Income Property Lending

Los Angeles Business Journal Quotes Jan Brzeski

Arixa founder Jan Brzeski was recently quoted in a Los Angeles Business Journal article about investing in residential real estate. The article can be found by clicking here.

Case Study of a Commercial Real Estate Bridge Loan

This podcast outlines a recent loan we originated, secured by a strip shopping center located in Ohio. This loan was compelling based on the income of the property. The attractive income outweighed the negative factor of the property being far from our office.

Register for the 2012 Annual Real Estate Roundtable Discussion

Join Arixa Capital Advisors and five established real estate investors for our seventh annual real estate investment panel discussion at the Anderson School at UCLA on February 8, 2012. To learn more, click here, or register at

A Quick Primer on Income Property

This podcast explains briefly how to look at income property investing, and specifically, how to think about the value of apartments, shopping centers and industrial buildings. Coming up with a good estimate of the property's projected cash flow is the the key to understanding the risk of investing in a trust deed secured by that property.

The Case For Single Family Homes

Jan Brzeski is a contributor to Seeking Alpha. The article below is a copy of what he posted on August 22, 2011. To access his article on Seeking Alpha, please click here.

I recently spoke to another Seeking Alpha contributor who expressed concern that home prices could drop significantly from their current levels. This article explains why that is very unlikely to happen.

Case Study: Phoenix I am a real estate receiver for a shopping center in northwest Phoenix. When visiting the property recently, I drove around the neighborhood surrounding shopping center, which featured 1970s-built ranch houses that would be familiar to many people who grew up in the western U.S. I was struck by two things: (1) many of the recent sales in the neighborhood were well under $100,000. Some were as low as $50,000; and (2) the other shopping centers nearby were not filled only with 99 Cent Only stores and check cashing shops. In fact, the closest grocery stores were upscale, with hardwood floors and expensive lighting in the produce area, as well as other upgrades.

Replacement Cost and Why It Matters The cost to build a new home similar to the ones I saw in Phoenix is at least $130,000. This includes land development costs such as streets, curbs, gutters and utilities, as well as city and county impact fees, plus hard constructions costs. I am assuming that the land is free -- with land costs of just $20,000 per lot the total cost is likely in excess of $150,000.

Now let's look at the historical population growth rate of Phoenix. Below is a chart, courtesy of Arizona State University's Water Simulation project.

If Phoenix is going to continue grow, even at half the projected growth rate, then home builders will eventually need to start building homes there again. However, the only place with vacant land to build homes is on the outskirts of the city, far from jobs, which tend to be closer to the core.

Granted, some people may prefer to live in a new home for $160,000 in the distant suburbs (this is about the lowest price at which homes can be built and sold profitably). However, others will prefer a 1970s house for $125,000 -- in a neighborhood with upscale grocery stores and a much shorter commute to work.

The bottom line is, home values in places like Phoenix are much more likely to go up in the coming years than to go down. In all likelihood, we are looking at a bottom right now. Values reflect the supply-demand imbalance brought about by the foreclosure crisis. But replacement value is a more fundamental driver of stabilized value. And replacement value dictates homes such as these are undervalued currently.

One More Data Point: Price History Past value is certainly no indication of future value in real estate. Still the table below showing the history of sales of a home in northwest Phoenix, which I chose more or less at random from website, is remarkable. This home fell by 77% in six years. It recently sold for half of what it was worth 17 years ago, in 1994.

Note: this article does not purport to say anything about the near-term direction of the stock prices of home builders such as KBR or Beazer Homes. It only argues that at some point, their services will be needed once again and before that can happen, values of existing homes need to move up significantly.

Equity Residential's Implied Cap Rate, And Why It Matters

Jan Brzeski is a contributor to Seeking Alpha. The article below is a copy of what he posted on August 22, 2011. To access his article on Seeking Alpha, please click here.

I am a full-time investor and fund manager focused on non-traded real estate investments. Right now I am focused on investing in real estate loans with a nice margin of safety, but that fall outside of bank lending criteria and therefore offer much higher yield than one would expect.

Every now and then, I take a look at traded real estate assets, and frequently the results amaze me. Today, we'll look at Equity Residential (EQR). All analysis in this article is based on the latest quarterly report on the company's website. To see the source document, click here.

Before we go into the details, I'll tell you the bottom line: public market investors pay a huge premium for the liquidity that they enjoy. To my mind, they are paying far too much, especially if the goal is to have steady income and there is no compelling reason for the investor to be able to liquidate an investment from one week or month to the next.

How Much Cash Flow Do EQR's Apartments Produce? In this article, we are not going to analyze EQR the way Wall Street analysts do. Instead, we are going to analyze it the way experienced real estate investors do. And we are not going to be extremely precise about the numbers. A rough estimate will give us a good view of what is happening.

In the latest quarter, operating income was about $146 million. But that is after deducting $159 million of depreciation, which is not a cash expense. If we add back the depreciation, we see the approximate cash produced by the portfolio of apartments owned by EQR, before debt service, is $305 million. Annualizing that number, we have about $1.2 billion of cash flow from operations (roughly the equivalent of "net operating income" to put it in real estate terms).

What Does it Cost to Buy EQR? EQR's balance sheet shows about $10 billion of debt. According to Yahoo Finance, the market capitalization is another $17 billion (rounding). There is a bit of preferred equity, but it seems to be small enough to ignore for our big picture analysis. So the approximate enterprise value of EQR is $27 billion.

The Implied Capitalization Rate Now let's look at the implied capitalization rate of EQR. That is the net operating income of its portfolio of apartments, divided by the price we need to pay to own that portfolio. The answer is, $1.2 billion/$27 billion, or about 4.4%.

Does that represent a good cap rate or a bad cap rate? It depends on one's perspective, but a seasoned real estate investor would tell you that, given EQR's portfolio, which includes plenty of units outside of the coastal land-constrained markets, a 4.4% cap rate is mighty low.

In other words, those who limit themselves to investing in real estate via today's public markets may be overpaying by a wide margin, relative to what's available to those who are willing to cut out the middlemen on Wall Street and in REIT corporate offices.

I am not advocating buying any old apartment building... only pointing out that yield hungry investors in the public markets should take a look at the underlying numbers once in a while and compare what they can get on Wall Street with what is available on Main Street.

As I will outline in future articles, the best risk-adjusted returns for investors seeking yield from real estate today are not in the REIT universe, and they are not even in the universe of acquiring individual real estate assets (except for a small number of very special situations). Instead, the best risk-adjusted returns can be had from making short-term real estate loans. Currently, banks refuse to make loans on certain types of real estate transactions, allowing private lenders to earn higher returns than would normally be possible.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Things That Can Go Wrong when Investing in Trust Deeds

This podcast addresses problems that can come up when investing in real estate loans. The most common problem is a default, but other problems include natural hazards, fire and bankruptcy by the borrower, to name a few. All of these issues can be mitigated with property structuring, however many investors are afraid of having to deal with these types of issues, which helps explain why investors in real estate loans get paid well for the amount of risk they take.

The Three Sub-Markets of Trust Deed Investing

This podcast examines three different sub-markets within the trust deed investing universe: (1) single family residential "fix and flip" six-month loans; (2) single family investor loans of up to 24 months; and (3) commercial real estate bridge loans of 12-24 months. The podcast compares and contrasts these three areas from the investor's perspective. Please watch our blog as we will be posting one new podcast roughly every week. There will be about 30 podcasts total in the series, and this is the seventh. If you are interested in learning more about what we do, please sign up for our newsletter at or give us a call at 310-846-1754.