Our Thoughts and Updates
From Dan:
Irony
I was reading a news article about distress (moreso the lack thereof compared to expectations) in the office space. There was a line that made me think about an overarching concept that’s important to understand which was, “America’s office firesale has barely begun”. I have been reading headlines about the impending real estate (all niches really) crash for 2 years now. Yet, residential housing is thriving and going up again in many places, multifamily has come back down to earth but certainly not to the degree expected and the same can be said of office which brings me to my point. The widespread expectation of a crash leads to preparation, liquidity and all around prudence which helps to ensure one does not happen. I ask myself, when has a large-scale market crash of any kind happened when everyone was expecting it?
The more that “fear” is the general sentiment among investors, the less worried I am about a crash of any kind. It reminds me of one of my all-time favorite (investment-related) quotes/questions which comes from Howard Marks, “How Much Optimism is Factored Into the Price?”. Lately, the answer is “not much” which keeps things a bit more in check.
Of course I’m generalizing and further distress is most definitely coming in the office and multifamily space BUT the entire point is that the expectation of that leads to more preparation today so that when loans come due, many investors will have prepared/found solutions.
On the residential side (i.e. single family/small multi), there’s a huge housing shortage in most parts of the country which presents a multitude of opportunities. Unfortunately, what’s really “crashed” is the value of our currency. Consequently, I’m glad rates are high and the monetary supply is being reduced some!
As history illustrates, everything “swings” too far from one side to the other so I’m sure many markets will become overbuilt and general sentiment will shift more towards excitement and optimism. When that happens, I’ll be far more concerned about a large market “crash”.
Other Projects:
989 Harmony: I’m having a duplex built on one of my lots (likely a 2nd this year as well) that I’m going to keep as a rental. I’ve done business in Pueblo West since I moved to CO in 2018 and it’s provided a framework for many of the other markets I’ve done very well in. It’s a tertiary market, ignored by most Coloradons due to its negative connotation (coming from Pueblo NOT Pueblo West but few are aware of the distinction) and it’s too small of a market for institutional players. Yet, it’s the next market down the hill from CO Springs, which has grown tremendously) and is also short on housing stock. Many of the people that live there are employed by the government via one of the military bases up north or the prisons in Florence/Canon City or work in healthcare.
At the same time, they are almost completely out of water taps and the Metro District (the governing body for the town) makes it nearly impossible to build anything over 2 units (I.E. constraints on supply). Given the aforementioned factors, it’s a great place for buy/hold rentals and competent competition if far less than up north.
I wouldn’t try to build a portfolio of 100 units there, but for a solo investor like myself to make a few million dollars and create a strong base of cash flow over time is very feasible.
Books:
The New Map: Energy, Climate and the Clash of Nations by Daniel Yergin
I mentioned this one last newsletter but was just starting it so I didn’t have any commentary. I’m nearly finished now and it’s fantastic! Yegin takes you around the world, talking through the history of all the major energy producers (U.S. – Russia – China – Middle East) and how oil, natural gas and now electric energy have driven the placement of borders (and the corresponding conflict). Highly recommended.
From Mason:
In the Business
March has been an extremely busy month for me in all my businesses. We’re finally making headway with the renovations for my commercial building project in Pagosa Spring. Hopefully by summer, that building will be fully renovated and rented out and give myself and my partners the opportunity to have a cash-flowing asset with enormous depreciation potential. I think if this project has taught me anything, it is to ensure you have the right contractor in place prior to purchasing and that there is a significant opportunity for experienced operators to come in from larger areas into smaller towns to complete business.
In the land business, acquisitions and sales are at an equal pace which is always where you want business to be. There are still certain pieces of land that the hold time has been longer than expected but by purchasing these parcels at such a discount compared to market price, the hold time will still provide better-than-market returns for myself and my investors.
The more exciting news in the business is the recent hire of Rachel McDonald as Chief Operating Officer for RM Golden. Rachel will be taking over a majority of the backend processes within the business that will allow me to focus on larger projects. With Rachel’s background in data and software engineering, business intelligence, and being extremely detail-oriented, I believe the business will be able to achieve new milestones. Additionally, with the amount of opportunity and demand within the real estate space for clean, usable data and business intelligence solutions for KPI-tracking, I believe our company will be able to begin offering more products and services within the real estate investing world.
Books:
The World For Sale: Money, Power, and the Traders Who Barter the Earth’s Resources by Javier Blas and Jack Farchy
In an effort to be a supportive friend and listen to Dan’s recommendations, I’ve been thoroughly enjoying this book that he recommended in the last newsletter. I think the lessons that this book provides on how to achieve massive success in business but being able to apply my own moral and ethical code to their operations opens my mind up to substantial opportunity in the business areas I’m operating in.
Dune by Frank Herbert
Don’t ask me how many times I’ve seen Dune: Part Two in theaters.
Thank you all for reading and don’t forget to read the article attached!
Cheers,
Mason and Dan
Appendix A (by Mason)
Finding the Gap: Aligning Market Demands with Business Opportunities
By: Mason McDonald
For the entrepreneur, it is the dream to come up with the next ābigā thing. Whether that is a new product or invention that the world has never seen before, creating the next social media network, or solving a problem thatās never been solved, the entrepreneur has a desire to find a gap in the market and fill it.
For the developer, it is the dream to take a raw piece of land and complete the necessary entitlements and horizontal improvements to make the land buildable. Not as sexy as creating a new app that you sell for over a billion, I know, but many of the richest people I know are residential developers. There are residential developers that are at the mom-and-pop level as well as developers that are household names. A common theme for the actions that all these developers are taking is that they are finding a gap in a market where there is not enough shovel-ready land, and filling that gap by taking the raw piece of land through all the necessary steps to be able to build on it and provide housing.
However, there is another common theme between the mom-and-pop developers as well as the biggest names in the industry: there is a significant gap between acquiring the land and the ability to take it through the development process. That gap is financing.
In last monthās newsletter, I focused primarily on why land loans are hard to find and how there is tremendous opportunity to provide the capital for land flippers (people who buy land cheaply and sell it for more). In this article, I aim to focus on the opportunities that exist in the current market due to the shortage of single family homes in the USA and the opportunities of providing capital to developers that are attempting to take a raw piece of land and develop it.
The Gap Between US Housing and Population Growth
If you keep up with news within the real estate world, Iām sure you have seen countless headlines over the last few years that are along the lines of: āUS Real Estate Market Crashing!ā and āUS in Severe Housing Shortageā. The thing to note about both of those article headlines is that they inspire a lot of fear which leads to clicks which leads to ad revenue for the journalist; however, if youāre aware of how economics work, you can notice that those two headlines contradict each other. In an effort to not overcomplicate all of the factors that can lead to a recession or depression, usually if there is a lack of supply and a high amount of demand, that particular sector in a market is safe. Below, Iāll highlight three primary drivers to the supply issues and the reasons for the demand of new construction in the U.S.
World Events and Their Contributions
In 2007-2008, the real estate market completely collapsed due to many horrible practices and many developers and builders lost everything. When that occurred, new construction came to an almost immediate halt. If you look at the graph below that depicts new construction starts, you can see the steep drop that occurred during The Great Recession.
For the next decade, developers and builders slowly started to correct and you can see a slow increase to get to a more normalized level of new construction. In 2020, another world event caused a drop in new construction. The COVID-19 pandemic shut the world down and the US saw another dip in new construction and while it corrected quickly, there were other implications of the pandemic that are not indicated in this graph.
Since COVID had effects throughout the world, and since we operate in a global economy in which many building materials are shipped in from out of the country, we had a significant disruption in the supply chain for materials. Combining government shutdowns, business shutdowns, extreme and deadly illness, along with a labor and material shortage, it is the perfect storm for another slowdown in new construction. So while the data indicates a continued increase in new units being constructed, the factors listed above have contributed to significant delays with the units being completed rather than just started.
Long Standing Regulations
The United States is known as the land of the free and home of the brave but if you drive through suburbia, it might feel more like some sort of dystopian (or utopian depending on your preferences) society that you donāt see in other parts of the world. If you walk down the street in many European cities, you will pass by a single family home next to a bakery next to an apartment complex next to a shopping mall next to a restaurant. In the USA, experiencing something like that is very rare due to many long standing zoning laws that are in place.
I do believe that there is importance with there being regulatory involvement with development and understand the desire of preservation of certain communities being a certain way; however, with many of the laws in place in the more severely zoning regulated states (i.e. Connecticut, New York, Arizona), it halts development. See the Connecticut zoning map below that shows how much of the state is zoned primarily for residential. In many areas where there are nicer or more luxury developments, the residents will do everything in their power to stop larger multifamily development from being allowed anywhere close by. I do have empathy for everyone involved in these situations and I believe most people have a desire for a majority of Americans, especially those considered as part of the working class that allows a city to function, to be able to have an affordable place to live. Yet, I believe that many Americans will hold the idea for the need of affordable housing but also have the NIMBY (Not In My Backyard) attitude [ā¦Google the drama associated with affordable housing projects in Jackson, WY].
The positive news is that for the past 5-7 years, many states have been focusing on reforming these zoning laws to allow for more sustainable development opportunities. This will help reduce the development timeline and increase the land available for new housing to be constructed.
The Surge in Demand from Millenials and Immigrants
There are many factors that have contributed to the population increases, decreases, and growth rates in the United States. The invention of birth control, the COVID-19 pandemic, a cultural change in the idea/expectation of having children, the cost of living, immigration, and anything else you can think of. Regardless of all these factors, the population of the United States is getting older and with an aging population, the demand for housing increases.
The average age for first time homebuyers in the U.S. in 2022 was 36 according to the NAR and historically that number has been in and around the early to mid 30s. Knowing this statistic, it is finally the millennial generationās time to purchase homes. In addition to millennials flooding the market, there is an increasing number of immigrants coming into the United States that is causing a surge in demand for new housing (see the image below). These two factors, along with the hesitation in sales for recently bought homes in 2020-2021 due to the historically low and locked-in mortgage rates that these people have, is another driver for the higher-than-supply-level demands for new housing.
The Gap Between Capital and Development
In the wake of a tumultuous period for the banking industry, including the subprime mortgage crisis (2007-2010), failed developments following the 2008 crash, and recent bank collapses in 2023, regulators have significantly tightened scrutiny and banks have become more risk-averse. Construction loans have always been expensive and difficult to come by, but with all of these additional factors coming into play, it has become even more difficult for developers to secure funding for their projects.
If you go back and look at the graph that shows āNew Housing Units Started in the United Statesā, you can see the uptick that occurred in new development in the latter half of 2020 through 2022. With many of these projects being in the commercial/multifamily space and there being a sharp increase in interest rates for all mortgages, lending institutions that provided the capital for these development projects have become stuck with holding the loans for longer periods of time than expected because of the decrease in buyers due to the higher interest rates. Therefore, many of the larger lenders that have the capability of financing large scale development projects have put a halt to funding, or simply extremely unfavorable lending criteria, in place towards this asset class.
These converging factors ā supply shortages, homeowner reluctance to sell due to low rates, rising demand, and developer financing struggles ā create a significant market gap, presenting a substantial opportunity.
The Opportunity
Similar to the converging factors listed above that explain why there is an opportunity within the space to provide capital to developers, there is a similar converging of factors that have occurred within mine and Danās businesses that allow this opportunity to be realized. While there are tremendous macro and socioeconomic trends that indicate the desire for capital in the development space, the driving forces behind the creation of Ground Up Partners were the frustrations that Dan, myself, and dozens of our friends that are in the land investing and/or flipping community have experienced. In starting a new business venture, there is a certain amount of validation that occurs when anecdotal evidence at the small level (other land flippers), and personal experience, is validated by data as well as anecdotal evidence at the large level (the nationās largest developers).
Where We Are
To fully explain what Ground Up Partners does in its current state of operations: we joint venture with land flippers by providing the capital necessary and expert-level guidance and deal underwriting/due diligence to complete the acquisition for a parcel, or parcels, of buildable land at a substantially discounted price compared to the market value in exchange for a share of the profit upon the sale of the parcel(s). The criteria for any deal Ground Up Partners completes is as follows:
- The sale price will be above $20,000 for each individual parcel.
- There are verifiable comparable sales within the same area for the parcel(s).Ā
- All necessary due diligence to ensure the feasibility of building on the land has been completed and verified.
- Ground Up Partners will hold the parcel(s) in its name through a warranty deed.Ā
The typical profit split that Ground Up Partners offers to our ādeal providersā is anywhere from 30-60% depending on the available profit spread within the deal. The capital that we provide for these deals come from a mix of sources to include, mine and Danās own, as well as many of you who are receiving this distribution. Since beginning operations in December 2023, Ground Up Partners has provided the capital to, or is currently in agreement with, six individual deal-providing partners for the acquisition of eleven parcels of land. The total acquisition price of all 11 parcels is approximately $313,233.58 with an estimated market value of $604,200.00 and a total profit potential of $235,084.73 after associated closing costs. The realized profit on the first two deals that have closed was $43,555.00 on a land acquisition basis of $69,146.31āthis is prior to payment of debt service and payout to the deal finding partners.
Between Dan and myself, we have completed several hundred land deals and by understanding the market-specific due diligence required for each parcel we are acquiring and knowing the local experts to assist in every transaction, we are able to successfully mitigate risk in every transaction weāre completing. The true value that we are adding to each stakeholder involved in each transaction is connecting the gap between the passive investor with capital and the dealmaker that cannot raise money through expert guidance and risk mitigation.
Where We Are Going
Myself and Dan are firm believers of the saying āyou need to walk before you runā, and thatās what we have done through our own businesses as well as Ground Up Partners. Through our individual businesses as well as combined through Ground Up Partners, Dan and I have successfully raised and deployed around $4.0MM. Prior to raising any money in our own businesses, however, we made and used all our own capital in all our own deals. Prior to using other investorsā capital to fund deals, we funded deals ourselves. Through years of work and hundreds of deals under our belt, we have created a track record of success and identified the true gaps in the market where the greatest opportunities exist.
However, while we believe it has been necessary to bootstrap and build our individual and combined businesses from the ground up (hence the name of our company), do smaller deals at a greater volume, and raise money in a non-systematic way on a deal-by-deal basis, we are looking forward to the future of getting involved in larger deals and raising capital through a more formalized investment vehicle for our passive investors. As outlined in the writings above, there is a gap for the small-time land flippers all the way up to the largest developers in the country that we will continue to capitalize on. Weāre truly grateful for all the investors that have believed in us, our operations, and the returns we have provided over the years and weāre excited to take you with us to the next level. More on this to comeā¦
