OPENING REMARKS
WOW!!! I remember the first time I heard that Robert Kiyosaki was saying that savers are losers. I thought, “Man, that’s harsh!.” It wasn’t until I read what he meant that I understood what he was saying. He was not saying that people (savers) are losers, but that people who had their money in a savings account were losing money.
For those of you who may not know who Robert Kiyosaki is, he is the author of the Rich Dad / Poor Dad books. He is also a very successful businessman and investor. So what did Kiyosaki mean? Let’s assume you have $100,000 of disposable money in your savings account. You own your home, you have a good paying job, you may have a 401K where you are putting in 10% of your income, and the 401K is invested in a properly diversified mutual fund. The mutual fund does what it does – goes up and down depending on what stocks make up the mutual fund. However, you have no other investments.
So how hard are your $100,000 working. As of the writing of this newsletter, money markets are paying 0.50% on your money. This is one half of 1 percent. This means that if you do not touch your money for a whole year, at the end of the year your money market account has made you $500.
But how hard would your money work if you took that $100,000 and invested in real estate (multifamily properties). Let’s say you made 5 percent on the investment (this means that you have paid all your real estate expenses including the mortgage), how much money would your investment have made in one year? Five percent of $100,000 is $5,000.
Think about this. It would take your money market 10 years earning 0.50% ($500) to equal what your real estate investments made in one year. And this does not include the other benefits of real estate investing: property appreciation, deduction of expenses, tax benefits from depreciating property, and that other people pay down your mortgage.
You are not a loser, but your money, when you factor in inflation, may be losing a lot of value. If you have not started investing in real estate and are interested in becoming part of our real estate investment team, send me an email at sergiosais14508@gmail.com. Together, we can start putting your money to work at least as hard as you do, if not harder.
THIS WEEK IN REAL ESTATE
Some of you who watch all the programs on cable about people buying houses, fixing them, and then selling them for a huge profit (this is commonly called flipping) are thinking, “this looks like like a good way to make money.” There are people who do make money, but it is not as easy as you think. I prefer the buy and hold strategy to building wealth. This week I included an article from the Wall Street Journal that discusses Zillow and its decision to drop its home-flipping business. Even the big guys can have problems making money doing the flipping thing.
Zillow Group Inc.’s unexpected decision to scrap its home-flipping business has analysts questioning whether the company has an alternative path to growth with as much promise as the enterprise it is leaving behind.
“The digital real-estate company, meanwhile, has started trying to unload thousands of the homes it owns and has been talking to private equity and other investment firms to gauge interest. Pretium Partners, one of the largest owners of single-family homes for rent, is among those in advanced discussions with Zillow about buying homes, according to people familiar with the matter.
Zillow’s largest remaining business revolves around its home-listings website and generating leads to real-estate agents. This practice is high margin and brought in $207 million on an adjusted earnings basis before interest, taxes, depreciation and amortization last quarter. That was up from $195.5 million during the same quarter last year and more than double what it earned in the same quarter of 2019.
But analysts have expressed doubts about how much the company can build on that success going forward, given that the business is already well established. Any prospect of significantly expanding the lead generation business, said Edward Yruma, managing director at KeyBanc Capital Markets, “is pretty much tapped out.”
Zillow’s shares sank 25% on Wednesday, the day after Zillow said it was slashing a quarter of its roughly 8,000 person workforce and abandoning the home-flipping business that was responsible for more than half the company’s revenue.
Securities advisers downgraded the company and investors ran for cover.
“We no longer see upsides in the shares,” Piper Sandler analysts said in a Wednesday note, after downgrading the company. Zillow shares opened lower in Thursday trading.
Zillow said it made the call to stop flipping homes because its tech-powered platform couldn’t make accurate price forecasts. As a result, Zillow lost hundreds of millions of dollars on homes during the greatest housing boom in recent history.
Its home flipping business, Zillow Offers, a so-called iBuyer, had provided an easy way for customers to sell their home fast, sometimes without the need of a real-estate agent. By seeking to make money primarily from transaction fees instead of price appreciation, Zillow could come out a winner as long as it broke even on the sale.
But in too many cases, the company said it overpaid for homes it couldn’t sell fast enough. Now as it exits the business, it is trying to unload about 9,800 houses on hand, plus another 8,200 it has contracts to buy and will eventually need to sell, many concentrated in Florida, Texas and California.
During an earnings call Tuesday, Zillow Chief Executive Rich Barton said the company would explore new revenue streams, particularly those that are not as asset and capital intensive as houses, and that the company could begin to scale up.
A Zillow spokesman pointed to the growth potential of Zillow 360, a service that pitches home lending, title and other services to customers who connect to real-estate agents through the Zillow website and then purchase homes.
The company said it also plans to improve the Zestimate, a popular feature that allows any website user to instantly get a price estimate on a home.
A few analysts, including those who doubted the iBuyer proposition in the first place, see positives in the company moving more toward improving each step of a home sale process, from finding a home to buying it to selling it again one day.
“That opportunity may even be bigger now,” said Tom White, senior research analyst at D.A. Davidson Cos. Mr. White said that instead of betting the house on flipping, Zillow may now choose to use its capital to acquire existing companies with proven products that it could add to its growing lineup of services.
For Mr. Yruma, it is hard to imagine that product add-ons, like 3-D home showing or closing services, would ever be more than marginal growth-boosters compared with the potential of home-flipping—a business the company once hoped would become a $20 billion a year enterprise.
Home-flipping competitors like Opendoor Technologies Inc. and Offerpad Solutions Inc. plan to continue building. If still incipient iBuying one day changes the way homes are bought and sold on a mass scale, as Zillow once imagined was possible, it could spell trouble for Zillow’s core customer base: real-estate agents.
“If the agent is endangered by these changes, their business model is at risk as well,” Mr. Yruma said.
Ark Innovation, the flagship exchange-traded fund of maverick stock picker Cathie Wood, bought nearly 290,000 shares on Tuesday, according to the fund’s trading website, before Zillow said after the market closed that it would be leaving the home-flipping business. Her flagship fund then sold 2.9 million shares on Wednesday. All the funds in her firm’s portfolio collectively sold 3.9 million shares on Wednesday.
Ms. Wood couldn’t immediately be reached for comment.”
WALL STREET JOURNAL – November 4, 2021
REAL ESTATE TIPS
We are continuing our back-to-basics sessions. Today I am going to discuss Net Operating Income and why this number is so important in the multifamily (five units or more) world.
You have probably heard Sam and me use the term Net Operating Income and have most likely asked yourself, what are they talking about?
The Net Operating Income number is derived by taking your effective gross income (rent money collected plus any other income you may be collecting, minus vacancies or credits you are giving your tenants) and subtracting expenses from it (expenses do not include your mortgage payment).
So as an example, let’s say your annual gross effective income is $16,826.40 and your expenses are $6,775.27. Let’s do the math: $16,826.40 – $6775.27 = $10,051.13. This is your Net Operating Income (NOI). This is the number the bank looks at to determine if you can pay your mortgage. The larger the NOI the better. In fact, by increasing your NOI, in the multifamily apartment world, you can increase the value of your property. I will cover this amazing concept in next week’s newsletter. It will explain, why Sam and I are working so hard to get apartment deals for our investors. If you are reading this email, you are one of our potential investors.
OPPORTUNITY ZONE
Number 220, Shelbyville Indiana. Shelbyville is a city located in Shelby County Indiana, approximately 30 miles southeast of Indianapolis. It is also the county seat of Shelby County. With a 2020 population of 19,663, it is the 48th largest city in Indiana and the 1889th largest city in the United States . Shelbyville is currently growing at a rate of 0.66% annually and its population has increased by 2.46% since the most recent census, which recorded a population of 19,191 in 2010. Shelbyville reached it’s highest population of 19,663 in 2021. Spanning over 13 miles, Shelbyville has a population density of 1,580 people per square mile.
The average household income in Shelbyville is $62,158 with a poverty rate of 16.60%. The median rental costs in recent years comes to $795 per month, and the median house value is $102,100. The median age in Shelbyville is 36.2 years, 35.2 years for males, and 37.1 years for females. This duplex is located near the updated downtown and library. Both units are fully rented. Unit No. 220 is a recently updated 2 bedroom 1.5 bathroom, and Unit No. 224 offers 2 bedrooms and 1 bathroom.
Sale Price $100,000.00
Down Payment $25,000.00
Closing Costs $4,000.00
Hedgehog Capital Investment $1,00.00
Total Out of Pocket $30,000.00
Loan Amount $80,000.00
Annual Mortgage $4,864.18
Annual Rent Income $17,712.00
5% vacancy rate $885.60
Annual Expenses $5,206.94
Net Operating Income $10,071.12
Annual Mortgage $4,864.18
Annual Net Cash on Cash Return $5206.94
Annual Percent Return on Investment 17.36%
MY JOURNEY (Sergio Sais)
As those of you who have been following this newsletter know, I am in the process of buying a triplex in Shelbyville Indiana. Shelbyville is approximately 30 miles southeast of Indianapolis. I received the inspection report from the inspector. It indicated that the property will need a new roof in one to three years (which to me that means it needs a new roof now), a new heater, and an assortment of other odds and ends that need to be taken care of.
I discussed the various issues with my real estate agent. I asked him to obtain at least three estimates to replace the roof. The estimates came in all within a few dollars of each other (approximately $6,700). We decided to submit a request to the seller to fix the roof and to credit us $5,000 to fix all the other odds and ends. The seller’s real estate agent called my real estate agent and told him that this was an unreasonable request. I told my agent to tell the seller’s agent to either submit a counter offer or pull out of the deal. The seller has until the end of the week to respond to the request in writing.
In the mean time, I am putting together all the paperwork required by the lender. The more property you acquire, the more paperwork is required. This is probably the one part of the business that becomes a pain in my behind. But it is part of the process.
In the mean time, I am continue to look for other properties. I was contacted by a real estate agent in Boise Idaho who wanted to know if I was interested in buying properties in Boise (we already own a single family residence in Boise). I told her that I was interested in apartment buildings consisting of 20 units or more. She said she would start sending me properties as they come up.
I will let you know next week if I am still in the deal in Shelbyville or if the seller decided to pull out.
MY JOURNEY (Sam Yin)
Lately, I have written more about mindset than my current REI journey. I felt it was important to remind people of how powerful your mindset is; how it can provide guidance, energy, and the drive to overcome the obstacles you will face. Time and experience will determine whether you choose to graduate from one asset class to another. You can be just as successful by focusing on one asset class you are good at, or on multiple asset classes. Only you can determine what makes you successful.
Do not spend too much time comparing your portfolio with others. Instead, compare how far your portfolio has come, are you happy with it, and where do you want it to go. Mine has come a long way, and I am very content when I compare it to last year, the year prior, and the decades before that. However, I want it to go further and have chosen to expand it through networking and partnerships.
This past week, I completed two evictions, one of which required an attorney. Both resulted in peaceful removals of the tenants and minimal work on my part. One of the evictions was for a Single Family Residence in escrow that will now close, and the proceeds will exchange into a 10-plex. This exchanges a net-zero asset with 50% equity into an instant net $3000/monthly asset, with 30% equity, a prime example of REI advantage.
The other was a unit within an 8-plex where the tenants were a nuisance. By design, and to minimize wasted time, the rehab began the same evening the unit became vacant. The plan is to refurbish with durable/economical material, with minor redesign/rearrangement of the kitchen layout, and a two-tone scheme to modernize the unit and raise rents. The cost should be near zero since the rent for November was paid to ensure first dibs on tenancy, and the past deposit (two-month rent) was forfeited, with a contingency of another month’s worth of rent to assist with the rehab cost. This was achieved through solid communication and building good relationships with key players in the government network.
Being an owner/manager means that there is some active participation on my part, but the systems in place mean the majority of those activities are phone calls, text messages, and bank logins to keep the books up to date. Because of the evictions, I made three physical visits this past week to verify vacancy and to meet with the contractor that will complete the rehab/remodel. I tend to be old school, focusing on practicality, but I am aware of this, and thus I involve my wife for a fresh perspective of modern designs and schemes that will make the unit more attractive. In the week prior, I had an emergency water leak from a tub faucet that required some cutting into the tile and the wall to complete the repair. That was quickly resolved with a phone call to a local Handyman, a two-day job costing $450.
I continue to analyze other potential deals to keep up to date with my education and pick off the ones that are within reach. My next goal is to move into the hospitality asset class, mix-use, and land development. The Real Estate Hedgehog Newsletter provides education and motivation to those that are on the fence about REI. It can also serve as a roadmap for those that have stalled in their journey by learning about how Sergio and I, and others, have overcome common barriers. Hedgehog Capital Investment helps you achieve your goals and reach milestones to build a solid cash flow foundation.
The right mindset is important for efficient operations. Refining systems and processes is almost equally important to keep losses to a minimum and allow time for growth. For me, the name of the game is buying back time to enrich my life and my family’s. Reward yourself, your family, and your network, now and again to keep you in the right mindset.
SHARE THIS NEWSLETTER
If you liked the information in this newsletter, please feel free to share it by hitting the above share button. If you are not on my mailing list and would like to receive the weekly Real Estate Hedgehog email, hit the subscribe button below.
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