset.

Petersen: Each one of the properties has its own expectations. As the investor gets involved in this, he purchases a fractional ownership based on the amount of money they put down on the property or a percentage of the total invested. The real benefit of being a member of a TIC is that you don’t have to do the day-to-day management tasks, that’s being done by a roup, and the returns that typically come back. Cash on cash and appreciation varies per project, and today that varies per market more than it does per project. We expect to get a higher return on appreciation than most areas because of the due diligence we put into our market research.

Gove: That (due diligence) has made all of the difference. Remember, money is made on the buy side.

Mosca: Is there a profile or certain characteristics of the typical investor?

Petersen: It starts with the client and diversifying their portfolio. When I first started working with investors, more of them were entrepreneurial, wanting to hold property on their own. In the seven years that I have been associated with RealSource, that number has dropped because more are willing to diversify into triple net leases or TICs opportunities. They like the returns and the simplicity of not having to do the day-to-day operations.

Gove: Every portfolio should have some form of a triple net lease investment. A triple net lease is similar to a CD as far as in the world of real estate investment. A multifamily investment is going to fluctuate; the income can fluctuate based on occupancy and expenses. In a triple net lease you don’t have that issue; you have consistent cash flow. You know exactly what you’re getting over a certain period of time whether it’s a 5, 10, or 15-year lease. There are no hiccups as far as expenses are concerned. Everything is thrown on to the tenant.

Mosca: What is your golden nugget for today?

Schmelzle: My golden nugget has to do with real estate investing as a whole. Keep in mind as a long-term investment, 33% of the U.S. population is made up of ecoboomers, the children of the baby boomers. The majority of this generation is still living and supported by their parents so within the next 5 to 20 years we’re going to see roughly 80 million people in the United States in need of housing, office space, retail shops, etc. Demand will continue making real estate the most appealing long-term investment.

Anderson: There is going to be opportunities in different types of markets, be sure to have the information and tools readily available to be able to determine when to get in and when to get out.

Petersen: Financing writes the rules of how a property is sold and negotiated upon. Negotiating the best terms possible means having actual numbers on today’s properties.

Gove: IRA funds, IRA funds, IRA funds. Don’t let an old 401(k), an old employer sponsored plan slip through the cracks. I have too many clients that forget that the have 50, $75,000 in an old 401(k) or even if it’s 10 or 20,000 and even an active traditional IRA, a Roth IRA, whatever the case may be. You don’t just have to stay the course in the old style of investing and watch your life savings go away. It’s a very simple process. Don’t be intimidated by it. We can work through the process of self-directing those IRAs into real estate.

Published: February 26, 2009

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Peter L. Mosca is president and founder of BAK Communications, Inc. He has over 22 years of communications and media consulting experience, serving a variety of nonprofit organizations, including the CCIM Institute and the REALTOR Association on all three levels – national, state and local. He is the Spokesperson Trainer for the CCIM's Jay Levine Academy and trains hundreds of residential REALTORS nationwide to be effective industry spokespeople. He is consistently ranked as "excellent" by about 90% of those who attend his presentations. While his principal consulting focuses are public speaking and media relations development and content delivery and management, Peter is also the host of the Voice America Network's weekly radio program, "Income Property Investment Talk," a one-hour program that brings the powerhouses of commercial and residential real estate to property investors every Wednesday at 11 a.m. EST. Peter is married 17 years to his wife Barbara. They have two children: Ashley, 15 and Kelli, 12. Hence, the name BAK Communications, Inc.