2nd Generation, and we sold another
Barn 47 sold last week, the day before the Thanksgiving break. It's another one down at the Crest project in North Branch / Fremont NY, just a few miles north of the outpost named Callicoon. Brokered by Erik Freeland, the nearly 3000 sq ft home (because of a finished ground floor) sports 4 bedrooms and 3.5 baths, has views, is partially wooded and partially pasture.
A lot of times I look around and wonder why it looks easier for some people, and feels so hard to me - or used to. It's still a bitch day to day operationally, but the systems and people and relationships are in place to help fix any problem. To some degree, I think it's a pretty simple explanation, and that's the burden of the startup, rather than the 2nd generation - the burden of the startup vs buying or leading a business that has been around a bit.
It's hard to overstate the complexities of a startup, especially one like Catskill Farms that happens from scratch, is basically a new idea - and is hatched where I knew no one, inherited no relationships, found no quarter in growing up with the people now in charge. I really didn't know a whole a lot about real estate, construction or development. So the lift is pretty heavy, just getting things up and running, and maintaining that momentum. Took a decade a half really.
I think about these things as my son grows up - Lucas Petersheim is now 14, and I wonder if he will have interest in this business of mine, and whether I will encourage him or aspire for him any part in Catskill Farms. It's a tough business, so I'm not overly concerned about passing it along - if it ends up winding down as I wind down, that might be fine. I gave birth to it, and oversaw its orderly unwinding. We will see. I like to use his name in the posts cause then when he and his friends google him he shows up through the years in various disguises and destinations.
But that's not my point - my point is if he did want to join and take this cash-flow flush, hardly leveraged, somewhat large company and do what he wants with it, grow it in some new direction, he would have a lot of advantages that would allow him to hit the ground running and accelerate through the curve, unlike me, who as soon as I picked up any speed, there was some new hurdle that needed to be jumped. Not that he - or any 2nd generational owner - wouldn't have issues, he would just have the tools and vehicles to navigate them - unlike me, who first had to figure out wtf was going on, then go find someone - a lawyer, an accountant, engineer, surveyor, project manager, interior designer - to help solve the problem. So all the momentum stops while I would go figure out how to fix a problem I wasn't expected and identified very late, and there was little money to deal with it
It's hard to overstate the value of having relationships in place - for instance, even now, I'm subdividing a piece of land and I don't do that much so I really didn't have an engineer in hand to handle the onerous process of the state and municipality process. So 9 months later, after 2 false starts and a lot of wasted time, I finally have the engineering company in place to help me to the finish line. The next time will be much easier.
Take Donald Trump. He was able to leverage all his father's hard lessons and relationships to go after much bigger fish than his father ever did because he wasn't spending his time in these exercises of learning, relearning, defeats before going for the big game. I literally 'lost' 15 years just putting the systems in place that anyone - my son, a purchaser, my employees - could use and leverage to not only grow the business, but not have to worry about putting the basic guardrails in place to keep the business safe - be that from the vantage of book-keeping, accounting, legal, insurance, benefits, payroll, - you name it.
It's hard to overestimate the value of go-to relationships in each of my fields of risk - at this point, I got a problem, I know who to call, and I have the funds to solve it. Back in the day, it was like ground hog day, each waking up to a new set of problems that looked a lot like the old set of problems that threatened the viability of my business without any real clue how to rectify it, so a lot of time was spent each week figuring stuff out that anyone running this business would benefit from.
A great example, and I use this example because I love watching his business kick ass and he's a good friend of mine, is what Eric Goldstein and his wife (and team) are building with 5G Insurance. He certainly is doing an impressive job with his 5 year old business, expanding across the country with his agency's work, and that growth is impressive - and it's a great example of what I'm talking about - he had a ton of experience, know-who-to-turn-to relationships, how to solve this and that problem since he worked at his family's firm for a long time and was bred into the business - this advantage allowed him to accelerate and lean right into the opportunities he saw, the opportunities he saw that motivated his jump into his own business, and is actually a safe guard insurance policy in many ways. When you are stuck on a problem - doesn't matter what the problem is - you aren't growing your business, and if you aren't growing your business, you are a sitting duck for hunters, be it competition, cash flow or the myriad of other problems. Business building is still hard, regardless of where you start or join, but if you aren't spending a lot of time solving remedial problems because you lack the basic knowledge of how to achieve what you've dreamt up, if you aren't spinning your wheels, you can just make a lot more progress more quickly. Truth of the matter is that Eric's knowledge of his business, even if his business is new, was a much safer bet than Catskill Farms when we were starting out, since he just knows more about what he is selling.
We have a small theater in Milford that shows classic movies on Sundays that are introduced by a film expert who gives all sorts of context and other related information about the film, the era, etc... Last week was Casablanca.
Air BnB, and Interesting Times
After nearly 3 hours up Wittenburg Mountain outside of Phoenicia for one of the best views around, this is what we ran into - a view into endless nothingness instead of across the Ashokan Reservoir and multiple peaks. I'm sure someone could wax poetic about the symbolism - a 'it's the journey not the destination' type of thing - but it ain't me babe. Not tonight, election night 2022. Especially here in Pennsylvania which somehow became the new Florida in terms of close races and pundit attention. I don't remember it being that way when I was growing up and all the Republican candidates would come to Lancaster as a showcase of American self-determination stemming from hard work, god-fearing and general neighborly industriousness.
Interesting article I read in Time Magazine about the glut in Airbnb's, many of the thoughts mirror/mirrored my own. Glut in Airbnb's brought on by all the purchases of 2nd homes and recreation homes over the pandemic years and the desire of those people to monetize their investment while not using it. I hear it all the time, this desire to 'rent' the home - I'm not a big fan of it for several reasons. 1, who wants someone in their home, 2, it's not easy to make money, 3, if its a home you use too I don't think you get to depreciate it, which is a big deal for the ultimate profit and loss of the venture, 4, the standards and expectations of the guests has increased to hotel level the last couple of years, 5, at least in the Catskills, it's hard to find services for the timely turnovers needed between guests.
I'm sure I'm missing some, but in the end, it's just not an easy gig. I guess if you are looking to pay your taxes (though that's a pretty tall task in NY), maybe it makes sense, but to turn a true profit of any interesting level, not an easy task at all.
I guess if you want to live/use the home sometimes, it might make some sense, but if it's solely an investment vehicle, I like longer term. You get to know and serve your tenants, you are currently helping with a large need in housing, the wear and tear is less, and the administrative work is less. I think I have 5 or 6 now, rental homes. 4 in Phoenixville, 1 in New Paltz, 1 in Rhinebeck. Thankfully they aren't fully leverage with variable interest rates right now, right?!
For years I was shocked at how hard it was to make money in the rental home game. Taxes, fees, vacancies, loan interest, repairs, upkeep. But my accountant told me most of the big boys aren't looking for profit - cash flow, long term appreciation, depreciation tax benefits, an easy vehicle to allocate other expenses. That was eye opening, to learn I wasn't doing anything wrong. And eye opening in how it's a pretty tough gig no matter how you slice it. You make money on volume of houses for rent, but with each house comes risk in terms of cash flow, and if a slew of bad luck runs your way, you can really find yourself in a pickle pretty quick, especially if debt is involved.
Too Many Rich People bought Airbnbs...
The Ground is shifting under our feet
It's an interesting time to be a veteran of Hudson Valley real estate and building, since the ground and terrain is shifting as I wake and write. I peruse the real estate listings that 'expire' each day, meaning a sale hasn't been completed by the time the contract ends with the realtor, and maybe more importantly, that the seller hasn't relisted or renewed the listing, typically marking some sort of pause and difficult soul searching from the seller as they contemplate the next move as interest and taxes accrue, and maybe worse, cash flow tied up so nothing more can be done on the next project, which means a loss of momentum, a scattering of relationships, and just a more difficult path forward for the next project. I know from experience how painful that can be and see quite a few new $1m+ houses languishing - because if the homes are finished, even if you get a deal going it's 3 or 4 months before the sale closes.
I like my vantage - we have a half dozen homes under contract which is great, but we also have a fully completed home for sale which is always something I want (as a sort of model home) until I actually have it, because even if you don't have a lot of debt borrowed against it, it still dings your confidence, even if that ding is unwarranted or premature. It's just the price of being careful - someone who doesn't feel it either is using someone else's money or is unrealistically too sure of themselves. Even though we have a pretty big ship at this point, I can still rev or brake the engine based on my observations and instincts and intuition. The data and interpretations of that data are flooding in daily. Average sales prices, days on markets, price decreases, etc... "Sold" updates don't tell you much right now since anything selling today was put into contract 3 or 4 months ago, a lifetime ago in this environment.
I think a lot of the realtors who have entered the game in the last few years might be a bit surprised at how gnarly the Catskill's real estate market can be - stingy, slow, temperamental and petulant. The days of slapping a price on it and fielding multiple offers is probably over for now, and those realtors who developed a reputation for the Midas Touch might be revealed to rather be well-timed surfers in a wave that floated a lot of boats. I get the feeling that those who will best weather what is brewing is those who took some winnings off the table rather than ramping up lifestyles to match temporary incomes. While I believe the long term trend of the Hudson Valley is strong as long as hybrid work remains a thing- which I am confident it will - doesn't mean the gravy days might entail a less nutrient and filling gravy.
My QB son broke his elbow which inserted us into the medical arena, where I don't go too often, being fortunate to be healthy and having the good fortune of having relations and family who haven't suffered from unexpected accidents or illness. My mind always wonders what people do who don't have the resources - be financial, time or referrals. I guess just go into debt, or get shitty care - turning bad luck happenstance into a permanent setback.
I had a lot of plans today, but woke up tired of being busy and cancelled them. I spend too much time in my car, so decided to spend the day at home watching Penn State duel Ohio State, type out this blog, read a good newspaper cover to cover and ponder our next moves as a business, where chaos and distress just might be our friends.
Real estate world is changing, New deals recorded.
I drink up a lot of newspapers and magazines and digital information, and lately it's a lot about housing- lots of perspective and lots of opinions. What is true is that the rise of interest rates will no doubt make a big dent in demand, and the higher you go up the price ladder, the bigger that demand drop might be.
Take a $450,000 loan, which would be a $550k purchase with a traditional 20% down and 80% borrowed. At 3%, that is $1900, or 8% that is $3300. And in the upstate real estate environment, those new $500k-$800k purchase benchmarks (that existed very infrequently pre-pandemic), if that price point market gets soft, then a lot of people are in for a lot of trouble.
There are all sorts of warning signals flashing - one I've notice recently are huge price drops in some homes that were priced wrong to begin with (some so wrong I can't help but think the sellers/developers/builder violated the golden rule of respecting your buyers' intelligence), and the big move towards 'open houses'. No one does open houses up here, and the idea that you have to staff and entertain an open house rather than spending your day fielding 8 offers must be a real drag to the realtors that thought this was an easy game, lulled into misperception by the ease of the pandemic fulled upstate sales seen. Welcome to the big leagues, where sailing is not always smooth.
Of course, another way to look at it, is an additional payment of $1400 a month is really not a lot of money for a lot of our buyers, and is not the final detail of a decision. Value is, and if you can articulate it and demonstrate it, then you still have a client base. If you've been swimming without shorts, and the only way you can make money was at pandemic level sales prices and volume, well, good luck to you.
One of the single biggest factors for us heading into this uncertainty is the certainty we have of free cash flow, low debt load, and at least 6 sales lined up for 2023 already. The trick for us will be not get in impatient and start buying other people's distressed assets too soon. I hate to be stingy and not be paying any interest payments to our good friends at Jeff Bank, but hey, business is business. At 7%, at our debt levels last year at this time, we literally would be paying $20k-$30k a month, which gets painful very quickly.
That's been the story of the last 2+ years. One thing after another. Lockdowns, lumber shortages, labor shortages, lumber price jumps, interest rate jumps, - you name it, we've seen it. Keeps life interesting for sure. Would hate to the guy with a lot of real estate debt right now -
Couple of houses we just put into contract -
Upper Big Sky in North Branch, at our Crest project. I believe nearly 10 acres of gigantic pasture and views.
Ranch 55 in Cochecton on 18 acres.
Ranch 56 in Narrowsburg on 10 acres. No pics yet.
To me, and what I know of the marketplace - these are homes and lands that are value-oriented, and unique. The idea we've never lost sight of the fundamentals - privacy, good taste, reasonable pricing, personalization - these are mantras and chants that have served us well. I literally don't think we had one client who regretted buying with us at the last downturn in 2008-2010. Life goes on.
