“Go east, young man, go east….” And that’s just what we did!
From Oregon we transported ourselves back to the Midwest.
Begin With the End in Mind
Stewardship Properties, is NOT a buy and flip company. We’ve built a relative fortune from buying and holding–so that’s our business model. But when you buy and hold you must address the challenges that come with it. The two big challenges are: 1) finding enough capital to not have to sell and 2) getting a firm grip on property management.
A buy and hold strategy
is much more easily accomplished in a “cash flow market” because in these markets rents are relatively higher to property values. This allows a lot smaller portion of the “expense pie” to come from the mortgage.
Cash Flow Markets
Kansas City is one of many “cash flow markets.” Others include Indianapolis, Dallas, etc. We picked Kansas City first for this reason and that Bill (and his wife, Teresa) grew up in Kansas and still have family there.
RIGHT PLACE: We target locations with the following “cash flow criteria:”
High Rent-to-Cost Ratio: areas of relatively high rents yet comparably modest purchase prices. The map shows an example of three targeted rent-to-cost submarkets–lower (cash flow plays: blue), lower-middle (value plays: green) and middle (equity plays: red)–in the KC metro.
Economic Stability: relatively low unemployment, steady population growth and a good outlook for the future.
Sizable Population Base: metro areas of (ideally) at least 150,000 with many viable rent-to-cost submarkets.
Our Goal in Kansas City and Indianapolis and Dallas, etc.
The goal is to acquire, rehab and rent properties at least 25% under market value with a minimum of a 1.2% rent-to-cost ratio in working-class areas that are not too difficult to manage. (Rent-to-cost ratio equals monthly rent divided by the purchase price. So, a 100,000 house that rents for $1,000 a month = 1%, and at $1,200 rent = 1.2% rent-to-cost.) This rent-to-cost criteria means that only certain areas of the country will work well as target markets. Equity build-up, appreciation, and tax benefits are “icing on the cake” but positive cash flow is priority number one.
Short-Term Financing on the Front-End
Stewardship purchases properties with private money at 9% (interest-only, no points) on the front-end, before the properties are rented and rehabbed. The company does not use hard money lenders, but instead individuals with reasonable means to lend. Given Stewardship’s longevity of 34 years in real estate and its perfect record of making its loan payments, the company has a large group of enthusiastic private lenders for front-end financing.
Long-Term Financing on the Back-End
After acquisition, rehab and rent up, the company seeks back-end financing by “packaging” 15-30 properties for 1-2,000,000 loans (30 year amortization, approx. 5 1/2%, 1 point).
This short-term/long-term financing strategy allows for properties to be purchased and rehabbed at 100% LTV with relatively inexpensive private money. Then we refinance private lender funds out with 100% LTV (or nearly 100%) conventional loans to lower our long-term cost of funds and raise ROI substantially. This continual cycle of short-term/long-term financing enables Stewardship to ongoingly build on to the size of its portfolio.