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Globe Institute of Technology ​hello and welcome to another edition of inquiry careese urch presents today on inquiry ktv questions with product issues hello and welcome to another edition of enquiry cat tv's questions with product issuers my name is Rick Purdy and thank you for joining me on the program today questions with product issuers is an opportunity for investors to learn more and get a better understanding of alternative investment opportunities in the exempt market the format of the series is to ask a standard set of macro and micro economic questions of every issuer so that our viewers can get a consistent an unbiased overview of the opportunities available now the first question for our guest on today's program is tell our viewers the elevator pitch for your investment hi I'm David Judy founder of capstone real estate corporation capstone was established in 2004 really for the sole purpose of helping investors diversify their investment portfolios with real estate we found it was an asset class that very few people had utilized in the past and very few people had access to so today we're actually on our ninth offering with capstone and our second offering in the last 12 months in the Phoenix area where we're actually specifically focused on single-family detached houses that provide cash flow and a great opportunity for appreciation now if you could share with our viewers what are your key macro drivers you know the key focus for capstone prior to launching Saguaro series 1 and now Saguaro series 2 was identifying that there was a substantial there was a great opportunity in the US market to take advantage of events that had happened over the last three to five years our core objectives always focus on two things one is we want substantial opportunity for capital appreciation meaning we want to buy significantly below current market value but just as if not more important is that we want to create consistent positive cash so we want a tangible asset that we know has value substantially greater than what we paid for it and we want to make sure that we're creating cash flow that just basically pays for us to wait to realize that capital appreciation the US as a whole seemed to provide some substantial opportunities we have a market that had decreased in value in some areas by forty to fifty percent and we had an underlying driver being adjustable rate mortgages where or a number of people who were heavily leveraged in that market decided to give their homes back which provided a substantial amount of supply into the market and very little demand most of these people get back their homes they couldn't qualify them for a mortgage right away but they needed somewhere to live so we felt that that provided us with a real opportunity on a macro level to look into the u.s. and then specifically what we needed to do was we needed to find out where was the where's the best place for us to focus our attention and invest and what are your key micro drivers for your investment premise well there were five states that were hit harder than any other when it came to foreclosures in the US market Michigan Florida California Nevada and Arizona we needed to look at those five states in detail and figure out where was the vet where were the best opportunity Michigan well you know I think there's a whole lot more challenges in Michigan just the housing market so that wasn't an airway of focused a great deal of attention on but we did focus a lot on Florida and California we still believe that there are some great buying opportunities in those markets but because our model is focused on positive cash flow our expenses have a lot to do with what the decisions are that we make and property taxes are a major expense in both of those states they have what's called non-resident property taxes so as investors corporations or non-us or non state residents we a significantly more in property tax that our next-door neighbor would and when we ran those cash flows those two markets just did not make sense today the other two markets that we were left with were Nevada and Arizona Nevada and Arizona really it's focused on two cities that's Las Vegas and Phoenix well there's some great opportunities in Vegas one of our challenges was it's an economy that was really built on construction on the strip if you went to Vegas in the last but probably 3-4 years ago you notice the entire strip line with cranes new construction lots of activity and that's why the economy was thriving in Vegas you've been in Vegas the last three to six months obviously that's a little different situation there are virtually no cranes and employments really people we had a real challenge finding employment so our last and and where we are today we focused on Phoenix why Wow property values in Phoenix decreased by 35 to 50 percent in many areas but extremely strong economy a growing population based as a matter of fact Phoenix has been one of the five fastest growing cities in the US for 15 consecutive years so we're always looking for a market that yes we can buy at a significantly below market but more importantly we're going to have renters because if you have renters you have cash flow and that's really what our focus was in moving into that Phoenix morning explain in detail how you make investment decisions they're basically four key criteria that we use when we're making investment decisions the first one is that we always want to pay under current market value the way that we purchase assets and the relationships


that we establish our key to us paying twenty to twenty-five percent under what the current market is the best people to buy from are motivated sellers I mentioned earlier and we're buying directly from the bank for buying directly from the bank we want a deal the second thing that we're concerned about is we always want cashflow being to dictate everything that we're purchasing we use what's called the one percent rule that's interesting if you talk to a real estate investor 50 years ago they all talked about the one percent rule but one percent rule is is if I bought a house 30 years ago for $50,000 I wanted to ensure that I could rent that house for five hundred dollars a month and that was just a simple rule of thumb that every old time real estate investor used unfortunately in this country for the last 30 years it's been very difficult to use the one percent rule but every single asset that we purchased in the saguaro series to portfolio meets that one percent rule if we want it we're only able to generate a thousand dollars a month in rent we will not pay any more than a hundred thousand dollars for that home the third thing we want to do is we want to only buy assets that we can keep vacancy levels at as lower rate as as as possible and the key to that is you want to cater to a particular market that it is in the need of a rental in the phoenix market that there's a whole lot of young families that unfortunately have had to give back their homes to the bank and are looking for another residence to live in rental demand is at an all-time high in the phoenix market what's very interesting is most of these people are not moving away they're giving their homes back and they're moving down the street they want to keep their kids in school they want to stay close to their friends and and and they you know they want to stay in the same neighborhood so how do we buy an asset that caters to those individuals and we're also going to make our investments decisions based on where can we get quality property management we only want to go into areas that we feel have have the ability for us to partner with good partners in the property management side of the business they're going to help us select quality tenants and make sure that the product the homes that we're purchasing our quality homes and they're kept and going to order because of course we don't want to hold these homes forever we want to have them as assets that we're going to liquidate at the maximum price possible down the road now one of the most important things for investors is what is your exit strategy yeah capstone we always have an exit strategy before we start an offering believe it or not that's that's not the way the vast majority investors invest normally people invest make up geez you know if I could just get as much as I possibly could out of this particular asset I'm going to be really happy what's the same as you go to the cocktail parties and someone's talking about the stock they bought the only the IPO for a dollar and it was worth a hundred dollars but they never talked about they sold it for a hundred they say it was worth 100 in most cases they're selling that asset for a dollar fifty if they're lucky in our case being disciplined not only in how we purchase assets but when we sell the assets is the key we don't want to be trying to time the peak of the market we want to be selling in a market that's in an upswing and we want to be taken care of taking advantage of that fervor that people have going I got to get in I've got to buy and we're always going to leave money on the table for the next person that's good business but it means that you're going to sell assets quickly and you're going to you're going to sell in an uptick market our exit strategy for saguaro is really based on a calculation of price per square foot our belief is that we don't need markets to go back four years five years ago right almost six years ago now was really the peak of that phoenix market and homes were selling for around 200 to 225 dollars a square foot that's significantly less potentially than then we'd be buying homes in Canada but that was an all-time high today we're purchasing properties in Phoenix our average purchase price per square foot today only 33 homes and saguaro series 2 portfolio is approximately forty nine dollars a square foot the market average today per square foot is eighty-four dollars a square foot so I mentioned earlier purchasing significantly below current market our exit strategy is that that average price per square foot goes from eighty four dollars to a hundred dollars a square foot and we will start a liquidator fit folio at that time we feel that that will crystallize substantial gains for our investors and we're not going to be worried about trying to time the top of the market again and by the way that exit strategy is approximately fifty percent of what the average price per square foot was just six years ago what do you believe is your margin of safety you always want to consider when you buy an asset what is your margin of safety real estate actually is a very unique asset in that you know I I usually look at my margin of safety as I can go kick the dirt and I think that's one of the real advantages of buying real estate is that it's a tangible asset it's it you're not buying you know a piece of paper that has some numbers and names on it and you say well this is the hopefully if I go to market I'm going to get X number of dollars it's a tangible asset with value you mitigate your margin a safety by a buy time if that asset is producing cash flow quality cash flow you wait and you let market conditions take care of themselves so by buying a tangible asset with real value that's the best way to protect yourself but where do you buy it well you only want to buy in markets where you know you're going to generate cash flow and you generate cash flow through renters so you want to be buying in an area where the economy is doing well Phoenix by the way its unemployment rate is significantly below at the national average is today you want to buy where the population base is increasing in that marketplace Phoenix population like


ice mentioned earlier one of the five fastest growing population basis in the US for 15 consecutive years and you want to buy an asset under current market value because nobody's always a hundred percent right unless they were never always 100 right but if we've got twenty twenty-five percent to work with because of how we bought that asset it definitely mitigates your downside risk do you use third party leverage or bank financing if so why and how do you perceive this affects the risk profile of your investments yet we have a lot of our investors ask us if we're utilizing leverage in our saguaro portfolios the quick answer is no as a matter fact none of our our portfolios in the past that we utilize leverage but I'm most careful in answering that question our offering does allow us to use leverage and I think that if you can find quality terms for leverage and your cash flow is going to produce quality returns over tub of those leverage costs then utilizing leverage to invest in real estate makes sense but you want to be very selective one of the challenges in the market today is that you can't easily access Capital in the US market especially the US housing market which is understandable because what's happened so the terms that we've looked at just don't make sense from a leveraged perspective but I I think it's important to understand if we did utilize leverage in the future we'd want rates below our six percent threshold obviously we don't want to pay significant points which means that we're not going to pay huge brokerage fees to secure that leverage and your loan-to-value ratio is a really important piece to keep in mind to actually increase your rate to return slightly by using a very low loan-to-value ratio makes sense but when people run into problems with leveraging in real estates when they started doing what they did with adjustable rate mortgage you start loads you know loaned evaluations over sixty seventy percent that's not quality investment that speculation and we're not in the business of speculation now if you could tell our viewers in detail about the founders their backgrounds past successes and operational experience in the current area of investments sure I'll tell you a little bit about the founders my Tompkins Cortland Community College.

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