Three Arch Investments, 2012 residential income fund was specially designed to safely pay quarterly dividends to our shareholders of between 5-7% from the renting of executive homes throughout the West Coast. Today, with the new Federal Reserve policy of zero interest rates now projected to continue into 2015, we strongly believe that accredited investors need to consider alternative income sources to boost their passive incomes.
In today’s investment climate – where one-year CDs are paying 0.50%, it is especially timely and compelling to achieve 5-7% yields from renting single family homes that have lost up to 50% of their value on average over the last five years. Only in the last 18 months have we seen the first real evidence of home price stability and even improvement, which provides us with the confidence that the bottom of the house market was achieved in 2012. Now that we are at the midpoint of 2014, we can clearly see an improving residential market. The resulting shortage of housing supply is causing home prices to rise quickly.
We began our initial acquisitions in 2010 in the Las Vegas market, and then added residential rentals in Portland and Southern California. We have seen consistent strong rental demand, with most families selecting 2-3 year lease terms as they preferred housing stability over flexibility. Of the 25 units we owned, we have had only three turn-overs during the last 24 months, and these were re-rented within 30 days. The number of late payments has been limited to only two tenants – both of whom paid late fees and then resumed normal payments.
The stability of the cash flow has allowed us to currently pay 5% to our investors without any interruption since the fund’s inception 24 months ago. The challenge we face in 2014 is that house prices are rising faster than rents, and thus our current income is heading down. However, our price appreciation is more than offsetting this trend.
Buying risk-adjusted single family homes that have fallen 50% in value, and then renting these homes to qualified families, is a compelling and timely alternative source of income. By the end of 2013, changes in our markets saw the average housing prices increase at annualized rates in excess of 12%. This trend suggests that real estate is one of the best ways to earn current income as well as achieve long-term capital gains.
During the past 24 months, we acquired single-family houses that have been foreclosed upon or have otherwise been acquired by banking institutions. Although virtually all of the homes had been recently occupied, all require some basic cosmetic improvements, such as exterior painting and landscaping. Most also require non-structural repairs to interior finishes and kitchens, which are essential to attracting families as tenants. After making the necessary repairs, we place the houses on the market as rental units for working professionals and their families who are already in the Las Vegas area. We believe this will result in one of the best real estate investments for private real estate investors seeking passive income. In 2012, we added Portland to our rental markets and will be adding other areas when market conditions warrant their inclusion.
Our renters are almost always local families who lost their homes for a variety of reasons, often due to bank foreclosures of their prior homes. They frequently have children they wish to keep in the same school district as their prior home.
The doctors, lawyers, CPAs, and others to whom we have rented wish to have as little disruption to their lives as possible. They are renting our homes for two or three years so they can maintain stability in their households after the traumatic events that led to their losing their previous homes.
These circumstances allow us – as investors – to get a better quality renter who has an incentive to stay longer in one location. It also appears that families that are previously homeowners are accustomed to keeping their homes in good condition, even if they are not the owners of their current property.
We wish to provide accredited investors with the specifics of the financial results for the Rental program. You can access this data on the password-protected pages of this website by submitting the Inquiry Form on the Contact page.
Our Rental Program “Social Experiment”
When we initially began our executive rental program, we focused primarily on long-time local families. They were being displaced from their houses when they chose to give the properties back to the bank when their homes dropped up to 50% in value. We found this same family wanted to find long-term stable rentals in the same neighborhoods where their kids went to school and they had community ties.
As they sought stability after the turbulence due to the foreclosure process, they preferred longer lease terms than the standard one-year lease. As a result, we have been very pleased to find most of our leases on the 25 homes are from 2-3 years, with almost no turnover during the first 24 months.
As we enter the recovery period, we still find home values compelling and the opportunities to meet our objectives readily achievable. The “perfect storm” – as some would say – has aligned to create a shortage of supply, low interest rates, and significant new family formation. According to the Harvard Business School Residential Housing Forecast for 2013, this will create an upward price movement for much of the remaining decade.
In what we call our “social experiment,” we have found quality long-term renters that, due to being recently foreclosed out of their family homes, are now in a forced renters position due to their not being able to qualify for mortgages over the next 3 -5 years. As a result, we avoid turn-over costs and they gain a 2-3 year lease which will provide them with some welcome stability.
We have provided supporting articles suggesting our social experiment is correlated to the tight lending standards. However, there are also families that choose to be renters as they believe in the flexibility of remaining mobile in today’s difficult employment market. We have attempted to mitigate this by selecting tenants who are long-term locals with deep ties to the community. While we anticipate many of these families will become homeowners again, this likely will not occur before 2015-2016, when today’s standards can be met, assuming these families continually improve their credit scores and maintain adequate cash reserves. In 2012, The Harvard Housing Review went into some depth supporting the strength of both the rental market and the single family markets, going as far as to say that housing is on a upward projection for the next 10 years.
During 2010, the Sponsor’s research determined high wage earning professionals, doctors, lawyers, accountants, engineers, who purchased homes during the boom times, were being affected by the huge drop in home values. They were losing their homes in large numbers, even though most had maintained good incomes and held jobs throughout the downturn.
Our main goal in creating this investment program was to seek a way to reduce the maintenance and high turnover rate risks of buying single-family homes, thus addressing the primary objections of investors in this asset class. During 2011, we confirmed our theory when we bought 25 homes using our new program (detailed information provided in the Funds Performance section). Investment Real Estate Trust (REIT) and Real Estate Income Funds seek out high steady monthly income. Our actual distributions for our private placement real estate fund in 2011 exceeded most alternative investments.
Our real estate investment company made interesting observations while implementing this social experiment. We often saw these families make significant improvements to our rental homes, installing water softeners, security systems, custom paint, and other improvements, upgrading to custom features similar to those found in homes they once owned. Upon our scheduled inspections at the 90-day point, it was clear they had better quality furniture and possessions than typical renters, and were maintaining our homes at a high level.
We found most of our renters were professionals who typically would be homeowners in more conventional times. The “social experiment“ was based on a recognition these “renters” intend to conserve, save, and repair their personal balance sheets with the goal of becoming homeowners once again.
The current FHA guidelines allow underwriting of families that gave back their homes after a three-year period if it was a short sale, and five years if it was a full foreclosure with bankruptcy. We deduced we could find families with above average income levels who intended to once again become homeowners. We found no shortage of renter families who met our requirement of having household incomes three times our rent levels. This resulted in our tenants generally having twice the average area income.
To summarize, we set out to find an alternative consistent income source with yields greater than 5%, yet still offered stability and safety in this zero interest rate environment. We carefully select our rentals by purchasing at roughly 50% below the replacement value. We then screen our rental candidates looking for local ties to the community in addition to stable local employment. We believe our objectives are being met in the alternative investment space.
As an Accredited Investor, we invite you to join us in selecting a three- or five-year term investment, with returns of 5% for 3 years, 6% for the 4th year, and 7% for the 5th year.
Accredited Investors who seek high returns on their investments through income properties that have strong operating cash flow and stable occupancies are invited to request additional information.
Please review our details under the Rental Section, and feel free to contact me either by e-mail or directly to my cell phone.
