Thank you to all of the new subscribers to Alpha Letter. Every week I write about something interesting happening in the financial markets. For Alpha Letter Pro subscribers, I write about off the beaten path stocks that Wall Street hedge funds are not looking at. These are the beaten down securities with market caps under $100 million. Shoot me a note if you want a free research report on one of my favorite new stock ideas.

But before we get into today’s piece, first a word from our sponsor…

Time’s (Almost) Up! Invest In This $155B Industry Disruptor Today

The US accounts for 30% of the $155B global pizza market. You have until Thursday to get a slice of the pie with Piestro.

Pizza vendors want more customers in less time, and they’re adopting just the right automation solution to get it done.

Since Piestro’s compact, robotic pizza pods can serve restaurant-quality pizza in most high-traffic areas, renowned brands like 800 Degrees, WingZone, and Fast Fired have preordered over $580 million worth.

The reason is simple - Piestro’s cutting-edge technology can:

Slice labor and real estate costs in half
Raise potential profit margins by 3X

The bottom line is that Piestro can make food brands more money by setting up shops anywhere: airports, stadiums, malls, offices, and universities.

This could be your last chance to own shares in a company poised to dominate the $155 billion pizza market.

Invest in Piestro before the cutoff on July 28th.

Interest Rates and Rising Rental Prices

I recently bought my first home. It is a penthouse condo with a sweet rooftop deck and lots of outdoor space. I’ve lived in the city for years and never pulled the trigger on buying anything given the high prices, low square feet and outrageous property taxes. I needed a bigger place though. My 800 square foot one-bedroom apartment was not cutting it. My wife worked at home and if I wanted to transition to working at home it just couldn’t be done efficiently in a one-bed room unit. We needed at least a three bedroom place with a parking spot and still access to the city as downtown living is way better than ever moving to the suburbs.

When looking at renting a three-bedroom apartment with all of the amenities we wanted it dawned on us that buying a condo would actually be cheaper in the long-run in terms of our monthly outgoing expenses. In fact, it would be significantly cheaper, saving us $6,000-8,000 per year and also allow us to build equity in real estate. We decided to pull the trigger and put 20% down on a condo. In addition to the lower monthly outgoing expenses with homeownership versus renting, I wanted to lock in ultralow interest rates just under 4% as I don’t think I will ever be able to borrow this amount of money with a 30-year term ever again.

Things were great. We had a bigger place. Lots of outdoor space. Three bedrooms and two bathrooms. Even a heated indoor parking spot that we still haven’t filled with a car. But things in life change fast. A material life event occurred over the past few months. I’m now beginning to explore the options of renting out my condo and moving elsewhere in the world. My preliminary plans are to buy a one-way ticket to Argentina in the winter and when the spring emerges fly to Europe and live there until I get sick of being an expat. Drink Sangria under a blood red moon in the bustling cities of Spain.

Before I digress on my fantasy travel plans I wanted to go over the reasons why I would want to rent my condo out over selling the asset.

I bought in a quickly gentrifying area and property values should continue to appreciate over time. Every new development that goes up in my neighborhood increases the equity in my unit.
I only bought six months ago and I don’t want to get hit any short-term capital gains.
The transaction costs of selling real estate are quiet high and I’d rather hold the equity for the long-run than flip, pay taxes and the annoying transaction expenses.
I locked in rates under 4.0% and I don’t think I will ever be able to borrow at this rate ever again. It seems irrational to sell debt at this price.
I think inflation continues to ravage the global economy and owning a real asset that I can live in with a fixed rate forever seems like something I want to hold onto and not sell.

To speed up the process of potentially renting my condo out I reached out to a few brokers. When I asked them what they thought I could rent the unit out for I was shockingly surprised.

I was quoted $4,600 per month. My all in monthly costs (including property taxes, HOA and insurance) is $3,500 per month. These fixed costs will likely stay fixed over the course of the 30-year term (especially the mortgage portion) and realizing $1,100 per month in cash flow in only six months of ownership shows the power of real estate. But what really stood out to me from speaking to a broker is when they said rental rates are moving up fast and will likely continue to go up from here. That is something I want to explore today.

Thesis: Rising interest rates price potential homebuyers out of a market. Rising interest rates also limit the supply of new houses coming into the market. The combination, lack of new homebuyers and new supply in the market, will force rental rates to increase materially.

When interest rates increase individuals get priced out when attempting to purchase a home. For an example, if I wanted to buy a $400,000 home with a 4% rate on a 30-year term, my monthly payment would be $1,900. If rates moved up 1% to 5%, my monthly payment would rise to $2,138 or a $238 increase. The higher rates move up the more priced out individuals will be, forcing them to rent instead of owning a home.

Higher interest rates also increase the cost of capital for any investor looking to bring on new homes to the market. Just as in the prior example with the individual looking to buy a home, as interest rates rise, the cost to build new home supply increases, limiting the supply of new homes coming to the market.

Based on these two examples, rising interest rates limit the supply of new homes to the market and also limits the number of homebuyers who can afford to buy a new place. These two limitations on the housing market will then in turn increase the demand for rental units in any given market. And that is exactly what has happened nationwide.

National average rental price trends - Rent.com

Rental prices are up 25% year-over-year for June 2022 compared to June 2021. And it doesn’t appear to be slowing down anytime soon, given the historical national consumer price index rents in the United States.

I think this trend of higher rental prices accelerates going forward as interest rates rise, inflation increases the costs of supplies, material and labor and the cost of homeownership skyrockets. Everyone who doesn’t make $500,000 per year or more will be priced out of homeownership and effectively be forced to rent until either pricing comes down or their wages go up.

Selling a real estate asset with an ultra-low interest rate that is termed out for 30-years seems like one of the worst allocation decisions one can make in this market. Controlling a real estate asset gives you homeownership in a rising rate and inflationary environment, which effectively keeps your fixed cost of living FIXED. In addition, rising rates push up rental rates which can turn your home into a cash flowing asset if you ever wanted to travel the world and live in a different area. $1,100 per month in cash flow could likely cover all of my fixed and variable expenses in a continent like South America, which would let my other investments compound into infinity and beyond.

To end this, I would be curious to talk to anyone who has lived as an expat for an extended period of time. I’m looking to make the international living a thing over the next 6 months and would be interested in chatting with anyone who has experience making this work. Feel free to reply to this email if you want to chat on this.

Disclaimer: The publisher does not guarantee the accuracy or completeness of the information provided in this page. All statements and expressions herein are the sole opinion of the author or paid advertiser.

Alpha Letter is a publisher of financial information, not an investment advisor. We do not provide personalized or individualized investment advice or information that is tailored to the needs of any particular recipient.

THE INFORMATION CONTAINED ON THIS WEBSITE IS NOT AND SHOULD NOT BE CONSTRUED AS INVESTMENT ADVICE, AND DOES NOT PURPORT TO BE AND DOES NOT EXPRESS ANY OPINION AS TO THE PRICE AT WHICH THE SECURITIES OF ANY COMPANY MAY TRADE AT ANY TIME. THE INFORMATION AND OPINIONS PROVIDED HEREIN SHOULD NOT BE TAKEN AS SPECIFIC ADVICE ON THE MERITS OF ANY INVESTMENT DECISION. INVESTORS SHOULD MAKE THEIR OWN INVESTIGATION AND DECISIONS REGARDING THE PROSPECTS OF ANY COMPANY DISCUSSED HEREIN BASED ON SUCH INVESTORS’ OWN REVIEW OF PUBLICLY AVAILABLE INFORMATION AND SHOULD NOT RELY ON THE INFORMATION CONTAINED HEREIN.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.

Any projections, market outlooks or estimates herein are forward looking statements and are inherently unreliable. They are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur. Other events that were not taken into account may occur and may significantly affect the returns or performance of the securities discussed herein. The information provided herein is based on matters as they exist as of the date of preparation and not as of any future date, and the publisher undertakes no obligation to correct, update or revise the information in this document or to otherwise provide any additional material.

The publisher, its affiliates, and clients of the a publisher or its affiliates may currently have long or short positions in the securities of the companies mentioned herein, or may have such a position in the future (and therefore may profit from fluctuations in the trading price of the securities). To the extent such persons do have such positions, there is no guarantee that such persons will maintain such positions.

Neither the publisher nor any of its affiliates accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of the information contained herein.

By using the Site or any affiliated social media account, you are indicating your consent and agreement to this disclaimer and our terms of use. Unauthorized reproduction of this newsletter or its contents by photocopy, facsimile or any other means is illegal and punishable by law.

For Full Terms of Use Click HERE. For the Privacy Policy Click HERE.

alphaletter.co (“Alpha”) is a website owned and operated by Substack. Alpha is paid fees by the companies that make investment offerings on this website. Be aware that payment of these fees may put Alpha in a conflict of interest with the investor. By accessing this website or any page thereof, you agree to be bound by the Terms of Use and Privacy Policy, in effect at the time you access this website or any page thereof. The Terms of Use and Privacy Policy may be amended from time to time. Nothing on this website shall constitute an offer to sell, or a solicitation of an offer to buy or subscribe for, any securities to any person in any jurisdiction where such an offer or solicitation is against the law or to anyone to whom it is unlawful to make such offer or solicitation. Alpha is not an underwriter, broker-dealer, Title III crowdfunding portal or a valuation service and does not engage in any activities requiring any such registration. Alpha does not provide advice on investments or structure transactions. Offerings made under Regulation A under the U.S. Securities Act of 1933, as amended (the "Securities Act") are available to U.S. investors who are “accredited investors” as defined by Rule 501 of Regulation D under the Securities Act well as non-accredited investors, who are subject to certain investment limitations as set forth in Regulation A under the Securities Act. In order to invest in Regulation A offerings, investors may be asked to fill out a certification and provide necessary documentation as proof of your income and/or net worth to verify that you are qualified to invest in offerings posted on this website. All securities listed on this site are being offered by, and all information included on this site is the responsibility of, the applicable issuer of such securities. Alpha does not verify the adequacy, accuracy or completeness of any information. Neither Alpha nor any of its officers, directors, agents and employees makes any warranty, express or implied, of any kind whatsoever related to the adequacy, accuracy, valuations of securities or completeness of any information on this site or the use of information on this site. Neither Alpha nor any of its directors, officers, employees, representatives, affiliates or agents shall have any liability whatsoever arising from any error or incompleteness of fact, or lack of care in the preparation of, any of the materials posted on this website. Investing in securities, especially those issued by start-up companies, involves substantial risk. investors should be able to bear the loss of their entire investment and should make their own determination of whether or not to make any investment based on their own independent evaluation and analysis

Alpha Letter

Rising Interest Rates And Rental Values