How Collegiate Football Success Affects Real Estate Appreciation [case study]

“Blue 42…Hot Route – RED 7 RED 7…settttt HUT!”

In 2008 I fell in love with who is now my patient & caring wife and awesome mother to our children. She grew up (in-laws still reside) not far from Clemson, SC, so naturally she is a Tigers fan. Myself, I was blessed to be born into the Auburn tribe. Being born and raised in Alabama, you are sworn to an allegiance before your first breath of oxygen. Luckily, a Go Tigers! keeps me out of the dog house and still in the Will. Happy Wife, Happy Parents…how does that saying go?

Back to my point. Since 2008 we have attended and tailgated several football games in Clemson. Great times, joyful memories and truly exciting time to be a Tiger as they have been on a hot streak the last several years. It has been amazing to see how that city has and continues to BOOM since our first football game there together just 9 years ago. New developments, shopping, housing, restaurants, etc. With Real Estate on my mind, I can’t help but wonder if some of that booming is due to the national recognition the school has received via its football program’s success.

Side note: I met Dabo Sweeney in the Tampa airport a while back. One of the coolest individuals I’ve ever met. #ALLIN

Back again to the point of this post. With Clemson’s football success and booming economic development, does this mean real estate values also BOOM? And if so, where is the next sleeping giant in FBS Division I NCAA football? I WANT TO BUY THERE!! I thinks it’s Nebraska, but before I go off investing in Lincoln, let’s do some analyzing to see if my theory holds water.

THE THEORY:  The theory I’m trying to prove is when a school places more frequently in the Top 10 year end BCS/CFP rankings, the more appreciation yields for real estate holdings in that college city.

Another Side Note: Our current investment strategy is primarily focused on cash flow, appreciation is icing on the cake. So while I’m using appreciation for this exercise, it is not a leading factor on whether or not we will invest in a market. 

THE DATA: Before I go and analyze the 129 FBS Division 1 Football Teams, I want to focus on just the Top 10, as they fall at year end rankings. For the sake of the graphic below, which looks like a grandmother’s hand knit quilt, I used the end of regular season BCS Rankings from 2000-2013 and the CFP Rankings from 2014-2017 found on Wikipedia.

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The city and state appreciation values noted below were sourced from NeighborhoodScout.com and this list is sorted by Highest College City Real Estate Appreciation since 2000.

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MY CONCLUSION: Fifty one (51) different teams have placed in the Top 10 BCS/CFP rankings from 2000-2017.  Twenty three of the 51 college city’s listed above, experienced greater real estate appreciation vs the state in which they are located.  Twenty eight did not. So, my conclusion is…the data is inconclusive. Take for example Ohio State. Ohio State has the most Top 10 finishes since 2000 than any other school, but almost the worst appreciation during the same time period. Ruling out an anomaly, look at Hawaii. Only 1 Top 10 finish from 2000-2017 and extremely high appreciation, but let’s face it, where would you rather be?

If anything this exercise proves that collegiate football success over time does not solely yield a higher appreciation for real estate in that college city over the same period of time – an economic boom, certainly.  It’s obvious to me other factors are involved to produce the higher appreciations. Take for example, Washington State. The Cougars are located in Pullman, WA (approx. 30k residents) and with only one Top 10 finish during the review period, experienced 85% real estate appreciation. Compare Pullman, WA, to Auburn, AL (#GoTigers!). Auburn, AL, approx. 54k residents, experienced only 39% appreciation while the school made the Top 10 six times. This play is under further review…

Agree/Disagree?  Let me know why by leaving your comments below.

 And how did your school do? Are they winning at the Game of Appreciation?#GoTIGERS!!

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Purchasing Our First Apartment Complex

If you’re keeping up with us, you know we’ve traditionally purchased SFR and small MFRs, but through some hard work, late nights and leveraging relationships, we were able to step into the Apartment Complex realm and the anticipated return on this turnaround project is better than any personal acquisition yet.

Here’s how we did it…

Relationships. Without relationships this would not have been possible. Relationships with brokers, relationships with bankers, relationships with like minded partners, relationships with potential investors, and most importantly, my relationship with my wife (for accepting the early mornings, late nights, and weekends this took and will take away from our family).

Strenuously Looked, Got Lucky and Revisited the Patience Virtue. I talk about being patient for a great deal in the Purchasing Our First Duplex post. Same concept applies here, my excitement almost led us to a bad deal but with some luck we side stepped it. My first partnership on this trek was with Tim Kelly, at Kelly Housing Group. Starting close to home in Pensacola, we searched w/in a 100 mile radius looking for any property that fit our like-minded criteria.  We found an opportunity that almost hit all the marks… almost but not all. With both of us being extremely excited to dive into the apartment complex world, we made an offer anyway (mistake!). Our LOI was accepted and with a little luck we never reached an executed sales agreement (nor did we lose any due diligence monies). Continuing the search, just a few months later we are under contract and eventually closed on an asset we renamed as Citronelle Square.  It took about 6 months from the time Tim and I started working together until we closed on this 42 unit apartment complex. Many steps along the way but in the end we brought on 2 more experienced partners, Robert Preston and Jeremy Hans and a total of 9 investors. Without all of these guys we would not have closed the deal and for that, I am truly grateful.

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The Numbers.

  • Purchase Price: $700,000
  • Cost per Unit (42 Units): $16,667
  • Renovation Budget: $200,000
  • Capital Raised: $330,000
  • Return: Anticipated 20% over 5 Years

The Turn Around Plan. One of our acquisition criteria requirements calls for a value-add play. Basically, we were (and still are for our next one) looking for a run down, tired, needing some TLC property.  And we’ve found it. At 55% occupancy, this property has suffered from a tired owner/operator for way too long and we acquired it at a bargain. Our renovation plan includes the interior of the units, uplift to the buildings’ exterior, repave/re-stripe the parking lot and renovating the laundry facility and playground. While these things are in motion, we are staying in contact with the cities Economic Development team to keep them aware of our progress.Citronelle-Square_300Next Acquisition. Citronelle Square was just the start and while we are focused on the stabilization and renovation of Citronelle Square, we have our sites on recreating the process and in search of our next acquisition. I have personally submitted three LOIs in the last month – none have stuck but I’m making offers that meet all of our criteria. Practicing patience and making sure our next opportunity hits all of our investing criteria is a must!

I look forward to updating everyone on our progress with this turn around project.

#HelmsREI #RealEstateInvesting

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Real Estate Investing Terms: Cash Flow [example]

Because we focus on buy & hold rental properties in Pensacola, Cash Flow is the most important metric we look at when considering an acquisition.
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Caution: This post goes technical real quick and my geeky side does come out 🙂

Most people, even some experienced Realtors, think cash flow is the gross revenue generated from a rental property. Unfortunately, that is not true.  Cash Flow is similar to Net Operating Income, but also includes some calculations for future expenses. Let me explain…

Cash Flow, as I calculate it, is the Monthly Revenue minus ERMVITC.
Monthly Revenue – ERMVITC = Cash Flow
What is ERMVITC?  Glad you asked.
Expenses (General): these include utilities, garbage, mortgage, property management fees, etc. You should be able to obtain exact #s for these variables.
Repairs & Maintenance: I typically estimate these between 5-10%. The range is based on the amount of repair work done prior to placing a tenant. The work performed up front, the lower the percentage and vice versa.
Vacancy: Also estimated between 5-10% based on the property, current tenant situation, and neighborhood.
Insurance: Insurance carriers always vary, so I encourage you to shop around. While underwriting a potential acquisition I stay conservative an estimate $100-125/unit.
Taxes: usually a known quantity by visiting the Escambia County’s or Santa Rosa County’s Property Appraisers site.
Capital Expenses: I typically estimate these between 5-10% also. The range is based on the amount of repair work done prior to placing a tenant in the property and covers such things as a new roof, bath room remodel, appliances, etc. And just like RM,  the more work performed up front, the lower the percentage I use in my underwriting and vice versa. 

 

Here is a real life example of how I evaluated a Pensacola property for acquisition. This property is fairly old and needs some repairs so I’ll be using 10% for Repairs & Maintenance as well as 10% for Capital Expenses. This property should stay rented fairly easy so I’ll use 7% for vacancy. I’ll also be using 10% for Property Management Fees, the tenant is responsible for all utilities, there is no HOA and I’m purchasing this Pensacola property with cash, so no mortgage payment. Let’s do some math!

Monthly Rent: $750

Expenses: 10% of $750 = $75 (for Property Management)
Repairs & Maintenance: 10% of $750 = $75
Vacancy: 7% of $750 = $52.50
Insurance: $125/month
Taxes: $840/yr or $70/month
Capital:  10% of $750 = $75

Add up all of our estimated expenses:
$75 (E) + $75 (RM) + $52.50 (V) + $125 (I) + $70 (T) + $75 (C) = $472.50

$750 (Monthly Rent) – $472.50 (ERMVITC) = $277.50 (Cash Flow)
 
 

Based on these calculations, this meets one of our investing strategy criteria. Now to further evaluate this property with our other criteria before making an offer.

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Real Estate Investing Terms: Capitalization Rate

Cap Rate…it’s not science rockets!? Wait, did I say that wrong?
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real estate investing pensacola fl

Capitalization Rate (Cap Rate for short) is the measurement used to reveal how well a real estate investment will perform or is performing. I look at 3-5 investments in Pensacola a day and Cap Rate is one of the factors I consider when investing or deciding to hold onto or let a property go. There are many ways to calculate Cap Rate but I do it by dividing the annual net operating income by the original capital costs (or its current market value). I explain why the potential to use different denominators below.

The example we’ll use for this post is a SFR with a purchase price of $50,000 and after all monthly expenses are paid, I expect $350/month in positive net cash flow (or $4,200/yr.), So, the net operating income for this property is $4,200/yr. Cap Rate is calculated as follows:

  • $4,200 / $50,000 = 8.4% Cap Rate
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A couple of resources we use, put Pensacola property appreciation between 1.2-1.8% annually, on average, for the last 30 years. For this calculation we’ll land in the middle using 1.5% appreciation. 

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Using our same example, let’s fast forward 10 years down the road. Now that I’ve owned the property for ten years, I want to see how this piece of property is performing against other properties in my portfolio. To recap, I purchased the property, made some improvements and some natural appreciation has occurred. Forcing appreciation by improving the property has allowed me to increase rents over the last 10 years. By doing so, this property’s annual net operating income is now $6,000 and with 1.5% appreciation for the last 10 years, the property is now worth approx. $58,000. After owning the property for 10 years, my Cap Rate calculates as follows:

  • $6,000 / $58,000 = 10.34% Cap Rate
At the 10 year mark, if I use my original purchase costs to calculate Cap Rate, my cap rate would look like this:
  • $6,000 / $50,000 = 12% Cap Rate (higher, but not an accurate insight on how this asset is performing today)

Cap Rates are used to compare one investment to another. If I’ve owned the Pensacola property for years, I use the present market value as my denominator. If I’m underwriting a property for potential purchase, then my denominator is my expected initial costs.

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