Host: Trey Stone
Guest: Scott Bassin
Scott Bassin’s Background
Scott Bassin is a real estate investor and mentor to Trey. About ten years ago a mutual friend of theirs, Tom Wilkinson, introduced them to partner in a deal together. Trey bought a 250 unit multi family property called Jefferson House and rebranded it to La Estancia. Since then they’ve done 8-10 deals together this past decade. Scott had a successful professional career but he did so well in real estate that he became a full time real estate investor. Trey notes that making that shift is the ultimate success for a lot of people.
Scott started his law practice in 1981. At that time, he was looking for a house for himself and his wife. His real estate agent came across an “intermission” property which was a commercial property with four residential units up above it. He persuaded Scott to invest in that property. Scott bought it and sold it two years later for a $100,000 profit. He was able to take that profit and reinvest it into two new properties. He continued to do this for the next 30 years that he practiced law in California. Towards the last 20 years of his practice, he joked about how he spent about 80% of his time practicing law, 20% of his time on real estate but the money he brought in was just the opposite. 80% of his income came from his real estate investments and 20% came from his law practice.
In 2003, Scott bought an 18 unit property that he ended up selling for a $2 million profit. He was searching for a place to reinvest it. After searching all over California, he realized he couldn't find anything that made economic sense. He found some properties online in the Houston area- one of which was listed by Tom Wilkinson. He flew to Houston, viewed some properties, and decided to invest in a property in Houston, Texas. Today, Scott owns 1500 or more units in Houston. He is now retired from his law practice in San Francisco. As he records the radio show, he is sitting on the island of Maui on vacation.
Financial Benefits of Investing in Multi Family Properties in Houston
Trey points out that by leaving California, Scott was able to escape state income taxes because Texas does not have them. Scott says that looking at the finances, about 5 years of savings in taxes compared to California pays for the house he bought in Houston. Trey also brings up the financial benefits due to depreciation tax credits. As a full time real estate investor, Scott is now in a better position for his federal income taxes. When you have income property, you can write off depreciation of that property which shows up as a loss for the purposes of your federal income taxes. If you’re not a professional and you’re not a full time real estate investor, you’re limited to $25,000 per person per year for depreciation.
La Estancia and The Strategy Behind It
Trey reflects on a time when a mutual friend of theirs, Cliff Norris, went on a property tour of La Estancia with Trey, other partners, and members of his team to see some of the vacant units. Trey brought everyone into an empty unit and told them to take a deep breath in and out. He swore to everyone that there was a point to this and they obliged. Some people commented politely until finally one of them said that it smelled awful. Trey pointed out that the feral cat urine smell meant they were all going to make money.
Trey emphasizes that it’s not hard to add value to a property that is grossly run-down and mismanaged. They bought the property for well under $20,000 per unit and sold it closer to $50,000 per unit after they repositioned it. They put about $8,000-$9,000 per unit into the renovations but it was still a home run as far as the capital gain that they made. Cliff Norris said that his IRA started at $200,000 when he began investing with Trey. After the past 10 years, it had grown to $700,000. It was partially made possible by Scott Bassin’s willingness to be Trey’s lender in the La Estancia deal because it was hard to finance through a bank considering the condition it was in.
Scott had similar experiences in his career with run-down and mismanaged properties so he understood Trey’s investment strategy. Scott recalls a property that he purchased for $1.8 million in terrible condition. The owner tried to sell it for years and actually got discouraged and took it off the market. After doing some research, Scott wrote a letter directly to him and made him an offer. Scott owned the property for about 3-4 years, renovated it, and sold it for $6 million. He spent less than a million on renovations so the capital gain was significant especially in the short time frame.
Legislation and Real Estate
This is not a show about politics, however, legislature does cause a ripple effect in the multi family real estate industry. Scott identifies himself as liberal and Trey appreciates having someone with different political views on the show to discuss some of the effects of liberal policy on real estate.
Some cities are making it difficult for landlords to do business and Texas has been the beneficiary of that. Legislation in some cities has caused a lot of capital to flow into Texas which in turn causes a lot of demand and property values to increase. Scott says this is true in California and most people are looking for areas outside of California but closer to the state like Nevada or Oregon. Scott said he lived in San Francisco for 50 years and it’s a beautiful city but it’s not the place to be a landlord.
Trey brings up a point about rent control and other policies that affect landlords’ profitability. He says that by introducing so many barriers to profitability for landlords including rent control but also challenges with evicting people who might not take care of the property or who conduct illegal activities at the property, it creates a much bigger housing shortage. When there’s less profitability for landlords it leads to fewer people interested in developing properties and ultimately a housing shortage. He explains that a lot of liberal cities around the country have good intentions in trying to help people by providing access to affordable housing but unfortunately, when the legislature makes it difficult for people to do business as a landlord and get fair market value for units, it undermines the supply of housing that those people need most. This is why the homelessness population in those cities has exploded as less and less affordable housing is available. The overall shortage contributes to the problem. Trey asks Scott to discuss his viewpoint on these issues.
Scott agrees that rent control policies are inefficient. He explains that ultimately rent control drives rents up. He says that research shows that it does not make it affordable in the long run. It keeps it affordable to long term tenants but as far as the market goes, it drives rents up overall. If you try to rent an apartment in San Francisco, a two bedroom would cost about $3500/month for a C or D class property. He says just a bed, not an apartment, could be $600-$800/month. Trey comments that you could definitely rent one of his whole apartments with all of the services and amenities for that amount.
Why Do Investors like Trey and Scott Continue Investing
Trey and Scott have built enough wealth throughout their careers that they could retire and stop investing altogether. Trey finds a bigger purpose in his real estate investing career and has no desire to retire yet. He asks Scott to explain why he continues to invest.
Scott explains that there’s a lot of satisfaction in this industry because they are investing in properties and improving the lives of the residents. The ability to upgrade an undesirable property to a comfortable and safe place where people can bring up their families is a rewarding aspect of this type of investment. It gives Scott a sense of accomplishment beyond the financial aspect. Trey expands on this describing previous projects where they’ve improved safety and reduced crime. He says it also improves the lives of their employees who live on site with their own families.
When Trey was growing up, he lived in a low-income area in Pasadena. It wasn’t always clear if he’d be able to go to college. Trey points out that the wealth he’s able to build in this industry provides more security for his chidlrens’ future. Scott’s children grew up knowing that college was their path and their future without burying themselves in debt. Scott reflects on growing up very differently because his parents weren’t able to contribute financially to his law school. He appreciates being able to provide for his family and giving his kids the opportunity to start out their lives without financial burden of debt.
Scott’s Advice to New Investors
Scott recommends starting out with multi family properties because you can put in the same amount of effort, have a bigger property, have more units, and have more money coming in. Scott encourages people not to be afraid of larger properties. He also suggests that you ask a lot of questions and get advice from people who have experience. You’ll pick up a lot of points that you wouldn't have learned on your own. You also have to watch your funds and where the money goes if you plan to invest by yourself. If you invest with a partner like Trey, you don’t have to manage that as much.