Reflections on the 4th

As another 4th of July is behind us, it’s worth a moment of reflection. For all the problems, pain, and political discord on both sides of the table, let’s not forget the amazing thing we have going here. The American experiment, started 242 years ago, unleashed the incredible power of human innovation and perseverance, lured by the promise of equality of opportunity and the clear rule of law. The result has been a massive increase in productivity, and the corresponding quality of life that entails. Our grandparents literally could not have imagined the way things would be today, and I suspect the same will be true for us with our grandchildren 50-60 years from now. Despite the occasional concern I might express with our direction, I remain convinced of the incredible opportunity that lies ahead, and feel blessed to be a part of it (however small). On that note, I went out and bought myself some more Vanguard Total US Market (VTI) today. Sure, I’d like it a lot more if it were cheaper, but given my hold period is forever, I expect any short term declines will be wiped away by the long term prosperity mentioned above. And really, what better way to put your money where your mouth is than to buy another small slice of this great nation.


Latest Investment News

On the investment front, I pulled the trigger on two Mobile Home Community (MHC) investments last month. As alluded to in my previous note, my hypothesis is that MHCs present a lower risk investment in this environment, given where they sit on the housing spectrum. There is still tremendous pricing power for a well managed MHC, and in the context of a downturn, they should perform relatively well (from 2007 to 2009, total returns for the sector were basically flat, compared to material losses for other sectors, and the S&P 500). In addition to all that, I believe there will be a long term secular driver for the sector in the massive number of baby boomers entering their retirement years with only modest savings at best. Social security offers a small lifeline, which will be enough to help many, but will result in a large need for affordable housing.

For some prospective investments, despite my desire to slow down capital deployment, I continue to see some compelling multifamily deals that are situated in the right markets, and underwritten with conservative investment standards. As a recap, the things I look for right now include:

  • Excellent sponsors – this is perhaps the most important thing – getting in bed with the right sponsors who know their markets intimately, have conservative standards, and the ability to drive value add in a material way
  • Conservative markets – considering their performance in the 2007-2012 timeframe
  • Class B properties – generally more resilient to economic and employment shocks
  • Healthy discount to replacement cost – want to make sure that the properties I invest in will have a distinct cost advantage over competing inventory or developments
  • Value add opportunities – the value add can helps to reinforce downside protection
  • Long term financing – as we enter the uncertainty of rising rates, I want to make sure financing is secured for long past the target life of the deal
  • Generous debt coverage ratios (1.8-2X or more) – I like to make sure the current property performance can more than cover debt obligations, even in the event of a major downturn in pricing, occupancy, or both

San Antonio / New Braunfels: In particular, I’m looking at one deal in the New Braunfels / San Antonio market. I consider that general market to be a great long term play. The Austin-San Antonio corridor is going to be huge over the next 10-20 years, and New Braunfels sits right in the middle of it. On this deal, I like the market and sponsor most – this particular sponsor has a huge presence in the region.

Jacksonville: Another deal I’m considering is over in Jacksonville Florida. I have traditionally avoided many of the Florida markets, as they tend to be a little more expensive and volatile. But in this case, the sponsor and the property are compelling, and I believe the long term prospects for Jacksonville are very good, considering the high cost of living in many other Florida locations, and the fact that Jacksonville, despite being on the coast, is actually well above sea level. This may be a moot point for most, but even if the target deal has a 5-10 year hold, I don’t like investing in things that might potentially be irrelevant in a 100 year timeframe. So much value in an asset like real estate is tied to the long term future prospects of things, that even marginal changes on future prospects like that can have a material impact on today’s value and price. For those who don’t know, I believe much of South Florida will almost certainly be underwater in the next 100-200 years.

Southeast: Lastly, a sponsor I’ve invested with in the past is soon to be opening up a fund targeting workforce housing in the Southeast. I’ve wanted to get more exposure to the Southeast markets, but haven’t found a good sponsor to do it with. This particular fund will give me broad based exposure to a number of second tier markets. These deals have conservative underwriting and target generous cash on cash returns, so I’m looking forward to this one as well.

Haven’t pulled the trigger on any of these yet, as I’m still in the diligence phase of things and waiting for things to firm up. But will keep you posted at things develop. If you’re interested in any of these deals, drop me a line and I can put you in touch with the sponsor.

Market Thoughts

On the topic of public markets and the economy at large, it feels like no real news to report, but a lot of commentary and hang wringing about valuations, interest rates, and trade wars.

There continue to be articles written about how Buffett’s cash hoard continues to grow, and how he isn’t able to find any bargains in the current environment. First world problems. But truthfully, valuations are rich as alluded to in my last review. It seems that prospective returns from investments made today will be disappointing. Does that mean they will drop anytime soon? As always, the whole market timing thing is hard to say. But we can say it is a good time for caution and conservative restraint. I wouldn’t be dialing up the risk of my portfolio at this time. It’s likely there will be some good buying opportunities over the next 2-3 years. Keep some powder dry.

In other news, the Social Security Administration was pleased to report that they’ll be able to continue making full social security payments out to 2034. After which, those payments will need to be reduced, or funding will need to be increased. Social security is on a collision course with our federal budget. One of the two will have to give, and I suspect in the end it will be our budget. Leaving the old and sick out in the cold just isn’t a great reflection on the greatest country in the world. But it will not come without a lot of loud noises from both sides of the aisle on this one. Of course, this whole development fits with my long term thesis on the importance of lower income housing options – in particular, mobile home communities. When you’re on a fixed (and dwindling) social security budget, finding cheap housing becomes priority number one.

Lastly, China. One of my favorite topics. We’re just getting into it with them over trade, and only time will tell how far this ‘trade war’ goes. For now, I’m apt to believe it’s a lot of bluff and bluster from both sides, without a ton of substance to back it up over the long term. Both will probably begin to feel the pain and step back from the edge. Of course, I think China still has more to lose on this front. Not being an expert on the matter, it seems our trade with them is pretty heavily lopsided (hence the trillions of dollars in US debt they own), so a little rebalancing wouldn’t be the worst thing in the world. But beyond the headlines of the looming trade war, China continues to have their own internal problems with corporate debt, and real estate overdevelopment. In short, I continue to believe they have their own real estate crisis that has been brewing since the Great Recession (or before). Of course, the Chinese government has a lot of resources and incredible will power to prop up both failing companies and real estate markets, but at some point the levy will break. This, above all else, might be the straw that breaks the back of this bull market. Only time will tell.

My real estate investment goals: I include my personal real estate investment goals with every Ramen Review, as it will help to put things in context. Generally speaking I look to real estate to provide me with inflation protected passive income (IPPI), with an emphasis on tax efficient cash flow and conservative downside protection (i.e. capital preservation!). Given that, I look for deals that are going to generate cash flow from day one, and be resilient to recession and financial shock. This means I tend to stay away from more ‘growth’ oriented markets, and ‘riskier’ real estate strategies like new construction – particularly in the current environment. My historical comfort zone is multifamily value-add investments in A & B sub-markets, with ~B grade properties that have potential to move up to B+ / A- with the right investments. I branch out from there on occasion into mobile home communities (MHCs) and other more conservative sectors, but try to stay within my circle of competence. 

Learn more: If you want to check out any of these investments yourself, join the big four online real estate platforms at CrowdStreetRealCrowdRealtyMogul, and RealtyShares. If you’re interested in one of the sponsors or syndicators I reference above, drop me a line at and I can put you in touch with the right person. And please remember, this is not financial advice, and I am not a financial advisor to you or anyone else. Please read the disclaimer for more details. Everyone’s situation is unique. With any investment, you should do your own diligence, and you should consult professional financial and legal advice if you’re not comfortable and / or capable of understanding and navigating the risks yourself. In short, invest scared, invest wisely. 


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