Hedge Fund Sabre Value Fund Investing Directly In Single Family Real Estate

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Dec 10, 2010
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I’ve been familiar with Aaron Edelheit of Sabre Value fund for several years. He is an excellent value investor and I first noticed him through one of his submissions to Joel Greenblatt ’s Value Investors Club. I owe him a debt of gratitude as his writing turned me on to one of my favorite current investments Sprott Resource Corp which also then led to an investment in Stonegate Agricom this summer. I’ve written about those here:



I’ve sold my Stonegate holdings and Sprott has had a bit of a run over the past week (I’m still holding though) so I’m not recommending a purchase at these prices.

I split my personal investing into two buckets. One is equities. The other is real estate. I try and use real estate as an opportunity cost when assessing whether or not I should be buying a given stock. It is very difficult to beat the returns from sensible real estate investing. The pain in the neck factor is higher, but holding real estate (sensibly leveraged and bought at a sensible price) allows for some very sound sleeping.

Consider the following real estate scenario which is based on a real life experience:

Purchase price of property - $525,000 (multi-unit complex)

Annual rent - $48,000

Gross rent yield – 9%

Net After Expenses but Pre-Tax - $37,000

Net yield – 7%

So there is a 7% yield from my purchase price without employing ANY leverage and without factoring in any appreciation in the value of the property. And I should also mention of course that the income is extremely tax efficient given the depreciation allowed on the property.

Double digit returns are actually pretty easy with a little bit of leverage. Double digit returns in the stock market on the other hand are not so easy.

Every time I pull the trigger on a stock purchase I try and ask myself whether buying that stock is a better use of my money than a real estate investment would be. I admit I don’t always manage to make the right decision (which is virtually always to not buy the stock) but it does work a lot of the time.

Given my interest in real estate, I was quite intrigued when I saw that Edelheit was investing through his hedge fund in single family real estate. This follows on the recent Bill Ackman presentation on real estate titled “How to Make a Fortune” which you can read about here:


Edelheit was on CNBC talking about his investments and discussing that he thinks that the best way to stabilize the real estate market is to encourage investments. Currently banks are being very stingy when lending to investors, and who can blame them given the crushing write-offs they have taken as a result of lending to property flippers at the height of the bubble.

But returning to a sensible amount of investment lending at sensible LTVs with the properties being purchases at sensible multiples of rental revenue would certainly increase demand for housing.

Here is the video of Edelheit, I encourage that you add him to your list of value investors to follow:


And here is a written take on the issues that Edelheit raised:


They have surpassed lawyers and repo-men as the most vilified professionals on the planet.

Thanks to the unprecedented real estate crash, "investors" are now the bad guys. During the housing boom, they canoodled with lenders to lever themselves to the hilt, and consequently fueled home prices to levels so unsustainable that the market came crashing down.

Never does the President, the Treasury secretary, or the HUD secretary announce a new element to the Administration's multi-billion dollar housing bailout, without making clear that investors need not apply.

Get over it. That's all I, and plenty of qualified real estate investors, have to say. That was then; this is now, and real estate investors may be our only ticket out of the housing crisis.

"If you want to stabilize the housing market, you have to encourage investors," says hedge fund manager Aaron Edelheit. "The quicker you can end the foreclosures and the short sales, the quicker you're going to have a turnaround in the economy and the housing market."

Edelheit has invested over $10 million in foreclosed homes. He's not looking to flip them for a profit; he's in this for the long-term gain. He doesn't buy up bulk condos, as many institutional investors are now doing, and which he admits is much easier. He buys single family homes with the sole intention of renting them out to families. No, he's not a do-gooder. He's making around an 8 percent profit after expenses.

Think of it this way. At the height of the housing boom, the home ownership rate was at 69 percent. It's now down to 66.9 percent and dropping. Historically it's around 62-64 percent.

"You have five to seven percent of the nation who needs a place to live, and they would prefer single family homes," notes Edelheit.

Today's jobs report proves that this is going to be a slow economic recovery, which means the pool of potential home buyers will remain small for quite some time. We have already seen apartment rents rise on higher demand. This in the face of a serious oversupply of homes for sale and a shadow inventory of, by some estimates, up to 7 million foreclosed properties.

"There aren't the natural buyers to buy these excess homes, but there are the families to live in them, so if you had long term capital to incentivize investors like me, we would go in, buy homes, fix them up and rent them to families," says Edelheit.

But there's the problem.

Gun-shy banks and government-owned Fannie Mae and Freddie Mac are being very stingy with credit to investors, capping them at very few loans. Fannie Mae allows ten loans to each individual investor, but investors tell me it's more like four when you talk to the banks. A Fannie Mae spokesperson adds, "Lenders may have their own overlays or added fees."

They've thrown the baby out with the bathwater. I'm not suggesting we return to the heady days of lending to any Joe with a pen to sign on the dotted line. I am suggesting we stop demonizing investors and instead offer low-cost credit to those with worthy balance sheets who are willing to put significant down payments on the properties. And yes, underwrite them conscientiously. It may be our best exit from a too-slow recovery.

Investors like Edelheit are waiting in the wings. "I think that if the government were to encourage investors, they would swoop in and buy homes, and you'd very quickly not have an excess amount of housing."

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