Scholastic Capital Update #12: Portfolio Update

Hi Friends of Scholastic Capital,

It’s been over three months since our last public update. In that time, we’ve been heads down buying & renting homes.

The headline: Scholastic now has 21 homes and is doing better than forecasted.

We’ll cover a lot of details in today’s update. All of these details and information have already been shared with our investors. 

As always, please feel free to respond to this email with any questions. 

First thing’s First: What homes does Scholastic own?

Scholastic now owns 21 homes. At our last third party valuation update done by our accounting firm, these homes were valued at a total of $11,135,085. 

Location wise, the homes are located in:

• 12 homes in Illinois

• 7 Homes in Wisconsin

• 2 Homes in Indiana

Our typical home is, on average across the portfolio:

• 3.1 bedrooms

• 2.1 bathrooms

• 1,760 square feet

On average, we purchased these homes for $480,548.

We also track appliance-level data on these homes very closely. Across the homes, this is the average age of each major appliance system. Our oldest system is the furnace, and the youngest is the microwave.

• Furnace: 2013

• AC Condenser: 2013

• Fridge: 2018

• Dishwasher: 2021

• Washing Machine: 2019

• Dryer: 2018

• Range: 2018

• Microwave: 2022

• Water Heater: 2015

• Roof: 2016

This data is critical for our financial forecasting. It enables us to forecast how many of each major appliance we need to replace each year, which ensures we have budgeted enough repair capital.

This also enables us to not over-budget for repairs and to instead send our investors their monthly distributions!

Why are things going better than expected?

There are several contributing factors for why things are going better than expected. The four most important are below.

Equity is up 7.3%

Our third party accounting firm runs a NAV (Net Asset Value) update on Scholastic each month. The goal is to provide our investors with real-time transparency of what their investment is worth.

The end result is this: our investor equity is up materially since we started buying homes in April and a $100,000 investment then is now worth $107,300.

This was not expected and not part of our financial return model.

Why equity is up 7.3%

Here’s an example: we bought a home this summer for $460,000. We found out afterwards that the seller had an offer for $490,000 but took ours instead.

Why?

Our offers were repeatedly viewed by sellers as the “safe” offer to take. We had a high down payment, high earnest money, and were perceived as easy to work with. 

Other competing offers were much lower down payment and higher risk on whether or not they would close.

This dynamic repeatedly played out, so we bought a lot of homes below what their true market value is. This is why the accountants believe the true market value of the Scholastic assets is 7.3% higher than it was in April.

Even better, it’s possible this dynamic continues to play out. To our knowledge, we are the only investment firm actively buying in these zip codes. 

If that continues, we could be the only “safe” offer for sellers to take next summer as well. That could lead to another nice equity boost for investors.

Interest rates are down from 6.75% to 6.15%

Our financial model assumed an average interest rate of 6.75% on the 30 year fixed mortgages we utilize. 

That average rate ended up being 6.15%. That is weighted based on the size of each individual mortgage and its respective rate. 

We spent a significant amount of time last year identifying lending partners who believed in the Scholastic thesis and vision. We strongly believe that Scholastic is “high floor” and a lower risk thesis. The lending partners agreed, which contributed to the lower interest rate.

The debt at 6.15% lowers our monthly payment by a few thousand dollars compared to what we thought it would be. That enables us to send more money out to our investors. 

Depreciation is $944,574

We have completed cost segregations on all of our properties and now have a finalized paper loss number of $944,574.

This paper loss number is important, because it passes through to our investors.

The net impact is this: our investors should not pay any taxes on their monthly distributions from Scholastic this year. In fact, depending on their tax situation, Scholastic can help enable them to save taxes on other income they earn.

The lack of taxes is a key incentive for investors and it’s exciting to be able to be able to confirm this with the investors. 

(As always: everyone’s tax situation is different. While the above is standard practice for most real estate funds and applies to most investors, your tax situation is different and speak with your CPA about your situation!)

Tenant profile exceeds expectations ($185,879/year tenant income)

Thus far, our tenants make about $185,000. 

To our knowledge, this is materially higher than other single family funds. That should be expected, because we do charge higher rents than most other single family funds!

However, it’s been encouraging to see this income as it theoretically enables lower risk of non-payment, increases odds tenants will use their own money to take care of the place, and that utilities will be covered.

It’s also encouraging to see further data points that some higher income families do prefer to lease homes. 

How is leasing going?

Leasing is about ~65% of the way done, with a few more homes to rent and two homes finishing renovation.

With that in mind, we look on track to finishing up with leasing in the next few weeks! 

Average rents right now are $3,596/month, which is a bit lower than we expected going into this summer. 

Right now, our leased homes skew towards Wisconsin. Rent prices are slightly lower there than Illinois, so we do expect this average price element to skew up a little bit higher. 

We’ll know a lot more in a month as we wrap up the leasing!

What’s next? 

Once we’re done with lease up, we have a few things to turn to.

First, we’ll be at Reconvene in LA next month! Let us know if you’ll be there, we’d love to say hello!

Next, we’ll take the time to start analyzing all of the data we’ve collected this summer. 

It’s time to look into what went well, what could have gone better, and how we can improve for next summer.

We’ve got a decade to go in Scholastic and we need to use every scrap of data we can to improve operations.

In October, we’ll start sending out monthly distributions to our investors! That’s a big milestone we are extremely excited about. These distributions should then occur every month from here on out.

Finally, we’ll begin preparations for our next round of fundraising. When we raised this past year, Scholastic was hypothetical and forecasted numbers.

We now have actual numbers and more conviction in the thesis than ever. New investors will also be buying into the fund as-is, so they’ll own a piece of the existing 21 homes as well.

There is quite a bit of work to be done to update our model, deck and prepare for this raise. However, we anticipate kicking off fundraising in earnest late this fall and wrapping up next March.

For that reason, we’re excited for this next round of fundraising and welcoming new investors into the Scholastic family.

Always feel free to reach out

We’ve met investors, friends, advisors, and vendors to Scholastic from replies to this newsletter. 

Please know that your input and feedback is always appreciated, and always feel free to reach out with any thoughts or questions or feedback!

All the best