OPENING REMARKS
Laayoune is in southwestern Morocco. It is the last bit of civilization before entering the vast Sahara Desert. The plane landed on an open field at three in the morning. The four of us got out of the plane. We were tired and sleepy. We got our bags and waited for the next step in this adventure that had started three days before. It was dark. I did not see any buildings in the area; not even the moon was out to lend a little light. The only light we had was from the headlights of two cars parked next to each other. I could not tell what make or models they were. Three men were standing outside the cars.
As the plane roared off into the moonless sky, one of the men walked up to Chris and started speaking to him. Chris is a missionary to Morocco, and he was there to spread the Gospel. The other three of us were along for the ride and to help him as best we could. The man spoke in Arabic but also threw in a little French, and an English word or two. After a minute or two of talking, Chris turned to us and said, “Ron, Bill, and I will go in this car, Sergio, you will go in the other car.”
Before I could say anything, all three of my compadres loaded their bags into one of the cars and left. As I saw them drive off, I turned and looked at the two guys standing by the car. The headlights gave off an eerie light that silhouetted the two men. They were standing about 20 feet from me, and there was no one else around.
They were dressed in black shirts and black pants, had short dark hair, and black beards. They did not look friendly nor did they look like they wanted to be friends. I remember thinking, oh oh, this does not look good. One of the men turned to the other and said something. I could not hear what he said. Not that it mattered because I do not speak Arabic. The guy then started walking toward me. I remember thinking, ok, this is it. If I am going to go down, someone is going down with me.
He came right up to me, stared at me, I stared back. There was nowhere to go. I was about to take a swing at him before he could make a move on me when he said in English: “Do you like Pink Floyd?”
It is amazing how quickly the mind works. It took me half a second to recover from the shock of what I had just heard. In the next half-second my mind was trying to decide if I liked Pink Floyd or not. I had heard of the band but was not a fan.
I was thinking, If I say the wrong thing, I may never make it back to Northridge, California. I had a fifty/fifty chance of being right. I said, “Yes.” He then stated: “What is your favorite song?” WHAT THE…? The only song I could remember was “Another Brick in The Wall.” So that’s what I said. All of a sudden his face broke into one of the biggest smiles I had ever seen. “That’s my favorite song too.” He took my bag and told me to get in the car. With some hesitation, I got into the front seat of the car. He got behind the steering wheel; his partner got in the back seat. He told me he knew all the Pink Floyd songs. For the next half hour, as he drove through the night desert to get me to the hotel, he sang every Pink Floyd song he knew acapella. It was one of the most surreal and bizarre experiences of my life.
At times, investing in real estate can feel surreal and bizarre. But it does not have to be that way. Yes, there is risk involved, but unlike being in the middle of the desert with nowhere to go, facing an unknown risk, you usually do not have to make split second decisions. There are people you can turn to to ask questions and ask for advise. Yes, you do need to know what you are doing and know things like interest rates and what the market is doing. But these are all things you can learn or have access to information that will be useful in your dealings. One of the things we need to know about is inflation and its impact on the economy, specifically on real estate. In “This Week in Real Estate, ”I have included an article regarding inflation and the impact it is having on markets.
Additionally, in the “Real Estate Tips,” I have included information on how to select a property manager when you are looking to buy real estate out side the state in which you live.
Enjoy the newsletter.
THIS WEEK IN REAL ESTATE
Inflation is a real thing. I know you have noticed the increase in the price of gasoline, eggs, and your favorite burger. My favorite was the Whopper at Burger King. Until I noticed the inflation the calories (677 calories per Whopper at last count) were causing around my mid-waste. So how is inflation impacting real estate? Inflation, along with other factors are causing the price of real estate to go up. Rents are also going up. To control inflation the Fed officials will be raising interest rates in the coming months. This week I have included an article from the Wall Street Journal that discusses inflation.
U.S. Producer Prices Climbed Sharply in November
Prices that suppliers are charging businesses and other customers leapt in November, signaling that broad-based price pressures are still building throughout the U.S. supply chain.
The Labor Department said Tuesday that its producer-price index rose 9.6% in November from a year earlier, the most since records began in 2010. The so-called core PPI, which excludes often volatile food and energy components, climbed 7.7% from a year ago, also the highest on record.
The higher-than-expected producer-price numbers suggest that consumer inflation, which hit a nearly four-decade high of 6.8% last month, will stay elevated into 2022 as price pressures persist.
The index, which generally reflects supply conditions in the economy, rose 0.8% from October, an acceleration from the 0.6% gain in each of the previous three months. Higher prices for energy, wholesale food, and transportation and warehousing contributed to the pickup in inflation.
“This is a testament to the fact that inflation continues to broaden out,” said Stephen Stanley, chief economist at Amherst Pierpont. Persistently high prices in large part reflected clogged supply chains, as manufacturers scrambled to keep up with unusually strong consumer demand. The rise in prices of goods continued to outpace that for services, as consumer spending on goods remains elevated, while that on services is up just slightly from pre-pandemic levels.
Prices for goods, excluding food and energy, climbed 0.8% in November from October, faster than the 0.6% increase the previous month. The services index advanced 0.7% on the month, up from 0.2% in October, driven in part by a pickup in hotel room rates and airfares.
The easing of inflation for goods used to make other products, though still high, signaled that producer-price inflation is nearing its peak, said Gus Faucher, chief economist at PNC. “PPI inflation will slow in 2022 as prices for energy and other raw materials decline thanks to greater production, weaker demand, and a gradual waning in supply chain problems,” said Mr. Faucher. “But PPI inflation will remain above its long-run levels due to continued strong demand for some goods and services and higher wages.”
Along with last week’s consumer inflation data, today’s producer data add to the case for Fed officials to speed up plans for winding down their stimulus efforts as the Federal Open Market Committee meets today and tomorrow. A faster taper would pave the way to raise interest rates in the spring to curb inflation. “The [Federal Reserve] should be very concerned,” said Mr. Stanley.
The Wall Street Journal – December 15, 2021
REAL ESTATE TIPS
You want to buy a multifamily property, but live in a state where property values are on the high side (think California). So you decide to buy a multifamily out of state, e.g., Indiana, Missouri, Texas, etc. You find the property that matches your criteria. You want to make an offer but all of a sudden it occurs to you: how am I going to manage this property. That is where property managers come in. The question then arises, how do you find these property managers. Well, here are a few tips. You can ask your real estate agent to recommend one; you can google property managers in the city where the property is located; or you can go to irem.org (The Institute for Real Estate Managers).
Personally, I like to get recommendations from the real estate agents I am working with. Once you contact the property manager, here are a few questions you are going to want to ask:
a. What is the general vacancy rate in your area/
b. How many units do you have under management? What type?
c. How long have you been in the business? (Need at least three years.)
d. What are your percentage management fees?
e. Do you have your own maintenance staff, or do you use independent contractors?
f. What is the cost of an eviction process from start to finish?
g. How do you advertise vacancies? How pays for advertising?
h. Will you help me set up an annual budget for the property?
i. What monthly reports do you typically send owners?
j. Do you have any accreditation? Such as CPM certified property manager or ARM accredited residential manager?
k. Do you carry a real estate broker’s license? It is required in your state.
This will give you a good place to start. With a good property manger in place, you can concentrate on finding new properties to invest in rather than worrying about the leaky faucet in one of the apartment units.
MY JOURNEY (Sergio Sais)
This is Christmas week. As Ecclesiastes tells us, there is a time for every activity under heaven. And the activity I have been sharing with you these past few months has been my real estate journey. But now it is time to thank God for the blessings he has given us.
Some of us will be working for most of this week. Thankfully Christmas will arrive at the end of the week. I want to take a few moments to reflect on what Christmas is all about. Many will take time off to eat, drink, be with family and friends, which is great. Christmas, however, is a celebration of how these wonderful blessings we experiences are possible. Luke 2: 9-14, states:
An angel of the Lord appeared to them, and the glory of the Lord shone around them, and they were terrified. But the angel said to them, “Do not be afraid. I bring you good news of great joy that will be for all the people. Today in the town of David a Savior has been born to you; he is Christ the Lord. This will be a sign to you: You will find a baby wrapped in cloths and lying in a manger.” Suddenly a great company of the heavenly host appeared with the angel, praising God and saying, “Glory to God in the highest, and on earth peace to men on whom his favor rests.”
Let’s take a few minutes as we gather with loved ones, to thank God, who in the fullness of time, sent his Son to earth, fully God and fully human, to die for our sins and to be resurrected so that there may be peace among men.
I want to thank all of you who take time from your busy schedule to read this newsletter. I look forward to bringing you along the real estate journey I am. In the mean time, have a very Merry Christmas.
MY JOURNEY (Sam Yin)
2022 is near and it is a good time to review 2021 records for tax filing in spring. This will give you a solid evaluation of whether or not things are falling into place or if there are inefficiencies that need to be corrected/adjusted. Tracking incomes, expenses, mileage, and other REI-related events throughout the year is good, but the end of the year totals tell you how well you invested. Weekly and monthly cash flows fluctuate, but the end of the year tally is what most people measure since those are the benchmarks used to underwrite. As a rule of thumb in real estate, most things often repeat themselves year after year.
This is also a time to review your goals, strategies, work/life balance, and what has been happening in the real estate market. A few articles ago, I discussed the market and what is likely to come… a whole lot more of 2020 and 2021. We are in the vicious inflation cycle, and there are better-informed real estate investors out there with a lot of money to spend and compete with others. You will need to depend on your network more than before to create a deal funnel and seize those good off-market deals before they go online.
Let us take a moment to review a few basics in REI. Capitalism is about supply and demand. Right now, there is more demand for real estate than supply. Inflation is now at least 6.8%, per our government readings. That means prices will still go up for sales and rentals. To me, this mostly means that renters are more accepting of higher increases in rent.
Having your mortgage rate locked and stabilizing other operating costs equals higher Cash on Cash returns and higher ROI for a higher valuation. The two main strategies in REI are Cash Flow and Equity Growth. Some chose one over the other, and some try to achieve a little of both. With inflation upon us, it will make it easier to achieve a little of both as long as you lock in the rate on the money that was leveraged.
Last week started with an apartment flood caused by broken plumbing under the slab foundation. The unit was ankle-deep in water, and it seeped into the adjoining unit. The apartment was not habitable, and the insurance company dispatched professionals to dry out the units with their equipment.
There was a rainstorm all day Tuesday, the first in Southern California in a while. Wednesday was my son’s orchestra performance at school, held outside due to Covid-19 protocols. On Thursday, a warrant served on a tenant at another apartment resulted in damages from the forced entry. Friday was my wife’s birthday as well as the kids’ early dismissal on their last day before winter break. Saturday morning capped it off with another leak, three units down from the last flooded unit, which also seeped into the adjoining unit.
It was definitely an exciting week in REI for me. My handyman and the insurance team dealt with the flooding. I stayed at home on Tuesday during the rainstorm and binge-watched all the Pirates of the Caribbean movies with my family, completing the last one on Friday night.
On Wednesday, the school dismissed my daughter from school at noon, and we spent some quality time until my son’s performance that evening. Thursday, while taking the kids to Farmer Boys for an after-school lunch, I received the notification of the warrant served at the other apartment. A quick call to the government housing coordinator resolved it. They will take care of all damages and continue to pay the rent for the unit.
I spent some adult time with my wife on her birthday, had a late breakfast, and took the family to see Spiderman on opening day. My handyman took care of the leak on Saturday morning, and I spent the day teaching my kids about the value of this business by taking them to a few properties to rake and clean the yards.
I wanted to share this because I feel it is important for anyone who wants to be a hands-on investor to get a glimpse of what happens day to day as you manage more and more units. However, it is also equally important to remind everyone that the systems you have in place can save you time, money, energy, and emotional turmoil.
Your network, experience, and operating procedures will get you back time to spend with the ones you love to spend time with most. If you want to be very passive from all these unpredictable REI dramas, investing with Hedgehog Capital Investments will make more sense.
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 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 Merry Christmas.