Betting Against the American Dream (in San Francisco)

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My friend Matt Pasienski, a Physics PhD, just announced he’s moving to Mexico and leaving San Francisco behind. Here’s what he wrote:

The American Dream has moved to Mexico. If you work hard in Mexico you can buy a house, have a family, and live a good life. That’s not something I can see happening in San Francisco right now.
Guadalajara is going to be a major world-wide hub for technology within the next 5 years.

As an American, these words break my heart. My father, born in 1929 to a single mom living in a one-room adobe hut in the Southwest, lived the American dream and clawed his way out of poverty into a PhD and professorship at a community college in Los Angeles. This is not supposed to be the story of the United States.

As a Bay Area resident, these words ring true. In any other place, our household income would earn us a place in the upper middle class, but here in the epicenter of the technology revolution, we instead live month-to-month, renting a musty, unadorned house for $3,700/month (a steal in these parts!). Daycare for our son, provided by a local church, costs $1,600/month and only lasts until 3pm, which means if we’re both going to work, we have to hire a nanny for $20–25/hour to fill in for the missing hours (you think a nanny could live on $12/hour in these parts? haha). Total cost of childcare: ~$2,500/month.

For our small family, that’s $6,200/month (i.e. $74,400/year) of post-tax income dedicated to just housing and childcare — before food, before gas, before clothes or toys or coffee.

64% of Americans don’t even earn that much money on a pre-tax basis.

Yet this is where the jobs are. For now.

Then there was this interview with the Mayor of Palo Alto:

We have to do away with this notion that Silicon Valley must capture every job available to it… We’re looking to increase the rate of housing growth, but decrease the rate of job growth.

Yep, the official stance from the Mayor of Palo Alto is that his city wants less jobs.

Ergot, he wants these jobs to go elsewhere. Like Guadalajara.

Or perhaps Seattle.

Austin?

Los Angeles?

Boulder?

As a Bay Area resident, these words make me feel hopeless and powerless. How will we ever afford a home here? It feels so out of reach.

As an entrepreneur however, these words make me think there’s an opportunity to bet against the Bay Area, to profit from the NIMBY catastrophe that is Bay Area housing policy.

Here’s my idea. Let’s call it IMBY Corp:

1) Raise a $50M investment fund from SF techies who are frustrated by Bay Area housing policy.
 Pitch it as a derivative of the broader tech economy, but with a lower risk profile than traditional venture capital or angel investing. After all, the strategy might not work, but unlike startup investing the result is unlikely to be a complete loss of capital.

2) Buy residential real restate in emerging tech hubs like Seattle, Austin, Guadalajara, etc.
 Target purchase price: $600k per property. Focus on the hip, gentrifying neighborhoods that are already attracting tech talent. Think: San Francisco’s Mission district back in 2010.

3) Invest $30k per property in renovations & furniture.
 Make the house nice enough and furnish the properties in order to…

4) Rent the properties out on AirBnB to generate cash flow.
 Back of the envelope: Average rental price of $60/night. Revenue potential per property: $21,900 (reality will be less, see next point…)

5) Use a third-party service provider to handle guest checkins, cleaning etc. for the first two years.
 Assume third-party service delivers 60% property utilization and takes 30% cut of gross revenues, leaving IMBY Corp. with $9,198 per year in net income before taxes. Assume that once the fund switches to first-party service in year 3, property utilization jumps to 70% and overhead drops by to 20% of gross revenues, leaving IMBY Corp with $10,512 per year in net income per property before taxes.

5) Sell the properties for a profit after 5 years at a 50% premium on the purchase price.
 Starting with $50M, you’d be able to buy 76 houses (assuming ~$500k in initial overhead). If each house sells for an average of $900k after 5 years (entry price: $600k), adding in all the associated setup costs ($50k) and AirBnB profit (($9,198 x 2) + ($10,500 x 3) = ~$50k) makes it a wash, the result is a net profit of $300,00 per house with a final total portfolio value of $68,400,000 for an Internal Rate of Return of 7.65% per year over five years, which is better than buying US Treasury bills, but nowhere close to being an LP in a Sequioa fund much less angel investing in the next Uber.

Am I missing something? Would you take this bet? This is an idea I’ve been toying around with over the last few weeks. Perhaps someone else wants to run with this and make it a business?

I’d love to hear from any real estate or finance folks with actual experience investing these types of assets. Are my ballpark assumptions in the ballpark? Please share your thoughts in the comments on tweet me @mattmireles.


Originally published at Matt Mireles.