Pensions & Investments, the international newspaper for money management, contacted Arixa Capital's Jan Brzeski and Greg Hebner for their insight on the institutionalization of single family investments - moving it from a collection of small operations to large, professionally managed portfolios. Read the full article
http://online.wsj.com/article/the_intelligent_investor.html This article from the Wall Street Journal explains the risks investors are taking today as they stretch outside of traditional investments to achieve current yield.
Investors purchased a one-year note designed by broker-dealer UBS, yielding 8.03%. UBS got paid a 2% fee. The only problem is that the return of 8% was premised on Apple's stock price remaining above a trigger level. Given Apple's drop in value, the investors in the note have lost 30% of their principal investment as of the date of the article.
It is hard to imagine that investors understood the real risk of loss when purchasing such a note. This story also points to a larger, underlying issue. Broker-dealers such as UBS may find themselves pushing products that are profitable for their businesses but not necessarily what is best for their clients.
At Arixa, we generally prefer to follow the approach of Registered Investment Advisors (RIA's) rather than broker-dealers. Unlike broker-dealers (which include the largest Wall Street firms), RIA's have a fiduciary responsibility toward their clients. This means that they must always put their clients' interests before their own.
The major Wall Street firms have long resisted having this standard applied to their business. They are more like an antique dealer‚Äîin business to acquire inventory for the lowest price possible and sell it for the highest price possible (while avoiding doing anything illegal). They are held to a much lower standard‚Äîthe "suitability" standard rather than the fiduciary standard.
The main reason that most investors never stop to think about this difference is that Wall Street firms have a lot more marketing budget to spend than RIAs, which tend to be smaller, independent companies. However, as this article suggests, in today's difficult investing environment, the day might soon be coming when investors finally realize that broker-dealers don't necessarily have their best interests in mind.
Arixa has funded the 100th loan in its series of residential renovation financing projects.¬† A photo of the property appears below. Of the 100 loans, one went into default and had to be taken over, renovated and resold. Arixa has generated a profit on each of its 100 loan investments to date. While we won't be able to maintain a perfect record forever, that remains our goal as our lending program enters its fourth year.
Our 7th annual event happens Wednesday, March 6, 2013. Once again, we will hold the event at the Anderson School at UCLA thanks to the support and co-sponsorship of the Ziman Center. Please click here for the event flier and click here to register. Last year we had over 250 attendees. Our event has been successful because it combines three things seldom found together: (1) a lively and experienced panel that emphasizes candor; (2) a great price of $15 which includes beer, wine and appetizers; and (3) excellent networking.
Greg Hebner has joined Arixa Management, LLC which is the fund manager for Arixa's residential investment funds. Greg has purchased more than 100 homes in California over the past two years, mostly from banks. His team makes these homes "like new" and sells them to families. Greg and his team will allow Arixa Fund II to purchase homes directly from banks for cash and renovate them cost-effectively. We call these properties "company-owned stores" to distinguish them from other homes that Arixa Fund II owns in partnership with experienced local operators who acquire, renovate and manage homes in areas where Greg and his team are less active. Greg will also assist Jan Brzeski with overall strategy for Arixa's residential funds. Greg's background can be found by clicking here. His company website can be found here.
In his latest article for Family Office Review, Jan explains how investors can plausibly double their equity in 5-7 years by purchasing single family homes, operating them as rentals and using moderate leverage. He also points out several challenges associated with this strategy. To see the entire article, click here.
Family Office Review, a media company that serves very high net worth investors and their professional advisers, has published an interview with Arixa Capital founder Jan Brzeski. In the article, Jan describes why many established investment companies have turned their attention to investing in single family housing, and explains how Arixa became involved in this market. To access the full article, click here.
Chimera Investment Corporation (CIM) is a $3 billion mortgage REIT with an 18% dividend yield. In an article for Seeking Alpha, Jan Brzeski analyzes Chimera the way we at Arixa Capital would analyze a real estate investment, focusing on the income it generates, the dependability of that income stream, and how the investment is financed. To read this article, please click here.
With a dividend yield of more than 14%, it is hard not to be interested in Annaly Capital (NLY), the largest mortgage REIT. At Arixa Capital we manage a portfolio of real estate loans...a miniature version of a mortgage REIT. In a two-part article for Seeking Alpha, Jan Brzeski applies his expertise as a real estate fund manager to analyzing the risks inherent in Annaly Capital's business model. To read part 1, please click here.
This article details that house prices continue to drop in the U.S., down 3% in the past year on average. Standard Capital is a bridge lender to builders who buy homes from banks and rehabilitate the homes before re-selling them for a profit to families that occupy the houses. The drop in home values means lower profits for our borrowers. We see affordability becoming attractive which should help create a floor for home values even as prices continue to ease in the next 12 months or so. In our view, as long as the Federal government continues its policy of providing low-cost mortgages, the market is unlikely to drop dramatically from current values. Click here to access the article on the Wall Street Journal website. -or- To access a PDF of the article, please click here: WSJ_Home Market Takes a Tumble
To access the article Jan discusses below, please click here: A Bull Market in Rental Housing - WSJ This article from the Wall Street Journal makes the case that buying apartments should yield attractive returns today. It is true that prices are down from their peak and the outlook for future increases in rental income is positive. However, the article sidesteps the single largest challenge for apartment investors--the market is overheated. In Los Angeles, there are hundreds of wealthy individuals and families searching for small properties to buy for all cash. They have pushed down capitalization rates, defined as initial cash flow from operations divided by purchase price, to the 5% to 6% range. Even though interest rates are low, the initial cash-on-cash return for apartment investors in California, defined as cash flow after debt service divided by the buyer's down payment, is in the low single digits.
For a very long term investor who has lots of extra cash to invest, buying apartments does indeed represent a valid investment investment strategy. However, for professional investors and others with limited resources to invest, buying apartments in Southern California at full retail value should be considered with skepticism. At the moment we prefer to make short-term loans to opportunistic investors who are buying assets from banks. By taking a strategy that is far off the main beaten path, and focusing on loans that are too small for real estate private equity funds, we cut the competition by 80 to 90% vs. the competition to buy apartment deals. With less competition comes better risk-adjusted returns, in our view. This is not to say that we won't buy any apartments...only that there needs to be a very unusual situation in order to entice us to spend time chasing an apartment acquisition, given today's high prices relative to cash flow.
This podcast addresses the maturity of both commercial and residential bridge loans. The maturity is the length of time that the loan can be outstanding before it must be repaid. The range of maturities is 6 months to three years, depending on product type.
Investors need to be very mindful of maturity because the lender generally cannot accelerate the repayment of a loan. If the lender needs liquidity prior to a loan being repaid, the only option is to sell the loan which might require some discounting as an inducement to other investors. Of course there is no guarantee that a loan will be repaid on its maturity date.
The investor needs to be prepared to foreclose on any loan if necessary, and subsequently sell the underlying property to recoup principal and interest, which generally would add six to 12 months to the investment time horizon on top of the maturity of the loan.
Please see the following article: Mega-Banks and the Next Financial Crisis In the article, fund manager Paul Singer argues that we may be headed for substantial inflation. The Fed "is treating confidence in fiat money--paper money--as inexhaustible." Loose monetary policy is being used as "virtually a complete substitute for sound fiscal, regulatory and taxing policy."
Mr. Singer has a point. Listening to the discussion and debate in Washington D.C. and Sacramento, one can't help but notice how far removed our elected officials are from the rules that govern a typical family's finances. Worse still, there seems to be very little resolve to tackle the tough issues, such as bloated pension promises, ever-rising government health care costs and raising the retirement age.
If Mr. Singer is correct, what does that mean for real estate investors? Here are a few observations about investing in an inflationary world:
* Owning real estate is a pretty good inflation hedge. Like gold, it is a hard asset and the supply is fixed. * Borrowing money for a long period of time at a low fixed rate is a good idea. The real value of the debt and the interest payments will shrink over time. * Lending money for long periods at fixed rates is a terrible idea. Avoid investing in long-maturity bonds because their real value will plummet if inflation comes back strongly. * In addition, any investment that is premised on the unlimited good credit of the U.S. or state governments, or on the credit of giant financial institutions, is risky.
What does all this mean for our program of making short-term real estate loans? Inflation would reduce the real return of these investments. However, because they are typically due in 6 to 24 months, they will fare much better than long-dated debt investments.
This article makes the argument that home prices are still overvalued relative to their 100-year trend of 3.35% price increases per year. If Federal support for the market were removed (e.g. home mortgage interest deduction and government guarantees of mortgages backed bonds from Fannie Mae), prices might drop 20%. Of course the U.S. Government is very unlikely to destabilize the market currently by removing support for the market given current conditions. That being said, investors in residential real estate need to be cautious and should not assume a return to rapidly rising prices.
Access the article on Wall Street Journal online here: Home Prices Are Still Too High
OR, if you are unable to access WSJ online, I've created a pdf of the article for you to read here: Peter Schiff_ Home Prices Are Still Too High - WSJ
The story below highlights what is going to become a frequent occurrence--city and state budgets will be strained by large payments that need to be made to public employee pensions. In this case, the City of L.A. is paying $500 million into the pension of fire and police employees for the next fiscal year One reason for the huge payments is that pension fund administrators made overly-optimistic assumptions about the returns they could generate on their investments. As pensions adjust their assumptions to match today's lower return reality, look for more announcements like this one. Los Angeles City Pension Costs Jump Again | FOX 11 News.
The attached story (link found below) includes comments by the CEO of Honeywell which I found very relevant. He makes the point that if we don't have the resolve to address our budget deficit problems, the bond markets will react by pushing up interest rates dramatically. It seems to me a fair assumption is that we will not solve all of our deficit problems quickly. Over time the Chinese and other buyers of US debt will demand higher returns given the increasing risk of lending to the U.S. As a real estate investor, if interest rates move up, real estate values will move down, all other things being equal. Therefore there is downside risk in today's real estate values. Acquisitions need to be scrutinized with this in mind. At Arixa Capital, we generally prefer to be the lender rather than the buyer of real estate in the current market, because this insulates us from being hurt by possible downward pressure on real estate values.
In the link below, you can access the transcript for this discussion. If you prefer to listen, the CEO of Honeywell, David Cote's comments are found at minute 3:05.