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New White Paper Available: The Great Housing Workout

The Great Housing Workout White Paper

Arixa Capital has released a new white paper focused on the U.S. housing market and single family homes as an asset class for investors to consider. The white paper is based on Arixa's concrete experience investing in this area in recent years, working with local operators who buy properties in a specific geographic area, renovate them, and either lease the homes or resell them.

The white paper explains various ways that investors can gain exposure to this asset class, which Warren Buffett recently endorsed as underpriced and attractive. The author explains the advantages and disadvantages of various investment strategies for both active and passive investors.

The white paper also explains that the activity of thousands of local operators is already helping to work through the backlog of foreclosed homes. Attracted by appealing profits, local operators will help the housing market to heal over the next several years. Policies that aim to solve the problem on a mass scale are neither needed nor advisable.

For a copy of our white paper, please click here.

February 8th UCLA Panel Discussion

To all who registered for and/or attended our event last week, thank you for coming. If you were able to attend, we hope you found it valuable. If you are interested in the photos that were taken of the event, please click here.

To read more about the event, please click here.

The unique value proposition for this event series is the high quality networking and educational opportunity combined with the very low registration fee ($15 for pre-registration or $20 at the door). The fact that beer, wine and appetizers are included in the price is also popular with participants.

For those of you who were unable to attend, or would simply like to listen to the discussion again, the UCLA Ziman Center was kind enough to record the event again this year. We plan to post this video very soon, so please check back on this blog for that link.

If you have suggestions for making the event even better next year, or would like to reach us for any other reason, we would love to hear from you. Please email Jan Brzeski at jbrzeski@arixacapital.com.

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 http://arixacapital.com/conference/

Arixa Capital 2011 Winter Newsletter

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Arixa's latest activities include:

  • The growth of our investment programs,
  • Upcoming events and Arixa's first assignment as a receiver for a shopping center in Phoenix; and
  • Information on our 2012 Real Estate Round Table Discussion
 

Jan's First Article for AllAboutAlpha.com is Published

AllAboutAlpha.com is the online publication of the Chartered Alternative Investment Analyst (CAIA) Association. The CAIA is devoted to training investment professionals who focus on alternative asset strategies such as hedge funds, commodities, private equity and real estate. Jan is writing a series of articles about today's real estate investment environment. Because AllAboutAlpha attracts readers from Europe and Asia as well as North America, Jan will curate articles by real estate investment experts from outside the U.S. about which investment strategies are working and why in their respective regions. In Jan's first article, he discusses how yields are compressed for many popular real estate investment strategies, but remain attractive on a risk-adjusted basis for other, less well known strategies. To access Jan's article, "What Los Angeles Traffic Can Teach Us About Investing in Real Estate Today " please click here.

A Real Estate Investor's Approach Towards Chimera Investment Corp.

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.

2 Roads Diverge In Commercial Real Estate

Jan Brzeski is a contributor to Seeking Alpha. The article below is a copy of what he posted on August 30, 2011. To access his article on Seeking Alpha, please click here. Real estate investors know that generalizations are of little value when describing the real estate investment market. Some markets see rising rents while others see the opposite. Results vary by asset class as well.

Today we are seeing an unusual divergence in values as indicated by the two charts below.

The Broad Commercial Real Estate Market: Still on the Floor The first chart is the Moody's/REAL All Properties commercial real estate index:

The index from which the chart above was made tracks repeat sales of all properties across the U.S. where the sales price was $2.5 million or above.

The Institutional-Quality Commercial Property Market: Bubbly Now let's look at the Green Street Advisors Commercial Price Property Index (CPPI). This index tracks the price at which public REITs are buying and selling real estate. This index also gives higher weight to higher dollar volume transactions, whereas the first index gives equal weight to every transaction (only repeat sales of the same property are tracked in the Moody's/REAL index; the CPPI tracks all large transactions by REITs, including those that are not repeat sales).

Mixed Signals The index of REIT-quality properties is up almost 50% since it hit bottom in early 2009. Meanwhile the broader index that includes many smaller, lower quality properties has actually gone down since 2009.

Consider for a moment that the broader index, which is still near its bottom, includes some large transactions where the price is presumably up 50% from where it was two years ago. This must mean that the prices of all non-large properties are down substantially since two years ago, in order for the broader index to be flat.

Imagine if the Dow Jones Industrial Average were up 50% in the past two years while the Wilshire 5000 Index was flat in the past two years. That is more or less what this data says.

Possible Explanations Let's examine some possible explanations of this dramatic divergence. Note that I am not advocating for the superiority of one or another explanation below, only trying to draw out arguments that could explain what we are seeing.

Explanation #1. The income of Class A buildings has gone up 50% in the past two years, while the income of all commercial property as a whole is flat. This explanation, if true, would be satisfying. It would suggest that the indexes are diverging for sensible reasons. However, that is not the case. On page 4 of the 2010 Annual Report of Vornado Realty Trust, "same store sales" EBITDA for Vornado's office properties rose 3.2%. And that includes more than a 5% increase from Vornado's big investment in the government bubble market of Washington D.C. which benefitted from stimulus spending during the period.

Explanation #2. Large, institutional quality assets are experiencing a bubble and are over-bought. Interest rates for both individual savers and institutional investors such as pension funds are near all-time lows. As investors look for yield, they are buying high quality REIT stocks, driving the dividend yields on those companies to very low levels. In turn, the REITs have issued huge quantities of equity on favorable term. If they only need to pay investors 2-4% dividend yields, they can afford to pay very low capitalization rates (very high prices) when they go shopping to invest the cash they raised. Of course if they are going to pay top dollar, they want to buy only the highest quality properties.

Explanation #3. Smaller properties will from now on be relegated to their appropriate place "on the wrong side of the investment railroad tracks." There has always been a gap between the value of a dollar of cash flow from a San Francisco or New York high rise and a dollar of cash flow from an Ohio shopping center or an Arizona mobile home park. The gap has now widened and will remain huge forever.

My Own Interpretation Personally, I think the rise in REIT stocks, and the related jump in values for top quality real estate assets, is part of a larger flight to safety. Investors are scared. They lost a huge amount of money on real estate in recent years. They need to get back into real estate because there is no way to fund retirement with a 1% or 2% yield from government bonds.

As Warren Buffett said, "be fearful when others are greedy, and be greedy when others are fearful." The best way to apply that advice in commercial real estate today is avoid pricy REIT shares and to embrace the healthy income that can be had from less prestigious properties. Small is beautiful in real estate today.

Disclosure: Our own strategy is to make loans to investors who are buying properties at beaten down prices. This provides healthy income with a margin of safety because the borrower's equity acts as a cushion for our investment in case values fall. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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 trulia.com, 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.

Case Study: A Junior Loan on a Fix-and-Flip Project

Those investors comfortable taking more risk may want to consider making a junior real estate loan, which can provide more equity-like returns (both on the upside and the downside) as opposed to the steadier returns on lower-risk first trust deeds. This podcast outlines a specific project in which we made a junior loan. This investment has now paid off and it was successful.

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.

Arixa Capital Releases FAQ About Trust Deed Investing

Arixa Capital Advisors has provided answers to a series of Frequently Asked Questions (FAQs) about investing in short term real estate loans--also known as trust deed investing. Our goal in doing so is to educate investors about various aspects of this lesser-known area within the real estate investment world. Arixa Capital Advisor runs a program of making such investments with its own funds as well as the funds of selected high net worth clients. We are releasing the FAQ in part because we feel trust deed investing offers attractive risk-adjusted returns as of mid-2011, relative to other real estate investment strategies. To access the FAQs, please click here:  http://arixacapital.com/trust-deed-investing-faq/

We hope you find this resource useful.  If you have any questions, or feedback, please contact Jan Brzeski at (310) 846-1754.

 

WSJ: A Bull Market in Rental Housing

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.