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What's the Alternative? | Episode 18 | Putting Your Money Where Your House Is with Sean O’Dowd
38 Plays1 day ago
In this episode, Shana talks with Sean O’Dowd of Scholastic Capital, who specializes in the residential housing market. Scholastic’s unique approach emphasizes school districts and their role in driving demand for housing.
Sean breaks down the current trends affecting the rental and housing markets, the implications of rising institutional investment, and strategies for investors to capitalize on these unique dynamics.
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Transcript
Aging Workforce in Trades
00:00:00
Speaker
It's not being talked about nearly enough, but if you look at the median age of plumbers, electricians, a HVAC technicians in our country, their median age is extremely old compared to historical norms. Our average electrician in this country is very close to retirement age, and we do not have a ah new crop of electricians coming in.
Introduction to Podcast
00:00:25
Speaker
Welcome to Bond Run Capital Management's What's the Alternative podcast. Join host Shana Orzak-Sissel, the queen of alternatives and founder, CEO of Bond Run Capital Management, as she interviews leaders in the alternative investment space. Learn more about their firms, their passions, and about the many different ways investors can use alternative investments to add value in their investment portfolios.
00:00:57
Speaker
Welcome everyone to another episode of What's the Alternative? I am Shana Orzak-Sissel, founder and CEO of Bonrion Capital Management.
Meet Sean O'Dowd
00:01:06
Speaker
ah We had a slight hiatus for the holidays, but we are back and we have with us one of our newest partners here at Bonrion. We have Sean O'Dowd at um Scholastic Capital, he is a general partner. ah Scholastic Capital is a real estate ah private fund and they focus on residential housing in the Midwest and the top school districts. So it's a really interesting niche. I know many of you will find it interesting. And I think as far as topics are concerned, residential housing markets is a hot one. So I'd like to welcome Sean to the show. Welcome Sean. Thanks so much. I'm glad to be here. This will be fun.
00:01:49
Speaker
Yeah, I think so too. a Fun fact, Sean lives like walking distance from me. And we've never had the opportunity to actually sit down in person. um and He probably could have come over and recorded this episode. ah But I digress. Sean, why don't you tell us a little bit about your background, kind of how you got into this niche and why you think it is such an interesting area for investment?
00:02:15
Speaker
Yeah, for sure. So how did I get into
Investment Opportunities in Good School Districts
00:02:18
Speaker
this niche? I originally from the Chicago area, and I'm the son of a teacher, and we moved 22 times before I went to college. So we bounced around a ton and basically every year new place and with my mom being a teacher it was kind of pretty plugged into the school district element to it. And By the time I was 13, 14 years old on my 13th or 14th spot, it was like, hey, you know, everywhere we live, like there's a really good school district in that area. Everybody knows that school district. Everybody is trying to get into that school district.
00:02:49
Speaker
ah So it was kind of an interesting observation there. And then I'm super fortunate I went to Wharton for school and then worked at BCG for consulting for a while and learned to actually how to like build and test a thesis and hypothesis there and realized there's actually an investment thesis around this idea of like there's really good school districts. So started buying homes with my own capital to see if I was right and if there was something. and It basically boiled down to like there's a big supply demand imbalance in these really good school districts. A lot of demand to be there. These are also areas that typically don't allow multi-family development.
00:03:22
Speaker
<unk> areas where the median purchase price is more than a million bucks to get in there. So you've got a lot of people who want to live there. There's not a lot of rentals available. If you can actually create a rental in a really good school district, you have a line of folks out the door who want to get there. And as a result, we've got a really interesting, stable tenant base that that makes a lot of sense for our investment, makes a lot of sense for the tenants who want to be there. Yeah, and that makes sense in my mind as as somebody who lives in one of said school districts and it knows how difficult the market is here for renters. I totally understand that thesis. Let's talk a little bit about just housing in general. It's obviously a hot topic, um interest rates in general.
Interest Rate Dynamics and Housing Market
00:04:06
Speaker
I was watching the latest episode of The Compound and Friends, which is hosted by my friend Josh Brown and Michael Batnick. And they had another friend of mine, Doug Bonapras, on recently. And they were talking about how
00:04:19
Speaker
in the current interest rate environment, there's sort of an interesting dynamic that we haven't seen, ah specifically that while rates have been cut by our Federal Reserve, the yield curve um has actually been steepening, ah so rates are rising. And that has resulted in you know mortgage rates, which are based on the 10-year, um going up and not down during a rate cut cycle, which is unusual, and as Josh put it,
00:04:49
Speaker
The only people that seems to hurt are the Realtors. um I thought that was quite interesting. um But I'd love to get your take on that. you know Obviously, we live in the northern suburbs of Chicago, which is a extremely affluent area with one of the top school districts. And you know just observationally, I've noticed the inventory here is increasing slightly, um especially with the rentals.
00:05:16
Speaker
um and houses are, for the longest time, there was no inventory and we're seeing a slight uptick. So can you talk a little bit about the current environment as it's residential housing um and like kind of what you're observationally seeing as it pertains to supply and um and and and days on market, things of that nature? Yeah, for sure. there's There's definitely a little bit more supply than we saw before. And What's interesting is almost the vast majority of people who are selling right now are people who have to sell. The like voluntary, like I'm going to sell this home and go buy a bigger home, will buy a nicer home, buy a different home and I prefer better. that That person doesn't really exist right now because to your point on the rates, it doesn't make sense to sell a home with a 3.5% interest rate to go buy a slightly bigger home that's going to have a seven handle on it. The people who are selling right now are the folks who have to sell.
00:06:12
Speaker
And in most cases, that's folks who are relocation for job, folks who need to relocate for family reasons, folks who are now empty nesters and are downsizing, and it makes financial sense to sell. But when you don't have that voluntary seller in the market that you traditionally typically do see, and um while inventory is a little bit higher because you have more of those need to sell folks, ah you don't really have the the voluntary seller, which is until that individual comes back into the market, which is unlikely to happen until you see rates at a point where you could ah could see that voluntary seller. It's going to be it's goingnna be really tough to expect inventory to really kind of spike up to to what we've seen, say, over the past a decade.
00:06:58
Speaker
What do you think is driving the uptick in the people that need to sell? um you know Economically speaking, we have fairly stable employment markets. Why do you think right now is the time that we're seeing that uptick in the folks that need to sell? It's a good question. I think there's a variety of different elements to it. When we talk with agents, what they say most of the time is people relocating for work. And in most cases, um right now, that's related to like return to office stuff, um where folks, they took a different job during COVID, they've been working remotely, and it's like, okay, like, they need me back in office now, and my office is in Atlanta, like I'm going to Atlanta, um or I'm getting a different job because I don't want to move to Atlanta, but then maybe I need to move a little bit further away. um It tends to be from all of the conversations we have on a database with agents, it tends to be work related at this point, and intent that
00:07:56
Speaker
also tends to be return to office related. That's really interesting. I never
Midwest Real Estate Trends
00:08:01
Speaker
really thought of that. um In the Midwest in particular, you know what are the markets that are most interesting? And you know some of the states in this area have a population issue where they have more people leaving than coming. Is that um affecting these school districts or um are the school districts that you would target you know less likely to have that kind of um um
00:08:27
Speaker
immigration is not the correct word but i can't think of a different word my migration from you know um some of the states here in the midwest to so the coast. it's It's a great question so for us we we exclusively want to be buying in school districts that have been great for an extremely long time they've gone through multiple super school superintendents like.
00:08:50
Speaker
One bad school superintendent can't destroy the place. It's a really established grade school district. We don't buy there, but like Greenwich, Connecticut, Palo Alto, California, like those kinds of places where you hear it, you're like, oh yeah, it's a good place.
00:09:01
Speaker
on What that means, though, is the population in these areas is almost exclusively flat for a 50 year period. And the reason why it's flat is we're buying in towns where there is no more land left to build. You you don't have big tracts of land where you can just build a big housing subdivision because the Area so desirable every piece of land already has a house on it and the scenario that typically doesn't allow multi-family development so you can't like knock down a house and build an apartment building with 100 100 units in it so the populations flat from that standpoint that being said there's always people who do move out but because the area is so desirable you've got people who are moving from like
00:09:42
Speaker
Mid-tier locations to the highest tier set school district so you you you don't see the population growing because there's no more land to build and you don't see the population falling because there's always somebody moving up to take the spot of the Typically empty nesters who move out once the kids go to college That's really interesting and know around us. And again, I just observationally talk about yeah the location I'm in because it's the location I know. um oh Your point about lack of land is an interesting one. First off, the thing you notice most here is knocking down houses to build a new house. um It's never you know lots for sale, although in Winnetka, there was like a
00:10:28
Speaker
like a florist kind of greenery place on yeah ah that um was like had been there for decades and the owners were older and their children didn't want the business. So they sold it and it was like three plots. And those three plots sold pretty quick um because to your point, it's in the most desirable school district in Illinois.
00:10:52
Speaker
and um Very difficult to find housing here. So when it comes to rentals though, you know, I um during the pandemic um looked for single-family rentals in this area we're discussing and I Remember how competitive the market was um as you are going out and exploring opportunities um whether it be locally or in the expanded area of which I you invest. um What are the key things that you look for? And you know how do you kind of approach the housing market? As you know, institutions have been in the headlines. um There's a lot of blowback on the idea of institutions and investors purchasing single-family homes, which are already in rare supply, um and then putting them up as rentals and
00:11:43
Speaker
renting them at you know premium prices. um So set how do you kind of approach the market? What are your thoughts on on the accusation that institutional investors are causing the housing market to be more expensive?
00:11:55
Speaker
Yeah, for sure. so on On our side of how we approach it, like we're we're looking for areas that have that supply demand and balance, like really high demand to be there and then not a lot of
Investment Strategy in Housing
00:12:05
Speaker
rental supply. The easiest way that we check on the rental supply is you can pull IRS data by zip code and you can see the number of tax returns filed in each zip code. You can also see the number of those tax returns that claim the homeowner's exemption.
00:12:18
Speaker
So we buy in areas where 90% of the tax returns have the homeowners exemption on it, meaning like 90% of people own the home that they live in. There's not a lot of rentals available. National average for that is around 60%. So it's those kinds of areas where they are they're very hard to access from a rental perspective. So to that end, like on the institutional side, like they're there are some institutions that are ah
00:12:44
Speaker
We're different kind of colored hats in terms of how they approach this. We we think we're on the for ah the the right side of this equation. um For us, like we the way that we think about it with our tenants is like it is much easier for a gentleman or a woman to afford a $3,500 a month rent payment than it is to save $350,000 for a down payment in one of these areas. um We have tenants who send us ah Christmas cars, we have tenants who burst into tears and we tell them they get accepted because they didn't think they could get their kids into the school district. um I was had an interview on the Chicago, one of the news shoe channels, talking about our thesis and I had about 300 emails in 10 minutes after I got off the off the air with people who were like,
00:13:33
Speaker
I would like one of your homes. How can I get in there? like we We think as long as we're on the side of, for lack of a better word, making these homes more accessible, we're we're on the right side of the of the of the question. What's the different characteristics and attributes of a renter of a single family home versus the renter of an apartment? and What are the things that single family home rentals really covet?
00:13:57
Speaker
For most cases, it's it's space because it's in most cases, um our our our average tenant has got a little bit more than two kids. It's like 2.3 kids on average across our tenants. so They tend to be families. It's three, four, or five people who are living in it. so They want space. um We also have about 80% of our tenants have a dog. For most of our tenants, they want um two bathrooms because there's parents and kids. They want an enclosed fence for the dog.
00:14:27
Speaker
It's cold here, so they want a garage. And that's, at its core, like the most important things that they're looking for. Outside of the gimmes of like, hey, it needs to be in a safe location. It needs to be a nice house. It needs to be in good shape. It needs to be clean. It needs to be very functional.
00:14:44
Speaker
And then we have additional things on top of that that like that what we care about from a fund perspective. um like we're We're building this portfolio in a way where we could sell it down the line. So we're using the same institutional buy box criteria that the other guys are. So if we ever sell it to them, we can. So for that, it's like no homes on the street where the speed limit is faster than 25 miles an hour. It's got to be a 25 mile or speed limit street of less. So it's It's a safe place for the kids. It's easy to rent. No one's going to chase a ball onto the street and get hurt. No solar panels. Institutions don't want them, so we can't buy a house with solar panels. No pools. They don't want them, so we can't buy a house with that. I know we've got a bunch of small things on the margins that we look like, but it basically ends up resulting in about 1.5% of the homes on the market at any given point are homes that fit all of the criteria that we're looking for for houses to buy.
00:15:37
Speaker
That's really interesting. I'm fascinated by this. the the No street with a speed limit more than 25 miles an hour. I wonder how like my area would fit because I live on the corner of a very busy street, but my actual address is on a cul-de-sac. You're good. You're good. Oh, okay.
00:15:59
Speaker
um you know ah What other amenities do you see? And again, what are the difference between if you look at like the pool of renters that are specifically looking for single family homes and the pool of renters that rent apartments and the risks associated with it and um that kind of thing. um yeah What really differentiates and then as as you look at your rentals because obviously one of the key aspects of anything when you're investing in a fund like yours is the risks of nonpayment of rent, costs of eviction, things of that nature. And I'm curious if there's information you have or if you guys have done any work um that kind of looks at the different pool of renters um in the two buckets and and have any insight into those types of risks.
00:16:48
Speaker
we've we've done We've done a good amount of work there. And the the big difference between the two of like folks who are looking for apartments versus folks who are looking for houses is the folks who are looking for houses typically have have more kids, um which as a result, just from like a pure data perspective, they tend to be much older. um They're much later in life. They're further into their careers. They're a little bit more established. They've got a higher income as a result because they've been they've been working for 20 plus years.
00:17:15
Speaker
um They have 20 plus years of credit history. You you have a much better understanding um when you're underrunning the tenant of like, hey, who this person is. Look, this person has paid off their credit cards every month for 25 years. They've never been late on ah on ah on a rent payment in 25 plus years. like You have a pretty high degree of confidence in who that person is and their ability to pay rent when they go for it.
00:17:41
Speaker
um For example, our average tenant makes around $228,000 a year right now. um and it's it's ah It's a high earning tenant who's who's later in their career. They're 45, 50 years old is is typically kind of our bread and butter tenant.
00:17:58
Speaker
um and it's it's It's one of those things where ah from an amenity perspective and how they think about it, they're like, hey, most of our ten about 65 percent of our tenants are moving to the area for their kids high school.
00:18:12
Speaker
where they say, hey, i I've been in the area, third grade is third grade, but I want them to go to a really good high school because I want them to go to Northwestern or UChicago or Michigan or any one of these Midwestern schools. So they upgrade school districts for high schools, their kids can go to a really good high school. When they're done with high school, they no reason to be here in the cold Midwest anymore. Our tenants typically move to Florida or Texas or something like that afterwards. So the amenity that I'm getting to there is most of our tenants want to sign a multi-year lease. We typically have three-year leases with tenants because they're like, hey, I don't want to risk losing this place after a year.
00:18:50
Speaker
um apartment tenants almost exclusively only want one year. Our tenants say, I want three years, four years, because I don't want to risk losing it. I know I'm going to be here until my kid has a diploma. And then once they do have a diploma, I know I'm leaving, so I don't need to sign anything longer than that.
Personal Experience with Rental Homes
00:19:05
Speaker
So it makes it actually a much more straightforward conversation with tenants there as well. Yeah, it's funny. i Obviously, I think we've talked about this. I rent the house I live in. It's not that.
00:19:17
Speaker
um ah Part of it is when I i moved into a single-family home, um it was sub-optimal time to buy. It was just such a competitive market because it was COVID. um And as you know, the area we live in become it suddenly became like overrun with people looking for single-family home rentals.
00:19:37
Speaker
um In fact, there would be like, you know, 10 to 20 applicants and people would say, I'll pay six months upfront to have this unit um because they just wanted to get out of the city so that their kids could be outside and running around and things of that nature.
00:19:53
Speaker
um And a lot of the schools in the suburbs went back to school in person sooner. And so that also played a part. um And it's funny because i every place that ah is the second single family home I've rented um were multi-year leases right from the beginning. And um the people who lived there prior to me had been there for a really long time. So like the place I live now, the previous time had been there here for six years. um And um it's entirely like, I love the house I live in.
00:20:22
Speaker
um It's entirely likely that I will be here through my son's high school. My son is going to be 10. So at least another seven years that I intend to stay in this location. So I think that's really interesting, the stability of the tenant and the quality of the tenant um that you see. I find it interesting what you said about dogs um because pet friendly in the apartment space is so much harder to find.
00:20:52
Speaker
um and And to your point, families really love to have a dog. ah a I have one and I'm getting a second. um So I totally get it. As a landlord though, how do you manage these properties? How do you mitigate the risk of damage as it relates to that? And then because these tenants stay for so long, what's involved um in you know traditionally like the refresh, is there aspects of the leases that are negotiated that have refresh, ah do the families do work in the homes because they're there for so long and they want to make it more their own? What kind of relationship occurs between you and these long-term tenants that have families and how that the property is is um is kept and um what is allowed? And then once they leave, what's that look like in terms of like refreshing the property?
00:21:47
Speaker
For sure. So to your point on with tenants staying for a really long time, in a lot of ways like the house becomes theirs because they're there for so long. So most of our tenants do do work to the house. Like it says in our leases like they have the ability to repaint colors like If it's like neon or something, like we have to approve it. That's never happened. But um most of our tenants like repaint the inside of the house to like a slightly different color. We've had tenants swap out light fixtures because they're like, oh, I really would like a different light fixture. We've had tenants refresh, swap out like the handles on cabinets in the kitchen. like we're We are totally okay with that because at the end of the day, like
00:22:30
Speaker
When if someone is in a house for one year, it's like, whatever. like Who cares? I'll put holes in the wall. like i'm going to I'm not going to be here next year. Who cares? But when it's a tenant who's going to be there for seven years, six years, eight years, whatever it might be, it's their house. they They're going to take really good care of it. They're going to make the colors they how the walls the colors they want, and they're going to preserve and protect the house.
00:22:53
Speaker
um So when we have had tenants move out, the homes are in phenomenal shape because the tenants took care of it like it's theirs because they were there for so long. um That being said, like with all houses and in every single house there's maintenance work, we're super fortunate on that. We have a ton of data from one of our advisors where we basically have a cost matrix against the the vintage, meaning the year that the home was built,
00:23:22
Speaker
against the square footage of the home, and then the annualized and um maintenance expense for that house. So I can say like a 1973 house that's 1,800 square feet is exactly this much in maintenance. um And then we can get even more more sharp and precise than that. That's like our first look. When we actually are buying a home and we're inspecting it, we get make model serial number for every single piece of equipment in that house. So we can say, hey, this water heater is four years old. It's got another We've got software that can get us to be very precise to say another 14 years left in the water heater. Water heater is going to cost this much to replace. We're doing it in 14 years. We need to be setting aside $18.50 every month for the water heater. The roof is this. The paint is this. so like We're basically escrowing every month a very precise number for that maintenance.
Data-Driven Maintenance Strategy
00:24:12
Speaker
so we We have yet to have an issue where we're surprised with an expense or we don't have the money safely escorted and ready for it.
00:24:21
Speaker
Oh, that's fascinating. i I replaced the AC unit at my home over the summer during the heat wave. um It just died. um And to your point, my landlord didn't blink an eye. He was like, okay, yeah, I kind of knew that unit was on borrowed time.
00:24:36
Speaker
um and And it was quick and easy and and to your point as a tenant he basically told me like. Find a guy do it on your time tell me how much it costs make sure it's not outrageous. and Just get it done so it really empowered me as the tenant to kind of again treat it like it's my own home.
00:24:56
Speaker
the positive of course in the positive renting and as much as people give it a bad rap is that i got to control all of that but i didn't have to write the check at the end um you know and so i had a lot of ability to pick the unit that i wanted the one that was going to be better for the home which i intend to stay in for a long time so um This is all very fascinating name to me because I have always thought that one of the areas that were so interesting in the residential real estate market was this type of residential, um which there wasn't a lot of.
00:25:29
Speaker
What are some trends you're seeing in single-family rentals, even above and beyond kind of your niche, that you're seeing that you know potentially could be interesting investment opportunities as people look and explore this differentiated way of participating in residential real estate? I think i think there's a couple going on. um one One big one is the the biggest SFR operators out there right now, um by and large are not buying individual homes on the and MLS or real estate market anymore. They're buying portfolios. They're at a size and scale where it's just easier to do so.
00:26:10
Speaker
So for that reason, um if you if you were to like make a list of all the biggest SFR operators, there's Blackstone, Tricon, Progress, Invitation. ah But you can like pretty quickly fall down the list. There's not a lot of operators in the 250 to 2000 home range. And the reason why is those biggest guys keep on buying the funds that are in in that smaller size. So there are there theres There is definitely an opportunity right now and somebody can make a ton of money doing like a speed run. I'm going to lever up. I'm going to buy a bunch of money. I'm going to buy 1,000 homes over a two-year period. I'm not going to send any distributions to investors. I'm going to buy 1,000 homes. I'm going to lease them up.
00:26:53
Speaker
and I'm going to turn around and try to sell them as a portfolio to Invitation and basically play portfolio aggregator for them. That's, I think, a a really interesting opportunity. um The other thing that's going on right now in SFR is insurance is becoming much more of an issue. and This is something that the the bigger guys have been worried about for the past couple of years very quietly.
00:27:16
Speaker
um if you like plot where SFR funds are buying, they're not buying in Texas, they're not buying in Florida, they're not buying in Atlanta anymore, and those are traditional like SFR strongholds. um In fact, like I firmly believe that they're like trying to slowly and quietly exit those markets. If you are an sifr want to get interested in SFR, I would become the SFR expert of Ohio, for example, because I think it's going to become a bigger SFR market. I've become the SFR expert of Pennsylvania, Tennessee, because those players are slowly moving north because they it's it's really hard to make an economic case for SFR in Florida and Texas right now.
00:27:56
Speaker
Really interesting. I'm just wondering if you've noticed, I feel like I've noticed this and maybe it's not something that's a trend, but it's just something I would notice, particularly in, and again, I refer to our area a lot, and viewers, sorry, it's just that it's the area I know. So from a standpoint of like, when I'm thinking about the types of questions I have as somebody who would consider this type of investment, like I'm obviously going to refer to the area I live in because it's what I know. But I have noticed in like parts of West Southwest Illinois, um like when you start getting out to like
00:28:37
Speaker
Naperville and that area, Aurora. I'm seeing these uptick in like developments of new construction, single family rentals. Is that a thing? And if so,
00:28:51
Speaker
Does that help or hurt the housing shortage? Because you're taking up these huge tracts of land and instead of having a multi-use, multi-family building of which you can have 20 tenants, you're you're doing something where it's a single tenant. And is that exacerbating the issue of ah housing shortage in the country?
Impact of Aging Workforce on Building Capacity
00:29:13
Speaker
it's It's very possible. i mean the the more The more people you have per square foot, like the more from like a multifamily perspective, the more people you can fit there, um the challenge is most people want want the backyard and they want the space. and it's it's difficult to It's difficult to get yeah families in particular to want to live in multifamily buildings, but multifamily buildings does give you a lot more bang for your buck from a housing shortage perspective.
00:29:42
Speaker
um and it's it's It's interesting too because there's a there's a there said window of time right now. it's It's not being talked about nearly enough, but if you look at ah the median age of plumbers, electricians, a HVAC technicians in our countries, meaning the folks you have to have legally because they have a license to build homes and multifamily buildings,
00:30:06
Speaker
Their median age is extremely old compared to historical norms. Our average electrician in this country is very close to retirement age, and we do not have a a new crop of electricians coming in. If you don't have electricians, you can't build anymore.
00:30:21
Speaker
like the the The pace of building is literally legally bottlenecked by the number of electricians, HVAC technicians, plumbers that we have in this country. um's like We've got kind of a window like now to be building while we have highly experienced still in their working years folks. Five, 10 years from now, like there's going to be a ah drop. and like We should be building now as much as we possibly can because I don't know what the solution is, but you're not seeing 20-year-old sign up for ah those jobs in the way that you have in previous generations. and but Without them, like we just we literally can't build houses or multi-family. Interestingly, I'm going to kind of like go a little off topic here because that's fasting. I actually have family that are contractors and and in unions, like plumbers in this area.
00:31:13
Speaker
um And um they, to your point, they're older, but their kids are getting into the family business because of the opportunity set. um the want to how Do how do we solve that problem? yeah If you think about what you're saying, right? It very, very interestingly correlates with the end of home and shop classes and traditional education.
00:31:39
Speaker
um And then the other issue I can think of is if if I for example wanted to become an electrician. I wouldn't even know how Right, like, you know, if you want to become a doctor or lawyer you go to law school you go to this school you like if I wanted to become an electrician Well, how do how do I even do that? Right? Like you don't see schools popping up. you There's no like oh very clearly communicated roadmap to the public of like, if you wanted to be involved in the trades, these are the steps you need to go. We don't teach high school kids, okay, you can apply to college or you can apply to trade school. Oh, where are the trade schools? Because you don't see them anymore. um You know, do you think like how off topic a little bit, but fascinating. How do you think we we
00:32:28
Speaker
We as a society have to address that because to your point I don't I never thought of that ah impact ah on the residential housing market, which already has some really fundamentally Bad issues that are gonna be really hard to solve um if what you're saying comes to fruition It's it's a good question and I I i'm I'm probably not the person to solve it. No, I'm not the person to solve it, but i think there I think there should be more visibility and accessibility to those kinds of careers. And and people need to, for example, have have options in high school to take Home X Shop, like those sorts of things to learn these things. i mean ah there's There's a really fascinating data point of like if you go back
00:33:21
Speaker
150, 200 years, like 70% of Americans were in the agricultural industry. We were all farmers because we needed to. And now in America, it's less than 1% of folks are farmers. um Because the industry has become more automated. You've got these big John Deers, you can do a lot more with just one person than you used to be able to do.
00:33:40
Speaker
ah For agriculture, like that's fine. You can drive a big tractor. You can't do that for as an electrician. like there is There is no way, at least that I'm aware of, to automate and speed up being an electrician. If you screw it up, the house burns down. It has to be done very accurately. It has to be done by somebody who knows what they're doing, and they have to be highly focused on one house at a time as they do it. You can't just like drive a big John Deere tractor through it, but I think a lot of people seem to have to this perception of like we don't need electricians. like No, we do. and I am extremely confident home prices will go up.
00:34:20
Speaker
um if we stop building homes and if we don't have the licensed, experienced folks who know how to build homes, like we're not building, which means how prices go up.
00:34:33
Speaker
Honest to God, this is a fascinating discussion. um I think that's, yeah, again, another thing that's like, wow, I never thought of that is that you can't use technology. There's really no way to use technology to scale electricians or electrical work um because it's so specific to that home and that building and like is no computer. that you get like how would you I wouldn't even know where to begin. Can AI solve some of it? Is that a possibility? I personally might go to chat GPT and see if it tell me how to fix an electrical problem.
00:35:17
Speaker
but as a individual I don't know if I would want to test that theory because if I screwed up I could like elect you myself you know it's not like if you screw up the plumbing um because chat GPT did it wrong or you didn't do it correctly um it's not going to like potentially destroy your house electrocute you, i like, harm you, and like, they're so, it's so fascinating. This went in a direction I had not expected, but truly fascinating. So let's get into like your thesis for this, this an investment strategy.
Investment Strategy and Stability
00:35:53
Speaker
um You know,
00:35:55
Speaker
What are the interesting aspects of it that you think is worth a second look that's really differentiated? And let's talk about things that a lot of advisors and their clients think about when they think about investing in real estate, which is like, to um ah what's it called? um um Any kind of tax-related transactional transitioning from one type of real estate investment to another. um ah Things of that nature. What are some things that people should consider as it relates to your strategy and your particular niche? For sure. 1035 exchange. Thank you. Sorry. Yes. ah
00:36:36
Speaker
at its At its core, like I think of it this is like highly simplistic, but I think it's um i think it's important framing. On a risk scale of 0 to 10, 10 being the highest risk, and rewards 0 to 10, 10 being the highest reward, like we are trying to be like a 6 or a 7 on the reward and like a 3 or a 4 on the risk. like i We are never going to be the highest yielding. We're never going to be the real estate development deal that goes right. Our odds of going to 0 are substantially lower than that. like We're trying to be like a real estate bond.
00:37:05
Speaker
for our investors. And the way that that comes out, um we because we have high paying tenants with one-term leases, we pay out monthly distributions to our investors. um And those distributions, because we do depreciation and cost segregation, for most investors, everyone's situation is different. But for 99% of investors in our experience, our distributions are tax-free. So they get basically tax-free cash into their bank account on the third Friday of every month.
00:37:34
Speaker
um And the other element to it is like we we we do have the underlying equity in the fund as well. Our fund admin marks NAV every quarter. We are up 7.3% right now since since April.
00:37:50
Speaker
So it's it's a kind of a three-part return. The first is the the first is the actual monthly distributions. The second is the depreciation that makes those tax-free. There's actually excess depreciation. So if someone else has other K-1 income, it could potentially have that tax-free as well. And then it's the iss the equity balance that comes up as well.
00:38:10
Speaker
Interesting. So talk a little bit about the strategy, the specific geography you focus on. um And then, you know, you talked about the equity, how do you monetize some of these things? Obviously, you want that cash and the income from the leases. um and But in what scenarios would you sell a property and how would that sale kind of come to be? What's kind of the life cycle of a typical investment in your strategy?
00:38:35
Speaker
For sure.
Focus on Upper Midwest
00:38:36
Speaker
so we are um Going back to the insurance piece that we talked about earlier, like we are intentionally buying homes in the Upper Midwest because of insurance. like We believe the bigger SFR funds are um moving north and we basically want to be a big shiny portfolio sitting here when they're moving because they like buying portfolios. ah and That's also why we're being very thoughtful to follow their rules on buying houses, 25 mile hour speed limits. That's their rule. We're following it for a reason. so When they underwrite our portfolio, it passes.
00:39:05
Speaker
They care about Starbucks locations. They care about Costco locations. like We care about those too, for those reasons. um so For us, in monetizing that equity, there's a couple of different ways that can come through. um Number one is if we do if we do any refinances in the portfolio and return cash, that's not something we promised investors because we don't know what rates will do. What if rates go down to 4%? I'm going to sign that LOI to refinance. and investors should get a nice, a nice check back and that should have no tax implications because it's not a sale, it's a refinance. The other element, the next element would be voluntary withdrawal. Investors can pull their cash out of the fund after a lockup period. um They get that back at now value. So they say, seven years from now, their kids are going off to college and they want to need to write a big check to a college, like they can pull their money out and use that.
00:40:02
Speaker
And then the last piece would be that sale period down the line, like we're building the portfolio for for a potential big sale down the line to a a large institutional player who will overpay for a portfolio because it's a portfolio and it'll be worth more than the sum of its parts. Do you ever have situations where your tenants want to buy out the property? And do you ever consider that? We do. um We have had that happen before. The challenge with it is um the tenants The tenants are valuing the homes at what the home would sell on the standard real estate market. And that's typically less than what the home is worth as part of a portfolio. um So there's theoretically, like it could happen.
00:40:44
Speaker
ah But it's unlikely because if the home is worth, call it $500 on the real estate market, but we think it's going to be worth $620 when we sell it in a portfolio, it's it's really hard to to make that sale because the seller is going to need to get a mortgage for $620 and it's not going to appraise for $620.
00:41:07
Speaker
How does that work in terms of um the impact on real estate statistics in the the area? um when When you're selling a home as part of a portfolio, does that affect comps in the area? Does it get put into the MLS system in that respect? and how How does that kind of work?
00:41:27
Speaker
it does um and so It does. It does get logged at that sale price. um so it It does impact comps in the area. um the The comps theoretically would go up as we as we sell a portfolio. ah Interesting. I don't know if that's a good thing or a bad thing these days. You can make a case either way. Yeah.
00:41:52
Speaker
It could make a specific house on a street screw up like what is realistically what a buyer would pay for a home on that street for everybody who's trying to sell individually versus the one that gets sold as part of a portfolio um and just really mess you know the square footage comps. Interesting from that perspective.
00:42:15
Speaker
So as you think about opportunities going forward and you know the issues we're having in the housing market right now, you know what are your biggest concerns as it relates to that? And then where are you seeing the opportunities going forward?
00:42:30
Speaker
I think my my but my biggest concern fresh far is just the the the construction of new inventory. like as If the population is growing and the inventory is not growing at the same rate, like you're just naturally creating a scenario where there's more people than houses. um i think that's I think that's by far the biggest risk. On the opportunity standpoint, what's what's interesting about real estate is like there's so many different cuts and flavors to it. um And it's such a large market where you can become really sharp at any one tiny specific niche thesis and get value out of it. um I know of some groups, for example, who are doing really well right now with housing for military service members
00:43:19
Speaker
um near military bases, they're doing extremely well. um That's one in particular that I think is a really interesting niche right now, but there's a lot of really cool kind of cuts and flavors to the real estate market right now.
00:43:33
Speaker
Yeah, i um it's funny, the military thing, workforce housing um as an investment strategy is one that has been coming up a lot recently when we talked to advisors um because their clients are looking for ways when you think about affordable housing of how how do we support our first responders? How do we support our teachers?
00:43:54
Speaker
How do we allow them to live in the communities that they serve? um And it's a big problem in the markets today, especially in the markets that you play in, um which are insanely expensive and most of the time,
00:44:09
Speaker
ah the workforce that supports that community, whether it believe police or fire or EMT or teachers, um don't and can't live in the community because it's they're just completely priced out. um And you know that that continues to be a problem. So um I think it's really interesting where those
Community Responsibility and Conclusion
00:44:28
Speaker
opportunities. Do you ever ah see a scenario where you know as you grow and expand Scholastic Capital, you would expand into potential opportunities that are niche like that?
00:44:38
Speaker
um Or is that too far away from your you know core area of expertise? i think it's I think it's too far away from our core area of expertise. But we do think about the things that you're talking about. And um like so and some of the towns that we live in, like we are the largest landowner. like We own more property in that town by just number of properties than anyone else. um So to your point on police, fire, local libraries, like ah we are technically like the largest player in the town. like We should be doing more outside of just paying property taxes to support our local placement, our local firemen. And we've got a couple of different things that we're doing to that step. But like we we do think we have a we have a role to play and a role that we should be playing to to support the the local community just because we're we are literally the baseline owner in town. Do you ever consider potentially making a a portion of the properties in your portfolio kind of focused on supporting that part?
00:45:36
Speaker
where maybe you're not getting market rent, but you're making it affordable for the the workforce? We have. That's something that we are extremely interested in doing. um And I think we will very likely do. Yeah, I i think and advisors, feel free to leave a comment underneath if you um agree with me on this.
00:45:55
Speaker
but I do think that there is um a lot of people that would support and want to invest in a product that did that. um you know As we think about the demographics of um investors as as the baby boomers kind of you know become less and less of the investor pool and Gen X and Millennials and Gen Z are ah coming into the wealth um and looking for areas of which they can invest. that that Those um generational groups are far more interested in investing in things that are supportive to their core values and their communities. um And there's certainly a lot of demand in the investor pool, especially in the the wealth management channel, which is
00:46:42
Speaker
typically supported by financial advisors and as individual investors. There's certainly a large demand and a pool of individuals that um want to be investing for the greater good, but also make a good investment. So um I think that's really interesting. Keep us updated if if you do decide to to to make that kind of shift um and have you know maybe like 20% of your portfolio being focused on that.
00:47:06
Speaker
I think that would be something that a lot of advisors would be interested in. on I do really appreciate your time. I actually find this very fascinating. Again, I apologize to the viewers. A lot of my anecdotal stuff is just based on the area I live, which is a fascinating area to live because um anyone who's familiar with the Chicago area, it's it's very fragmented, is like either very poor or completely insane. um and And Sean and I happen to live in one of the areas where um It's completely insane. um um you know We both live in the same town um and there's the town that we live in is this weird fragmentation of
00:47:48
Speaker
ridiculous homes that are like tens of millions of dollars. And then these smaller like split level ranches, which go on the market for like a million dollars, but they're like 2000 square feet um because of the town it's in, but like the actual house is nothing special. um and and And it's a very interesting um kind of place to be and observe. I like to joke, um when I drive around,
00:48:17
Speaker
There's a lot of people on social media that make comments about you know rich people don't drive expensive cars, and I would like them to come. to like Winnetka or Kenilworth or Wilmette, even Evanston, and look at the average parking lot at any supermarket. And I would beg to differ with that assumption because I drive down the street and you're far more likely to see somebody driving a Porsche than a Toyota. um And it's prominent. and It's not like one or two. So um I beg to differ with the idea that rich people don't um drive fancy cars because there's lots of fancy cars where I live.
00:48:54
Speaker
And there's lots of rich people. So um I think it's really interesting. um Everything that you're doing, um I think what you're doing is fascinating. If you're an advisor who's interested in learning more about Scholastic Capital, let us know. um I think you'll be really impressed with Sean and his team. But above and beyond that, as we think about ways as you are approaching retirement and looking for potential income opportunities,
00:49:16
Speaker
or if you're concerned about tax consequences and things of that nature, this is a strategy that can really ah solve for a lot of that. So um definitely worth um considering and and looking at in the scope of like potential opportunities um as you consider the myriad of opportunities and not just real estate, but alternatives in general.
00:49:37
Speaker
So thank you so much for your time, Sean. It's been a pleasure. um I've learned a lot and you've made me think about some things that I never considered as I think about the housing market issues here in the United States. So again, everybody, thank you for listening.
00:49:53
Speaker
ah Thank you for subscribing. Feel free to like this video if you have ideas or types of strategies and managers that you want to hear from. ah Let us know in the comments. Make sure you subscribe to this. um And we'd love it if you left us a review and let us know what we're doing well and any feedback on what we could be doing better. So thank you for your time. And again, this is Shayna Orzak-Sissel, founder and CEO of Binary Capital Management.
00:50:20
Speaker
and you are watching what's the alternative have a great day
00:50:29
Speaker
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00:50:56
Speaker
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00:51:14
Speaker
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00:51:58
Speaker
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00:52:26
Speaker
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