June 2015

We specialize in providing flexible short-term hard money and transactional loans for real estate projects. We also invest in equity of strong real estate projects with proper leverage and strong sponsors.

Welcome.

It is our goal to keep our investors, borrowers, closing agents, and other stakeholders informed and in-touch with the latest developments at TF Management Group LLC. We aim to accomplish this by providing you updates, education and industry news through this Monthly Newsletter. We hope you enjoy it and welcome your feedback.

This month features:

  • Recent deal examples
  • Commonly asked questions

Mike Zlotnik, Managing Director


Recent Deals Examples

  • Odessa Florida - Real Estate Deal
  • Odessa, Florida
  • Purchase price $235,000
  • Rehab $50,000
  • After repair value $385,000
  • Loan Amount $260,000
  • Funded May 7, 2015
  • Nashville, Tennessee - Real Estate Deal
  • Nashville, Tennessee
  • Purchase Price $5,200
  • Rehab $15,000
  • After repair value $105,000
  • Loan Amount $50,000
  • Funded May 1, 2015

Commonly Asked Questions.

What is the most promising asset class for the next 5 years?

Residential Real Estate. It is that simple.

Why?

Let me start by saying that both Stocks and Bonds are just too sensitive to the interest rates. Bonds will have a bloodbath if rates move up by 1-2% for the 10 year treasuries. This is very obvious, and warrant no explanation. Stocks appear to be pretty sensitive to FED meeting discussions about rate increases too. US Economy has been running on Ultra-Premium gas fuel dependent on the low interest rates. Corporate earnings growth is likely to slow down as the rates climb. Investors often over-react, and can easily put the market into 10-20% correction mode as rates start to climb. FED is very sensitive to it, and will make their best efforts to move rates up as slow as they can, But the rates are moving up for sure.

FED has dual mandate – keep the unemployment rate low and inflation at bay. Unemployment rate is approaching the target that will require FED to increase the rates. Inflation is a major concern, but it might accelerate as US economy continues to improve.    Therefore, the rates have no place to go but up, but it will happen slowly.

Commercial and multi-family residential Real Estate is sensitive to rate moves too because of the high degree of leverage that most assets are purchased with. Most commercial loans are 5-10 year balloons, and the ability to refinance mortgages cheaply drives property prices. As rates climb, Commercial Real Estate price growth will slow down for sure. We will observe this sector taking some beating if the US Economy slows down, putting pressure on commercial rents combined with higher interest rates.

Residential Real Estate often fairs better than the commercial Real Estate when the rates climb. This is because many people buy the house as their home. Good portion of the demand is coming from the owner-occupied, primary residential need. Family formation, life events, and demographic trends, drive demand growth. The sector still has some sensitivity to rates.

The most interesting opportunity in Residential Real Estate are good cash-flow properties in the neighborhoods that have decent owner-occupied demand. These properties provide strong cash-flow and offer the appreciation upside. They enjoy the mixed ‘investors and resident buyers’ demand. It is not difficult to get healthy leveraged finance on these properties too. This, in my view, is the best asset class opportunity for the next 5 years.

What kind of rates of return could one expect in this sector?

Let me start with the Cap rate of 8-10%. Typically, properties in the $75,000 – $125,000 price range provide an optimal opportunity for the best cash-flow mixed with appreciation. Add say 2:1 to 3:1 mortgage leverage, and we wind up with Cash-on-Cash return in the 12% range. Combine that with annual appreciation of say 4%. The 4% appreciation with leverage – looks like 8-12%. So, the actual annualized ROI with leverage might look like 20-24%. Not too bad! I think most people will be happy with numbers north of just 12% combined (cash-flow and appreciation). There is a lot of upside above 12% per say.

There are risks in this section too. We all remember the crash of 2008-2009. But there was a major asset bubble created in the residential real estate section by the banks’ very loose underwriting. Today, the underwriting is very tight. Most banks have hugely over-compensated on the conservative lending side. There is absolutely no bubble today because of bank’s tight lending. If anything, tight lending standards have slowed down price appreciation. Banks are not getting looser, and so, we have nothing to worry on that front.

In summary, I believe that Residential Real Estate in the $75,000 – $125,000 price point range offers uniquely best opportunity to enjoy strong cash-flow and appreciation over the next 5 years. Every market is different and large metropolitan cities price points are higher, and they offer less cash-flow, but they might compensate through higher appreciation rates. Many smaller and medium size cities offer better cash-flow opportunities, but somewhat slower appreciation. Local demographic and economic trends should be considered when deciding which real estate market to choose.

If you are interested to invest in this Real Estate sector, feel free to reach out to me. We have developed relationships with a number of real estate investors, who specialize in offering “turn-key” residential properties to passive investors looking for a healthy mix of cash-flow yield and appreciation. We’ll be glad to make introductions.

On the final note, here is the link to the Webinar that we co-sponsored a few weeks ago. This is a very powerful method how to sell your house for top dollar, fast with maximum control/leverage. Enjoy!

http://inspiremycapital.com/education/

Please be sure to download the presentation. Click on the link à select the Webinar “How to Sell Real Estate FAST, for TOP DOLLAR, with ULTIMATE CONTROL” and DOWNLOAD it (don’t stream it as Dropbox it will freeze on you after 15 minutes).

 

Enjoy the Summer!

Mike Zlotnik

Managing Director

TF Management Group, LLC

917-806-5029