DISCLAIMER

The analysis of Eden Fund, LLC may include certain statements and projections of the anticipated performance of certain assets. Such statements and projections reflect the opinion of Eden Fund, LLC regarding anticipated results and are subject to economic uncertainties. The information contained within has been prepared solely for informational purposes. This presentation is not a recommendation or solicitation to buy or sell any securities.

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Eden Fund, LLC

WHY WE LIKE LAS VEGA S R E A L E S TAT E

There has been a once-in-a-lifetime housing bust in the United States that has destroyed misguided notions that home prices rise year after year. Bullish sentiment that lasted for generations has disappeared without a trace. Gone are the days of the zero down, negative amortizing, adjustable-rate mortgage. Now it is time to get back to reality. The operative word right now is panic: Foreclosures are rising; banks have tightened lending standards; and unemployment is elevated. It appears there is no worse time to buy a home. Each market has its own dynamics based on variables like I nventory levels, employment prospects, migration trends, and property taxes. This chart shows the variation in median home prices across various markets. As you can see, the magnitude of the housing bubble was far from uniform nationwide.

So why am I now turning bullish on Las Vegas real estate?

Simply put, Las Vegas real estate is too cheap on a relative basis. There is a time and place for every market. I believe it is Las Vegas' time.

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Eden Fund, LLC

L A S V E G A S R E A L E S TAT E MARKET
The Las Vegas real estate market has been hit especially hard by this housing crisis, which makes sense if you think about it. As a hub of discretionary spending, the Las Vegas real estate market will tend to be procyclical. In other words, it will rise more than other markets in times of economic expansion, and it will fall more than other markets in times of economic contraction. In a sense, it is the ultimate leveraged play on real estate. It is important to understand that Las Vegas real estate is no longer a bubble; in fact, it is at pre-bubble levels. Distressed sale prices are converging with conventional sale prices, which is a positive for buyers. Prices continue to fall as short sales, foreclosures, and REO sales rise. Buyers are hesitant to step in right now because they think another major dip in home prices is coming. I personally think the worst of the housing crisis in this particular cycle is over, and I'll explain why. But first I want to take some to time to explain how real estate works as an investment.

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Eden Fund, LLC

U N D E R S TA N D I N G R E A L E S TAT E
The most important thing to understand about real estate is that it is an investment that depends on leverage. The implementation of the 30-year mortgage helped support home prices during the Great Depression by allowing the average person to bring 30 years of earnings forward. Once the 30-year mortgage was in place, home prices rose more or less in line with inflation. It was only after the introduction of leverage via securitized products that housing expanded way beyond the rate of inflation. Now that these securitized products have blown up, it is reasonable to believe that housing will rise in line with inflation. Loan-to-value ratios represent the leverage in an investment. While loan-to-value ratios have fallen considerably from their peak, they are still very attractive. A standard 20% down payment still represents 5 to 1 leverage. You will be hard-pressed to find this kind of leverage in any other mainstream investment. The upside potential in these kind of leverage plays is tremendous.

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Eden Fund, LLC

C A S H F L O W V S C A P I TA L G A I N S
Real estate should not be bought as a speculative purchase; it should be bought when the cash flow from rents exceeds the cost of carry. With a positive cash flow position, one can ride out cycles in real estate while building equity through loan amortization. This presents a very cookie cutter, "safe" return in most economic environments. However, by catching the right cycle, one can return many multiples on invested equity. Here's a very simple example of the potential returns in real estate with the following assumptions.
ASSUMPTIONS Price Home Price Appreciation Down Payment on Property Mortgage Rate Closing Costs Selling Fees Property Taxes Maintenance & Insurance Income Tax Rate $85,000 0.0% 20.0% 5.0% 2.0% 5.0% 1.5% 2.0% 25.0% ($ on monthly basis) Rent Cost of Carry Mortgage Payments $950.0 $506.7 $365.0

MONTHLY REVENUES AND EXPENSES

SOURCES USES / COSTS Monthly Mortgage $365.0 $365.0 $365.0 $365.0 $365.0 $365.0 $365.0 $365.0 $365.0 $365.0 Monthly Maintenance $141.7 $141.7 $141.7 $141.7 $141.7 $141.7 $141.7 $141.7 $141.7 $141.7 Total Monthl Monthly y Net Costs Income $506.7 $506.7 $506.7 $506.7 $506.7 $506.7 $506.7 $506.7 $506.7 $506.7 $443.3 $443.3 $443.3 $443.3 $443.3 $443.3 $443.3 $443.3 $443.3 $443.3

Yr 1 2 3 4 5 6 7 8 9 10

Home Price $85,000.0 $85,000.0 $85,000.0 $85,000.0 $85,000.0 $85,000.0 $85,000.0 $85,000.0 $85,000.0 $85,000.0

Monthly Rent $950.0 $950.0 $950.0 $950.0 $950.0 $950.0 $950.0 $950.0 $950.0 $950.0

Down Payment Closing Costs Total Initial Costs

$17,000.0 $1,700.0 $18,700.0

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Eden Fund, LLC

ANNUAL REVENUES AND EXPENSES

ANNUAL Net Income (Pre-tax) $5,319.5 $5,319.5 $5,319.5 $5,319.5 $5,319.5 $5,319.5 $5,319.5 $5,319.5 $5,319.5 $5,319.5 Property Taxes $1,275.0 $1,275.0 $1,275.0 $1,275.0 $1,275.0 $1,275.0 $1,275.0 $1,275.0 $1,275.0 $1,275.0 Net Income (Post-tax) $4,044.5 $4,044.5 $4,044.5 $4,044.5 $4,044.5 $4,044.5 $4,044.5 $4,044.5 $4,044.5 $4,044.5

IRR 17.2%

As you can see, buying real estate when it provides positive cash flow results in returns even with no home appreciation. Buying when the costs of carry are covered by rents defines your downside to an extent. This is your margin of safety. The optionality of real estate is derived from capital gains.

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Eden Fund, LLC

I N F L AT I O N - A D J U S T E D H O M E P R I C E S
When thinking about real estate, its important to distinguish tween nominal and real prices. Nominal prices, or prices not justed for inflation, are what most people focus on. bead-

However, the savvier investor focuses on real home prices. As Ive demonstrated before, home prices nationally have more or less tracked inflation for generations. Currently, the real price of homes nationally is slightly above the long -term trend in inflation.

However, in Las Vegas, not only have nominal prices collapsed, but real prices have as well. In fact, real prices are currently below 1987 levels, which was before the initial resurgence in Las Vegas courtesy of Steve Wynn. Prices in Las Vegas have overshot to the downside, and it is reasonable to expect the pre-bubble trend in real prices to reappear. No matter how bearish you are on housing or the economy in general, you must understand that every asset has a price in which the expected return justifies an investment. This is a situation that is developing in Las Vegas.

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Eden Fund, LLC

HOME AFFORDABILITY
There are three key factors that affect the affordability of homes: mortgage rates, household income, and home prices. While U.S. median income has stayed relatively stable, mortgage rates and home prices have fallen off considerably from their peak. Normally you would expect home prices to move inversely with interest rates; however, home prices have fallen along with interest rates in this particular cycle. This is a positive scenario for potential homebuyers.

30 YEAR MORTGAGE RATE

U.S. MEDIAN INCOME

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Eden Fund, LLC

M E D I A N P R I C E / I N C O M E R AT I O
One metric used to calculate whether real estate is overvalued, undervalued, or trading at fair value is the median home price to median income ratio. Historically, the national ratio is 3.5, which is just about where we are trading at now. In comparison, the ratio in Las Vegas is currently 2.5. In other words, homes are very cheap in Las Vegas relative to the income of its residents. This phenomenon will work to support prices moving forward.

NATIONAL MEDIAN HOME PRICE TO MEDIAN INCOME

LAS VEGAS MEDIAN HOME PRICE TO MEDIAN INCOME

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Eden Fund, LLC

AVERAGE MONTHLY MORTGAGE PAYMENT AS % OF MEDIAN INCOME

Another way of determining home affordability is to measure the portion of income that goes towards housing. Due to the curious situation of mortgage rates falling with home prices, mortgage payments have actually fallen as a percent of income, even during the recession. As you can see, the data simply does not support the notion that home prices are overvalued. Real estate is a market dominated by irrational fear. At tops, everyone is exuberant; at bottoms, everyone is fearful. This is just how markets operate.

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WHO WILL RENT? A R E N T VA C A N C I E S H I G H ?

All cash flow projections go out the door if there are no renters. This is why you should have a huge margin of safety when you Invest in real estate. Based on conservative projections, we can calculate our breakeven vacancy rate using the projections from Page 5. Keep in mind that even in this somewhat drastic scenario, we are still paying off the mortgage with other peoples money- hence in a flat market, we are still making a return.

Yr

Annual Net Income

Breakeven Vacancy Rate

1 2 3 4 5 6 7 8 9 10

$4,044.50 $4,044.50 $4,044.50 $4,044.50 $4,044.50 $4,044.50 $4,044.50 $4,044.50 $4,044.50 $4,044.50

35.50% 35.50% 35.50% 35.50% 35.50% 35.50% 35.50% 35.50% 35.50% 35.50%

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ECHO GENERATION, ANYONE?

Demographics play a huge role in any real estate market. Most people know about Baby Boomers and the effect they will have on our economy. However, fewer people know about the Echo Generation, which is composed of people born between the mid 1970s and the early 2000s. The Echo Generation represents another Baby Boom generation, albeit smaller in scale. The average person in the U.S. now buys a home when they are 38. In other words, the majority of the Echo Generation is still renting. Shortage of renters?

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HOME OWNERSHIP RATE

The home ownership rate in America gives us an idea of the number of renters there are at any given time. A lower home ownership rate means there are more renters, which favors those who own rental properties. According to the Census Bureau, the homeownership rate has fallen, and with rising foreclosures, it will likely continue to fall.

Each percentage point drop in the home ownership rate is equivalent to about 2 million people becoming renters. Everyone talks about foreclosures, underwater homeowners, and distressed sales as if it were a bad thing for owners of rental properties. But these seemingly negative housing indicators actually increase the supply of renters and put upward pressure on rents. From the following chart from rentbits.com, it appears rents have stabilized even while home prices continue to fall. This is very bullish for owners of rental properties.

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BABY BOOMERS
One of the most important things to consider is the migration pattern of Baby Boomers. The two things on the top of Boomers wish lists for housing are: 1) low costs of living 2) favorable climates Las Vegas scores high on both counts. Baby Boomers who planned on using their home equity to retire are now in trouble. While a rising market benefited the net worth of Boomers, it didn't necessarily improve their cash flow situation. Many Boomers are now finding that they are sitting on a liability with rising property taxes and energy costs. This is leading to the next big trend for Boomers: Trading down. The majority of the wealth in the country is concentrated in the Baby Boomer demographic. By extension, the most expensive markets are dominated by Baby Boomers. We believe you will see a converging of real estate prices between the overvalued markets (NYC, Los Angeles, etc.) and the undervalued/distressed markets (Las Vegas, Miami, etc.) as domestic Baby Boomer migration trends emerge. While the Echo Generation will determine rental income, the Baby Boom generation will determine home appreciation. Boomers by and large are not affected by recessions; they are affected by interest rates. They are the only demographic that has the ability to spend in a downturn. In other words, Boomers will provide liquidity to the housing market.

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CONCLUSIO N
After the bursting of the real estate bubble, housing has become a relatively shunned investment. There is no better time to invest than when an asset as a whole is hated, especially when objective metrics suggest huge undervaluation. No one is rushing to buy Las Vegas real estate, which means we can slowly build a position and capitalize on the eventual appreciation. Considering the macroeconomic backdrop, mortgage rates, and prices, we believe 20% annualized compounded returns are a very conservative forecast. In our opinion, a bottom in real estate is going to come sometime between late 2011 and late 2012. The countertrend recovery cycle in real estate should last 3-5 years, and Las Vegas should be one of the prime beneficiaries. It is just time to invest in Las Vegas real estate.

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C O N TA C T U S
Moses Kim & Victor Yun Managing Partners Eden Fund LLC edenfundllc@gmail.com expectedreturnsblog.com

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