hey everyone in this video I want to
talk about how hedge funds are making
big real estate profits or more
accurately how they're planning to make
big real estate profits and really the
reason behind this video is the time I'm
doing this video about in 2013 there's
been a lot of Wall Street money so the
big big money including hedge funds but
also other private funds that have been
moving into the to your backyard and so
what I mean by that is the residential
areas in many markets around the country
and they're moving into areas that have
traditionally been the real estate
investment properties for small
mom-and-pop type operations which I'm I
count myself in one of those I'm a small
real estate investor who owns a
portfolio of properties and pies
investment real estate and has been
doing that for years and sort of the
purpose behind this is a lot of
investors the smaller investors have
been kind of frustrated maybe by the
competition there's a lot of big money
moving in making it harder to buy
properties but more what I want to talk
about here is is not how to beat
competition but to how to learn from the
big money that's moving in to these
these real estate markets and I which I
want to talk specifically about why the
big motivation behind why this money has
been flowing there and maybe maybe you
can take these insights and use it for
your own real estate model for buying
residential real estate and sort of the
big kind of context or setting behind
all this you know why this has happened
is of course in with the big downturn
the Great Recession there was that one
of the main causes was the housing
sector and there was an oversupply over
building a lot of speculation and there
was in many markets there were a massive
number of foreclosures so banks and
mortgage companies have been taking huge
numbers of properties back and that of
course as we all know catapulted and
cascaded into a worldwide recession and
affected all sorts of other areas but
this huge housing surplus calls the
problem because a lot of these banks had
all this inventory and they banks want
to have loans with with people making
payments on those they don't want to
have inventory of vacant houses and so
the big problem was if they were to put
all these houses on the market which
they started doing then you're gonna
basically decrease the prices of houses
in these markets and so even without
releasing all of there's a huge
inventory of houses that were not
released but even the houses they did
release had a big downward pressure on
prices because there was an all of a
sudden a much bigger supply of houses
for sale then there were buyers and so a
lot of buyers were getting out of market
- just from the fear of the downturn so
sort of a spiral and prices definitely
went down and in certain markets like
Atlanta Tampa Phoenix parts of
California places they had a lot of
building boom and bubble were even more
over built and those areas went way down
in price and so that's that's the
context then but one of the positives
was because the prices went down so much
the incomes the income or the rental
income on these properties didn't
necessarily drop with the prices it was
more of a financing thing than and so
people still had similar incomes and
we're still making rent payments and
sometimes even increasing in rent and so
the income - the price ratio is actually
really good so we as investors look at
that that rental income is that was one
of the most important thing reasons to
invest in real estate and so that was a
big positive so because of these two
factors a lot of people with big money
on Wall Street who normally wouldn't be
and a single family rental house market
saw this as an opportunity this was a
place where they saw an opportunity to
make big profits and so here's this
situation before you have banks who have
a lot of vacant houses and remember they
don't like bakers what do they want in
this situation what they're really
needing is cash they would rather have
cash money they have regulators knocking
on their door saying hey you need to
have more cash on your balance sheet you
have all these these houses and the big
down the risk if you have too many
houses and bad loans and not enough cash
is you'll get shut down as a bank so
this is a survival type game that banks
are not happy with the houses they would
be happy if they had more cash but
remember the problem they put all their
houses in the market and liquidated them
they get lower and lower amounts of cash
and it could be you could lead to them
having even bigger problems at the same
time as these banks have this problem
you have a lot of people with private
phone
sitting on the sidelines especially very
wealthy people and or big big managers
of big funds of money they have money
sitting in cash or if they do they're
very unhappy about this because what's
wrong with the interest rate pictures
out there interest rates are very low so
interest rates are or low or
historically low you know and the less
you're sitting in a CD or money market
you know you're in the less than 1%
range and that that's just I'm not gonna
work that's not the kind of returns
they're looking for so they would be
very happy with something like real
estate that produced a good income and
so this is that the general context what
made made sense if there's a way for
this big inventory of houses to go to in
bulk to private funds who had the cash
and we're willing to do to get to build
a business of owning investment real
estate they could basically just trade
places and so that's the thing that led
to the strategy on all sorts of sides
the government government was and Fannie
Mae Freddie Mac hedge funds and they all
put this together that this is and this
is a way for to transfer the housing
inventory to bigger funds with money who
are willing to hold them and rent them
and so the strategy was right now the
funds are gonna buy the project houses
at a what they see is a relatively low
price now I'm historically or compared
to what they were worth before they were
gonna hold them and here's the key the
tent that they hold them through the
storm or through the period when when
prices might recover to what they were
before the downturn and so until the
inventory levels can stabilize
themselves and in the meantime they
collect rental income and remember that
was one of the big positives of this
whole situation and then in the future
they exit and get out and they sell into
a better market and they they don't sell
to other investors they sell to retail
users who will like the house and get a
loan and buy them out at a higher
so that's the strategy by hold for five
to ten years this is more of a
short-term hold and then sell in the
future let me just show you some numbers
to be a real example of what I mean by
that and so let's say before there's a
house it's a simple single-family house
2007 it sold for 160,000 to a to a
homeowner and moved into the house 2010
they were foreclosed on and because of
all this stuff I've talked about the
value today on this REO or foreclosure
property there's only one hundred and
twenty thousand but it did have a rent
of twelve hundred dollars per month so
this is what why the hedge fund or the
private fund would be interested so the
bank sells the house they get the cash
and they're actually gonna do this in
bulk of course instead of one house it
might be you know this hedge fund is
trying to buy ten thousand houses you
know raising a billion dollars and to
buy a bunch of houses but this is just
one to show you an example of what each
one would look like and so this fun
hedge fund might have a cost of one
hundred and twenty thousand dollars and
the rental income is twelve hundred
dollars but as we all know there's
expenses involved in running properties
and so let's say they had a 450 dollars
of taxes and insurance and maintenance
and management and those sorts and
vacancy coughs and so they'll say they
netted 750 dollars per month and for
twelve months that would be nine
thousand dollars per year so that they
had no debt on the property if you just
the net operating income tells you what
they would net in this one little house
if they had they just had no debt so
this is that the bottom line income
figure from renting the property nine
thousand per year so this is the profit
number one they're looking at is the
operating profit of nine thousand
dollars and if you divide that by 120
thousand dollars to try to get a yearly
return that's actually about a seven and
a half percent return just from the
rents and to put that in couldn't in
comparison you remember if they had
money and a money market or some kind of
bank fund you're getting less than one
percent
if you put it in the stock market and
you try to get dividends you know that's
sort of income then you might get a two
to three percent return
you've also have some growth in some
other area you know other ways to make
money in the stock market but we're just
talking about income here and you know
bonds maybe you could do a little bit
better but you know you're still you
know these on the looking anywhere from
two to the most secure ones up to you
know it's a six percent maybe if you're
lucky so those are the kinds of that
when they see these kinds of returns
just from the income that's a really
attractive number and that's going to
attract a lot of money to make it worth
their effort to do what has
traditionally not been done because
there's a segment at market there's a
lot of houses spread out all over the
place
and typically big money has bought real
estate that is in one big complex like
one big apartment complex or one big
commercial building or commercial
complex and so but it made it worth
their while to try to look into
aggregating all these houses but that
wasn't the end of it so that the bigger
profits and the reason 7 1/2 percent by
itself would not be good enough for
hedge funds to get involved and but what
they there's another profit potential
and which is that they eventually if the
prop market came back and in certain
markets they felt this is more likely
then they could sell the property for
what it was worth maybe back in 2007 so
if they sold it for a hundred six the
house is worth 160 originally and they
had a cost of 120 thousand there's
another forty thousand dollars in value
potential appreciation value which they
could sell eventually they might be able
to sell it for something like that and
get a capital gain and so that's $40,000
on their hundred twenty thousand
you
when you look at this whole picture they
have two different places they're making
a profit 12 and if you use the financial
calculator which I've done on my own the
year they've the real yield they're
looking at maybe a 12 to 15 percent
yield without leverage and a lot of
these funds use some leverage you have
the ability to borrow cheap money they
might use leverage and a lot of them are
looking at a 20 percent plus returns so
this is really what they are looking at
whether from the bottom line of what the
fund managers what has attracted them
and what I find interesting is this
business model is not much it's not any
different than the kinds of things we do
to small investors and I've been doing
my own business and I've been looking at
these same kind of numbers for years but
because this is such a massive
opportunity scale wise and there's been
a lot of big money you see it more as a
opportunity to get in big and so if
you're watching this video I'm actually
gonna be teaching a class on this
business model on how how these deals
work going to more details on some case
studies of these I mean an interview a
manager of a local fund that's been
buying properties and show you how their
business model work and it works and
just really sure if you're interested in
this model of buying holding properties
for this period of time nicer houses and
nicer neighborhoods where you buy low
you rent it for a period of time in the
future you sell it at the right time in
the market and sort of be a cyclical
kind of real estate investor that's what
we're going to be teaching this model of
buying and holding for the short term
and so you can learn how to make profits
like hedge funds are doing right now in
today's market so thank you for your
time go to coach Carson comm if you want
to hear more about this class and I
really appreciate your time watching
this video
you