To the Limited Partners of Ziggy Capital Fund I, LLC,
Since beginning operations in April, we have finalized the purchase of four homes, finished renovations and listed for rent one home, and are in the final due diligence of a fifth property.
Amid rapidly cooling consumer demand, we predict renewed buying power through Q4 and into 2023. We have begun the acquisition process of the second half of the portfolio and plan to cautiously acquire more homes in the next three months pending market timing and prime rate fluctuations.
In this update, we will go into depth on the progress of the fund, our response to changing market conditions, and new initiatives to maximize margins and investor returns. We will outline our plans for the immediate future as well as the unvarnished risks.
This is the third quarterly investor update, and as a reminder you should expect these updates in the first month of each quarter. We remain committed to being the most transparent and honest investment in your portfolio.
We appreciate your continued support.
The fund has been active for six months. Our timeline is to return the first capital distribution to LPs after 18 months or when the fund has stabilized all properties. We remain on track for this goal.
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.
In light of accelerating interest rates and record demand this past Summer into Fall, we elected to adjust our strategy to maximize margins in the short term and minimize acquisition costs in the medium term. We purchased four of five initial properties in cash, thereby avoiding expensive (10%+) hard money loans and closing costs. Cash offers also allowed us to bypass financing diligence and begin renovations faster.
As of our July investor update, we had five accepted offers. As of today:
Childs Street 1, Lincolnton, NC: Renovation Complete
One bedroom, one bathroom, 590 square feet. We completed this tiny home in record time and at a very low renovation cost. The property is listed on Airbnb.
Childs Street 2, Lincolnton, NC: Renovation in Progress
Two bedrooms, one bathroom, 1,072 square feet, converted to a three bedroom, two bathroom family residence. Situated just off of Main Street on a quiet street near a church.
Salem Street, Lincolnton, NC: Renovation in Progress
Three bedrooms, one bathroom, 1,227 square feet, converted to three bedrooms, two bathrooms. 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. It is down the street from a hospital, a city park, recreation center, and the town of High Shoals Main Street.
Sycamore Street, Lincolnton, NC: Renovation in Progress
Renovation has begun to convert this home from two bedrooms, one bathroom to three bedrooms, two bathrooms.The additional bedroom and bathroom, prime location, and landscaping potential will combine for an excellent Airbnb and prime resell opportunity.
Pine Street, Lincolnton, NC: Financial Due Diligence in Progress
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 five bedrooms, three bathrooms and a finished basement. We also plan to add a full apartment in the back to increase Airbnb revenues and property value. Construction to begin shortly.
Remaining Properties
We have begun the identification, marketing, and offer stage of the next stage of homes. Our goal is to have several properties in contract by the end of the year.
Inflation is at a forty year high, interest rates have increased faster in 2022 than anytime since the late 70s and early 80s. The S&P 500 is down 22% in 2022. Gold is down 9% YTD. And still we believe the macro environment hasn’t felt the true impact of the Federal Reserve’s quantitative tightening.
Federal Reserve Prime Rate:
Real Estate Confidence
Despite the economic uncertainty, high caliber investors and billionaires have continued to increase their allocations to real estate, especially hospitality real estate. Amancio Ortega, the founder of Zara, and his family office have deployed almost $2bn into real estate over the past year. Bill Gates and his family office increased his interest in hospitality real estate by $2.21bn over the past year.
Institutions are also following suit, as evidenced by Blackstone's record $30.3bn raise and non-exchange traded REITs raising billions every month.
Like these investors, we are bullish on real estate.
Looming Downturn & Ideal Timing
Historically the Fed has overcorrected and the last time they tightened the economy this much this fast we endured the then biggest recession since the Great Depression.
As investors in a 5-7 year fund, if a downturn is going to happen, it would be ideal for it to occur early in the fund lifecycle. A slowing housing market would enable us to acquire homes in a buyer’s market, capitalize on increased rental demand, and ride multiple years of appreciation to ensure maximum home value before liquidation.
Exciting Acquisition Opportunity Ahead
Fed rate hikes typically impact the housing market first. Higher interest rates lead to reduced demand for houses, which leads to a fall in construction (applications for building permits have already fallen sharply). Home prices are expected to flatten through early 2023 and might even fall if the larger market turns over.
For well-timed investors, this cooling consumer demand presents a unique chance to acquire homes at great prices. We will capitalize on this window of opportunity for the remaining homes in Ziggy Capital Fund I. We also expect the first half of 2023 to be a very exciting time for residential property investing.
Complete Renovations & Rent Three More Properties
Our goal is to complete the renovations and list for rent the houses on Childs St., Salem St., and Sycamore St. in Lincolnton. We also plan to make significant renovation progress on the very large home on Pine St.
Cautiously Acquire Additional Homes
We have begun marketing operations and already identified nine homes for possible acquisition. We hope to make offers on more homes before the end of the year pending capital constraints and homerun opportunities.
High Borrowing Costs
Our thesis depends on extending capital via aggressive financing tactics and low borrowing costs. To ensure we minimized the risk of foreseen rate hikes, the Ziggy financial model accounted for a 175 basis point increase in the first year. A prediction that would have accounted for the fastest prime rate increase since the early 80s.
Unfortunately for our borrowing costs and our model, the Fed has increased prime rates 275 basis points in just nine months.
To mitigate this risk, we have shifted to a cash-first strategy for acquisition and rehab. Cash allows us to close deals faster, renovate faster, and rent faster, all while keeping costs low and rehab margins high. The downside is that we can only move as fast as the amount of working capital we have under management.
Slower Acquisition Timeline & Impact on Investor Distributions
Although currently on track, we are at risk of not meeting intended acquisition timelines. The middle of 2022 was one of the hottest home markets on record. Pent up demand from Covid coupled with a rapidly closing window of cheap money pushed the consumer market to record demand. It was more difficult than anticipated to acquire below market deals quickly. Given the hot housing market and the cash-first risk mitigation strategy, we acquired homes slower than expected.
Fall Out of Housing Market Too Early
Our process includes rehabilitating ailing homes before refinancing out of a new after repair value (ARV). This allows us to recycle capital over and over again to ensure maximum investment and returns for all shareholders.
If the market falls out too early this may impact the appraisals necessary for high ARV. If housing prices cool too quickly we might not be able to borrow the same amount as we would in a hot market, thereby limiting how far we can extend initial capital.
Further Increased Rates & Market Changes
Recent inflation numbers and market response indicate further action from the Fed to raise rates which might impact our timeline. We will continue to analyze prime rate changes and prepare to be more aggressive or more patient accordingly. Flexibility for homerun deals remains our primary goal above any specific timeline or preconceived strategy.
The first phase of Ziggy Capital Fund I is the toughest part of the operation. We must acquire, finance, rehab, furnish, refinance, and rent nearly a dozen homes. A process that began six months ago is nearly halfway complete.
We face numerous unforeseen risks. We’ve dealt with issues like squatters, hoarders, HVAC thieves, and even an unexpected pet pig that came with a house. Amid massive market uncertainty, including record cost of materials, record inflation, record consumer demand, and record borrowing cost increase, we remain committed to delivering to our valued investors. The team has creatively shifted capital strategies, acquisition methods, and renovation tactics.
Real estate remains our passion. We appreciate your continued patience and enthusiasm for this business. We hope to offer more opportunities to invest in the coming year.
Sincerely,
Ziggy Capital General Partners
