To the Limited Partners of Ziggy Capital Fund I,
It is our pleasure to send the second quarterly update.
As a reminder, we officially closed the fund in April. We exceeded investor interest and balanced this interest with our execution and IRR goals to ensure maximum inclusion and returns. It has been an exciting few months focused on seller marketing, property identification, financing and acquisition. We are pleased to announce that in the past 90 days we have entered into contracts with five phenomenal properties.
In this update we will outline the specifics of these properties, macroeconomic trends, foreseeable risks, and our plans for what’s next. We hope to be the most transparent investment in your portfolio and take this responsibility very seriously.
Thank you for your continued support and confidence in our thesis and team.
For our first wave of homes, we focused on Lincolnton, NC. A small and growing commuter city 45 minutes from downtown Charlotte. In Lincolnton, the median home price is up 89% in four years and up 19.9% year over year. As the county seat, Lincolnton is the center of a growing community that includes several large hospitals.
Concentrating our efforts in one region has numerous benefits in addition to the macro economic trends of the community. We understand local comps and competitive pricing better. We are able to source construction supplies more efficiently at a lower cost. We can more effectively manage construction crews across multiple properties at once. And we will be able to better upkeep and manage Airbnb properties when renovations are complete.
Sycamore Street, Lincolnton, NC
Two bedrooms, one bathroom, 1,147 square feet. We plan to convert the home to a three bedroom, two bath during renovation. The property is in a great location next to the town library and other nice houses. The renovation and additional bedroom and bathroom, the prime location, and the landscaping potential will combine for an excellent Airbnb and prime resell opportunity.
Pine Street, Lincolnton, NC
Three bedrooms, two bathrooms, 2,808 square feet. This property is a home run. It is situated next to a walking greenway, across from a local splash park and one block from bars and restaurants. We will convert the main house to have five bedrooms, three bathrooms and a finished basement. We also plan to add an additional apartment in the back to increase Airbnb revenues and property value.
Childs Street 1, Lincolnton, NC
Two bedrooms, one bathroom, 1,072 square feet. Situated just off of main street on a quiet street near a church. This property has a large front porch and footprint enabling a conversion to a three bedroom two bathroom family residence.
Childs Street 2, Lincolnton, NC
One bedroom, one bathroom, 590 square feet. It is a cute home with some minor cosmetic needs. This property is right next to 606 Childs St. which will enable much faster and more cost efficient construction.
Salem Street, Lincolnton, NC
Three bedrooms, one bathroom, 1,227 square feet. Purchased for 40% less than the Zillow estimate and situated on a large 2.5 acre lot, this property has high upside for the fund. We plan to add a bathroom and upgrade the outdoor space to welcome Airbnb customers who prioritize amenities. The property is down the street from a hospital, a city park and rec center, and the town of High Shoals Main Street.
Overall, we are excited about this initial burst of home acquisition. Not only do all these homes present high upside long term. Our ability to acquire them quickly enables us to turn the homes around and begin earning cash flow months sooner than expected.
The Federal Reserve on June 15, 2022, lifted interest rates by 0.75 percent, the third hike this year and the largest since 1994. While the Fed is hard to predict, we are anticipating another lift by up to 75 basis points in July. The building supplies market is also correcting. Concrete is falling slowly from a high in February. Lumber prices are down 47% year-to-date, and are off 65% from the 2021 high of $1,733 per thousand board feet.
These rate changes and supply prices have both positive and negative effects on the fund.
Money is more expensive
We borrow money in two ways: hard money short term loans for property acquisition and construction and long term portfolio financing borrowed against the after repaired value of our properties.
Short term loans, which we are currently utilizing, will be less affected and will have little impact on the economics of our model.
It is good news that long term rate changes are happening so early in the life of the fund. The market is cooling rapidly and more deals are becoming available. After acquisitions, we can patiently wait for long term rates to peak and then fall through the second half of 2022 and the first half of 2023 before we package the portfolio and refinance.
Decreasing Consumer Demand & Increased Opportunity
30 year home loan rates have nearly doubled in just 9 months. This spring we faced one of the hottest home markets on record attributed to general market fear of rising rates and buyers eager to get in before it’s too late. This record consumer demand impacted home prices, seller response rates, and general deal availability.
Rates may continue to rise in the short term before falling again. As rates pass 6% toward 14 year highs, we expect consumer demand to cool down quickly. Sales of existing homes fell 3.4 percent in May from April, according to the National Association of Realtors. In the four-week period ending June 26, the median asking price for newly listed homes was down 1.5 percent from its all-time high this spring.
We anticipate prices will continue to flatline or drop. Sellers will be increasingly receptive to all cash deals. More below market opportunities will become available to the fund.
Buy Early to Hedge the Market and Put Money to Work
We utilized some aggressive tactics these past few months to acquire five good homes in a hot market. At the off chance that consumer demand is not impacted and home prices continue to climb we will have hedged our bet.
We also did not want to wait to deploy capital. The opportunity cost of sitting on cash is expensive when weighed against buying, renovating, and renting homes as soon as possible. We could not afford to wait. We expect these five homes to be cash flowing by the fall thereby mitigating any premium we may have had to pay.
Supply Prices Leveling
Just as we begin construction in earnest, the cost of supplies is leveling or falling in some cases. Appliance pricing continues to rise tracking the CPI. Generally we feel these trends have hit or will hit a high soon and subsequent price decreases will only benefit our margins.
Over the next few months we will focus primarily on the construction and Airbnb listing of these first homes. Spiking interest rates are also minimizing buyer demand in new and exciting ways presenting numerous acquisition opportunities.
Renovations on all five Lincolnton properties. The goal is to complete these renovations and furnish the homes by November. We plan to add additional bedrooms, bathrooms, and even external apartments to some properties. Some renovations will take longer than others, but we expect significant forced appreciation multiples and higher ARV (After Repair Value) as a result.
New wave of direct mail marketing. With money becoming much more expensive, we are already observing diminished consumer demand and a renewed willingness of sellers to consider our aggressive offers. We plan to launch the second and third wave of our direct mail campaigns over the next few months.
Finish Portfolio Acquisition. We plan to patiently finish portfolio acquisition by the end of 2022. Which should enable us to finalize renovations and refinancing by Q2/Q3 2022 at which point we can begin capital distributions to our Limited Partners.
Interest Rates. We cannot predict how the Federal Reserve will act. We cannot predict how our community lenders will change prices and willingness to lend. And we cannot predict how the consumer and institutional market will respond. We will stay focused on our thesis and utilize the advantage of this strong acquisition quarter to allow for maximum patience in the next few months.
Direct mail response. Direct mail response is a core advantage of the fund that did not perform to our standards this spring. We attribute this to record market demand which we expect to correct quickly in Q3 and Q4 2022. We have saved the majority of our direct mail budget and plan to utilize it conservatively going forward.
Concentrated geography. Lincolnton is the perfect example of the type of community we planned to target. It is a commuter community, a county seat, has enjoyed a recent and accelerating burst in home prices, and is home to two of the largest hospitals in the area. However, the geographic concentration of our homes does present a risk. We will continue to seek the best deals possible both in the Lincolnton area and especially outside of it to ensure maximum diversity and upside.
Closing Properties. Under contract does not guarantee the properties we’ve targeted will close. All of the properties we’ve discussed here and future properties too may fall out of contract due to circumstances outside of our control.
The S&P 500 is down 19% year-to-date. The Dow Jones is down 14%. Gold is down. The timing of Ziggy Capital Fund I could not be better. We continue to believe in the security and opportunity of the U.S. housing market.
Money is made in turbulent times. With interest rates on the rise and consumer demand peaking and falling, we are poised to take advantage of an exciting moment in the housing market. We remain committed to our thesis of distressed property acquisition coupled with quality construction, creative financing, and short term rental revenue multiples, all culminating in well-timed liquidation.
If the market continues to be favorable, we will consider opening up new opportunities for investment in the fall and winter of 2022. Please let us know if something like this would be interesting to you.
Thank you for your continued commitment to Ziggy Capital. We are always available for questions via email or phone call.
Sincerely,
Ziggy Capital General Partners
