By Datta Khalsa, Broker & Owner, Main Street Realtors
My first real estate purchase was a sprawling mid-century adobe revival ranch house Soquel in need of some repairs. I borrowed the bulk of the down payment from a family friend and rented out the extra bedrooms to help with the monthly costs. Over time, I repeated the pattern every 1-2 years, using my accumulated equity in an upward trending market to buy additional rentals that showed sufficient cash flow to cover the cost of both the mortgage on the new property and the loan I would take out for the down payment.
This strategy is summed up in the old Italian saying, “Chi Vende Perde”, which translates to, “He Who Sells, Loses”. And while this method can get an investor to a good start to steadily build wealth over time, it isn’t the fastest way to show profits and it isn’t very scalable.
"This strategy is summed up in the old Italian saying, 'Chi Vende Perde', which translates to, 'He Who Sells, Loses'."
When I helped start our local real estate fund, my partners and I were faced with the challenge of attracting capital from people seeking returns of 10 percent or more on their money, which required more aggressive models for investment and also took us across state lines. Given the benefit of hindsight, I now know first-hand that there are limits to doing these types of investments on a large-scale level because of the amount of oversight they require.
Hard money loans against real estate have proven to be one relatively effective model for getting double digit returns when the loan goes well. And for the loans that haven’t gone according to plan, we’ve been able to ultimately collect our principal using a combination of litigation and working collaboratively with the borrowers with extensions and payment plans. These situations come up more often than you might expect going into a loan, so there is something to be said for having your capital invested in a fund where it is spread over multiple loans with a management team to help stay on top of things, instead of a single note with a single borrower.
Our other sources for higher returns have also tended to be more management intensive than my initial cash flow-based model, also being more speculative and cyclical in nature. Over the course of the past decade our foray into flips of Single Family Residential and Apartment properties primarily in other states has run its course, with property values no longer growing at the rate they were. Instead, our focus of late has turned increasingly to development projects, where our analysis continues to show projections well within the range needed to keep our investors happy.
After managing investments across the country that have ranged from hotels in Missouri and New York to apartment stabilization projects in Arizona and Texas, it’s nice to be able to bring the fund’s capital home for opportunities to help shape the future of our own community. And with California’s higher density mandates contributing to 2800+ housing units now under development within the city limits of Santa Cruz alone, there appears to be no shortage of projects around town for local investing to keep our dollars both profitable and in the area.