How do you protect your assets and keep your equity amidst the changes in the market? Here to share a realtor’s take on the matter is Nancy Chu. Nancy is the Owner and Team Leader of Nancy Chu Homes. In this episode, she joins Jack Krupey to discuss the true extent of the impact of the recent market shift on buying and selling homes. Her insight on it just might surprise you. Plus, get pro financial tips and expert advice on purchasing real estate. Stay tuned!
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A Realtor’s Take on Alternative Investments With Nancy Chu
I’m excited to have our guest, Nancy Chu. Nancy, how are you doing?
I’m great. Thank you.
We’ve been in touch for a few years now and have done some investing even through the fund. It’s great to connect, do a little deeper dive, and learn a little bit more about you and your business, and how you look at investment opportunities. Thanks for being here. If you could just give me a background.
My name is Nancy Chu. I run a real estate team called Nancy Chu Homes. The team itself has been around for several years, although I have been in business for about seventeen years now, in 2022, in the Northern New Jersey market, primarily. I will tell you that we’ve had a couple of good years. In 2021, we closed about 168 units at about $82 million, which is nice. It puts us as one of the top 20 agents in the entire Garden State Multiple Listing. We’re busy. I would tell you that the market in 2021 was super busy and kept us going.
How did you break into real estate? What were you doing before? What was the transition like?
I went to school for theater. It was interesting because, at the same time, I developed a career in medical administration. I happened to find a job that was an opportunity that allowed me to grow. I got myself to a point where I said, “I have to step away from theater at some point.” I wasn’t going to make it to the show. It seemed like a good idea to find something else to do. I’m not sure that I thrive outside of running my own business, which a lot of people who are in business have that bug and itch. You got to run your own thing.
When I was looking to transition, we moved to Jersey. I could not stop looking at homes. My husband was like, “You should do this.” I ended up getting my license. I remember he teases me about this all the time. I say things like, “If I don’t sell a house in our first year, are we going to be okay?” I made sure that we had enough money to cover it in case I didn’t bring in any income, but in my first year, I did 22 transactions. We did okay.
You started before the last crash. I get a lot of questions about what’s happening in the world, the interest rates going up, and the potential risk of the business. How do you look at what happened in 2008 versus what’s happening in 2022? What are you seeing?
I don’t see the same thing. You see a lot of news media out there saying things like, “Foreclosures are coming. There’s a tsunami of foreclosures.” We all know that’s not true. Everybody I know who purchased in the last several years has purchased with significant amounts of equity in their home. Lending standards have been pretty harsh. They’re not allowing people to do these things anymore, to do these low money down lows. I’m not worried.
Most people, especially if you add on top of the amount that their houses have grown from the market itself, the likelihood is that no matter what they owe, they can probably sell the home and take their equity out of it rather than lose the house to the bank and all the equity that they’ve gained. It’s not the same market. As my husband would say, “This is a bread bubble because it’s baked in. Bread bubbles don’t burst like that.”
I completely agree with you on that, as someone who also lived through the crisis and was even buying loans during the crisis. Interest rates went up significantly. I have known that in certain markets, there is a little bit of a slowdown, at least from the euphoria that there was with maybe multiple offers well above listing or well above asking. Have you seen any changes in the number of offers or houses still trading and bidding wars above the asking price? Has there been any change in the last several days?
I have to say yes, but I’m fully aware that being twelve miles west of the city, we have some insulation. I have colleagues all throughout the country, and they’re starting to panic. You can see them. We put the house on crickets 2 or 3 weeks in. They’re starting to recognize that the pricing is probably slowed down for them in other market areas, especially ones that have vacation or investor-heavy markets.
For us, because we are Northern New Jersey, we do have a direct pulse, a direct line to the city and the folks coming out of the city. If I look at Montclair, which is where my office is based and the foundational town for my market, you can see that a few years ago, the median sale price in town was $750,000. If I pulled up the median sell price now, I would tell you that it’s probably closer to $1.1 million, and that’s only a few years of growth.
What it says to me is that I’ve had little people truly step back into the upper price point. Does that make sense? Anything that’s in that $800,000 and above price point, they haven’t gone anywhere. That’s because they may have been investors anyway certainly in other places. They are cash-heavy. They’re putting down more cash. If they are looking to meet a monthly payment with their mortgage, they may fill in the gap right with cash instead.
I don’t see much market movement in that $800,000 plus range, but I will tell you that in that first-time home buyer, that first-time home buyer has taken a pause. They have stepped back. For those that didn’t buy in 2021 and who waited and unfortunately missed the boat on the interest rate, many of them are looking at a $300, $400, or $700 a month difference in their mortgage payments. I don’t know if that’s tenable for some of them.
Most of those that did buy, even if they put more money down, locked in 30-year fixed. The big difference between the last 2008 and now is that those lending standards were tighter. Also, these were not these option ARM mortgages. There’s a 30-year fixed on Fannie Mae up to a certain level. Even through these non-2M products or portfolio loans for some of the $1 million houses, it’s available.
I do have clients who are looking because there are many alternative loan products. This isn’t the case anymore because the jumbo product is cheap now by comparison to what it was several months ago. I did have an interesting situation where I had a client who came in, and they were looking initially at a jumbo loan. This was several months ago when we were putting in their offer. It was cheaper to put them into a conforming conventional loan at 66% and fill the rest of it in with a HELOC piggyback. Compared to the jumbo back then, it saved them $1,000 a month.
As the interest rate goes higher, we’re starting to investigate seven-year ARMs again. We’re starting to investigate alternative loan products that can keep that monthly interest rate down. I’ve said to my clients, “If you cannot ReFi in the next seven years, there’s something wrong with you.” You must be able to get it together to ReFi in the next seven years. I’ve had people say, “What if I don’t make it?” I’m like, “It’s seven years, for goodness sake. That’s plenty of time to take care of it.”
You stay busy with the brokerage side of the business. What have you done as far as personal real estate investing?
This particular market has made it difficult. There aren’t as many good delicious deals. It’s funny because I get off-market properties they come through, and none of them have good cap rights. For the first several years, my husband and I used to do slow flips. We would purchase a property well under the median. In that distressed property range, we would make sure to get it up and running enough that we could live in it. We would slowly flip it over time. We would wait for our capital gains to be done or close to done, and we would sell it at a profit and piggyback our way into the next property.
We haven’t had much success in the last few years because any deals that we’ve found, we’ve funneled to our investors. Honestly, I need to keep my investors fed. I have probably failed myself disappointingly. We don’t keep a lot of rental property at this point either because the retail portion of our business has been keeping us quite on our toes. We only have kept three doors. At this point, we are looking around for funds because the less I have to hands-on manage, the better for where we are. I don’t know if you have that with your clients. a
It’s a typical story at this point. We have a lot of investors that are tired landlords and busy professionals. You fit into both categories because you’re a busy professional. You have to do it yourself enough to know that, in real estate, if you have 1 or 2 units, it’s not truly passive. If you’re part of 100 or 200, it’s big enough that you have an economy of scale, and it becomes a little more passive. That’s a transition I’ve made over a period of time as well after having 50 doors when I was in my mid-twenties. If I had hair, it would be gray probably from that experience.
There are many great markets. Technically, we’ve been keeping our eye on Vegas and, for instance. There are some fabulous markets you can get decent returns on doing decent rents. I’m at that point where I have to decide, “Do I try to push myself into enough doors that it makes sense to hire the management company?” I agree. Up until a certain number, It’s your hard work, blood, sweat, and tears. In truth, having someone who has the infrastructure already in place that we slide right into, I’m okay with that.
A full-time real estate broker qualifies as a real estate professional. When did you start realizing that on your tax returns? Is that something that was part of your planning years ago, or is it something, as the volume increased and the tax bills got higher, you don’t get to the rental?
For the first several years of my real estate career, I wasn’t technically filing as a real estate professional because I was also writing and directing at the same time. I had a different way to write things off, and it did well for my taxes. When I realized that that wasn’t going to happen, I was pretty much going to step out of that world. That’s when we started looking around.
As with many real estate agents who function, you’re busy running around and doing business that you don’t even think about. For many years, I’ve had a couple of accountants who I loved as people but who, in the end, were not hugely aggressive and were taking their cues off of me in terms of how aggressive to be and what direction we should go in. They were not proactive in terms of saying, “How about we file an LLC? How about we do this?” They weren’t doing that.
“Let’s talk about how you should be filing. Let’s talk about depreciation.” We weren’t having that. It wasn’t until a few years ago when the tax bill took such a huge chunk out of us. I woke up and said, “We have to do something. We have to go out and seek out better financial advisors, better accounting folks, and people who are going to help us make better decisions with our money.
Ever since then, we have been working with higher-level people. That has been helping significantly. It’s going to be another chop of a tax bill in 2022, and we are working hard. I hadn’t thought about this, but I have an ownership stake in two houses that I didn’t even remember. I technically was part owner of it, and we could have utilized it for tax purposes. I feel like I’m an idiot. Is this a show about what not to do?
It’s a great way to learn. Part of a mastermind is to learn from others’ mistakes and help each other. It’s not too late for 2022. It’s the last year of bonus depreciation. We can talk if it makes sense to try to look at cost segregation, even on those two properties, if that’ll move the needle on the tax situation in 2022.
I need to pay for cost segregation. At this juncture, probably it has been slightly better. In terms of moving forward, working with our new financial folks, we have some plans in mind, which is good, but the truth is I’m focused on the retail side of real estate.
That should be the majority of your focus and with the right team. None of it is rocket science once you have the right playbook. For those that aren’t fully aware, cost segregation is an engineering study that can be done, whereas, for a traditional residential property, you have to take depreciation over 27 and a half years. With cost segregation, you hire an engineer to look at, “How much longer does the roof have? What about the cabinets? What about the heating and air conditioning? “
Often, some of those have 3 or 5-year life cycles. In our typical deal, on the larger deals, you get about 30% of the value of the property back the first year. If you’re borrowing at 65% or 70% loan to value, it can often be almost 100% of your investment coming back in depreciation. When you’re at the 37% to 50% tax bracket in high tax states, it can save you a significant amount in taxes. It’s a powerful tool. Often for a small single family, if it’s in the Midwest. If it’s $100,000, it’s probably not worth it. If you’re in an area where the values are close to $1 million, it may be worth the $7,000 to do the engineering study, but it saves you $50,000 in taxes.
Especially if you’re going to hold onto it. Moving forward, I don’t think I’m going to be selling anything. We’re going to hold anything that we purchase forever and ever.
One of my other friends is saying, “ReFi until you die.
Houses are storage banks for funds. I could utilize it as a rotating credit source to fund other things. That’s an amazing realization. That’s something that a lot of real estate agents don’t always understand and know how to talk about with their investor clients, for instance.
I focused on business that ended up with the one track in mind, and you end up on the hamster’s wheel. Instead, you step back and think about long-term building.
I’m focused on half of a state. You have your eye on a lot of different markets. What are you seeing out there in the other markets?
It sounds relatively similar that there’s a little bit of a pullback. It’s more coming down to earth than any major crash. There are markets with 5% to 10% corrections. There’s a market where the average daily inventory went from 30 days to 40 days and is still well below the historic. I’m blanking on the exact numbers, but still, most markets are well below the historic inventory levels.
I’m in a mastermind group that has a Facebook group, and the people from all different markets were posting. In San Diego, everything except the super high end was still perfectly fine. The middle market type properties barely affected more than a few percent. The higher end of the market where a lot of sellers were trying to stretch the market and see what they could get seems to be what’s come down to earth. New York may be a little sheltered from that.
I was at a market center in San Diego. It’s the opposite of us. Our higher end has stayed fluffy and healthy, while our lower end has suffered more. You have to understand that November 2021 and December 2021 were active for us, which is usually a sign. For me, it’s a sign that January and February 2022 are going to be crazy because it means that no one’s taking a break. They’re all pushing through the holiday season to try to get into something before summer starts.
We’ve gone from lovely 1,800 square foot houses coming onto the market in a market like Montclair and having 25 to 37-ish offers on that property. That property did perform. For instance, let’s say, the house is listed for $929,000, and it sells for about $1.45 million. That’s been our market. Those are the ratios. As a matter of fact, the ratios have even moved higher at this point.
The thing that was interesting about it is that the houses are still performing at the same ratios, even if you only get 3 to 7 offers. I’m going to assume that what we’ve got are the people who have good financials. The ones who were capable of playing in this market in the first place are still there. They’re players, and they can still do it.
A lot of folks were throwing offers at properties. I don’t know how much hope they had, or maybe they were not informed of the performance the market was going to have. You’ve got a lot of folks in that 25 to 37 range who are putting in offers may be around $1 million, $1,000,001, $1,000,002, thinking, “This should be fine.” Instead, the three that are remaining are as good as the top ones from before. We’re not seeing a number’s movement, even if the reduction in offers.
This is a little bit of a separate topic, but it came up in conversations. The Hamptons and the Jersey Shore rental market is down significantly. In the last few years, people weren’t traveling internationally because of COVID. They were spending their money on Hampton’s rental. I heard from someone who has some property out there that they were down about 30% from the renter in 2021. That leads me to think people are finally traveling, taking that Europe vacation that they were putting off for several years, or going somewhere else other than staying local.
A beach rental is great if you want to keep other people away from you. It feels like we’ve gone right back to normal. Once they lifted the mass mandates on the planes, it was given permission for everyone to fly free. I agree. Everyone seems to be traveling all over the place now.
I’m excited. I’ve got two trips to Europe this summer on 2022 myself.
I’m taking sad short trips, like weekend trips and stuff, because we’re not able to leave the business now. It’s a good problem to have.
When things are good, you grind and continue to build the passive income. Are you into anything besides real estate? Have you dabbled in crypto? What are your thoughts on some of this other stuff?
We have a piece of some crypto. If it were a chocolate coin, we’d break it up into a tiny little piece, and it would end up looking like a spec on the ground. Both my husband and I are of that generation that probably was not initially comfortable with the concept of crypto. Does that make sense? I’ll be completely honest with you. The first two properties that I purchased, I purchased entirely with cash. I wasn’t even comfortable with lending initially. It’s probably partially cultural and the age bracket that I’m in. I’m older than you think. Generationally, we were not stupendously comfortable with the concept of lending.
I see that with my clients all the time. I have older clients who are like, “Where’s my cash offer? I want that cash offer.” They see that as true stability, as opposed to mortgages. They have unusual ideas of what mortgages are. They find it negative as opposed to the younger generation. These folks that are Millennials in their 30s look at this and say, “Money is cheap.” Even at 6%, it is still well below the historical national average of 7% to 7.5%.
They look at it, and they’re like, “This is cheap money. I’d much rather borrow at this percentage than take my money out of the market where it’s making more.” It’s been interesting. We came to this game a little bit late on the other stuff because I’ve had to train myself to think like a slightly younger person. That’s probably a nice way of putting it.
I have a small amount of crypto personally. Moving down to Puerto Rico, I’m surrounded by the crypto enthusiast, some of whom bought it for $200 a coin and have become multimillionaires. Some of them were dumb luck. I know a few poker players, and I don’t want to say it’s dumb luck, but because poker became illegal, they were getting paid in Bitcoin. This was back in maybe 2012.
There was a point when online poker was outlawed, and now it’s back. Some of them fell into it because of that. Others were into the technology. They were not finance-driven people or money-driven people but were into the technology and its decentralized nature. They found wealth because they were interested in it as a hobby.
I’m not exactly a crypto enthusiast myself, but I spend a lot of my time researching different opportunities. It’s been interesting. That’s maybe 1% to 2% of the wealth of your wealth could be in it, as far as a hedge in case there’s some catastrophic change in the world order in the coming years. I don’t get distracted. There are many things you can do at once. I’d tend to focus on cashflowing investments, including all these real estate syndications and other things that spit off positive cashflow.
There’s a bandwidth issue, and there are many things. It’s funny because even now, my son is talking about things that I don’t quite understand, like art that they make on the internet and exists in the ether and what that’s worth. My son’s producing that. I don’t have the bandwidth for it, although I am intrigued by it. People are starting to purchase homes with crypto. That is coming down a pike. I haven’t seen it by us, but you do see it out in California, and it’s starting to happen.
I saw an advertisement for a company that will lend against your crypto portfolio to turn it into cash. You could buy a house. They secure the house and a portion of your crypto portfolio is collateral. Things are changing, and real estate has changed a lot as well. We’ve been in about the same time. You’d still send maybe mailers. Maybe Craigslist was getting started on the internet. You mentioned training in San Diego. What is your advice? How are you training new agents that are coming into the business on how to make their mark in the market?
I don’t know why anybody’s coming into the market. It’s not meant to be negative. This market is moving fast. I’m almost at a disadvantage in some ways because I’ve been in the market for so long. I have in my head what is a normal way in which the market functions. Some of the young whipper snappers that are coming in don’t have expectations. They’re moving at the pace of the market.
The truth is that there are four significant ways in which any agent who’s starting to work needs to be focused. They need to be focused on lead generation and historical and anthropological economic data. That is huge. Understanding how people relate to money is a huge part of being able to work with clients moving forward and understanding metrics. I keep a significant set of records on not only performance metrics for myself and my team but also all the performance metrics for all the major towns that we work in and how the market is moving in general.
Last but not least, I’m always looking for some growth pathway for other things and opportunities. This is a business where people have taken lead aggregators. You look at Zillow, Realtor, Trullo, etc. They’re lead aggregators. They’ve managed to find a way to wedge themselves between my client and me. I got to figure out how to live and work with these lead aggregators.
At the same time, I need to make sure that the people who are coming to me understand that I am better than Zestimate. I have more value than a straight-on Zestimate. We all know that Zestimates cause Zillow to have a significant loss with their iBuyer program. Maybe it’s not hard to believe that I’m better than Zestimate.
Those are the four pillars of training right now. Because of the aggregators, there are many people with their hands in your pocket. They’re taking nipples and chunks off. You’re not making as much money per transaction as you used to. It’s important to be looking for ancillary businesses that are sideways and tangential to the real estate world so that you have other pipelines for income. You need other pipelines for income. Agents who are in that growing, developing group, there are many hands in the till. That’s what we’re looking for.
It’s like a double-edged sword of access to information. It’s about as free as it ever was, but it’s not free. They all have their hands in your pocket for a few dollars here and a few dollars there.
It’s like James and the Giant Peach. I’m like, “I’m going to take you little chunks out of you all the time.” Anyone who’s coming into this business better want to be in business for themselves. They better want to be thinking in a business-minded fashion. That is a huge part of having success in real estate. A lot of people come in, and they view the houses as the product. They view it as, “The house is not the product. I am the product. The house is the widget in which we sell my product. “
I’ve had my license. I was mostly doing investment sales, but I’d showed some friends some houses here and there. I remember catching myself saying, “I’m not going to talk someone into liking the house.” They know when they see the kitchen, the bathroom, or whatever. They have a vision of a certain living room, man cave, she shed, or whatever it is. That’s what sells the house. It’s not you’re there as an advisor to guide them and help them provide the data that they need to make a decision.
I say to my clients plainly, “I don’t care about the house. You need to pick the house that makes you happy. If there are questionable issues about it, I will let you know, but this is about the house that you want. I could give a rat’s patootie whether it’s a two-door, a Victorian, a ranch, or whatever you want. However, I do care about how much it’s listed for, what the price per square foot is, what the median in the neighborhood is, and what we have to go to in order to win it.
I am 100% on board with you. I’m not looking at beautiful archways and a lovely service deck. I’m trying to figure out whether this house is going to be a good part of your overall investment portfolio. Even if it’s the home that you’re going to choose to live in, and it’s going to be your personal primary home, it still needs to play a part as part of your overall real estate portfolio.
What are your goals for the rest of 2022 in business and investing?
There’s been some talk in the real estate world for those of us who coach and mastermind with other high-level realtors that if you can maintain in 2022, you’re doing pretty well. Does that make sense in terms of dollar volume units? There’s some expectation that people are going to pull back and perhaps, cut and trim the fat and maybe be a bit miserly with their money.
I understand that impulse because there is a whole lot of, “We don’t know what’s happening,” feeling. At the same time, it’s like the Warren Buffet quote, “You should be greedy when others are wary.” It’s always a good time to purchase real estate. All you have to do is find real estate that is selling under the median. Whatever the flaws are with it, the condition, etc., all that stuff is changeable and fixable. You can’t change it if it’s located in the middle island or on the median on a highway strip. Maybe you can’t change that.
If you purchase that below the median for that neighborhood, you’re always going to have a good deal in comparison to what other people are doing and how that market is performing. There’s an opportunity here. We’ve talked about the idea that we had hoped to add a couple of investment properties in 2022. We’re halfway through the year, and we have not yet found something that we’d like. A couple of multifamilies would be nice. We’re not seeing it. There are no cap rates on them. I recognize that I have to leave the area. I can’t invest in my own market area now. There aren’t any opportunities at the level that I would like them to be.
A lot of people are in the same boat. Demographically, people are moving to the Southeast, Sunbelt, and Florida. There was a panel I listened to that had Barry Sternlicht, and a few other big-time real estate billionaires and everybody were still bullish on Florida because of the business climate, and the demographics. People have been moving to Florida for a generation. It’s not the seniors anymore, too. There are the twenties that could work remotely.
The Mayor of Miami was recruiting everything from Bitcoin to financial companies. Goldman’s moving down to Palm Beach, or at least their wealth management division. The one thing that COVID is maybe unlocked is it’s not that the offices are dead by any means. Maybe 10% to 20% of people will work remotely, and certain companies that might have been tied to certain markets are going to be more open to having branch or satellite offices in different places to better recruit talent.
It will be interesting to see how that affects the commercial property in secondary and tertiary markets. I feel like secondary and tertiary markets like Cleveland and towns like that are going to be where you’re going to see that. It makes more sense to have one smaller, large city hub, and have a satellite office centered and clustered around these secondary markets.
In the tech space where Silicon Valley is largely unaffordable, you could be an entry-level programmer and start at $200,000 plus. You’re still similar to New York. You’re getting a roommate, or you’re getting a 400-square-foot studio. You could recruit from Pittsburgh Carnegie Mellon Engineering graduates or Computer Science graduates that end up at a silo office in Pittsburgh. They make half the money, but that’s a good wage for Pittsburgh.
It’s going to increase productivity, too. Not taking people out of their home environments is probably a good productivity booster.
There’s a way to do it, certainly. Working from home if you’re in the first year out of college helps to have some type of office culture, training, and mentorship with certain senior employees, but a satellite office in a more livable market. You could still have those growth opportunities and opportunities to work with a team while not having to uproot yourself and commute two hours a day from full lodges of the East Bay because that’s the only place you could afford.
I don’t have the stomach for that. I’m too old.
I grew up in Jackson, New Jersey, and saw my parents and my parents’ friends commute an hour and a half each way. From the start, I said, “I don’t want to commute.” I’d rather live in a smaller place and have a fifteen-minute commute that’s two hours of my day. I had been fortunate to be able to limit my commutes for most of my time.
It sounds like you have the best. Puerto Rico is the best.
It was an amazing trade to move from New York in 2018. I got out in time. I avoided the whole COVID thing. It’s been great for me, and it’s revitalized my life. I’m happy down here with my new business, spending my time talking to cool investors like you.
You look permanently tan and happy all the time.
It’s great to connect again and chat. Hopefully, we can do this again at some point in the future. Do you have any closing thoughts?
No. What’s your next fun? Talk to me.
We always have opportunities going. I will follow up afterward. There’s a cost tag vendor that we’ve used for a number of our deals. They’ll give you a free quote. They’ll do a back at the envelope for you to give you an idea of what they think you might get. You could decide if it’s worth it. I will set you up with that. I hope everyone enjoyed this episode. Please leave us a review on iTunes, Spotify, or your platform of choice and subscribe on YouTube. Nancy, it was a pleasure chatting with you.