Investor Strategy Call – May 19th, 2023

So this is the model that we have. Yeah. Cool. And are you comfortable with all the numbers here? Y yes and no. So this is a little more in depth than how I write stuff. Usually write stuff up. But this is so I have a little more difficulty getting through some of this stuff especially since I, I haven’t how do I wanna say this?

Some of my, my, my costs are not fixed yet, and I guess some of the my acquisitions costs are going to. Fluctuate a little bit. I got a good idea of what my average acquisition cost is gonna be in my average rental rate on each house that I want to target. I try getting through some of this, okay. Again if you don’t mind sharing, what exactly do you want to know here? I feel like this model looks pretty good, if I’m being honest here. Okay. So I guess yeah, so I guess I’m based on everything off of a $20 million fund. Within average acquisitions cost per unit of.

85,000. That’s all in costs. Including closing costs and everything. I’m looping everything in together. So based on that, get, that gets me a about, we’ll just underestimate and say 220 properties. My average anticipated rent is gonna be. $1,102 per property. I’m just making notes here times and I guess a little more context might help too.

So I’m this isn’t a bulk portfolio purchase. I’m piecing the portfolio together myself. So some acquisitions costs are gonna be higher, some are gonna be lower. Same as some rental rates. Some rental rates are gonna be higher. Some are gonna be slightly lower.

So based on $1,102 times 220 houses, that’s a an average gross monthly income of 242,000. Plus remind us a little bit, but we’ll just say for number six per month, right? Okay. Let me just yep. 12. Okay. So we are saying this is going to be our revenue for year one, right? Probably not year.

That, that honestly will probably be end of year two or three. So that is, I would have to buy. And break it down. Year one, I’m starting from, ground zero basically. Say an average one to 220 houses times, just say I’d have to buy about 18 a month to be at that 2 42 revenue in year two.

So I would say that 2 42, that sta that, that stabilized 2 42 probably wouldn’t be until year three. Year three. Okay, let’s do that. 42.

Yeah. And then what about year one and two? Year one and two, I would say I’ll do from this time from now until this time next year. I, my goal would be 75 properties. So 75 times, we’ll just say, yeah, that 1102 would be 80, 82,000 revenue monthly, around a million dollars a year almost. Yeah. Yeah.

Roughly, let’s say we do double that in the year two, right? Make sense? Yep. That’s yep. And then what about year four and five? So that’s where I’m stuck as far as if I would want to season the portfolio as it would fit at that 200 or so units, or if I’d want to keep reinvesting.

My, what would be my portion of profits? So I know I would base everything off of, between a three and 5% increase in rents across the board each year. Yep. So I would say, just for simplicity’s sake right now, I wanna keep it conservative. Full stabilized value. Let’s just do a 5% increase in rent.

For that year four, and then another 5% increase in year five. Okay, so that’s what, so we have the total grant received, right? So we have this now. The cost of good. So I don’t think this really applies for rental properties. You can consider something, but let’s just skip this completely. I don’t think it is that applicable for this particular case. I don’t think there’s any do you have a breakdown of all the operating expenses that you might incur?

So I would anticipate my operating expenses to be anywhere between 50 and 60%. That let me back up first. That would be if I included debt. So these would all be quote, owned, free and clear until I decide to either sell the portfolio or until I refinance. With, without factoring in debt, I would probably run.

Around 20, 25% operating cost is what I would expect. That would be 10, 10% for management. Which is, a big part of this. With the rest split between maintenance, taxes, and insurance.

So you said total 25, right? Yeah, 25. Okay, so let’s do maintenance. 10% or not 10%. Actually let’s do 5, 6, 16 and then we have 9%. So we can do five and four. Yeah. Yeah, that, that. That makes sense, right? Yep. Yep. And how much are you ex, so how are you financing this? So the I’d be buying everything cash initially.

Now. What I will, and I’m still interviewing some people that would be able to provide debt. I would. It’s hard to value. I don’t wanna say this, the my, my intent would be to refinance pay all the investors back and then retain 100% ownership of the properties. Sorry. Sorry, sorry to cut you off on this, but before we get to that what is the purpose of this model?

Yes. I’m sorry. Go ahead, Matthew. Yeah, I can jump with because cause I guess I’m the one who assigned it to David to get the i r return on equity. Yeah, I r return on equity. Cash and cash. Cash and cash. Cash, yeah. For that syndication, because those are the numbers that we plug into the for his or sorry for the fund, not syndication, because those are the numbers that we plug into all the legal drafts.

Just for context and go on Matt. No. I was gonna say exactly that. So your. So you’re talking about a syndication and you’re trying to just raise debt, but you are not trying to give any equity to anyone, correct? No, so I, this would be inequity raise. So debt I would be, the debt would come from the refinance.

So there, there’s no, no initial debt really. So I’d be taking the money from the fund, purchasing everything with cash with through the fund. Yeah. If that makes any sense. Yeah, no it does. So the funds, so are you raising money for the fund then? Correct. Is that the target? Okay. And you are raising the whole amount to finance all these houses and not okay, so a hundred percent yes.

But that would effectively mean that you are giving away equity in the fund, correct. I guess I never I wouldn’t want to, no. So I guess I would wanna form well okay, so I guess I see what you’re saying. So I would, I guess have to structure, I’m trying to think of what the correct way to do that would, so I wouldn’t wanna give away any ownership, obviously managing the fund.

So I guess, Nancy, what would your thoughts be on that? I guess as far as what do you think like the right structure would be? Cause I, I don’t wanna give up any ownership if I don’t have to if I’m just raising the money. Sure. Yeah. So two things. One is that yeah, one, one is that even before this, my initial impression was that the purpose of the fund was to cover the equity down payments of the single families, and then they’ll be dead to cover the dead part.

But but I guess that’s one topic. The second thing to answer your question, Yeah I guess it was also my understanding that the limit that we’re, they’re taking profit share of the, because the limited partnership is a new entity, which doesn’t entitle them to have any equity in the underlying deals.

They’re just taking, a profit split of the profit from the deals. So that was my understanding. So I think you’re safe in that time. Yes. Because we just wanted to split profit. Yeah. Yeah. Yeah, exactly. Yeah. So if I’m so thinking about this if you’re raising, if you’re financing these houses, a hundred percent cash and you are use and you’re getting the cash from your fund, basically, so you have to understand, so the cost of equity is going to be a lot higher than the cost of debt. And even if we don’t, if we do the math here like the it won’t be a profitable investment if you are not using debt. So the debt would come after yes. Yeah I get that.

So the debt would come through a refinance, at which point, it’d be whatever it would be, a tw 20, 30, 30 5 million refinance or whatever it would end up being, at which point I’d be able to replenish, basically give everybody back their initial. Investment plus whatever the profits would be on top of the cashflow.

And I guess this context would’ve helped a little bit more as well, I just jumped in and started talking. So the, yeah. I’m I’m buying all of these thousand very middle market areas and putting Section eight tenants in every property. Basically what that it’s subsidized low income housing get with guaranteed income that’s subsidized from the federal government in the us.

So from like an appraisal and a value add standpoint it, it really is guaranteed income, which is where some of the value add comes in. Through the refinance. So just fake numbers. If I’m in into everything for 10 million for by the end of the year too, and I decided to refinance my, my hope would be that the portfolio value would come in around 14 or 50 million.

At which point there’s a pretty big return on equity for those that are invested in the fund. On top of the profit to put through the cash flow. If that makes it a little bit easier to understand.

No, it, it does. But I still can’t really I understand what you’re saying, but I still can’t understand why are we, so you’re talking about refinance okay. That’s understandable. But. Are you doing Reef? So let’s talk about year one. So you’re saying you’ll be purchasing 75 houses in year one.

And then you’ll be purchasing that all cash, right? Correct. We are on. Okay. And then when are you going? So leave year, all the other years out. When are you planning to refinance that 75 houses? That it would really depend on what’s stabilized. That, that is, so that was something, that’s something I’d have to figure out, to get a little more clarity to come up with exact numbers.

My, my initial thought is to do one giant refinance through, I don’t know, 200, 200 or so houses. And maybe I’ll, I’m not reasonable in thinking that too may, maybe I’m way ahead of myself. Cause I’m thinking I’m sorry, go ahead. Yeah, but the point that I’m trying to make here is, so if you are buying that 75 houses in year one, all cash, and you like, you’re not doing the, you’re not raising the debt for those 2 75 houses in year one and it is already a lost business.

Well, lemme so I mean my, and that would be. And I guess I should have mentioned this too. So my initial I would wanna outfit these. I’d be buying houses each one vacant and having a tenant occupy the house within 45 days or so. At which point I, that’s a, pretty say quick return.

It, I start cash flowing pretty quick. No but the thing but you’re not factoring in the cost of capital for that. Required to purchase those 75 houses.

All right. I see that, that’s where I’m not following. So how before, so how much is the average price of one one house? 85,000. So one house is 85,000. That’s it? Yes.

So 6 million. Okay.

I’m just trying to do some math here. So it’s a 15% rent. You’ll be able to get on that.

But the thing that I

don’t understand is why wouldn’t you raise that right away? So it’s very it’s tough to.

It’s easier to purchase cash instead of having to going through it, it cuts down. A couple reasons actually. So there’s this we probably know this, but, so there’s this thing called cost of capital, right? An average cost of equity capital is, could be anywhere from. 10 to 15%, like minimum, right? So let’s say 12%, the cost of debt, even in this market, like right now, the market is high. So let’s just say five, six, 6%.

So when you are using and when you’re using the funds money, that means you have already given away equity in that fund and all the investors that are investing in that fund. Are equity investors, so they require a higher cap rate of return for that and for investing that capital compared to a debt capital.

So your cost, even though you are not, even though you might be cash flow positive, the equity capital cost is way higher than the, than what you would get from that property. Because, so let’s think about it this way. So 15% is your this thing is your return on total revenue. So for all the money and the 12% is the cost of equity capital.

So you only have a 3% margin and then you have all these expenses to pay as well.

So I guess I, I’m looking at it. Wanna, all right, so I let’s take one house, for example. So at 85,000 I call the, if the, all right, let’s just let’s say I was gonna buy everything with debt inequity. So let’s say, and there’s a reason I’m not I’m not doing that or don’t plan on doing that initially but let’s just say I’m sorry, go ahead.

So you said, So I’ll just do the math. So if we just take one, and you said $1,102, right? Correct. Per month. Yep. So 12. So this is your total revenue from that house in the year, like for the whole year. So 13,000 to 124 makes sense. And then if, even if we assume a person who is investing in your fund, Once a 12% return, or let’s say even a 10% return, the cost of that is around 10,000 at 12%.

So if we can even go a little lower and say 10%, right? 8,500. So that’s your gross margin. And then you have about.

This one, 25% that’s what we were discussing. So 25% in operating costs. So that’s your, so at 10%. So you are only making $1,400 in this year, and that is also assuming 10%. But if we is, which I don’t think is reasonable, it would at least be 12% like the standard equal and year in loss.

But if you sorry, but if you, let’s say you do the same thing. So we do this thing. So let’s say it’s equity is 20. You put in 20% equity and then you have 80% in debt for that. So your cost of capital is 7.2% in this scenario. So if we change that to 7.2%,

You suddenly have a 4,000 $3,800 profit from that. So the, and that, that’s why I’d be so heavy on that refinance as quickly as, I would, yeah, I would, need to really, so maybe I’d have to shorten enough the time in which I refinanced that to add that debt. So a couple reasons.

I’m not doing that from the right, from the jump. At that $85,000 purchase price. It’s very difficult to have like a D S C R lender or something like that lend on a property that’s less than a hundred thousand dollars. So that’s, go ahead. Okay, so no I see what you’re saying and I see why you’re trying to raise the fund and not get the debt financing, but then I would, change the strategy a bit and. Not try to raise the funds for all the 230 houses that you’re trying to get. You would raise, let’s say in year one, you start a fund and you raise about six point this million, $6 million to buy 75 houses, okay? Then right away you start focusing on refinancing.

Through your fund, right? So once you refinance, You invest that money in another chunk of houses and then you refinance those and then you get their money. And then, because you can’t, basically what I am trying to say here is, so the 6.3 million into three, so that’s the total number of houses you’re trying to get.

So you’re about to trying to raise 20 million. If you raise 20 million in your fund. That is going to be a loss making thing. But if you raise about six, seven, 8 million depending, like we need to do the detailed numbers on this, like I can’t, but I’m just guess doing a rough math here. If you do six, 7 million for the first branch of houses and then you refinance those and get that money for the second branch of houses, so your suggestion would just be to break it down into chunks for lack of better terms? Yes. And then not to, yeah, just do an initial raise for whatever houses, number of houses you want in the fund and just keep it, and then basically don’t raise any more money from a fund perspective.

And then just run my Refinance it and then yeah, basically refinance that portion of it, and then go from there. Okay. So okay. Yeah. That that, that makes sense. That makes sense. So I guess what would, okay. I’m trying to think of, that’s my initial, that would, that was my initial So you’re saying to break it down in the chunks to be profitable quicker, I guess is what I’m.

Gathering. Yeah. To even generate a profit, I would say. Because if you’re, yeah, if the longer you keep your equity capital invested in a real estate property and you’re not using debt, it is not really a profitable thing. Real estate. Yeah, true. Yeah. Real estate is profitable if you use. Quite a bit of debt and Oh, yeah.

That I know. That I know for sure. Yeah. Yeah. That, yeah, that yeah. Yeah. So my, yeah, my, my initial thoughts were, it’s very long. 20 million. It’s, yeah I just had a conversation with a friend of mine today actually. He said he is gonna start buying stuff, all cash and whatever.

I was like, yeah, that, that’s stupid because you’re not gonna see a profit for 10 years. Yeah. I know that obviously we don’t really show a profit for, Whatever the timeframe was I was discussing with him. Yeah. So ba basically what your suggestion would be is just to break it, raise less, break it down, refinance faster, is what I’m gathering.

Yeah. That would be my suggestion. And yeah, so if I, so you basically refinance, I think you, I’m not really sure. If I’m thinking about it, Fred, if you only, if you are able, let’s say, In the first 75 tranche of houses, you are able to 85,000, we are able to get, what do you call it 80% of of the funds as refinancing.

So let’s say 80%. So it’s 5 million. So I don’t think you even in the four 5 million. Yeah, you could probably start slow, to make it more profitable. I think you could start with lower number of houses to begin with, and then gradually increase, like maybe the refinancing time period should not be yearly.

It could be like, three months, it could be six months and you are refinancing it again and again. Like the new properties you buy, you get, because the only hindrance for you is that you are not able to get the. Loans from a bank or a private lender for $85,000 houses. So you need to join everything.

But I would suggest get the minimum number of houses that we would require to get a debt financing in, like from a private lender or anything. And then just build upon that, right? So there’s actually somebody that I met through raises actually that I forget exactly the terms. He’s got a 50,000, I think he’s just broker and he’s a broker, but the his minimum I know I can get the debt for a refinance on with commercial terms.

So we’ll try, I’m not necessarily against all that. I would like to see profit faster, obviously. So Okay. That, that, that makes sense. And then, okay. So basically just have to tweak the numbers and tweak my strategy a little bit is what I’m gathering to yeah.

Correct. So yeah how I would think about it. So first thing is, what is the minimum amount of private lender would finance? So you need to get to that number. Okay. So that say the minimum deal that they would do is $5 million. So you need to start with that, the refinancing amount that you will be able to get.

And raise money according to that, and then buy houses according to that. And then go from, and just build upon that. Like when you buy more houses, refinance again, buy more houses, refinance again and go from there. So it’s the amount that you need is where I would start. Okay. And then just build upon that then, yeah. Yeah. And this is the for now, like just, yeah, I think. Maybe the first ranch won’t be profitable but the sooner you raise debt for that, and the sooner you buy new houses and the sooner you raise another debt for the new, when you buy the new houses is that, then it, it’ll start earning profit because the initial one or two deals I’m in the debt, like until you get the debt is not going to be profitable.

It is actually going to be break even or even loss making because the cost of equity is so high. Okay. So I guess we I gotta, we’ll go back to breaking things down a little bit more on my end then to see what would be, how small or how big of a troche I can put together, for a first round.

Yeah. And Exactly. And then I guess now too, we’ll have to. Get back together, to determine what, i r and cash on cash and everything else would be, I guess with a smaller amount initially for my docs, and I think that’s what ethical will probably give us a little more clarity, and maybe.

Yes. I think, yeah the first thing just start with the funding required. Sorry. The the debt, the minimum amount of debt financing you will get. And based on that, so let’s say it’s 80%. So let’s say even if we’re doing this math, so let’s say, let’s just assume 5 million is the minimum they would do in debt financing.

So that means, and then 80% is the maximum ltv they would go, okay, so you have 5 million number here. You buy 75 houses, you of $85,000 each, you this is the minimum amount you will need to raise in your fund. So 6.4 million, 6.5 million. Let’s say you raise this debt financing, you buy another chunk of houses, 85,000, and you buy 60 more houses.

So that is going to, so your second year revenue is going to be, One 60 75 plus 60 into whatever amount that we have. Uhhuh, let’s say five into 60 into 1, 1 0, 2 into 12. So this is going to be a second year. Maybe I just did something wrong, or No,

I’m doing something wrong here. Oh, 75 plus. So this is going to be a second year revenue. Yeah. And then you’re able to refinance another 50% of this 80% of this. So that is going to be a third launch. And then you buy another chunk of houses from using this money, 85,000. You see what I’m doing here, right?

You’re getting my point. Yeah. Yeah. Yeah. Yeah. So yeah, that’s how I think it would flow. And then you keep on adding to those and that’s where you need to figure out the amount, like what is, how do you want to start? And then once we jot it down, 4, 5, 6 years, and you have, you are able to get to, a good amount of debt in your portfolio.

Then you will be able to get a five, six year projection and then we can calculate the N P V and I R and all those things because if we just do an IR calculation for the first launch, it is going to be so low that it won’t really be profitable. But you have to factor in all these launches before you actually get to a good return that even show to investors.

Okay. So basically, See what the minimum amount of debt I can get at that acc that, with that acquisition cost, then I guess, which I know who I can go to talk to about that. Yeah. And then b, work backwards basically from that, I guess is what you’re suggesting. Yeah. Okay. Okay. Interesting. Okay. Yeah so it looks like cause Matter used his his personal plan so we should get kicked off.

Would you like to continue disc? I have a lot of availability right now. Would you like to continue discussing both of you or should we should I conclude in the notes or I think I think I’m good for now. I think that kind of knowing. This gives me more clarity, and I, which to start on the smaller end, so I’ll mess around with my.

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