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Dive deep into the lucrative world of fractional real estate investment as Alex Blackwood and Joey Gumataotao, co-founders of mogul, unveil the strategies behind their success. This AMA recap brings to light the nuanced approaches to real estate financing, market selection, partnership cultivation, and investment optimization in the dynamic real estate landscape.
With the current economic climate posing unique challenges and opportunities for real estate investing, Joey’s insights into mogul’s approach at navigating these waters look to provide some clarity for investors looking to maintain profitability.
“We ended up originating a loan with an 8.5% interest rate here which was incredibly accretive to us at the time because the day one income yield on cost was targeting about 9.3%...That spread against that interest rate means that we're able to pocket again all that profit that's going to be coming to us through cash flow because we're paying our lender the pre-negotiated rate that we've negotiated with them at the closing table any yield that we can achieve on the property day one.”
Understanding the role of leverage and its impact on the profitability of real estate investments is crucial. Alex elaborates on why leveraging is particularly beneficial in the context of the Logan property.
"Yeah, I mean we can touch a little bit too on the leverage and why it's accretive in this scenario. So, obviously you touched a little bit on how it's a high yielding asset. And so, for that, margin expansion that you're discussing which is just that rental yield over the interest rate. I mean this one because it's such a behemoth and because it really is going to be yielding a ridiculous amount. That is why it is an accretive leverage and that's why it's in place and we have a DSCR. I think it was about the debt service coverage ratio, by the way for everyone. It's the amount that you're earning over the amount that you have to serve as the debt."
Joey shares the story behind the Kendall property, highlighting the combination of skill, luck, and strategic decision-making that led to its acquisition and the immediate realization of value appreciation.
"This one honestly has a special place in my heart. I think we just got incredibly, there was a mix of good skill and luck that came with the value accretion that happened day one here. Just incredibly valuable for everyone involved on the day one basis... This one, we got at $432,500... The Loan-to-Value here made a lot of sense and going back to what Alex was speaking on with the accretive leverage, as long as our yield is above that with a decent healthy spread day one, you're going to rake in that spread above that interest rate given that's a pre-negotiated return to the lender which is going to be pure cash flow to our investors and to ourselves."
Exploring the intricate balance between financing rates and investment returns, this section delves into how varying interest rates affect the profitability of real estate investments, with specific examples from Alex regarding mogul's portfolio to illustrate key points.
"Financing rates significantly influence the investment landscape. While Bowser's lower rate of 2.6% showcases an era of incredibly low rates, the shift to financing other properties at around 8.5% reflects the current market dynamics. Despite this, our approach ensures that each property remains a viable and profitable investment. The difference in financing rates underscores the necessity of a robust underwriting process, aiming for conservative yet realistic projections of yield and appreciation. Through our investment return calculator, investors can directly assess the potential returns, taking into account these variable financing rates. This transparency allows for informed decision-making, highlighting our commitment to maximizing investor returns despite fluctuating interest rates."
Joey expands on Alex's explanation of returns, highlighting the compound nature of returns in real estate investment and its significance in building wealth over time.
"100% and that was super helpful commentary. And the one thing I would add too - 17% is compounding every year based on that internal rate of return. So, not only are you getting that $17 on that $100 or $170 on that $1000…but next year, you're going to be getting 17% on that $1000 plus that $117."
Joey elaborates on the strategic financial planning behind their property investments, specifically how accretive leverage plays a vital role in enhancing the return on investment for their stakeholders.
"This one, the Roman, just maybe a quick overview on the numbers. Very similar business plan to what we saw at the Kendall. So, this one's a $450,000 basis targeting that kind of 16.5% annual net return which is going to be that IRR that Alex walked you through. For this one, we had a little bit more accretive leverage. It was a 75% Loan-to-Value at a 7.9% interest rate. Really what happens there is, it's just timing in the market. Sometimes, lenders would be willing to underwrite half a point below where interest rates are today. Sometimes it's a half point above. It just really depends on how things fluctuate and every lender has different requirements according to who they can sell these loans to on the servicing side or if they're going to service it in-house."
Alex delves into how different financing rates, from remarkably low to significantly higher, affect the overall return on real estate investments. The discussion also touches on the strategic decisions behind choosing specific financing rates for different types of properties within the mogul portfolio.
“For the 2.6 that we achieved on Bowser, that was because we were able to transfer over a 2.625% mortgage rate from the original owner into the fractional ownership on our platform today. So, that's an incredibly obviously accretive leverage rate and that was in this past era of incredibly low rates. So, long-term rental is a high yielding asset when you have those rates in place. And so, for the Bowser, that's why we were able to pass that along. Outside of that, the 8.5% interest rate… this is actually a short-term rental property. So, the yield is actually much higher than 8.5% and this goes back a little bit to that debt service coverage ratio that we had mentioned. The debt service coverage ratio is the amount that your rental income comes in divided by the interest rate and all the servicing that you need to do on the debt…interest rate, principal, whatever it might be. And so, with us, with that property with the 8.5% interest rate, that's a 1.31x debt service coverage ratio, which means that there's a 31% margin or just above the debt service.
Alex introduces a modern strategy for portfolio diversification, emphasizing real estate's significant role in achieving a balanced and high-performing investment portfolio.
"The Yale method, emerging as a modern school of thought, recommends introducing real estate to traditional stock-bond portfolios to enhance overall returns. This approach, shifting from the classic 60% stocks and 40% bonds to a 50-30-20 mix with real estate comprising 20%, has shown to significantly outperform the traditional model. This method, validated from 1985 to 2021, suggests allocating 20% of a portfolio to real estate, highlighting its efficacy in risk-adjusted returns and portfolio diversification."
Joey clarifies the essence of investment through mogul, emphasizing direct ownership and transparency.
"We're all about transparency here. So, what these are as Alex mentioned, these are investment clubs. You're directly investing into this real estate... You are the owner, you are the Governance... It's fractionalized ownership... you are directly investing in these LLC units that own the real estate."
Alex delves into the tax incentives provided by the IRS to encourage real estate ownership, highlighting depreciation as a pivotal benefit.
"You never care about taxes or you hate talking about taxes until you're trying to find ways to pay less of them... with real estate, the IRS wrote the tax code to incentivize home ownership... It's called depreciation... this ghost expense... protects against the rental income that you're receiving." This mechanism allows investors to decrease their taxable income through a non-cash expense that accounts for property depreciation, despite potential market value appreciation.
Joey dives deep into how real estate investments generate returns, focusing on cash flow, appreciation, and leveraging tax benefits.
"The two main pillars of real estate value... the cash flow of the real estate itself and then the appreciation... operationally, every real estate asset that we have on the platform is going to be yielding some sort of cash flow... We love appreciation. We love accretive leverage and we love operational yield."
Alex: “Yeah and just to add on I would say - accretive leverage, yield, appreciation, and tax benefits. So two or four depending on how you look at it.
Joey highlights the operational and governance aspects of investing with mogul, where investors have a say in the operations based on their ownership stakes.
"These are autonomous LLC companies that you're investing in because you own direct equity pieces of that real estate...So, we have the voting system according to the operating agreement...We're creating liquidity. We're creating direct ownership."
Alex explains the fundamental differences between investing in Real Estate Investment Trusts (REITs) and the mogul platform, emphasizing the unique advantages of mogul's direct investment model.
"With a Real Estate Investment Trust, it’s defined by the SEC as the 75-75-90 rule...you as a holder of a REIT stock, you receive part of that 90%...Now, how is a REIT different than investing in mogul?...By investing in mogul, you're buying into the property. You get to choose which property you invest in...we're actually passing along the tax benefits directly to you as the holder."
Joey outlines the core pillars of mogul's success and competitive advantages, focusing on the people, platform, and product that set mogul apart in the real estate investment landscape.
"We always love to say people, platform, product. They’re the three bigpillars of what we do here...We have an awesome network of infrastructure partners, and they are working with us to source hundreds if not thousands of properties every single month...that's what we're here for - transparency. We just want to grow your investments and grow the platform with you guys."
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