Moses Kagan spent the ZIRP period accumulating a portfolio of properties that he can hold indefinitely, just like what I want to do for the Neighborhood. The strategy was to find properties with cap rates 2-2.5% above mortgage rates. He'd acquire them, uplift their value and improve their NOI, then [[Refinance|cash-out refinance]] to return investor capital, and hold forever ([source](https://kagansblog.com/2018/09/why-we-focus-on-unlevered-yield/)). This would have been so nice, if it were possible in SF! However, as of 2024, these are all true: - San Francisco cap rates for coliving-quality homes are around 4.5-5.5% - [[Mortgage rates]] are now around 7%, which wouldn't be a problem if home prices had a corresponding fall, which you'd expect in a [[Housing inventory is the best measure of housing supply vs demand|healthy real estate market]] - However, SFH prices have *risen*, because [[A majority of homeowners in 2024 have interest rates below 4 percent]] so they feel "locked in" place, because moving would involve switching from a 4% to a 7% mortgage which is nearly twice as expensive So it's difficult to make the math work while mortgages are in the 7's. Here's a table with various combinations of the above parameters in a [simplified investment model](https://docs.google.com/spreadsheets/d/1HRn974H9bKnfokvPqtBbIchJwHpll8bbuHDAiNzsohw/edit?usp=sharing). The dependent variable is the year investor capital is paid off, and LPs can long-term hold the asset. I consider returning LP capital in 10-15 years viable as long as it produces an income of $30K+/year. By that metric, it's very difficult to make the numbers work unless mortgage rates come down. | Scenario name | Mkt value | Value uplift | Redev cost | GIM | Rent prem | Prop mgmt % | Expense ratio | Mortgage rate | Pref return | Cap returned | LP income yr 2 | Capital needed | Investors paid off | Notes | | ------------- | ---------- | ------------ | ---------- | --- | --------- | ----------- | ------------- | ------------- | ----------- | ------------ | -------------- | -------------- | ------------------ | ---------------------------------------------------------------------------------- | | 1 | $2,500,000 | 15% | $150,000 | 100 | 0% | 10% | 35% | 7.00% | 5.0% | 100% | $22,425 | $493,750 | 37 | | | 2 | $3,000,000 | 15% | $150,000 | 100 | 0% | 10% | 35% | 7.00% | 5.0% | 100% | $26,910 | $562,500 | 32 | | | 3 | $2,000,000 | 25% | $250,000 | 100 | 0% | 10% | 35% | 7.00% | 5.0% | 100% | $19,500 | $375,000 | 27 | | | 4 | $2,000,000 | 25% | $250,000 | 100 | 5% | 10% | 35% | 7.00% | 5.0% | 100% | $20,475 | $375,000 | 17 | Rent premium impact is big! | | 5 | $2,500,000 | 0% | $0 | 100 | 0% | 10% | 35% | 6.00% | 5.0% | 100% | $19,500 | $625,000 | 31 | | | 6 | $2,500,000 | 15% | $150,000 | 100 | 0% | 10% | 35% | 6.00% | 5.0% | 100% | $22,425 | $493,750 | 16 | Ok, you really need some kind of uplift AND reduced mortgage. | | 7 | $2,500,000 | 15% | $150,000 | 100 | 0% | 10% | 35% | 5.00% | 5.0% | 100% | $22,425 | $493,750 | 11 | Starts to make a lot more sense at 5% mortgage rates. | | 8 | $2,500,000 | 15% | $150,000 | 100 | 20% | 10% | 35% | 7.50% | 5.0% | 100% | $26,910 | $493,750 | 11 | To make it work at 7.5%, I need a rent premium of 20% lol | | 9 | $2,500,000 | 15% | $150,000 | 100 | 5% | 5% | 30% | 7.50% | 5.0% | 100% | $12,679 | $493,750 | 11 | At 7.5% mortgage at 5% rent premium ($100/mo over) would require 30% expense ratio | | 10 | $2,500,000 | 15% | $150,000 | 100 | 5% | 5% | 35% | 6.00% | 5.0% | 100% | $12,679 | $493,750 | 8 | At 6% mortgage at 5% rent premium ($100/mo over) works | | 11 | $2,500,000 | 15% | $150,000 | 100 | 0% | 8% | 35% | 6.00% | 5.0% | 100% | $19,320 | $493,750 | 10 | | Unfortunately, other real estate investors seem to agree: [[2023 investment transaction volumes are at 10 year lows]].