OPENING REMARKS
It was just past the noon hour. Our small group of four took off our backpacks (each weighing 20 to 30 pounds) and scrambled up the last 50 yards or so to the summit. Finally, after more than 12 hours of hiking we reached the highest peak in the continental United States: Mount Whitney. It is located in the eastern Sierra Mountains of California and is 14,508 above sea level at its highest point.
We were elated, tired, and hungry. But ominously, the clouds above us were filling the sky and turning dark. We knew we needed to get off the summit. We quickly signed the notebook that rested just outside the hut, took a picture with my wife, rushed back to get our backpacks, and started the eleven mile journey back to the trail head.
We had to cross a two mile ridge before getting to the point where we could head down the mountain. We were about 10 minutes from the summit when the storm hit. It was violent, strong, and loud. It started innocently enough with some hale coming down. Suddenly, it seemed that the sky exploded. The thunder was so loud that it knocked us to the ground; the lightning appeared to be as thick as tree trunks and crashed all around us. The wind threatened to blow us off the trail, and the hale pelted us incessantly.
Not going to lie, we all felt that this was how we were going to meet our end. It was a two mile slog through wind, hale, lightning, and thunder before we got some relief from the storm. I am writing this newsletter, so you know we made it off the mountain. We made it because we educated ourselves about the mountain, we planned, we trained, and we had the right equipment.
You would think that after this experience I would not want to go back any where near a mountain. I have been hiking now for 10 years. Since then, I have summitted Mount Whitney three more times along with other high peaks. It seems that the more I hike the more I want to hike. Very much like John Muir, I feel that the mountains are calling and I must go.
Real estate investing is similar. Those of you who have gotten the real estate bug know what I am talking about; especially once you get your first investment property under your belt. Much like I keep wanting to climb mountains, you keep wanting to get other investment properties.
But just like climbing Mount Whitney, when it comes to investing in large real estate properties, you need to be prepared. You need to get educated. This means getting information about how investing in large real estate deals work. You need to have a plan. This means knowing what markets and what type of properties you should invest in. You need to train. This means working with people who have invested in large deals. You need to have the right equipment. This means having the know-how, the right team, and knowing the legal issues involved in getting a deal done.
If you want to get more information on how to get ready to climb the real estate investment mountain, contact us at the email address at the end of this newsletter.
THIS WEEK IN REAL ESTATE
Many people are getting into the short-term rental real estate business. While many people do this on their own, many others use companies that specialize in managing these short-term rentals. This Wall Street Journal article discusses some of these companies and the issues they are facing as they compete for market share.
Vacation Rental Firms Vacasa, Sonder to Test Market With Public Offerings
A group of short-term rental companies are poised to go public, testing investor appetite for companies marketing themselves as alternatives to hotels, individual host listings and even traditional office space.
Professional managers of vacation homes and apartments have benefited from surging demand over the past year, as more Americans take advantage of remote work to book stays in small towns and resort destinations.
But the managers also face challenges. They are increasingly competing with renters—who can lock up properties for long time periods—to add listings, driving up their costs. And the lack of new homes is crimping their ability to expand.
Unlike the hotel sector, where big brands like Marriott International Inc. and Hilton Worldwide Holdings Inc. dominate, the short-term rental sector is mostly the domain of individual hosts who list directly on sites like Airbnb Inc., sometimes with the help of small, regional property managers.
Professional managers account for 16% of U.S. short-term rental listings, up from 13% before the pandemic, according to data company AirDNA.
Jamie Lane, vice president of research at AirDNA, said he expects professional managers to keep growing market share in the short-term rental sector because branded properties often get higher rates and occupancy than individual homeowners posting on sites like Airbnb.
Companies like Vacasa and Sonder are betting that managing short-term rentals in bulk is more efficient, and that customers like the certainty of branded homes that meet the same basic standard wherever they go.
Bookings picked up in the summer of 2020, as people tired of being cooped at home started booking vacations, usually within driving distance. Vacasa, which manages vacation rental homes for their owners in return for a cut of the profits, said it almost tripled its revenue between the second quarter of 2020 and the second quarter of 2021, to $238 million.
The short-term rental sector is now larger and more profitable than it was before the pandemic. Total revenue in the U.S. increased to $3.8 billion for the month of September, according to AirDNA, up 30% from September 2019. Revenue per available listing increased by 40% to $149.
But as demand increases, supply in the hottest markets is becoming a problem. Unlike hotels, which only depend on the ups and downs of the hospitality market, short-term-rental operators are also at the mercy of the residential market. That is because they often compete with long-term renters and home buyers when they look to add new listings.
Over the past year, rents and home prices have surged in the kind of places where demand for short-term rentals is strongest, such as California’s Coachella Valley and New York’s Hudson Valley.
Many people also decided to move into their own vacation homes to work remotely rather than list them on short-term rental sites. That has made it more expensive for vacation-rental companies to add the new listings they need to continue growing and meet their lofty valuations. Labor shortages make it more challenging to find cleaners and property managers, squeezing profits.
Wall Street Journal – November 30, 2021
REAL ESTATE TIPS
My partner, Sam Yin, wrote this week’s Real Estate Tips. As part of the back-to-basics series, I asked him to write up a short history of what has been happening in the real estate market in the past 15 years or so and where we are today. Not to brag on my partner, but this is one of the best write-ups on where real estate has been and where it is today. So, please read it. I hope that, just as I did, you learn a thing or two about real estate.
The real estate market is hot. Prices are high. Should you buy or invest in real estate when housing prices are so high? That is the big question for many people sitting on the sidelines. Your goals and phase of life will be the key factor in your decision.
For those who monitor this news on real estate, you may have heard that prices have tapered off in the recent month. They could fall as the Federal Government has indicated they may raise rates in the second half of 2022 to combat inflation. Some feel this housing boom is a repeat of what led to the housing crash in 2006 and 2007. I caution you otherwise.
Having experienced the market leading up to 2007 and enduring the current market, I can tell you there are many fundamental differences. Lending practices were substantially different before 2007, when people were approved for loans based on stated income without proof, allowed 100% LTV financing, and second mortgages upon initial financing were the norm. For example, if you did not have sufficient funds for a down payment, lenders would creatively approve an 80/20 loan: a first mortgage for 80% loan to value (LTV) and a second at 20% LTV at a higher rate in place of the down payment. After the crash, the government stepped, bailed out institutions, and imposed much more strict lending standards and practices. They changed the allowed Debt to Income Ratios and raised the bar on credit approval limits.
In the years leading up to 2007, more homes were built than there was demand based on speculation and the falling interest rates from the double-digit 1980s. The waiting lists for new builds were artificially inflated to create euphoria demand, aided by bad lending practices. Today, the difference is demand is higher than available inventory. The US is about 4-5 million homes behind in inventory based on the current buyer demands. It would take about a decade to close that gap.
The government imposed shutdowns and restrictions caused economic turmoil and the stock market took a dive in March 2020. The Federal Government immediately intervened with extraordinary measures to keep the economy afloat, including stimulus money, additions to Unemployment Checks, billions of dollars in grants, and dropping interest rates to near zero. This made houses more affordable for potential buyers. The idea of negative interest rates was floated and is still on the table. With new variants, more lockdowns abroad, the Federal Government will continue to raise the debt ceiling and intervene to keep the domestic economy moving.
Additionally, the Coronavirus created a shortage in manufacturing, supplies, and labor, leading to a hike in material costs and a slow-down in new builds. At the same time, the shutdowns created a new culture of remote work, allowing people to move away from the city and apartment living. Many remote workers with high-paying jobs can afford to pay higher prices for suburban homes, contributing to bidding wars.
Material costs remain high, and as inflation saturates into every aspect of life, the cost of fuel to transport materials will keep rising. Inflation will also create a rise in wages to meet the cost of living. This vicious cycle will continue for many months and perhaps years to come before it settles, which will keep housing production numbers low. It has been reported that the pace of home sales has slowed, that is, it has slowed compared to the previous months during the frenzy, but homes are still selling at a record pace and overbidding is still the norm.
As the Millennial Generation begins to reach career maturity, get married, have families, and crave homeownership, it will continue to add pressure to demand. Every capitalist knows the law of supply and demand. Barring a full government regulation of pricing and retraction of buying up mortgages, housing prices will continue to stay high and grow. With the new virus variants spreading, the Feds will buy more, keep interest rates low for the next few years, and force the prices to rise further.
I want to be clear, I do not foresee a housing bubble burst in the near future, even if the Federal fund’s rates rise in 2022 and 2023. I believe housing prices will remain high, continue to grow at a healthy pace, and demand will linger for a long period. The rise may not be double digits, but even with a slight increase in rates as projected by the Central Bank, it should still rise slightly above the norm, around 4-6% if I were to guess. The rates are tied to the 10-Year Treasury, and if you noticed, it took a dip again. With better lending practices and the credit quality of homebuyers, foreclosures will be minimal. Therefore, if you are attempting to time the market and wait until prices drop, you may end up with a big disappointment.
If you are reading this newsletter, you are either in the market to buy, invest, or learn when it is the best time to take action. My tips to you are:
· Now is always the best time to buy!
· Your money will always be worth less later.
· Your money is worth most right now.
· Lower interest rates mean you will be paying less later, for what you borrow now.
· Real estate will go up in time, and time will overcome price point mistakes.
There are many people out there ready to invest and you will never be able to wait them all out. There are always good deals; you just have to search for them. So start searching and start investing.
OPPORTUNITY ZONE
No. 3302 Indianapolis. Great opportunity to add this cash flowing apartment complex to your portfolio. 11 of 12 units currently rented; grossing $6956/month. 1 vacant unit1 have potential for another $675. Access to a vacant unit will be provided initially. All other units can be accessed with an accepted PA. All units are similar.
Sale Price $150,000.00
Down Payment $30,000.00
Closing Costs $4,500.00
Hedgehog Capital Investment $1,500.00
Total Out of Pocket $36,500.00
Loan Amount $120,000.00
Annual Mortgage $6,874.78
Annual Rent Income $22,680.00
5% vacancy rate $1,134.00
Annual Expenses $9,254.20
Net Operating Income $12,291.80
Annual Mortgage $6,874.78
Annual Net Cash on Cash Return $5,417.02
Annual Percent Return on Investment 14.84%
MY JOURNEY (Sergio Sais)
One of the nice things about the holiday season is that things tend to slow down. It can be a time to reflect on what you accomplished during the year; start thinking about goals for the coming year; and as you gather with friends and family, use that time to rejuvenate yourself. One of the things I also like to do is touch base with people I have done business with during the year; wish them well, and remind them that I look forward to working with them in the coming year.
In doing that this past week, an opportunity presented itself. A real estate agent I work with in Boise, Idaho told me that he and his partner found an 18 unit, off-market apartment. They are looking to acquire it for $1.8 million and wanted to know if I or any other investors I may know of would be interested in going in on this deal.
Boise is a hot market. As some of you may know, my wife and I bought a single-family residence in Boise in October of 2020, right in the middle of the pandemic hullaballoo. We bought it for $485,000. Today, the Zillow mid-price value for the property is $645,700. That is a, increase of $160,700 (a 33% increase in value). Our return on investment (ROI) was even crazier. We put $94,000 as a downpayment. The ROI for one year is approximately 171%. Granted, this was not a normal year, but nowadays, what year is normal?
They stated they were going to do a site visit this coming week, underwrite it, and let me know if the numbers make sense based on price, downpayment, rents, expenses, net operating income, and cash on cash return. I told them I would be interested in investing in the property if the numbers make sense.
I will keep you posted on how Sam and I proceed with this opportunity. This is the type of deal we will present to all of our Real Estate Hedgehoggers as well as to other people in our investor group to see if the deal fits their investment criteria.
MY JOURNEY (Sam Yin)
“Behind every success story is another success story.” I heard that somewhere, maybe not those exact words, but close. Learning about the successes of those before you can motivate you to follow their blueprint. But more important, your success is directly dependent on the success of your network; your ‘behind the scenes support. They will help you to buy it right, pay it down, and even pay it off because your network will keep you focused and successful on the two types of REI: Equity build and cash flow.
Each week in my REI journey, I strive to be active, purposeful, and selective in the actions I take. This past week was no exception. On Tuesday, I retrieved 10 sets of keys for the new apartment from the Property Manager, since I have canceled their services. A notice for tow/removal was placed on all the vehicles, which residents can contact me if they claim those vehicles. I set up a contract with the local tow company so they can tow out any unpermitted vehicle without notice. While there, I continued to introduce myself to tenants and remind them of the late payment penalties and the electronic deposit options for rent payment. This undervalued deal is for equity growth.
The rehab/remodel on a separate apartment was completed and it passed inspection for a certificate of occupancy on Thursday morning. Later that afternoon, I successfully negotiated a rent raise for this unit, from $980 to $1200. That sets the new standard rate for the remaining units to meet.
For some context, this 8-plex apartment was recently acquired put into service on July 1, 2021. Each 500 square feet unit consists of one bedroom and one bathroom. At the time of purchase, I negotiated the price from $725K to $700K. It appraised for $660K in May of 2021, thus I had to make up the $40K difference, resulting in a Down Payment of $238K. I did so because I saw hidden value and it was a cash flow type deal.
The capital was from a 1031 exchange of an SFR. The Net Operating Income (NOI) at the time of purchase was approximately $51K and the Debt Service was just over $25K, which resulted in approximately 11% Return on Investment (ROI). The rent raises from expired leases in the last five months have increased the NOI to over $58K. The ROI increases to almost 14%, without factoring in the 5% management fee and 7% maintenance cost that was underwritten. This is a government rental in which they cover all repair costs for items damaged by their tenants. In total, the actual returns on this Southern California property is now over 25%.
This may not be the norm in CA, but it is an example of what can be achieved if you analyze deals and make offers. Remember, some deals are for cash flow and some are for equity growth. However, there are no deals for those that do not analyze and make offers. Sergio and I analyze deals all the time. We constantly communicate about leads and go through the numbers together to see if it meets our standards for investment. We often find deals that are close, but just do not cut the mustard for our investors and we pass on those. We continue to look into other markets for great deals that will help investors achieve FIRE – Financial Independence and Retire Early.
Everyone one has a specific goal and has a number that equals FI, or RE, or both. Everyone can get there quickly if you chose to take the necessary actions and work on it. For those that want to remain passive or would like to spend time at their jobs, Hedgehog Capital can help you achieve FIRE. For the active investors that need a boost, contact us. We are always looking to creatively collaborate and grow with you.
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If you want additional information on what I am doing or would like to partner with Sam and me an a deal, email me at sergiosais14508@gmail.com. Have a great week and a Happy Thanksgiving.