Scholastic Capital Update #2

Hi There,

Welcome to Scholastic Capital Update #2. It’s been approximately three weeks since our last update, and a lot has happened.

Today, we will have an update on:

• Market Observations

• Fund Terms

• Fundraising

• Next Steps

Market Observations

We’ve built a proprietary software tool that enables us to scrape all new listings on the MLS and then enrich those listings with additional data. Here’s what we see:

As of August 22^nd at 12:14pm:

• There are 3,502 homes on the market right now in our target zip codes

• 638 pass Check #1

• 214 pass Check #2

• 40 pass Check #3

Let’s explain the “checks”:

Check #1 evaluates quantitative factors. A few of those are:

• Does this home have 3+ bedrooms?

• Does this home have 1.5+ baths?

• Does this have 1,100+ square feet?

• Is this home priced below $800,000 (our upper bound per house)?

• + several other factors

If all quantitative factors “pass”, we advance to Check #2. Right now, 18% of homes on the market pass this check.

Check #2 is more qualitative. A few of those are:

• Condition of the house: Do the pictures show a falling down interior, crumbling exterior chimney, or a rain-streaked roof?

• HOA presence: Is there an HOA? Is the HOA hostile to rentals? Can the HOA easily change its bylaws to become hostile to rentals?

7% of homes on the market now currently pass check #2.

Check #2 is extremely important. If it passes Check #2, we would put an offer in on this house if the price is right.

Check #3 does exactly that. It looks at the existing price of the home to calculate profitability.

As of this minute, there are exactly 40 homes available that pass Check #3 – just 1.1% of the total sample.

We believe these homes would be immediately profitable rentals.

Of course, they would have to pass a detailed home inspection first! We will NEVER purchase a property without getting an inspection first. Never.

What does this mean?

A couple take-aways:

First, we think there are roughly 100 homes we could buy today. That includes the 40 homes with the right price now, and ~60 homes that passed Check #2 where we could negotiate the price down.

This 100 homes number is a bit low. We saw closer to 120-150 homes available at any given point this summer.

The current supply is likely lower in our markets for a few reasons:

• School is starting: people who wanted to sell and move before school starts likely did in June/July.

• Interest rates: people with a low fixed interest rate, especially in a great zip code, will only move for mission-critical reasons (e.g., corporate relocation, divorce, etc.)

When these factors are taken together, there’s less incentive for families to move right now.

Best guess: the supply numbers will hover around 75-100 homes available at any given point, then start climbing up again to ~120-150 next April/May as people list ahead of summer.

Second, pricing.

Home prices are falling. For our shortlist ~100 homes, we see an average list price today of $433,482.

Graphically, prices are distributed as shown below. The Y axis here is the number of listings in the price bands on the X axis.

On a surface level, we’ve seen prices fall over the past 3+ months. Price cuts are increasingly common.

That means we see homes that passed Check #2 quickly slip into passing Check #3 as they cut price to a point where it makes sense to purchase.

However, there is a nuance here.

Many of these price cuts are “initially irrational” sellers. It’s mom-and-pop individuals who see what their neighbor sold their home for in 2020. They’re asking for a huge price themselves, and when they don’t get it, they cut their price accordingly.

Best guess: pricing is actually stable in these zip codes. However, irrational sellers forced to cut prices create the perception of lots of price cuts.

Fund Terms

In our last newsletter, we asked for feedback on our marketing deck!

We received an absolute outpouring of fantastic feedback as result. THANK YOU for doing so!

As a direct result of the feedback, we’ve dramatically updated our marketing materials. The new deck is now available HERE.

Our biggest change is in the return profile. We’ve restructured the fund offering to now provide investors with a 14.6% or 15.1% IRR.

The main difference is driven by increasing the preferred return from 6% to 8% and revising the terms for Class A Units and Class B Units.

Class A Units: Investors who join the fund as part of the first $5M or commit more than $500K. These units come with the right to 80% of fund profits. The target IRR for Class A Units is 15.1%.  

Class B Units: Everyone else (later investors and investors committing less than $500k). These units come with the right to 75% of fund profits. The target IRR for Class A Units is 14.6%.

Fundraising

Fundraising is interesting! Most of the past 2-3 weeks has been spent on the phone with investors, emailing investors, and helping investors complete subscription documents.

We’re fortunate to have well passed the 7-figure mark of committed capital – on track for the $10M we aim to raise in Year 1.

A few take-aways have also emerged.

#1: Belief in product

It’s substantially easier to fundraise than it could have been. This is because Sean has followed this exact strategy for years.

Meetings with investors are practical, not theoretical.

When investors ask: “how would you handle XYZ situation?”, Sean can answer with “This is what we did” rather than “This is how we think we would handle it.”

Second, Sean has seen the actual returns himself. For that reason, he has complete confidence in the strategy and it appears investors can pick up on that.

#2: A Tale of Two Pitches

Investors who have school aged kids immediately get the thesis. In calls with them, we practically skip over the thesis and go straight to their investment objectives, numbers, and return.

In calls with investors without school-aged kids, we tend to focus more on the thesis.

Typically our calls focus on one or the other – not both (which was a surprising insight for us).

#3: Quality of People

Everyone we’ve met with thus far has been a fantastic person.

From a personal perspective, it’s meaningful. Putting a face and a name to the people we invest money for is a privilege.

They’re all great people, and if we could help grow their money to pay for their children’s education, their retirement house, or anything they want, it is extremely fulfilling.

We’re happy to report we genuinely like the investors that have committed to the fund so far-and we plan to keep it that way.

Next Steps

As the legal documents, financial model, and marketing deck are now complete, our focus is 100% tied to real estate data collection and fundraising over the next few months. We’re excited to continue meeting with fantastic people excited to invest with us over the long run.

If you’d like to chat about joining Scholastic Capital, please feel free to grab time HERE.

As always, please also feel free to reply back to this email! We get the responses directly.