🛑 WontWork, 529 vs SFR, Bigfork, and Blanket

Adam Neumann + WeWork = 2pointNo?

Adam Neumann, the founder and former CEO of WeWork, is making a move to reclaim control with a $500M bid for the company currently navigating a bankruptcy restructuring.  Once valued as high as $47B under Neumann, the firm currently trades around a $15M market cap.  

Neumann remains the unquestioned winner in the WeWork story, bought out of his majority stake in 2019 for $1.9B cash, leaving venture investors and the remaining employees with a business struggling to find a path to IPO.  So why is he stepping up and claiming to be the ideal candidate to steer the company forward?

His Superpower

Adam Neumann’s super power is more evident now than ever before.  He is a master persuader.  The brilliance behind Neumann in the context of WeWork is that he convinced a group of sophisticated venture investors to put billions of dollars into TI money (tenant improvement, or what commercial lessees spend to design/build their office space) on the theory that it was a “proptech” software business.  

The billion-dollar lesson learned: like others of its vintage, the company fundamentally operated as a traditional real estate service business under a tech facade, leading to valuation chaos.  However, Neumann's unwavering belief in WeWork's mission positions him as a visionary leader provided he is paired with a pragmatic operator to hedge excess.

The Path Forward

The bankruptcy filing gives WeWork the opportunity to reset their entire operating model and cost structure.  This includes reevaluating the quality and profitability of the portfolio, shedding or renegotiating bad leases (cost and location), and becoming a much leaner real estate development/subleasing services business for a great private equity partner.  New ownership retains beautiful spaces that pre-bankruptcy WeWork dumped billions of TI dollars into.  According to Bloomberg, WeWork is already predicting $8 billion in annual rental savings alone from this cost restructuring.  

Why Now?

Neumann understands.  Re-entering now means leaving behind all the excess, cult-like, magnum Don Julio bottles funded by venture capital, for a future sustained by positive free cash flow.  We commend his swing, even if it’s bizarre that he still has a chance at the plate.  

Read more → Bloomberg

Saving for College: 529 or SFR?

Part of the conversation for a family’s financial plan includes the best strategies for saving for college. The 529 plan is a popular choice, known for its tax benefits and a focused way to accumulate funds for higher education. For some, single-family rentals (SFRs) have emerged as a viable investment class that also offers unique tax advantages. 

This article explores these two options, not pushing one over the other, but to offer a comparison through a different lens.

The 529 Plan: A Proven Way to Save

The 529, named after its section in the tax code, is a disciplined approach to saving for college. Each state offers its own plan with unique benefits, which means the best plan for you might not necessarily be in your home state. We recommend consulting a licensed advisor to explore the specifics of various plans.

For this comparison, we'll look at Virginia's plan, managed in partnership with Capital Group, known for its strong track record and respected investment offerings.

Key features of the Virginia plan include:

→ up to $18k annual contribution limits before gift tax limit
→ grows tax free
→ dozens of funds to choose from
→ can be used for traditional or vocational education costs without penalty
→ will be taxed and penalized if used for non-qualified distributions

For our projections, we assume an 8.5% annualized rate of return, based on the 10-year average return of five popular funds from the plan. We model an 18-year return projection, assuming an initial investment of $15,000 per year for four years, staying below the gift tax limit. 

The SFR: A Foundation Built on Real Estate

Investing in an SFR offers a tangible asset that has risen significantly in popularity over the past decade.

The benefits of single-family homes include:

→ leveraged returns (invest 20% down, enjoy appreciation on the full value)
→ cash flow (rental income that exceeds monthly expenses)
→ tax benefits (depreciation + expenses)
→ hedge against inflation (when costs go up, housing usually leads)
→ hedge against technology (we still need a place to live, regardless of AI, etc)

Given the current housing environment, with multi-decade lows in transaction activity and housing shortages across the country, single-family rentals are poised to continue their upward trajectory. 

For our comparison, we consider an SFR purchased for $300,000 with a 20% down payment ($60k year 1) and a 5% fixed interest rate over 30 years, generating $2,350 in monthly rent in the first year. Expenses are assumed to be 40% of the rent, increasing by 2.5% annually, with home price appreciation at 4% annually, slightly below the historic national average.  (In future issues expect hyperlinked pro formas for self analysis.)

Where the Projections Land

The clear early winner in this comparison, based on the chart above, is the SFR.  However, it’s important to consider where we intentionally simplified this comparison.  

1. Specific tax equivalent yield comparisons were omitted because every situation is different.  Please consult with a licensed CPA to explore individual scenarios.

2. The investment schedule is not apples to apples.  The SFR includes a $60k initial investment starting year one.  The 529 is paired with four $15k investments over the first four years of plan establishment to avoid the gift tax limit. 

3. While it’s straightforward to calculate the 529 plan over time with the 8.5% projection, a SFR performance can be affected by multiple factors.  Big repairs, vacancy, and interest rates all play a role in exactly how well your rental yields over time, and this comparison is admittedly too simple for savvy investors.  

Looking to the Future: A Degree or Real Estate?

As education evolves with online courses and certification programs gaining prominence, the value of a traditional college degree may shift, especially over nearly two decades.  This is where we see the most value in planning with real estate vs 529’s.  

In a 529, you can pay for tuition or qualified educational expenses only.  But what if we develop far better ways to educate?  Let’s examine the progress of Netflix.  Their early video collection was almost unusable, loaded with second-rate throwaway movies to fill volume.  Fast forward today and it’s become a premier content creator.  Should we expect anything less from the Coursera’s of the world?  

Weighing the Merits

While it’s impossible to know where things will be in 18 months let alone 18 years,  SFR presents not just a physical structure but a financial hedge that can support a range of future scenarios. It's an asset class with historical precedence for growth, offering a compelling case when juxtaposed with the 529 plan.

Consider the value of owning real estate in the context of financial planning, where it’s possible that education could drastically change in two decades,, but will housing?  Does a 529 plan offer the same or better benefits compared to the flexibility one has with a home?  Does it make more sense to own a home that yields enough cash flow to pay for carry costs, plus student loan payments in the future, while still having the option to sell in a financial emergency? 

The choice between the tax-efficient 529 plan and the tangible investment in an SFR rests on personal preferences, risk appetite, and future outlook.  We encourage readers to consider single family rentals as an alternative to saving for college.

Bigfork, Montana

Situated on the northeastern shore of the 27-mile Flathead Lake, the largest natural freshwater lake west of the Mississippi River, Bigfork is growing into the next Lake Tahoe with an enclave of wealthy vacationers and a downtown boasting of amenities. It’s the summer escape to escape high trafficked vacation spots.

Proximity to Glacier National Park is the main draw for vacationers. In a travel survey 77% said a visit to the park was the main activity during their stay. 53% said a visit to a brewery/distillery was the second most frequently mentioned in the same survey. Average length of stay is 6.6 days.

Winning the STR Game in Bigfork

For Short-term rentals, the market could support a cap rate of 7.96% as the average home price lands at $771,425. To win at the STR game in 2024 for Bigfork, it requires some additional amenities like EV charger, Beachfront (on the lake), and/or pool. Surprisingly Hot tubs and Saunas don’t offer the same revenue boost.

Price Appreciation

Home prices in Bigfork—like the rest of the US—have accelerated and projected to continue climbing. The play here in this market would be STR or vacation/2nd home and capture the appreciation from the increased popularity of Bigfork.

20 Bear Dance Village

Discover the essence of waterfront living in the vibrant heart of downtown Bigfork. This gated estate, complete with a personal boat slip, offers a blend of rustic charm and modern design. Its open layout and expansive balcony provide the ideal setting for entertaining, both indoors and out. 

Named Bear Dance, this vacation home comes fully furnished and offers a seamless experience for family getaways or lucrative short-term rentals, helping to mitigate ongoing carry costs.

The Investment Thesis

This property represents a unique opportunity for your portfolio, diverging from our typical investment focus at prop.text by focusing exclusively on appreciation potential and lifestyle.  If you are familiar with Southern California, think Catalina Island as the best comp. 

→ Extremely limited housing supply in a surging vacation market
→ 25% population growth since 2020
→ Location: in the heart of downtown and on the waterfront 
→ 10-year average annual appreciation rate of 9.14%
→ Affordable for more via fractional ownership with Pacaso

 Property Details

 Financial Projections

Interested in Learning More?

*Asking price based on fractional ⅛ and is negotiable.
**Appreciation based on 4.5% growth rate. 
***Gross income based on renting 30 of the available 44 usage days per 1/8th ownership + two weeks no income for personal use, subject to approvals.

The Frozen Housing Market: A Consequence of Bad Rate Policy

The aftermath of the Federal Reserve's near two-year policy suppressing the Fed Funds Rate to near 0% is now evident—a stalled housing market. Lance Lambert, co-founder of Resiclub, recently shared a straightforward visualization illustrating where the majority of today's interest rates fall for current outstanding mortgages.

Key Stats at a Glance:

→ 58.1% of loans have an interest rate below 4%
→ 86.6% of loans have an interest rate below 6%

For prime borrowers (credit scores 740+), the current 30-year fixed interest rate stands near 7% in the first half of April.

Understanding the Impact

What does this shift in interest rates mean for homeowners and potential investors? Let's examine the financial impact using a $400k loan as our benchmark, with interest rate being the only variable factor.

→ At 4%, the monthly payment is $1,910
→ At 6.93%, the payment increases to $2,643

This $733 rise in monthly interest payments translates to nearly $111k in lost purchasing power for buyers.

Delving Deeper: The Dual Challenge

The challenge facing the housing market is multifaceted. Besides current interest rate costs, maintaining artificially low rates for an extended period led to a surge in demand, as the purchasing power increased when rates dropped from 5% to below 3% in 2020. This environment prompted most homeowners to either refinance at lower rates or upgrade homes, often without increasing their monthly mortgage payments.  

This relationship between price and cost should highlight the price elasticity in housing, but the market is broken at the moment.

→ Homes are priced as if interest rates are still 3%, leading to widespread affordability problems.
→ Interest rates are hovering near 20-year highs, complicating new purchases and refinancing.
→ Builders, the great savior of 2023, can no longer leverage pre-build land appreciation to buydown new homebuyers mortgage rates via points as aggressively.

Implications for Investors and Homeowners

For investors, the current landscape imposes a significant challenge to generating positive cash flow from properties in desirable locations, as the increased carrying costs tip the scales toward negative returns.

Homeowners, on the other hand, are likely to continue a "shelter in place" mentality. Higher interest rates effectively lock in many homeowners, removing the incentive to sell or buy in an already constrained market.

The opinions expressed are those of the proptext crew.

You can find more great content from Lance Lambert by heading over to his Linkedin for a follow.  Don’t forget to subscribe to the Resiclub Analytics newsletter here.

Blanket

Lior Abramovich founded Blanket, a B2B2C platform adding value for property managers and real estate investors, by creating a marketplace to buy and sell single family homes through off-market listings. 

From Defense to Doors: Lior’s Story

Lior made his first investment at 20, in a single-family rental in Atlanta.  While serving in the Israeli Navy, he helped fellow seamen invest in US real estate, then transitioned to full time. Over a three-year period, he helped foreign buyers acquire over $150M in single-family rentals in the U.S.  He operated as both acquisitions lead and asset manager, exposing him to both sides of the equation of successful real estate investing.

Solving Property Managers’ #1 Challenge: Retention

The mission behind Blanket is to help property managers become asset managers, providing all the services an investor needs in their journey, from acquisition, strategy, to disposition across the lifecycle of the investment.  

As Lior started to better understand the dynamics behind property management from the customer’s viewpoint, he identified a critical gap: retention.  On average, property managers can lose up to 30% of their doors annually.  Some losses are because of issues they can control (service, cost), and others not so much (life events).  Property managers live and die by retaining and growing their door count, so Lior founded Blanket to create an organic way to get ahead of traditional open market sales and keep doors under management.

What Blanket Offers ✨

For Property Managers

Blanket instantly establishes a real estate marketplace by securely integrating with the majority of primary property management operating systems. This includes, but is not limited to, Appfolio, Buildium, and Doorloop.  The marketplace is also unique to the manager, adding value to their web presence, driving new investor leads to their site, and most importantly, retaining doors by creating a peer-to-peer market for investors. It is a place for buying, or streamlining a sale when life happens and a customer needs to move on.

“We are bringing institutional investment capabilities to property managers with deep local expertise,” Lior said, “giving investors the best of both worlds.”

Blanket is more than just a marketplace.  It is a platform business with active and integrated third parties that offer insurance, lending, 1031 exchanges, and more.  This gives your investors a consolidated list of the best service providers on hand without time and money establishing these strategic partnerships.

The race to the bottom in property management where everyone competes on price is over, according to Lior. 

“Investors want more and are willing to pay for it,” he said. “ The property managers of tomorrow are asset managers, supporting investors across the entire lifecycle of real estate investing from acquisitions, portfolio management, and dispositions based on each owner's unique needs.”

For Investors

Blanket is the only organic off market single-family rental marketplace built for actively managed rentals.  There are the convenience factors of finding properties in a given market/location that aren’t available on the MLS, having a quality tenant already in place, and are cash flow positive day one.  Few things are more frustrating for hands-off investors than unexpected down time from close to tenancy.  There is also best in class performance reporting, tracking ROI to make data driven decisions about how to balance your portfolio as it grows.

How Do I Get Started? ☎️

First, if you are a current investor and your property manager is not using Blanket Homes - demand it! Okay, demand is a bit strong but you get the point.  

For property managers interested in how to leverage Blanket to retain doors and grow your business, request a free 15-minute demo.  This is the first step toward intentionally attracting the right type of investors. 

Disclosure: prop.text was not paid for this piece. 

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