Quote Originally Posted by Milton Kuo View Post
One thing I've been watching and suspect is that the sweet spot for returns was Eastham Fund III and I suspect returns will be lower for Fund IV and perhaps even lower for Fund V. It seems that there are now many more players doing the Eastham thing: buying lower end apartments that are in need of repair and better management, renovating them, better managing them, and then eventually selling them. That seems to be showing up in the general prices of apartments that Eastham has been buying.

It was very common to see Fund II buying apartment complexes where the per unit costs were $30,000 - $50,000 with the rare purchase of properties that had per unit costs of $82,000 or $99,000 for Class A properties. In funds IV and V, I'm seeing a lot more properties being bought at $60,000 - $70,000 per unit and these are not Class A properties. Many of the apartments Eastham has purchased are in the Houston area, which I am fairly familiar with. In Fund IV, two Class A properties were in Houston and San Antonio with per unit prices of $101,000 and $113,000, respectively. That's actually getting pretty close to the price of a lower end house in the Houston area.

My gut feeling is that a decade of ZIRP and QE have affected prices on Class B and C apartment complexes enough that excellent returns are going to be much harder to make. I think Eastham's ability to use its network to find off-market, distressed sales is going to be the key of whether it can generate returns comparable to its previous funds because the per unit prices of the regular buys has gone up noticeably with each fund.
Interesting observations, thank you.

Fund II launched shortly after the recession ended. Fund II benefitted from a depressed property market and reduced access to credit. In addition to having a large network to find good deals, an outstanding credit rating gave the Eastham Capital team access credit when others were shut out. The result Fund II returns have been nothing short of astonishing, far more than they suggested in their webinars with us.

As the economy recovered, suitable properties purchased for subsequent funds have grown increasingly difficult to find, nonetheless the Eastham team has been able to do so. Relationships, savvy negotiation, and shoe leather are the secret sauce.

All that said, the economy has continuously expanded since Fund II. I expect the thing to watch during the next recession is whether occupancy rates in fact hold up.