February 2024 – Page 5

Swidget

by Carole VanSickle Ellis
Comment Off
1,214 views

So Much More Than Meets the Eye By Carole VanSickle Ellis It all started when Lowell Misener fell down the stairs and found himself lying on the floor, looking at an electrical outlet that was not doing one thing to help him. Misener, who is co-founder of smart-device maker Swidget along with Swidget president and COO Chris Adamson, got up and got to work, ultimately creating the Swidget outlet and Swidget switch, part of a network of future-proof, modular, smart devices designed to do everything from enhancing homeowner health and wellness to conserving energy and preventing costly power drains on rental homes. “We started out just thinking about how to create an outlet that would provide emergency light during a power outage,” Adamson recalled. “What started as a very humble emergency light has evolved into so much more.” Soon, the two were adding elements to their smart, battery-less nightlight-outlets like USB chargers and eventually air quality sensors, motion detectors, and humidity monitors. By 2018, they were winning awards at tech trade shows like CES and being described as “pretty darn awesome” by industry analysts, and by 2019, the company had been recognized as one of the CES “Techlicious Top Picks” for the year. Homeowners, real estate investors, and soon, real estate developers, were all installing Swidget technology in their properties in order to safeguard assets and optimize prevention and performance. Swidget outlets and switches are wired into homes just like any other traditional wiring device. Their smart “Inserts” draw power from the wiring device, making them wireless and battery-less. Their modular format makes them hassle-free and simple to install for anyone seeking a hardware solution or a data aggregator and contextualization tool. “The easiest way to think about Swidget is that we provide actionable insights through data created by these ubiquitous devices in the home,” Adamson said. He continued, “The hardware enables users to make smart decisions for the betterment of their lives about what is going on in the space in which they live and work.” For a property owner who wishes to make it so, Swidget data can be almost entirely comprehensive, running the gamut from when lights are turned on and off to managing air quality and providing security monitoring when the owner is absent. Swidget has recently also evolved into the aging-in-place space, providing monitoring and reporting options for caregivers that can promptly enact alerts and even life-saving contact and safety measures in the event that a senior resident fails to go about their daily routine or forgets to turn off an appliance like the stove. “We are so much more than meets the eye,” Adamson said. “The breadth of what we can cover is very, very wide.” Providing the Means to Fully Informed Decisions Swidget devices started out as highly practical, easy-to-install tools for improving life in any residence, but it was only a matter of time before the data element of the devices emerged as a powerful asset. The amount of data available from the Swidget devices and sensors soon proved valuable in many market verticals. Optimizing this element of the network for verticals like SFR vacant property protection, for example, is a primary function for Cameron Wilson, CEO of Swidget and early angel investor for the group. “I was in the audience during one of the founders’ first pitches to an Angel Investment Group,” Wilson said. “I have a background in the electrical, electrical distribution, connected home, and audio spaces. I thought the Swidget concept was one of the best I had ever seen.” After getting to know Misener and Adamson and investing in the company, Wilson came on as the company CEO in early 2019. “I am responsible for guiding and financing the strategic direction of the company,” Wilson explained. “We are trying to solve some pretty big problems that investors and property owners face using the hardware and the data from that hardware to help make informed decisions.” Not surprisingly, real estate investors were early adopters of Swidget technology, with landlords and fix-and-flip investors quickly realizing the implications of a device that could not only prevent home disasters like fire, mold, and flooding but that could, in Wilson’s words, “report the occurrence of motion in a vacant home, when there should be no motion.” He added, “This usage was a big surprise to us at first because we had not been involved in the property rental market initially. However, it quickly became a top priority to help rental and real estate companies monitor and indicate the status of what each property currently is compared to what it should be, and provide alerts when there are anomalies.” During the lockdowns associated with the COVID-19 pandemic, many property owners adopted self-guided tours in lieu of in-person showings, and this has led to a much higher incidence of rental fraud, squatting and theft in vacant SFR homes. “Through the use of motion sensors and video cameras, we are able to monitor and even collect footage when there is an anomaly and notify the right people to address the issue,” Adamson chimed in. “That is a solution we built out specifically to address the needs of vacant-property owners and it has become part of the overall application of our technologies throughout the life cycle of a property.” Seamless Implementation & Seeking Solutions From the time Misener hit the landing at the bottom of his stairs and glanced over to see the entirely dark outlet that could not support a nightlight thanks to a regional blackout, Swidget’s founders and team members have prioritized seeking solutions to practical issues that may be implemented seamlessly into a resident’s or investor’s life and business. For this reason, many of Swidget’s technology packages are designed with new construction in mind. “We want to offer builders the option to install flexible systems that do not mandate future buyers arrange their lives around their proptech,” said Adamson. “Builders want to offer customers flexibility and custom options for energy savings, smart-home technology,

Indianapolis, Indiana

by Carole VanSickle Ellis
Comment Off
349 views

The “Crossroads of America” Gears Up for a Busy 2024 By Carole VanSickle Ellis In January 2023, Zillow analysts released their much-anticipated “hottest housing markets” list. Not surprisingly, last year’s list was dominated by the south and southeast; only two midwestern cities even made the list. This year, however, Indiana’s “Crossroads of America,” Indianapolis, catapulted to number four on the list, leaping over all of last year’s frontrunners to snag the spot. Zillow analysts placed only three markets ahead of Indy: Buffalo, New York; Cincinnati, Ohio; and Columbus, Ohio. “2024’s hottest markets all boast solid economic fundamentals, relatively fast-moving for-sale housing inventory, plentiful likely buyers, and expectations for stable home values,” observed Zillow economic analyst Anushna Prakash. She added, “[The top 5] should stand out as strong in a housing market still buffeted by low inventory and relatively high mortgage rates and prices.” The real estate data giant bases its rankings on analysis of forecast home value growth, recent housing market velocity, and projected changes in the labor market, home construction activity, and number of households, Prakash noted. For investors already active in Indianapolis and the surrounding area, the news that the market is heating up is nothing new. However, investors like Dustin Malloy, CEO and founder of Cash4Homes and an active wholesaler in the area, are thrilled by the activity and insist that rising demand in the area is affecting their businesses positively despite relatively low inventory. “There is always someone in a situation you can help sellers out of while making great income on the transaction,” Malloy explained, adding, “There are lots of buyers, and many will buyyour deals with only one call.” Malloy, who is active throughout central Indiana, noted there is a substantial demand not only for larger three- or four-bedroom properties, but also smaller two-bedroom units to serve as rentals in the area. Many developers have reported seeing falling demand for smaller single-family rental (SFR) properties elsewhere in the United States, which makes the steady demand in Indianapolis intriguing and somewhat unusual. Bruce McNeilage, co-founder and CEO of Kinloch Partners, a real estate investment company specializing in SFR development and management in the southeast, noted, “We have been following growth patterns outside the urban core [in southeastern markets] because the value is better for us and our residents and fits their lifestyle.” While this trending demand for larger properties may emerge in the Midwest a year or more down the road, demand for all sizes of rental stock has skyrocketed so dramatically in the past 12 months that competition in Indianapolis has nearly doubled for each rental unit. According to the U.S. Census Bureau, nearly two-thirds of Gen Z renters in the Indianapolis area are spending one-third or more of their annual income on rent. While rents in many major metro areas around the country have eased off or even fallen in recent months, the Harvard Joint Center for Housing Studies reported midyear 2023 that Indianapolis had posted 7.7% rent growth year-over-year. However, the center predicted rents in still-warm markets would “likely also slow in the future… [based on] softening of other rent indicators.” Until this happens, Indianapolis renters may find smaller, older properties more affordable and attractive. So far, however, all systems (and rental investments) appear to be “go” in the Indianapolis area. “We consider Indianapolis to be an excellent destination for cash-flow rental properties,” said Marco Santarelli, founder and CEO of Norada Real Estate Investments. “Indianapolis has a record of being one of the best long-term real estate investments in the U.S. over the past 10 years.” A Growing Economy Going Full Speed Ahead As the home of the famous Indianapolis 500, Indianapolis gets its fair share of speedway jokes and “full speed ahead” references. The Indianapolis Motor Speedway, itself, is an incredible economic engine for the area, generating $1 billion in annual economic activity as a result of events and operations at the venue itself. “Of this total, more than half — $566.4 million — is attributed to the Month of May and the world-famous Indianapolis 500 Mile Race,” observed Forbes contributor Bruce Martin in October 2023. Martin was reporting results from a newly published study by the Indiana University Public Policy Institute that focused on breaking down economic activity related to the speedway. In the report, the researchers credited the speedway alone with 8,440 “direct and indirect full-time equivalent jobs, totaling and estimated $360 million in labor income.” Investors should note short-term rental activity in the area spikes during speedway events, with Airbnb reporting hosts in the Indianapolis area collectively made more than $1 million in the two weeks leading up to the race in 2021. A “typical host” earns more than $1,000 over the race weekend, Airbnb representatives said. The speedway is only one facet of Indianapolis’s accelerating economic momentum, however. Statewide, the Indiana Economic Development Corporation (IEDC) is leveraging a variety of investor- and business-friendly programs to incentivize economic growth in the area. In Lebanon, Indiana, a suburb of Indianapolis roughly 20 minutes from the city center, Eli Lilly and Company recently broke ground on a $3.7 billion investment that will ultimately bring in a projected 700 direct jobs. The manufacturing operations center is part of the LEAP Research and Innovation District in Lebanon. The district consists of 9,000 specially designated acres on the Indiana I-65 Hard Tech Corridor and boasts, according to the IEDC, “an experienced workforce of 1 million+ within a radius of 60 minutes.” The Indianapolis Chamber of Commerce notes there are many local and municipal programs designed to keep the Indy economy growing, also. In a recently published report on the topic, the chamber reported average hourly wages of $44/hour, $134.7 million in active tax abatement projects, and a “land strategy” incorporating public land, Opportunity Zones, and remediated properties in order to “catalyze investments” from developers and target businesses. The program is part of an evolving initiative that has already created a highly attractive industry ecosystem in the area with the top six industries

Facing Interest Rate Risk with Confidence

by Michael Riddle, Geoffrey Sharp
Comment Off
1,019 views

Leverage Financial Risk Management Tools to Tame Interest Rate Risk By Michael Riddle & Geoffrey Sharp Making money in private lending requires navigating a minefield of risks every day. From mitigating legal risk with tight procedures or credit risk with careful underwriting, lenders must constantly be vigilant to identify and neutralize threats to their business. Perhaps no major risk they face is more overlooked than the interest rate risk assumed when locking a loan. The biggest impacts of interest rate risk are hard to miss. Many real estate lenders did not weather the storms caused by the historically-fast increase in rates from 2022 to 2023. With the benefit of hindsight, we can grasp how significantly rates contributed to the reduction in resale value of loans and reduced demand for home purchases and refinancings. Even though the seismic impacts appear to have subsided, and we seem unlikely to face another 5% rise in rates in a two-year period, we still find ourselves with an inverted yield curve. Lenders who spent years profiting from the “carry trade” of borrowing at low, stable, variable, short-term rates and investing at higher, longer-term rates (especially fixed) find that this math does not work. Those who were fortunate enough to survive the transition to higher interest rates recognize that the gap between the interest rate terms of their funding and investments represents interest rate risk. Lenders respond to rate risk in three ways, and these responses can mean the difference between profit and loss. Eris SOFR Swap futures provide lenders one of the best tools to respond confidently. Response 1 Ignore the risk because “everyone knows rates are going down” With recent inflation data trending down and the Federal Reserve forecasting multiple rate cuts in 2024, it is tempting to assume the storm of rising rates has subsided and lenders can return to business as usual. But as any long-time lender can attest, the road is littered with the bodies of those who tried to predict the direction and pace of interest rate moves. Among the primary drivers of interest rate increases are events that cause chaos and uncertainty, such as wars, terrorist attacks, pandemics and large-scale supply-chain disruptions. Unfortunately, these types of events seem to have increased in occurrence and likelihood in recent years. Assuming rates will go down in the coming years and failing to prepare your business for other possibilities amounts to betting against uncertainty and chaos. Is that wise? Some market watchers may observe that term rates are currently 100-200 basis points lower than daily Secured Overnight Financing Rate (SOFR, the replacement to LIBOR and index underlying most hedging activity) and conclude that “market consensus” or the “wisdom of crowds” points to lower rates. But basing business decisions on forward rates remains inherently speculative, and markets often fail to predict their own futures well. Today’s term rates may represent the most likely path of rates, but without putting in place financial hedges, one cannot assure that outcome. Even if current market rates are broadly correct and rates end up lower in a year than they are now, who can predict the path they will take to get there? SOFR may end up 100-200 basis points lower overall, but the path may involve weeks or months of increasing rates. A rise of perhaps 10 basis points over a month would seem insignificant over the course of a year, but its impact on a portfolio of loans that have been locked and are awaiting sale or securitization during that period can be significant. The reality is that predicting interest rates over any appreciable breadth of time is impossible. Private lenders specialize in sourcing funds and deploying them to promising projects, not predicting the direction and pace of macroeconomic factors. It requires humility to recognize that one possesses neither the time nor the expertise to forecast the future, and the frequency with which even so-called economic “experts” miss their predictions should remind us that lenders are at their best when they focus on lending. Response 2 Constrain lending practices to limit exposure Perhaps the most common private lender response to interest rate risk is to modify lending behavior to decrease exposure to rates at the expense of competitiveness and commercial upside. First, a lender who funds at SOFR plus a spread can mitigate risk by lending exclusively on variable rate terms, such as SOFR plus a higher spread. While this is an effective way to avoid spread compression from rising rates, the increasingly-competitive market for deploying funds limits the number of qualified borrowers willing to accept these terms. Lenders are faced with the choice to do fewer deals, loosen their lending standards, or lend at fixed rates and assume the rate risk. Second, lenders often seek to re-sell their loans as quickly as possible, treating them as “hot potatoes” to be moved at any price in case the market turns quickly. But this approach potentially limits their upside, as they sacrifice the premium available for amassing larger packages of loans for resale or securitization. Third, many lenders configure their fixed rate loan terms to use rate levels that build in some insurance in the event rates increase. While this approach contains elements of prudent risk management, the challenge is to pick the right rate for every single loan. Picking the wrong rate not only runs the risk of loss from incorrect forecasting (rate rises exceed the buffer levels), it also decreases the competitiveness of the lender’s loan offering. Lenders who build in “extra juice” in the fixed rate as a profit buffer risk pricing themselves out of the market compared both to firms who are more aggressive in taking rate risk, and to those who manage risk through well-calibrated financial hedges like those described below. Response 3 Market-based loan pricing and simple, cost-effective hedges Fortunately, financial markets provide lenders the tools to observe dynamically the markets’ consensus for SOFR’s path over time, and to lock in rates and preserve lending spreads on the day

The Hidden Link Between Fraud and Technology

by Alexander Fahsel
Comment Off
362 views

Recognizing and Mitigating Risks is Paramount in Safeguarding Investments By Alexander Fahsel In the rapidly evolving landscape of real estate, the digital transformation has ushered in a new era of convenience and efficiency. From virtual tours to blockchain-based transactions, technology has revamped the way we buy, sell, and perceive property. However, this shift is not without its pitfalls. As we delve into the intricacies of the real estate market’s digital metamorphosis, a concerning trend emerges — the rise of technology-fueled fraud. This alarming development signifies a dual-edge of technological advancement, where the benefits of digital efficiency are counterbalanced by the escalating risks of sophisticated frauds. According to the FBI, Boston Division, “Nationwide, in 2021, 11,578 people reported losing $350,328,166 due to rental scams which is a 64% increase from the previous year. The actual losses are most likely much higher because many people are hesitant to report they were scammed.” In this exploration, we aim to uncover the hidden link between these technological innovations and the surge in deceptive practices plaguing the digital real estate market. Understanding this connection is not just an academic exercise; it is a crucial endeavor for every stakeholder in the real estate arena. From individual buyers and sellers to industry giants, recognizing and mitigating these risks is paramount in safeguarding investments and maintaining the integrity of this rapidly digitizing market. The Digital Transformation of Real Estate The real estate sector, long known for its reliance on traditional and in-person transactions, is undergoing a seismic digital transformation. This shift, while streamlining processes and broadening market access, has inadvertently opened the floodgates to a new breed of cybercrime. Recent case studies, like the surge in apartment application fraud fueled by social media platforms such as TikTok, Instagram, and Facebook, underscore this alarming trend. As highlighted in a Bisnow article written by Jarred Schenke, these platforms have become hotbeds for fraudsters, where stolen identities and fabricated credentials are traded like commodities, leading to significant financial losses and legal complexities in the rental market. This transition into a digital arena has diversified the types of fraud encountered. From identity theft, where personal information is hijacked for unlawful gains, to fake listings that lure unsuspecting victims into fraudulent transactions, while costing operators and investors hundreds of thousands due to illegal occupants, the spectrum of cybercrime in real estate is both vast and complex. Each type presents unique psychological and technical challenges. Fraudsters are adept at exploiting the inherent trust people place in digital processes and the vulnerabilities of online platforms. Understanding these crimes goes beyond recognizing their modus operandi; it requires an in-depth analysis of the psychological manipulation techniques used and the technical loopholes exploited. This approach is crucial in assessing the full impact of real estate cybercrime, which extends beyond financial losses. It erodes trust in digital platforms, hampers the growth of online real estate marketplaces, and necessitates a reevaluation of digital security measures. The real estate industry, at this digital crossroads, faces a pressing need to fortify its cyber defenses, ensuring a safe transition into its digital future. The Role of Technology in Facilitating Fraud In the realm of real estate, technology’s rapid evolution has undeniably streamlined numerous processes, yet it has also inadvertently paved the way for sophisticated forms of fraud. This paradox becomes especially apparent when examining how certain technological features, specifically automation and anonymity, have become double-edged swords. Automation, designed to expedite transactions and reduce manual errors, has been manipulated by fraudsters to generate fake listings and documents at an alarming rate. The ease and speed with which these fraudulent materials can be produced pose a significant challenge to detection and prevention efforts. Furthermore, the veil of anonymity that digital platforms often provide has been a boon for scammers. They exploit this feature to create false identities or to impersonate real estate professionals, thus deceiving unsuspecting buyers and sellers. This anonymity not only makes it difficult to trace and prosecute these fraudsters but also erodes trust in the digital real estate ecosystem. When we turn our focus to the cybersecurity aspect of these platforms, the picture remains concerning. Despite advancements in technology, many digital real estate platforms still exhibit glaring vulnerabilities. These range from inadequate verification processes and weak encryption standards to loopholes in data storage and transfer protocols. Such weaknesses are easily exploited by cybercriminals to gain unauthorized access to sensitive personal and financial information. The current state of cybersecurity in real estate reflects a sector struggling to keep pace with its own digital transformation. As the industry continues to embrace technology, the need for robust, adaptable cybersecurity measures becomes increasingly critical. This includes not just technological solutions, but also comprehensive education and awareness programs for all stakeholders in the real estate transaction process. Bridging these gaps is essential to safeguard the integrity of digital real estate transactions and to ensure that the benefits of technology do not continue to be undermined by its vulnerabilities. Combating Cybercrime: Technological Solutions and Best Practices In the digital real estate arena, the fight against cybercrime is increasingly being spearheaded by advanced technologies like Artificial Intelligence (AI) and Machine Learning (ML). These sophisticated tools are a game-changer in detecting and preventing fraud. AI and ML algorithms excel in uncovering subtle patterns and irregularities that humans might overlook, making them indispensable in identifying fraud risks. By meticulously analyzing vast datasets — encompassing transaction records, communication logs, and behavioral patterns— these systems can pinpoint unusual activities that signal potential fraud. For example, ML models can detect anomalies in listing data or spot unusual patterns in online real estate interactions, offering early warnings of possible scams. This technological intervention is crucial in outsmarting the sophisticated tactics employed by modern cybercriminals. However, technology alone is not a panacea. It is equally crucial for consumers and professionals to stay vigilant. Simple yet effective measures can significantly mitigate risks. For instance, verifying the legitimacy of online listings, double-checking email addresses for subtle anomalies, and being wary of deals that seem too good to

Imagine This on the Horizon…

by Suzanne Andresen
Comment Off
258 views

Thinking Outside the Box to Solve the Housing Shortage By Suzanne Andresen We have recently seen some concerning legislative attempts to continue the demonizing of real estate investors who are allegedly gobbling up all the assets in front of homeowners. Let’s look a little deeper into this and really contemplate the “evil landlords.” We can start with a quote from David Howard, CEO of the National Rental Home Council. Howard is regularly in DC lobbying for the rental real estate industry. He recently shared the bill “End Hedge Fund Control of American Homes Act” proposed by Senator Jeff Merkley (D-OR) and Representative Adam Smith (D-WA). This is a bill targeting the legitimate development, investment, and ownership activities of America’s leading providers and builders of professionally managed single-family rental homes and communities. Those evil landlords. What we fail to take into consideration is the intent of the rental tenant’s perspective. My niece who is 26, has no intention of purchasing a home and just entered into her fourth lease, after several moves back home for extended time frames. It had nothing to do with the cost of rent, as my brother was paying her rent for a one-bedroom apartment in midtown Manhattan. She simply moved out mid-lease and back home to live with her mom. My brother continued to pay the rent, and actually could have sublet the unit for years. I negotiated the lease for him the October following the COVID outbreak. As I watched the vacancy rate rise as it showed the units available on their floor plan website, I kept calling back and asking when they wanted to accept my offer? They eventually did, and we had a smoking good deal with sublet rights. At today’s market rate and with the rental control components to NYC housing, he would have cleared $1,000+ per month. That said, there is clearly a housing shortage, and we need to collaboratively try to figure out how to fix some of the most important issues. There is some truth in prominent cities having an increased focus for some of the REITs investment strategies. But there is also a similar, less interesting element to the less popular cities. There are actual zombie housing markets, but some of this goes a bit deeper than just the image of the house or location. We all know the challenges home buyers face as they diligently put money aside in savings for their down payment and closing costs. Now let’s look at the REO and zombie assets these first-time homebuyers feel they can afford. The most likely financing will be a 203K loan product or something similar. This is a significant challenge for a first-time home buyer to attempt. We have seen a shortage of materials all over the country, with costs increasing every month. Now imagine the miscalculations of the new homebuyers as they run out of money and are only 92% complete, with no additional funding available. They face default and the loss of their American Dream along with the years of diligent savings. Heartbreaking, and not the cause of any real estate investor. There are additional shortcomings along the way. Let’s take a step back and look at the now-vacant house. If it is not located in an up-and-coming market, it may go into foreclosure or even a tax sale. Foreclosures are great opportunities for the next buyer if there is one. When there is not — the town gets it back. They have the right to have a tax sale but may keep the asset on their books for years. My town has several. Some are land only and one is actually 27 acres on the water. As an elected official, I think there is opportunity on the horizon. At the same time, the allocated taxes for the properties have not been paid for years, essentially diminishing the services the town can offer. I have a solution. Ever hear of a 529? It is a tax-advantaged savings plan to encourage savings for future education costs, paid to qualified tuition plans. This is authorized through Section 529 of the Internal Revenue Code. It is sponsored by a state, state agencies or educational institutions and administered through an approved financial institution. Let’s call this a 529-C, for college education. Now let’s create a 529-R for rental conversions to homeownership. Each month a tenant can contribute up to 4% or whatever the tax law allows, which can be matched by the landlord — all tax free. Similar to the 529-C, the account follows the tenant from state to state, and years of contributions are accrued. Let’s go back to a tenant, not yet ready to buy a home. Like my niece, she could have been depositing and receiving matched funds into her 529-R account for years. What a terrific solution, fostering home ownership, when the buyer is ready. The person who opens the 529-R plan account is called the account holder or the saver. The person the account is opened for is called the beneficiary or the tenant. The account holder and the beneficiary can be the same person. Next issue— solved. What happens if the tenant never buys a home? As of 2024, the following rules apply to 529 plan rollovers to Roth IRAs: The 529 plan must be under the beneficiary’s name for a minimum of 15 years. Yearly conversions cannot exceed annual Roth IRA contribution limits. The lifetime 529 to Roth IRA rollover limit is $35,000. We could replicate this to the 529-R. Now we have created a conversion strategy for a lifelong tenant, who can either purchase a house or contribute to their IRA — or both, if they have saved enough through the years. Now the tenant and landlord are partners in homeownership. What a terrific solution. Are the landlords and real estate investors still demons? I think not.