OPENING REMARKS
Last week I had Robert Kiyosaki telling us that Savers are Losers. This week I have Grant Cardone telling us that Cash is Trash, but Cash Flow is King. Based on these two statements you may be thinking that I have something against cash. Just to be clear, I do not have anything against cash. It is the tool by which I pay my mortgage, feed my family, donate to my church, and buy overly expensive hiking socks at REI.
Last week I explained what Kiyosaki meant by his statement. So, allow me to explain what Grant Cardone means by his. First of all, if you do not know who Grant Cardone is, he is a successful real estate investor who specializes in buying large apartment buildings (100 units plus). He has been doing this for approximately 30 years.
What Cardone means by saying that Cash is Trash, is that cash, in and of itself is just paper. It is not even backed by gold. In 1933 President Franklin Roosevelt suspended the gold standard. Then in 1971, President Richard Nixon decreed that the dollar would no longer by defined by gold. In other words, gold would no longer back the value of the dollar. Consequently, the buying power of today’s dollar is equivalent to fifteen cents in 1971, a depreciation of 85 percent.
So, what does this say about the money siting in your savings account. I am not talking about the money you use for your daily living, paying bills, buying groceries, donating to charities, entertainment, etc. What it says is that if you believe that keeping money in a savings account to take care of you in your retirement, you may be in for a rude awakening at some point in the future.
So, if saving money is a losing game and cash is trash, what are we to do. One thing we can do is to trade an asset that continues to lose value for one that increases in value. You can do this by taking dollars that are sitting in your savings account, being devalued by time and inflation, and investing them is an asset (real estate) that produces cash flow at a greater rate of return than what your money market is paying you, not to mention all the other benefits of investing in real estate (property appreciation, tax benefits, write offs, and have the tenants pay off the mortgage).
As Grant Condone says, “Cash Flow is King” because it is cash flow that can give you a return on your money that can keep you at least current with inflation. It is cash flow that will pay you more than the average money market account pays today. And, it is cash flow that increases the value of your multifamily apartments (see the Real Estate Tips for an explanation of how this works).
THIS WEEK IN REAL ESTATE
In the “This Week in Real Estate,” I included an article from the Wall Street Journal that discusses how Airbnb is making a comeback from its Covid lows. My wife and I are going up to Boise Idaho (we already own a property there) to look at other single-family homes that we can set up as an Airbnb. I will let you all know what the Airbnb market looks like in Boise in next week’s newsletter.
AIR BnB REBOUNDS FROM PANDEMIC SLUMP
Airbnb Inc. ABNB +3.70% posted record revenue in the third quarter, punctuating the home-sharing company’s rebound from the collapse in bookings during the early days of the pandemic.
The three months covering much of the busy summer vacation period is typically the most lucrative for Airbnb. People resuming more normal travel patterns and other factors helped the company fill the rentals available on its platform. Airbnb said it is preparing for bumper Thanksgiving business, with bookings at the end of September up roughly 40% from the 2019 level.
Airbnb on Thursday said revenue for the third quarter reached $2.24 billion, up 67% from the year-ago period. The company’s previous revenue record of $1.65 billion came in the third quarter of 2019.
The strong bookings helped the company generate a $833.9 million profit, its highest ever and almost four times the year-earlier figure. Results beat Wall Street expectations for both the top and bottom line.
“The travel rebound is here despite the continued pandemic,” Airbnb Chief Executive Brian Chesky said on an analysts call.
Airbnb shares closed up 3.23% as investors anticipated robust earnings and were little changed following the results.
Bookings on Airbnb plunged last year early in the pandemic, as travel for business and pleasure effectively ground to a halt with people sheltering at home. To adapt, Mr. Chesky redesigned the company’s website and app last summer to entice customers to book nearby getaways. The company also slashed costs, cutting a quarter of its staff, freezing noncritical projects and reducing its marketing budget.
Remote work has allowed employees to log in to meetings from nearly anywhere around the world, and many large employers have signaled that working remotely will remain an option even post-pandemic. Those policies have driven longer-stay bookings on Airbnb.
The company earlier this year also launched a search feature that helps curate trips for customers who don’t know where and when they want to travel, allowing Airbnb to nudge prospective travelers toward locations where it has supply. In August, Airbnb said the feature had been used more than 500 million times, with the most-booked trips being treehouses, beachfront properties and houseboats.
Now overseas travel is picking up again. Within one week of President Biden saying in October that the U.S. would ease rules on cross-border travel, such international bookings rose 44%, Mr. Chesky said. Airbnb’s cross-border activity is back to 80% of what it was at its pre-pandemic peak, he added, now accounting for a third of the company’s total business.
The company expects sales in the current quarter of between $1.39 billion and $1.48 billion, topping both the 2020 and 2019 figure. Cost management, the company said, should boost the bottom line in the current quarter even more than in the third quarter, though analysts still expect a loss in what is a seasonally weaker travel period.
The company says it is seeing strong demand for travel extending well into next year. Airbnb added that as travel markets reopen, some of the strength it has seen in average daily rates is likely to ebb as people start heading to lower-cost markets.
Airbnb also is contending with stiff competition. Expedia Group Inc.’s Vrbo is trying to lure new hosts as travel demand increases.
Wall Street Journal
REAL ESTATE TIPS
Last week we discussed the important of the Net Operating Income (NOI). As a brief overview, the NOI is equal to total money collected (rents, etc.) from your tenants minus all the property’s expenses, not counting the debt (mortgage). This is a very important number as it is the number lending institutions look at to determine if they are going to lend you money. It is also important be cause as you increase the NOI, you can increase the value of the property. So how does this happen?
This brings us to this week’s topic – The Capitalization Rate, or as it is better known, the Cap Rate. We can have a long conversation regarding how Cap Rates work, their meaning to a real estate investor, and how they are applied. But for our purposes I am going to focus on only one aspect of the Cap Rate and that is how in combination with the NOI, you can increase the value of your property.
The Cap Rate is the rate of return you would get if you paid 100% cash for a property without using financing. So, if a property is worth $100,000 and your cash on cash is $10,000 your Cap Rate is 10%.
Each area has its own Cap Rate. There are a number of ways to determine the Cap Rate of a particular location, but probably the best way is to ask several commercial real estate agents, and take the average of the numbers they give you. For those of you who are more into numbers the above formula is another way to determine the Cap Rate of a particular property. Let’s look at an example:
Number of Apartment Units – 8
Current Property Value – $749,900
Current Annual Net Rent – $78,865
Current Expenses – $29,056
Current NOI – $49,809
Cap Rate – 6.64%
If you increase the rents at a rate of 5.5% each year over the next three years without significantly increasing expenses, you can increase your NOI to $63,489. If you take this number and divide it by the Cap Rate ($63,489 / 6.64%) you get $956,159. This is an increase of your property value of $206,259 ($956,159 – $749,900), an increase of 27.5% on the value of the property.
This is why you want to increase your NOI. Not only should it increase your monthly cash flow, it can also tell you how much the property may be worth depending on the Cap Rate for the property.
OPPORTUNITY ZONE
This week there were no properties that qualified for the Opportunity Zone. So, I will take the opportunity to explain what I look for when searching for properties that make it into the Opportunity Zone.
First of all, I look for duplexes, triplexes, and fourplexes – no single-family homes. The reason for this is that when you have a vacancy on a single-family home, you get no rental income while you try to get a new tenant, and the owner bears the burden of paying the mortgage payment. With two or more units, when you have a vacancy, the additional units provide you with the financial cushion you need as you look for a new tenant. I have experienced this first hand with the triplexes I own. Those few times when I had a vacancy, I still met all my expenses without using my own money.
I also do not include properties that have five or more units. As I have mentioned in previous newsletters, properties with five or more units are considered commercial property. As a result of this, different rules apply, especially when obtaining loans from lenders. Additionally, these properties are more expensive, and depending on the price of the property, may require investors. The laws regarding the use of investors are governed by the Securities and Exchange Commission (SEC) and require attornies that specialize in this type of law.
The other thing I look for is that the property is located in neighborhoods with relatively low crime rates. While all neighborhoods can fall prey to crime, some neighborhoods can be more dangerous than others (gangs, drug sales, etc.).
The last criteria I look for are properties that will give the buyer a positive rate of investment (ROI). Rates of return are never guaranteed. You never know what is going to happen that may reduce your ROI to zero or even into the negative range. However, when underwriting a property, assuming you are reasonable with the amount of rent collected, and the expenses incurred, the property has to show that the ROI is positive.
To include a property in the Opportunity Zone, they have to meet all of the above criteria. This week, none of the properties I reviewed this week met all of the criteria. Let’s wait and see what next week brings along.
MY JOURNEY (Sergio Sais)
Regarding the triplex I am in the process of buying in Shelbyville, Indiana, based on the Inspection Report, we determined the roof needed replacement. We obtained a couple of estimates and my agent sent them to the seller along with a counter offer. The seller requested an extension until this past Friday on their response so they could get their own roofing company to give them an estimate. I stated that was fine. In the meantime, I continue to look for other deals.
The real estate agent I work with in Kansas City MO sent me a property that consists of 5 duplexes and 4 fourplexes for a total of 26 units. The seller is asking for $3,250,000. Obviously, this is a very different situation than the one in Shelbyville. Due to the larger price tag ($125,000 per unit), it will require more intense negotiations and several investors to make this deal happen. The property is a C+ to B- property and is in a good location. These are the types of properties that can make for good investments for small investors. I ran preliminary numbers on the property and it seems to be overpriced. I contacted the real estate agent and requested she check on the average unit price for the area and the average rent per unit. Once she gets back to me, I will determine if this property is worth pursuing. I will keep you posted.
MY JOURNEY (Sam Yin)
I have written about my REI journey and talked about the trials and tribulations associated with it. Looking back on this journey, I could have done a few things differently for greater growth, but those opportunities have passed. Looking forward, I can only see linear and more difficult growth as prices continue to climb and markets continue to be screened by other investors moving into the small multifamily space. This is where networking is crucial to keep the momentum going for exponential growth.
The saying goes: “You are the average of your five closest friends.” I find that to be an accurate statement most of the time. If you are absolutely content with your position, your routine, and your level of control, then your five closest friends are in a similar boat, and that is a wonderful thing! If not, and you want more control of your time, AND you want REI to be your vehicle, expand your network. Meet some new friends, find those that will inspire you, and achieve your goals faster.
I am about to close on a 10-plex next week, but several minor items need correction before the Lender will fund, or else there will be a holdback. The Seller will not budge, since he already discounted $35K, raised rents by $50/unit during escrow, and will pay for property clean-up before the close of escrow. As I said before, negotiations are in phases, and this is now entering the final phase. After two short phone conversations, my Agent agreed to pay for all the corrections out of pocket and use the contractor/Handyman of my choice. We have worked together on three deals back to back; he knows my methods, understands my needs and criteria, and is motivated to close this deal so we can move on to another. He knows my underwriting standards.
I have already scheduled some Capex repairs/renovations for mid-November so I can follow up with a rent raise by January. These raises are the result of a change of ownership, as the tenants will see immediate improvements to their living environment. Looking ahead, I will acquire another asset of similar quality by leveraging equities to keep my reserves untouched. This can be achieved through additional exchanges, refi, or HELOCs. However, the problem remains: how to scale? Finding the right property at the right time requires hours of screening, meticulous planning, precision strategy, and deep knowledge of markets and opportunities. This is where networking and partnerships come in to build the deal and opportunity funnel.
Hedgehog Capital Investments is that vehicle because it has built that team. Sergio and I continue to expand our network so that “deal flow” is centralized. Sergio has put a lot of work into finding and refining the right property, at affordable prices and with great returns. I hope some of the readers have seized the opportunities that have been showcased in this newsletter.
On Monday evening, I had the opportunity to meet two outstanding individuals in the REI space, one of whom was Sergio’s close friend. They are the types of investors I aspire to be. Their journey has taken them to a place where they now control their destiny. Although we all came from very different backgrounds, the core goal of everyone at the table was to be in control of their time, set their values, and provide financial security to their loved ones.
To keep on achieving your goals and enjoying the time you took back, make sure to strengthen your foundations. Start with your physical fitness to keep you energized and strong and enjoying the fruits of your labors. Educate yourself in the REI space. Stay mentally fit and prepared to execute when an opportunity comes your way. Take time to reflect and focus on your “why,” to know what all this work is for, in order to find spiritual fitness. Finally, take control of your finances by reviewing your budget so that you can extract more to invest and make that money work for you. This is my path to personal wealth. I hope you can incorporate some into your routine and strategy.
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If you want additional information on what Sam and I are doing or would like to partner with us on a deal, email me at sergiosais14508@gmail.com. Have a great week.