Q4 2016 Update

Operating Results:

We report Sandalstone’s Full Year 2016 results to be a record during the rental phase. Full year revenues increased 8.3% over 2015 compared to a 7.8% increase in 2015 over 2014. The primary reason for this was the rise in rents and a decrease in vacancy from 1.4% to 0.89%. Asset prices continued rising in our markets albeit at a slower pace than last year. We are not complaining as the gains have now met our expectations as we have had the patience to hold. Quarter to Quarter revenue declined 1.8% reflecting a seasonality in our existing AirBnB property. Year over year our Quarterly revenue increased 8.1%. We left 2016, fully occupied and continue to be in a good position to raise rents as the fundamental economic conditions in our markets remain strong.

We added a property to the Portfolio at the end of the year following in the footsteps of one of our favorite Partners and Board Member - a condo in the Village of Squaw in Lake Tahoe. We plan on using AirBnB and VRBO for this property and will have these results starting in Q1 of 2017. This purchase was a result of many bids and trips to Tahoe and which we hope will lead to a profitable and fun new opportunity. It was purchased with leverage - a 10 year fixed note - the plan is to pay it down as quickly as possible and then decide at the end of ten years whether or not to keep depending on rates. An extension of the experience of AirBnB over the past years.

We successfully closed our position on a short term loan made to our primary Contractor, in Oakland as he sold a fixer he had purchased on time, on budget and for his expected sales price. Would gladly make this investment again. Our other investment in AIS will take longer to materialize as the business needs to scale to cover its fixed costs. We remain optimistic that the Manager will be able to grow this business into a success.

Back to the core business, we ended up with 0.89% vacancy rate which is a strong indicator of rental strength compared with our 6% historical average. Drilling down into our two geographic areas, our Bay Area vacancy rate was 1.1% with 15% turnover. We increased rents on those by 20% on new rent. In Las Vegas we had a 0.76% vacancy rate with 18% turnover and new rents coming in 2.6% higher. We are far more judicious in raising rents on good long term tenants. We find it to be sound business practice to have a smoother path up for those customers than in forcing them out just to meet market rents. Overall, it was a very good year on the Revenue Side.

The biggest news, on the Operating Side is that we have taken over Property Management in Vegas.  We had a situation where our Property Manager sold her Company to another Broker and the level of service provided to us and Owners and to our Tenants was visbiliy diminished.  We decided that we could do a better job ourselves.  Unfortunately the transition will take place over a year as properties roll off the Contracts.  Our first property that we took over was our 6 Bedroom, 5 Bath house which we rented by placing ads on Craigslist and Zillow and found a great family who is taking good care of the place.  At year end we have 3 properties in-house and will expand that over the next year.  We visited most of our properties and tenants this year and are well underway with the transition.  

On the Operating Expense Side, we hit many speed bumps and obstacles - with the hope the major maintenance items addressed lead to fewer issues going forward.  

In Oakland we painted the Duplex and addressed the remaining siding issues.  This was a significant task given the water intrusion issues discovered last year and we hope to have put those behind us for now.  In the Shorey House we had the unfortuante incident with a tenant who had passed out in his unit.  Upon his recovery and move-out we re-painted his unit to our new Millenial paint scheme.  In East Oakland, we replaced a Security Door.

In Las Vegas we had several major issues over the past year.  The "winner" was a property where we started the year with a tenant that we had to "soft" evict for a domestic violence issue and which resulted in a complete re-painting of the house as well as having to deal with some code compliance issues.  We also finalized the granite countertop.  Later in the summer we had a leak in the backyard which required an urgent plumbing fix and we also had to replace the garage door.  And finally we had a report at the end of the year of black smoke coming from the heating unit - which required a replacement.  This property ended up losing money on the year.  A good reason to have a portfolio where these costs can be absorbed.  

Last year we had three properties which required 5-6 service calls.  When we visited the property ourselves we came away with the clear indication that the property managers were simply unable to keep up with the defered maintenance issues and that the tenants were also part of the problem.  The tenants are heavy/rough user of the property and the wear and tear was significantly above a reasonable amount.  We took care of many of the items - however, will expect the use to continue - we will raise rents accordingly.  Other properties had mid-level issues isues - which we would classify as normal.  

In summary, this was a very bad year for Expenses.  In Oakland, we mostly took care of log term issues with the bulk being the exterior painting and siding in one property.  About one-quarter of the Las Vegas expenses was due to the turnover of that problematic tenant.  The other reason was that we addressed a lot of the deferred maintenance as we visited the properties and corrected those issues.  Hopefully, the years ahead will see fewer issues, 2016 was not a pleasant year for repairs.  


As we thought in last years update the Bay Area economy continued another year of torrid growth.  Once again demand for housing has exceeded supply and combined with the great jobs market, rents soar.  We are more cautious this year and have favored tenants whose employment is not as tech / mobile / VC dependent as in past years.   Las Vegas is also seeing upward pressure on rents, however as we suspect like most of the country it is consistent with inflation - at about 2 to 3% overall.  We are content with those results given our return on assets on those purchases - its adding cherries to our rich sundae.  

Almost every time we meet with investors (or would be investors) we get asked for our opinion on where are we in the real estate cycle?  In 2017, it will be 9 years since we purchased the first of our distressed properties in the Bay Area.  The cycle played out exactly as we thought and we are at the end of the 6 to 9 year range we predicted when we thought the next cycle top would be.  Does that mean we believe the cycle will go down? Next year?  Did we think Hillary would win?  We have been bad at forecasting - the prevailing wisdom is that the Trump adminstation will have to borrrow signficantly in a full economy which will compel the Fed to raise rates to put on the brakes.  However, take that 2 cents for what its worth.  What we will do this year is to consider the opportunity cost to both us and our Partners of selling assets and earning a "risk-free" rate.  With interest rates rising it may make more sense to take the cash out and park it in other assets.  We should be able to raise rents in Oakland, Vegas is slower.  We will continue to track operating costs closely - if we aren't hitting our 6.5% goal on invested capital - that will also be an indication that we need to cut back on those properties.  

Market Update 

We reference Case Shiller in each of our updates as we believe that index to be the best indicator of asset prices. as of end of January 2017, SF registered annual gains of 6.3%.  This reflects a slowing down of the growth rate - law of large numbers finally catching up?   Las Vegas registered a 6.2% increase which was about average for the nation.  We continue to be pleased with those results.

We believe this upward move is due to real buyers.  In SF the price appreciation is driven by the strong regional economy.  Cash buyers continue to make purchases and the natural barriers to entry (land and land use policies) ensure the rapid increase.  We believe Las Vegas reflects a more normal price appreciation as the local economy reflects steady growth.  Tourism is still the dominant industry and while domestic travel is up, international tourisism is down.  However, Vegas is doing well with several large projects now coming on-line and as always plenty to do there.  

In summary, while the temptation to sell properties is present, as we recognize a cycle top, we will continue to hold as we enjoy the income from rental operations and are cautiously optimistic that we can emerge in good position through a downturn - optimism which has been rewarded for the past century for holders of real estate.         


We had an interesting situation this past year where one of our Partners in Clarameda Fund needed their investment back for personal reasons.  This gave the Company a chance to buy back that share at par (meaning at original price without payout on the appreciation).  It is similar to a publicly traded company buying back shares (at an IPO price when the price of the shares is higher).  The Company financed the buyback by drawing upon its credit line, which we anticipate it can pay down with cash flow within a year without sacrificing any other obligations including Partner distributions. While we prsonally hated to see any Partner force to liquidate a great investment such as this one, the Company was financially happy to grant this request.  One of the perks of having a strong balance sheet with liquidity.  

We would once again like to highlight the Note program that the Company has been offering for the past four years.  Under this program, Partners have had the chance to "deposit" funds with the Company.  The Company has an underlying credit facility which enables it to pay back funds on demand.  If you have excess funds sitting in checking/savings and/or are considering a CD this program might be a suitable alternative.  This past year we raised the rate to 3.625% in step with the Fed raising short term rates.   Check it out...  Approximately 40% of Partners have used this facility and it has met all expectations.      

Clarameda Fund, LLC:  

-  Continued payout of monthly distribution.  Initial Partners have received over 50% of capital back in the form of distributions.  Zillow estimate of property value is up 100% from purchase price plus rehab costs.  

-  K1s were distributed thanks to our  Accountants for taking care of us thru it all.    

In Summary,

We head into 2017 with several new challanges.  We look forward to being more involved with our Las Vegas properties as we will fully control the management this year.  We also look forward to being more involved with AirBnB / VRBO thru the Squaw property.  From a strategic standpoint, we may decide to make some asset allocation decisions that allow us to reap the rewards of what we have sown these past years.  

My thanks as always to the people who assist us in our endeavors and the Partners who trust us to manage the Company with their capital.  




Biren Talati
Managing Member
Sandalstone Group, LLC




CURRENT YIELD:  3.37%  Compare to Clarameda...



Bay Area Rents:

SF remains highest priced rental market in Nation

Case Shiller:

Dallas News:  Q4 Case Shiller - Home Prices back above pre-crisis levels   

Las Vegas Unemployment:

UNEMPLOYMENT RATE - 6.2% vs 6.9% - Lowest level of the year in December