2019 NEXTGEN Conference Keynote Address for the Houston Trust Company. Presented by Neal Dikeman, Managing Partner, Old Growth Ventures

1. Keynote Address
Presented at 2019
NEXTGEN Conference for
Rules of Engagement
for Residential Real
Estate Investing
www.oldgrowthventures.com
Neal M. Dikeman

2. Why Do it? - Residential Real Estate Returns
are Similar to Equities with Less Volatility
• “residential real estate and equities have
shown very similar and high real total gains,
on average about 7% per year [c. 11-13%
nominal]”
• “that housing returns are similar to equity
returns, yet considerably less volatile, is
puzzling”
Federal Reserve Bank of SF, Dec 2017

3. What We Do

4. Old Growth Ventures
Our business is simple:
• ​Find
• Buy
• Rehabilitate
• Lease
• Unique focus on historic properties with tax credits
• Experts in sustainable living and historic
rehabilitations
• A single mission: save 1,000 historic homes while
driving profits

5. Historic
Preservation
Fund I, LP
• Specialty Real Estate Tax Advantaged Income
and Growth Fund backed by 7 family offices
• Managed by Old Growth Ventures LLC
• Focused on Adaptive Reuse and SFR Certified
Rehabilitations of Certified Historic Structures
on the National Register of Historic Places

6. 908 Sabine Project
Old Sixth Ward Historic District
1890 Folk Victorian & 1915 Craftsman
• 2020 Good Brick Award Winner
• Texas Historical Commission Certified Historic Rehab 2018

7. Carter-Milroy-Canfield
Houses
• 1922 Craftsman Bungalows in the
Heights
• Historic Project Plan Approved by Texas
Historical Commission 2019
• Preliminary Determination for National
Register Approved by National Park
Service
• National Register Approval exp 2020
• In Rehabilitation: Exp Completion 1Q
2020

8. Victor Street Historic Rehab
Project
Freedmen’s Town Historic District
• Ten 1915-1920 Shotgun Row House Rehab Project
• The last shotgun row in Houston’s original African
American community
• Listed in Houston Architectural Guide
• Exp Completion Date 2Q 2020

9. Investing Rules of
Engagement

10. You Are What You Eat
Successful real
estate investors are
usually focused and
disciplined
Market chasing looks
like it works right up
until the market turns
down or you overpay

11. Rule #1
Buy the smallest
house on the
biggest lot in the
best neighborhood
you can afford
Surrounded by 7 figure owner
occupied homes
Remaining un-updated neighboring
homes currently under expansion
remodel

12. Rule #2
Like Texas Hold’em, the money is
made in what you don’t play, if
you play every hand, you lose

13. Rule #3 New
House Value = 3-
4x the Land Cost
10-30%
development
margin
Heavily
leveraged 75-
90%+
Usually
vertically
integrated
$70-$150/sq ft
in build costs

14. Rule #4 Speed Kills,
but you Live with Your
Purchase Forever
• Good opportunities either sell very
fast or very slow
• Development time is very costly
• You cannot recover from
overpaying
• But if the rental is profitable, you
can hold
3-5%/yr
Minimum
Appreciation
Needed for
Raw Land
1%/Month
Development
Carrying Costs

15. Rule #5 Your Own
Home is Not an
Investment
• is NOT an Investment
Your Own Home
• is NOT an Investment
Your Own Home
• Is NOT an Investment
Your Own Home

16. Tools and Concepts

17. Concepts to Know
• Deferred Maintenance – Amount of investment needed to make up for
prior underinvestment in repairs
• Occupancy rate -% of days/year rented
• NOI – Net Operating Income, Revenues minus operating cost
• Cap Rate – NOI/Purchase Price
• Highest Valued Use – The theoretical use of the land or property that
would yield the highest expected return
• Comps – Similar or comparable properties used to establish value
• DSCR – Cashflow /fixed payments ratio, 1.3x is usually the investor loan
minimum
• ARV – As rehabbed value
• Wholesaling – Purchasing properties for immediate flip to other
investors
• Recourse v Nonrecourse – loans guaranteed personally, vs only secured
by the property

18. Valuation is
Multivariate
Value is function of:
• Rents
• Completed sale price
• Comps
• Location
• Land value
• Size
• Updates
• Design
• Highest valued use
• Market demand

19. Flipping • Goal is to buy cheap, rehab
fast and sell quick
• 10-30% average margin
• Speed kills – slow projects
destroy returns
• Almost all done with lots of
leverage
• 25-35% equity capital
• Margins heavily susceptible
to purchase price and reno
timeline/estimates
• Most flippers vertically
integrate with either
• Real estate brokerage or
• Construction mgmt
Flipping provides a crucial
market service, but … very few
stay in the business long

20. Renting Property is
Not Rocket Science
• Keep it rented at all costs
• Turnaround fast
• Manage costs
• Your customer matters
• Your supply chain matters
• 55-75% cash margin

21. Multifamily v
SFR
Key
Differences
• Economies of scale in
investment, construction, and
management for multi-family
• Apartments rent for less than
houses, and usually higher
turnover – the dreaded
common wall
• Apartments are more
commoditized than houses,
and typically more volatile
• Rent multiple should be lower
• Apartment Cap Rates now down
into the 4%-6%
• Deferred maintenance and
occupancy can dominate returns
• SFRs can see value uplift
from gentrification
• Apartments always sell for >
of land value and cap rate
• SFRs are more fungible than
apartments, but with lower
barriers to entry
• Not all neighborhoods make
good SFR rentals
• Customer segments are
different

22. Neal M. Dikeman
• Managing Partner, Old Growth Ventures, General
Partner of Historic Preservation Fund I
• US Senate Nominee, Libertarian Party 2018
• Venture capitalist and 7x tech startup founder,
multiple exits; CEO, Chairman, CFO, VP, and board of
directors roles in public, private, nonprofit
• Successful private equity and venture capital funds
management experience: Shell, Jane Capital,
Globalgate, D&B LLC (CalPERS)
• Banking and finance roles at multi-nationals Bankers
Trust, Royal Dutch Shell
• BA Texas A&M in History & Economics
Questions?