OPENING REMARKS
I remember the first time I walked into the gym at Los Angeles City College many years ago. It was Saturday morning. The gym was large. It held six full-sized basketball courts. Each one was being used with guys playing three-on-three at each basket. Most of the players were young Black guys. There were a few Hispanics and a couple of White guys. The games moved fast. You could hear the squeaking of basketball shoes on the wooden floor; the bouce of the basketballs created their own rythmic cadance. The games were on the rough side, with pulling, pushing, and shoving; the intimidation game was in full force, with taunting, cursing, and players calling each other out. You could smell the sweat and feel the energy being generated. I thought I had died and gone to heaven.
I loved playing basketball. These were some of the best “street-ball” basketball players in the city, and yet there was room for anyone who could put together a group of three players and be willing to wait patiently for their turn on the court.
I found a couple of guys waiting for a game. They needed a third and that was me. We got in a game. Due to my quickness, I was able to go around defenders and go for lay-ups. But it seemed that each time I did that, the ball was blocked. We quickly lost. We got in other games; we won some and lost others. The one thing that kept happening was that each time I went for a lay-up, it seemed that the shot was being blocked.
I remember thinking about this for a couple of days afterward. It finally occurred to me that the reason the shots were being blocked is that a guy who is five feet, six inches tall has no business trying to make lay-ups against players who were over six feet tall. Once I had this “aha” moment (some might say “duh” moment), I made plans to change up my game. The next time I went to the gym, I used my quickness to find the open spot on the floor and take an open shot. I also, developed a fall-away shot to get the ball over the outstretched arms of guys who were taller than me. Once I did that, I really enjoyed playing every weekend at the gym; I even made some of my shots.
So, what does playing basketball have to do with real estate investing. The answer is nothing. But the lesson I learned has everything to do with it. After that first day of playing, I reflected on what had happened, I identified a limitation I had (being short in comparison to my opponents), I analyzed it, understood it, and developed a strategy for overcoming it.
The same applies to investing in real estate. If you are serious about winning in the real estate investment game, you need to identify any limitations you have. Whether they are mental limitations (Investing in real estate is too hard for me, I can’t do this, I am not good enough, I will fail if I try, etc.), or whether they are physical limitations (I do not have money to invest, the market is not good, there are no deals in my area, my schedule does not allow me time to look for deals, etc.).
Once limitations are identified, as Bruce Lee stated: “Capitalize on them.” In other words, come up with a strategy to overcome them. Whether it is getting more information, getting educated on how real estate investing works, reading self-improvement books, partnering up with someone who knows how to invest, learning what it means to use other people’s money, or finding a coach to teach you the ins and out of real estate investing. Do what you need to do to put yourself in a position to win.
One thing you can do is contact us at the below email address to discuss the steps you need to take to get in the game and get the real estate investment ball moving forward. Hope to hear from you soon.
THIS WEEK IN REAL ESTATE
Although I currently own three single-family homes, I am not a big fan of buying SFHs as investments. My focus is on multifamily (five or more units) apartments. With that said, there is money to be made in SFHs. Below is an article from the Wall Street Journal that discusses the money that is being made building and renting SFHs. I hope you get some good information from this article.
Building and Renting Single-Family Homes Is Top-Performing Investment
Single-family homes built to rent are emerging as the hottest corner of the U.S. property market, as investors respond to booming demand from home-seekers priced out of housing for sale.
Rents on homes are rising faster than ever. New household formation is also increasing the demand for rentals, as more young people get their own places.
Meanwhile, historically high housing prices and steep down payment requirements for homes are driving more people to keep renting, even as rents rise, said Green Street analyst John Pawlowski.
“The cost of housing alternatives for single-family renters has exploded,” he said.
The expected risk-adjusted annual return for built-to-rent investments in the private market is now about 8% on average, according to securities advisory Green Street, the highest of 18 property sectors tracked by the firm. The weighted average return for all property sectors was 6.1%, Green Street said.
The growing investor interest in building homes for rent is driving a land grab, especially in the Sunbelt where proponents expect the housing demand sparked in part by the pandemic to continue for years.
Close to 100,000 built-to-rent homes will have started construction this year, according to estimates from Brad Hunter, founder of the Hunter Housing Economics consulting firm. Investors have poured about $30 billion in debt and equity into the sector in 2021, with many billions more in future commitments, Mr. Hunter said.
Traditional home builders like Lennar Corp. and D.R. Horton Inc. have made building rental houses a major component of their business. Giant investment firms like KKR & Co. and Blackstone Group are also piling up cash to add already-built rental houses to their portfolios.
Crow Holdings, a company with a background in apartment construction, is considering testing the sector, starting with two proposed Texas projects near Dallas and Austin.
Home builder Bruce McNeilage’s company Kinloch Partners has built and currently owns more than 100 homes near Nashville, Tenn. But he said he could no longer compete for land in that fast-growing region because he was losing out to more deep-pocketed investors
That has made him look for less crowded opportunities. His firm is among those racing to buy land in Texas towns like Royse City, Waxahachie, and Melissa, which are more than 30 miles from downtown Dallas. He plans to build 500 homes, all for rent, across the Texas exurbs during the next 18 months. But now bigger investors are circling some of the same plots.
“You almost have to find the land before it gets put on the market,” Mr. McNeilage said. “Because the day it gets put on the market, there’s a feeding frenzy.”
Some analysts and builders are starting to believe the breakneck pace of growth in the sector is unsustainable. Investors are stepping over each other in the Sunbelt markets like Phoenix, analysts and builders say, risking a supply glut. Land sellers are raising their asking prices.
“What we’re seeing across the board is that land values are rising,” said Pratik Sharma, managing director of Bridge Tower Group, a single-family rental builder and manager.
Higher land prices could mean that investor returns compress, making built-to-rent less attractive for some investors. The relatively low inventory of available land that is desirable to builders could also mean fewer deals get signed than expected.
But the biggest players in this market are showing no signs of slowing. American Homes 4 Rent, which owns more than 55,000 houses, built 1,600 new ones last year and expects to deliver more than 2,000 in 2021. Tricon Residential, a Sunbelt-focused single-family rental owner, made its debut on the New York Stock Exchange last month and has plans to buy up to 5,000 new construction rental homes directly from home builders.
Wall Street Journal 11-16-21
REAL ESTATE TIPS
In this weeks Back to Basics segment, we are going to discuss another very basic but very important concept: assets. I checked the internet for a definition and this is what I found:
“Assets – property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.”
So, let’s, as my college professors use to say, “deconstruct” this definition.” Of course, now you are probably asking what does deconstruct mean? It only took me forever to figure that one out. It means breaking a concept down to its basic components. So, let’s break down the definition of assets.
Property – By property we mean concrete as well as conceptual things.
Examples of concrete assets include: cash, buildings, land, cars, airplanes, boats, furniture, tools, artwork, gold, silver, animals (cattle, pigs, horses, etc.), you get the picture.
Examples of conceptual assets include: stocks, bonds, crypto, information, computer code, even debt can be an asset.
These assets have value to the people who own them. What is interesting is that the value of all of these assets can go up (appreciate) or down (depreciate) depending on circumstances. Also, you can exchange one type of asset for another. The trick is to identify which assets are gaining or losing value.
In our case, we are mostly interested in buildings, land, and cash. For the past year, interest rates have been at historic lows. This is great if you are taking out a loan. But not so great if you have cash sitting in a savings or money market account. Currently, savings account are paying .05%, that is one half of one percent. Additionally, inflation has spiked to an annual 6%. This means that your money is not only earning very little, it is actually losing value every day it sits in your account.
In situations like this, you want to exchange an asset that is depreciating for one that is appreciating. If your constitution is such that you can handle the ups and down of the stock market, that may be a place to invest you money. But if you are looking for solid returns, where you do not have to put up with the vertigo inducing ups and downs of the stock market, you want to look into investing in real estate, specifically multifamily properties. Real estate investing (if done properly) not only pays you better rates of returns than your money market account, there are tax strategies that you can take advantate of that can reduce your taxable income. Contact us at the below email to learn how real estate can help you make more money and maybe even reduce your tax liability.
OPPORTUNITY ZONE
This well-maintained property features a unit mix of two, three-bedroom units and two, two-bedroom units each with one full and one half bathroom. Property has been treated for termites and is monitored yearly. Unit 214 had new flooring installed in 2020. The two end units are two-bedroom, the middle units are three-bedroom.
Sale Price $297,500
Down Payment $74,375
Closing Costs $7,437.50
Hedgehog Capital Investment $2,975
Total Out of Pocket $85,287.50
Loan Amount $223,125
Annual Mortgage $14,132.83
Annual Rent Income $38,400
5% vacancy rate $1,920
Annual Net Rent Income 36,480
Annual Expenses $14,266.45
Net Operating Income $22,213.55
Annual Mortgage $14,132.83
Annual Net Cash on Cash Return $8,080.72
Annual Percent Return on Investment 9.47%
MY JOURNEY (Sergio Sais)
So, the property in Shelbyville Indiana did not work out. As I mentioned in the last newsletter, the property needs a new roof among other issues the inspection identified that need to be fixed. I sent the seller a couple of estimates to replace the roof in the $6,700 range and asked for a $5,000 credit to fix the other issues. After several days, the seller countered by stating he would contribute a total of $7,650 to conduct repairs on the roof (not replace it) and fix the other items identified by the inspection.
My counter was to get the roof replaced, and instead of getting a $5,000 credit, I lowered the offer on the property by $5,000. This is the back and forth of the negotiation process. My main goal was to get the roof replaced. It is going to need to be replaced in the next one to three years.
Apparently, the seller was not pleased with the counter because he countered by stating he was not going to fix anything and would not lower the price. Obviously, we reached an impasse. In my opinion, there are plenty of fish in the ocean and there is no need to chase after a deal where the seller does not want to negotiate.
I requested my real estate agent draft the documents needed to get my earnest money back. For those that do not know what earnest money is, it is like a down payment on the down payment. It is usually around 1% of the purchase price.
This money is paid to show the seller that the buyer is serious about purchasing the property. If the sale goes through, the money is applied to the down payment. If the sale does not go through, depending on the circumstances, the buyer either gets his money back or the seller keeps the money. This is usually determined by who cancels the deal and the reason for the cancellation.
Last weekend, my wife and I went to Boise Idaho to visit friends and check on some real estate. We already own a single-family home that is being leased. Boise is a great town. People from across the nation are flocking to it and the neighboring towns. This time we did not find a property that met our criteria. However, we are looking to Airbnb the house we own. The current lease ends at the end of March 2022. We are in discussions with a short-term property management company called Escape and Stay. They manage short rentals on Airbnb, VBRO, and Rent.com. Based on what they tell us we will decide on whether to do it or renew the lease with the current tenant.
MY JOURNEY (Sam Yin)
Goal setting is a part of the REI journey. You will not get to where you want to go without setting goals along the way. In this past week, there were many goals met, but there are still more to meet. To recap, I finally closed on the SFR that required tenant eviction. I requested a special recording from the county on Friday to obtain early confirmation and for the loan to fund the same day. Those funds were immediately transferred to an Exchange Accommodator by noon so that they can quickly fund the awaiting up-leg (10plex) by 1 pm, to satisfy the seller’s timelines and complete the 1031 exchange.
The goal is to meet all the tenants next week and sign them over. For readers that have been following this newsletter, during the first phase of negotiations, I was able to get the seller to raise all tenants by $50 in October. I will take advantage of the change of ownership and give everyone the notice of a $100 rent increase beginning February. While the tenants process this, I will be making improvements to the property, starting with roof repairs, installing a fence/gate around the community BBQ area, and initiating a policy of permitted parking to keep the traffic to a minimum. All future vacancies will be rented at market rates, approximately $400-$500 increases in rent, depending on the number of bedrooms.
In the meantime, my Handyman is deep in the remodel/rehab of a unit vacated by the tenants. He is part of the team, and I make sure he communicates frequently with my wife to achieve her design concept. That rehab should be complete by Thanksgiving. The government program has a tenant currently in a hotel and waiting to move in since they paid for the rehab and this month’s rent. At another ten-plex (acquired in September), a prospective renter wants to move into a unit where a current tenant plans to move out by the end of the month. The background check was solid, and the references were good. I collected the Deposit on Saturday morning after a face-to-face interview. That unit will rent at the market rate. Another tenant in the building has indicated a possible relocation in January. That too will rent at the market rate. Those that remain will have another rent raise before the end of 2022.
This should bring all ten units near market rates by the end of 2022. That will put me in a position to either cash out the forced equity or exchange the property for another with the same hidden value. How much this other ten-plex’s equity can be forced will determine the proper exit or hold strategy. Additionally, interest rates and the state of the local economy will be a factor.
The ultimate goal when the properties were selected was to have solid cash flow AND available upside at the time of the buy. Increasing the rents while controlling the expenses will increase the Net Operating Income (NOI). This will directly affect the valuation of the asset based on a combination of the CAP rate, physical conditions, and market rents. Extracting all of the initial acquisition costs through a refi will give the asset an infinite Return on Investment. Forced equity raise allow additional money to be extractable, and those combined funds can be used to acquire additional assets. On the other hand, a 1031 Exchange allows 100% of the equities to be re-invested into a larger deal. The networking and team-building generate deal flow to bring larger opportunities.
I continue to educate myself in the process and look for other ways to accelerate growth, minimize risks, and maximize time. During this past week, Sergio and I have been constantly exchanging ideas, comparing notes, networking, and providing education to those looking to begin or accelerate their REI journey. The Holidays are near and work/life balance is important to give back to the family unit.
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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.