My Advice To New Real Estate Investors with Scott Magill | StreetBeats Ep. 109

- I got in relatively early with CrowdStreet, but I think you guys really got started about two years earlier. Some of those initial deals that where everybody was sort of feeling out how this platform was gonna work, those have had really, really great returns.

- Well, we've got a lot of new investors signing up, you know, each and every day, and some of those are gonna watch this video. So what advice would you give those new investors today that are just kind of jumping on?

- Hello and welcome to another edition of StreetBeats, our video series to keep our entire community here at CrowdStreet connected, investors, sponsors, and the like, and I'm Brent Hieggelke, Chief Marketing Officer, and I am really excited today to bring you a conversation with one of our investors on the platform, Scott Magill. Scott, thanks for taking time. And why don't you tell us a little bit about yourself.

- Well, thanks Brent. As Brent said, my name is Scott Magill. I've been investor with CrowdStreet since about the middle of 2019. I've been investing for, I hate to say this, over 50 years. I started as a teenager, and over time and have basically been in the market almost continuously for the last 50 years. So I've been done stocks and recently decided to get into real estate, in part to diversify my portfolio and essentially reduce my overall risk to equities.

- So you mentioned you've been on CrowdStreet since 2019. Have you been investing in real estate though all overall before CrowdStreet?

- To be honest with you, no, because I think what I, I don't think I quite realized this, that it was possible to invest in these kinds of LP deals that CrowdStreet offers. Maybe that was just me not knowing, but I also, it's also my understanding that there were some pretty substantial changes to securities laws and tax laws that sort of allowed the creation of these crowdfunding vehicles. And so when I learned about it and I actually learned about it through, of all places, Motley Fool, which has a service called Millionacres, they were the ones who introduced me to various real estate investing options, including CrowdStreet.

- Okay. Yeah, no, you're right. There was a legislative change, the Jumpstart our Business Act 2012, made it possible for sponsors to start basically soliciting investors for retail investing in their projects. And so before that, yeah, if you didn't, you know, if you weren't a golfing buddy or didn't play at the right country club with real estate developers, it was pretty unlikely that you'd be investing in any project. So that's one of the reasons why so many folks like yourself that's really recently discovered and gotten enthusiastic about investing in real estate. And certainly the direct investment model that CrowdStreet offers has been really a favored one by many of them for the reasons that, you know, were attractive to you. So Scott, why don't you tell us a little bit about the different projects that you've chosen to invest in on CrowdStreet?

- So just a little bit of history on me just before I go into that. What I did, as I said, my goal was to diversify out equities and I came to the conclusion that I wanted to put, and I did quite frankly, I did almost all of this through a self-directed IRA, not through what I would call my cash accounts. And I made the conclusion that I wanted to put roughly a third of my IRA money into commercial real estate deals like this. So I got started with actually one of the most simple ones. I don't believe it's offered anymore, but this was a short term in, you know, lending fund that was gonna return anywhere from 10 to 12%, with very little risk. It happened to be based in investing in Seattle real estate, real estate developers, bridge loans, et cetera, et cetera. I've been in that for two and a half years and the returns have been exactly as advertised, you know, anywhere from between 10 and 12%. But from there, I basically branched out and said, where do I want to be? What do I want to be in? I looked at obviously multifamily. I liked industrial. I liked warehousing. I decided to do some hospitality. So in total, in that first year or so, I made 13 investments in the course of about eight months. I will say that that of those investment, here's what's happened so far. I invested just before Covid struck and obviously that hit the hospitality industry pretty hard. I've had two small capital calls, which each one of which represented about eight or 9% of my initial commitment. Both of those deals seem to be doing fine and have recovered. They needed to be additional capital. I've had one that paid out at a 1.7x multiple in two years, which is near a 40% IRR. So I'd be more than happy to do as many of those as I possibly can. And the rest of them are sort of distributed, as I said, multiple areas of real estate, but also multiple geographic locations.

- Yeah, no, that sounds like a great approach. When you started, was there certain geographies that you were more interested in? Like, have you found that over time, you've gotten more comfortable putting money into geographies where perhaps you don't understand them as well as some of the local ones?

- Well, just to give you a sense, as I said, the original deal that I did is in Seattle. I know nothing about the Seattle market other than the fact that it's done really, really well. There's a lot of building and you've got some very, very wealthy organizations that are continuing to drive that economy. I invested in a deal in Portland, again, same kind of situation. I've invested in Texas. Never, I think I've been in Houston and Dallas, but I've never been in Texas to speak of, but I think I have two or three deals that are in Texas. And again, it's just a recognition of how dynamic that marketplace has been. I've typically tried to stay away from what I sort of call the Rust Belt stuff. But to be honest with you, there are some interesting situations that can come available. And that's part of what I like about the CrowdStreet platform is you get the opportunity to look at these, kick the tires as you might say, and then decide whether to invest or not. And I should also say, recently, you better decide quickly because these deals are getting really popular.

- You kind of represent a very typical scenario where, you know, you got involved and then you started building confidence. And once you got that confidence up and then you realized, okay, this is changing kind of my original even thinking about how much to put in, where to go, what type of assets. When you started, I think you mentioned multifamily as maybe one of the first, I know your Seattle deal, but have you found yourself getting like a little more adventurous in terms of the types of deals you're investing in and maybe back when you started, you wouldn't have imagined going into certain types of assets?

- I guess I outta start by saying, I have a fairly high risk tolerance. I've seen some major ups and downs in the 50 years that I've been investing and actually got, almost went bankrupt because I was in one company specific stock that ultimately tanked. But as I said, I've got a high risk tolerance. So while I started with sort of a simple thing like, you know, a lending fund and then did one of your blended portfolios, it didn't take me long to go straight to things that are literally holes in the ground or dreams of holes in the ground and buildings to be constructed. Again, those kinds of returns, those kinds of deals typically have a higher return, but there's a reason for that because they're higher risks. You've got much more execution risks than if you're buying a preexisting, you know, multifamily development that somebody's enabled to buy off market and now intends to upgrade and therefore increase rents. But one thing I would say is that I'm looking, I'm gonna be looking at multifamily going forward because I just think that there's a shortage of that stuff and rents are running in us, the landlords' favor.

- Yeah, I mean, certainly multifamily is very popular right now. Are there other categories, other asset classes that you're excited to see new deals launch around?

- Well, there was one that I really liked, again, it was outside of Boston. It was custom manufacturing up in the north shore of Boston. So that was, I really liked, I liked that deal. I mentioned the recent industrial deals. I just think those are really good. I'm probably gonna try to stay away from offices just because it's unclear where that marketplace is going, but that's not to say that there aren't great opportunities that may present themselves. As I said, I'm in at least three different office buildings and they're all, they all seem to be performing well. But at the end of the day, the real question you've got and where a lot of these deals actually pay out is that you're going to sell hopefully for a gain after you get some cash flow while things are going on. But ultimately, this is a case of, you want to see that sale happen. And I think that that could be a little tougher for some of the office buildings that I've got. But on the other hand, if I really do terribly and only make 7%, I'll take that. When I do my planning about what my annual returns are and what my expected returns are, I'm really conservative, even though I'm really aggressive. My expectation for long-term planning is a return of 3%. So anything above that is gravy. So, as I said, even if a 17% deal turns out to be a 7% deal, from my planning standpoint, I'm still ahead of the game. But it's just, it's be aggressive, but plan conservatively. You probably won't be disappointed as a result.

- Yeah, no, that's a great philosophy. What's, is there one thing you wish you'd known before you got involved in investing in real estate?

- Yeah, quite frankly, that I could've done it sooner. I got in relatively early with CrowdStreet, but I think you guys really got started about two years earlier. Some of those initial deals that, where everybody was sort of feeling out how this platform was gonna work, those have had really, really great returns, the first-mover advantage.

- Yeah, well, we've got a lot of new investors signing up, you know, each and every day and some of those are gonna watch this video. So what advice would you give to those new investors today that are just kind of jumping on?

- Well, I think there are two, here's sort of the thing that drives my thinking about this. One is I really like the due diligence that CrowdStreet does. I like the way that the sponsors are categorized and you get a sense of who they are and what they've done. I typically go for, I like the idea of repeat deals with sponsors, although I'm willing to look at new ones, but it gives you some sense of execution. To me, there are sort of two risks associated with real estate. One is execution risk, which is, can the sponsor actually build the building or manage the product or do whatever they say they're gonna do. But then the second piece of this is, as I said earlier, most of these gains are on the expectation of a sale for a capital gain. Well, a sale implies that somebody is gonna take look at those future cash flows and then put a capitalization return on them. That capitalization return is out of my control. It's out of the sponsor's control. It's out of everybody's control, But it may have quite an impact on the kind of return that you might see. So I keep my eyes on expectations about long-term interest rates. And if I were to be of the, if I were to come to the conclusion that they were gonna rise, I'd probably be less aggressive because, or I'd put a bigger discount on those expected returns because if the capitalization rate is 7%, instead of five, you're gonna notice that and what the return's gonna look like.

- That's great. That's great advice. Well, Scott, I've definitely enjoyed meeting you. It's great to hear your philosophy and your enthusiasm. So I'd like to thank you

- Well great.

- for being an investor with us and thanks for taking time to share your insights with the CrowdStreet community. I really do appreciate it.