June 3, 2013 South Bend, IN Buy and Hold

June 3, 2013 Investor Newsletter

South Bend, Indiana Single Family Home Buy and Hold Project

John Hostetler told of a story of two individuals he knows of that were real estate developers. They both built commercial properties. One person refinanced and kept them. The other person sold them off to investors. The first person became extremely wealthy and was worth millions when he died. The second individual unfortunately died penniless.

There is tremendous wisdom and value in buying and holding. I implore you to think of doing this now particularly when the interest rates are so low. Several weeks ago, I introduced you to our St. Louis multiplex project as one of our buy and hold strategies. In this newsletter, I want to introduce you to our South Bend, Indiana single family home buy and hold project.

Jacob Day lives and invests in South Bend, IN in single family homes (Cell: 574-315-6527). South Bend is the third largest city in Indiana and home of The University of Notre Dame. Outside of ND, it is primarily a working class city with a lot of cheap properties and no shortage of tenants. There has been a tremendous amount of development over the past 10 years. Their downtown district has major developments or renovations going on with old buildings being converted to apartments or condos along with new construction projects that are pre-leasing and selling with 100% occupancy.

Jacob owns and operates a property management company called Central Management Services (). He currently has 325 homes in his portfolio many of which he owns himself. His management company has been operating since 2008, and their occupancy rates have always been above 90%, and the past two years it has been at no less than 93%. He helps other investors by finding these properties, fixing them up, renting them out and managing them getting CoC returns of 15% or more. These homes can be purchased from $15K to $19K. They can be rented out from $500 to $550 per month. They require several thousands of dollars of work and will appraise for $20K+.

Dan Boecher (Office: 574-522- 2247) is a loan officer at a local bank called Lake City Bank. He is an investor himself and owns commercial real estate in the local market. He stated that his bank will provide us with a line of credit (LOC) using the properties as collaterals for someone with good credit. The rate is around 5% and payments will be interest only. The loan will be up to 80% of the appraised value of the properties and will be for 3 to 5 years after which it can be renewed.

We have purchased three homes in the last month and in negotiations to buy another. Here are the details of the three homes we just purchased.

1739 North Brookfield, South Bend IN 46628 1941 Brookfield

Date of purchase 5/3/2013

Purchase Price $18,000

Rented at $500/month

1310 North Brookfield

Date of purchase 5/23/2013

Purchase Price $14,000

Rented at $550/month

1941 North Brookfield (currently vacant)

Date of purchase 5/23/2013

Purchase Price $10,500

Will rent $500-550/month

We plan to spend about $100K into the South Bend market. Our strategy is to purchase 5 homes for an average price of $18,000 each. If they appraised for an average price of $20,000 each, then we can finance out $80,000 which will give us most of all the original investment of $90,000. With these funds we will purchase 4 more homes. We will then get increase in the LOC for the 4 more homes. With the increase in LOC, we will purchase 3 more homes. We will repeat this process until we have bought about 15 homes with $100K. We believe that after 15 homes, the cash flow from the homes themselves should allow us to purchase a new home every few months.

Since we have purchased 3 homes and have another one in the wings, we can work this strategy with actual numbers. Please refer to the Excel Spreadsheet provided with this Newsletter. With an initial investment of about $91K for our first five properties, we should generate approximately $14,625 in net income, a 16% return. However, when 80% portfolio financing is in place with a credit partner, we should recoup about $80K bringing the initial investment under $11K. With two thirds of the cash flow remaining with YOJ, the CoC return should be approximately 65%. If we can continue the strategy to 25 properties, we should be cash flowing $34k per year on a total investment of under $45K which is a CoC return of 79%. Keep in mind that we are being quite conservative in our assumptions on expenses, with fully 55% of gross income going to cover vacancy, operating expenses, and reserves. If we experience lower expenses over time, the numbers will improve.

At the point where we have 20-25 properties in the portfolio, we have a number of different options. Clearly, keeping the properties in place for cash flow is warranted. But this type of portfolio may also be attractive to either an individual investor or possibly even a hedge fund at a CAP rate which could result in significant capital gains. If sold, we would 1031 exchange this into a much larger commercial property. Our strong desire is to duplicate this strategy in a number of markets throughout the country. Spreading our assets around may require a bit more management time, but will also reduce our risk by avoiding being in a single area hit hard by natural disasters or economic decline.

Kevin Yoo, M.D.