Tempo Investor Update

July 2018

In the July Issue

  • Momentum Plays and Where to Invest
  • Examples from TF Management Group LLC’s Portfolio
  • Where Contrarian Plays Meet Opportunity
  • Four Pieces of Advice for investors

July 2018 Newsletter

Understanding Today’s Market

In our June newsletter, we discussed in length how current market conditions are affecting investors, and how smart investors are capitalizing on alternative investment strategies. This month, we are delving deeper into opportunities the TF Management Group LLC is finding to help you expand your own portfolio with high-yielding projects.

Let’s start with a recap of current market conditions:

  • The economic cycle is peaking, therefore, slow down is inevitable (*dependent on location).
  • Most asset classes are fully priced (or possibly overpriced).
  • CAP rates are historically low.
  • Interest rates are rising and will likely continue doing so.
  • Department stores are rapidly closing due to the ‘Amazon.com effect.’
  • Unemployment is low which will likely trigger inflation in the near future.
  • With this type of market climate, there are both risks and opportunities for investors, so let’s explore which opportunities are worth investing in (and which ones are not).

    Momentum Plays: Identifying Opportunity (and Risk)

    With today’s ever-changing climate and foreseeable rising interest rates, high-yielding investment opportunities of the past may not be the best place for your money today. Here’s a snapshot of good momentum plays (and not so good ones) to help you make the best decisions for your money.

    Opportunity:

    1. Entry level single family homes, townhouses, and condominiums
    2. These entry level construction projects are running full steam ahead with no sign of slowing down. They are generating good returns for investors and remain in high demand in the housing market.

    3. Multi-family, retail, and commercial project investments
    4. These types of projects create phenomenal opportunity when invested in at the right time. Look for projects with assumable mortgages and opportunities for value-add.

    5. Land purchases for infill projects
    6. With high-end properties on a downturn, infill projects are in greater demand due to their high land value, specifically land zoned for residential development.

    Risk:

    1. High end, luxury property development
    2. Prices on high-end townhouses and condominiums have slowed in recent months (nearly a 20% price decrease in some markets). Supply is starting to outpace demand, leaving lots of inventory on the market.

    3. Turnkey investment properties
    4. Historically, turnkey properties have sourced some of the highest ROIs for investors; however, these opportunities are slowing down for two main reasons: cash on cash return has decreased and cost of financing has increased.

    You can always find opportunities to invest beyond the traditional investment sectors; it’s simply knowing where to find them. Let’s look in-depth at some projects the TF Management Group LLC has found for their investors in recent months.

    Example #1: An Infill Project

    July 2018 Newsletter

    Like we mentioned above, infill projects are a promising investment in today’s market climate. The TF Management Group LLC recently found this type of project in Jacksonville, Fl that could be a phenomenal opportunity for its investors.

    Project Details

    The project sponsor is looking for a hard money loan to help construct nine new townhouses in the Jacksonville area. Collectively, the “all in” cost will be approximately $1M- $1.1M with a resale value of approximately $1.5M- $1.6M. Since townhouses are in high demand, the project looks good on many fronts because we can secure reasonable loan valuation and the land is in a good location.

    Another benefit about this project is it’s dual exit strategy. In today’s market, an investment with a strong dual exit strategy is appealing and increasingly sought after. In this specific case, the project sponsor has two options:

    1. Upon completion of the project, refinance with a conventional bank loan and rent the townhouses as investment properties.
    2. Sell each townhouse individually to buyers and generate maximum ROI within a year.

    The project sponsor can also do a mix of both strategies creating an even stronger exit strategy. This momentum play is just one example of an infill project that has the potential for strong returns.

    Project Summary:

    Example #2: A Value-Add Project

    We’ve discussed value-add projects in previous months, but they continue to be one of the best investments to maximize returns and cash flow because of the opportunity to create value and forced appreciation.

    *Reminder: You can increase forced appreciation through repairs, renovations, and upgrades in contrast to natural appreciation that is solely controlled by market factors.

    Project Details

    The TF Management Group LLC recently acquired a 344 multi-family unit complex in Chicago for a base cost of $45,000,000 with a mortgage rate of 3.09%. We made improvements to the units, common areas, clubhouse, etc. and will likely see an end value price of $65,000,000. The internal rate of return (IRR) will land around the mid 20s.

    As you can see, this type of project generates strong returns for both the investors and project sponsor. The renovations will result in rent increases on renewal for existing tenants or new tenants in the future.

    Project Summary

    Contrarian Plays: Thinking Outside the Box

    July 2018 Newsletter

    Now that we’ve discussed the best momentum plays to invest in today, let’s turn to another type of ‘play’ for investors. By definition, a contrarian play is doing something that no one else is doing, or in other terms, discovering opportunity where others only see risk.

    Ask yourself this question… Who is in distress today? Often times the answer to this question will lead you to phenomenal investment opportunities like the ones we are seeing in the retail space today.

    Many of the big retail operators are selling semi-decent assets (shopping centers, strip malls, and plazas) to combat the inability to raise fresh capital. These shopping centers often lease out to service-oriented stores like gyms, hair salons, dentist offices, etc.- services that Amazon can’t compete with.

    This opens the door for investors to step in and buy these assets at high entry level CAP rates (i.e. 9%+ cash on cash 11%-16%).

    Investing in these types of projects is somewhat like investing on speculation with the hope that the service sector continues doing well; however, if you stay focused on the cash flow and the value-add, you can do well. Let’s look at an example of a contrarian play the TF Management Group LLC recently discovered.

    Example: A Syndication Project

    We found a service oriented shopping plaza in Augusta, Ga with strong cash flow (13%-15%) along with a great assumable mortgage. The leases are long term with a bit of upsite when rent renewal increases. The plaza is going through redevelopment right now and is in a good location with lots of traffic.

    This kind of opportunity has potential for strong returns, but it can be a difficult project to enter if you are an individual investor. One of the many benefits of investing in funds is the ability to diversify your portfolio with these types of investments without doing the heavy lifting. It’s completely passive.

    Project Summary

    Here’s What We Recommend

    Now that you have tangible examples of real-time projects the TF Management Group LLC is finding, here are four investor tips for you as you look to expand your own portfolio with these projects.

    • Investor Tip #1: Diversify, Diversify, Diversify
    • We can’t emphasize enough how important diversification is for your portfolio. It is the single, universal way to ensure income across multiple channels, regardless of economic sway. If you’re looking to invest in individual deals, be sure to invest in a varied amount of projects. One of the best ways to diversify, however, if by investing in a fund that has a built-in level of diversification.

    • Investor Tip #2: Focus on the Cash Flow
    • Rather than worrying about the value, focus your attention on the cash flow of a project. When a potential recession or price decrease hits, your investment’s cash flow will protect you from any kind of downturn.

    • Investor Tip #3: Focus on Areas of Lower Volatility and Higher Predictability
    • There are sub sectors of the economy where volatility is much lower (i.e. Southeast and Midwest), meaning property prices fluctuate less. The cash flow from these properties is stronger and more consistent compared to properties in New York City, Miami and Los Angeles that have more volatile markets.

    • Investor Tip #4: Use Conservative Leverage
    • Aim to borrow less money. It will reduce the rates on your loans, your debt service, and be much easier to survive a downturn.

    Wrap-Up

    While the stock market continues to fluctuate, the alternative investment sector is rich with deals and opportunities worth finding. The key is knowing where to look. As a recap, here are the best momentum plays to capitalize on right now:

    • Entry level single family homes, townhouses, and condominiums
    • Multi-family, retail, and commercial project investments
    • Land purchases for infill projects

    If you’re interested in diversifying your portfolio without the heavy-lifting of finding high-yielding projects, investing in a fund is a great option for you. The Tempo Opportunity Fund LLC is already finding and participating in the market’s best investments and diversifying them across many channels. If you have questions about the Tempo Opportunity Fund LLC or how to invest with us, please contact us and we’ll be happy to talk with you and answer any questions you may have.

    Thanks for reading,

    Mike Zlotnik
    CEO, TF Management Group LLC

    This newsletter and its contents are not an attempt to sell securities, nor to sell anything at all, nor provide legal, nor tax accounting, nor any other advice. The presenter is a private lending and real estate fund management business, and the information represented herein are purely for educational purposes and represents the opinions of the presented. Prior to making any investment or legal decision you should seek professional opinions from a licensed attorney, and a financial advisor.

    TF Management Group LLC (TFMG) is an investment fund management company that specializes in both short-term debt financing for real estate “fix and flip” projects, and long-term “value-add” equity deals.