Moses Kagan on Real Estate

Immigration and real estate

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Fellow not-under-rock-dwellers know that Obama issued an executive order yesterday granting a kind of contingent, temporary reprieve from deportation for several categories of illegal immigrants.

This blog is about real estate, not politics, so I don’t want to get into debating whether what he did was right or wrong.

But it is worth thinking a bit about how immigration impacts our business (investing in apartment buildings).

In general, as suppliers of rental housing, we have a strong interest in:

  • Population growth, and particularly growth in younger people (who are more likely to rent than own)
  • Employment growth, since you need a job to pay the rent

It seems to me that anything which spurs increased immigration (eg population growth) and makes it easier for people to work / start businesses is, on the face of it, positive for our business, because it increases demand for- and, therefore, the price (rent) of rental housing.

Written by mjkagan

11/21/2014 at 10:45 am

Posted in Uncategorized

We missed…

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Just missed on a deal I really wanted and I’m upset because I didn’t follow my own advice.

When I’m brokering deals and people ask me what to bid, here is what I always tell them:

  • It’s impossible to know what others will bid
  • Instead, play with the numbers to figure out the highest price you can pay while still getting an acceptable return
  • Bid that price knowing that, if someone bids more, you don’t mind losing the deal

So, what did I do?

I bid a price where the returns were very tasty.

I could have bid more and had the deal end up at an acceptable number.

But I didn’t and I lost the deal.

Now, I’m filled with regret.

Written by mjkagan

11/20/2014 at 9:58 am

Posted in Buying

Concentration vs. diversification

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One of the interesting issues with managing other people’s money is having to decide how exactly to allocate that money among projects.

At any given fund size, you need to decide whether you should do a small number of big deals or a large number of small deals.

All the theory points toward diversifying. After all, assuming that all projects have similar return characteristics, if you spread the money among many projects, 1-2 going badly won’t destroy your results. And, indeed, the docs governing many investment funds require that they refrain from allocating more than a certain percentage of their equity to any given deal for exactly this reason.

But real life, of course, can be more complicated than theory, because:

  1. Sometimes (not often, but sometimes) the larger project(s) promise better returns than the smaller ones that are available at a given time; and
  2. In our business, which is extremely hands-on, managerial attention is at a premium, so spreading it among many, smaller deals may mean worse performance than if the attention were concentrated on fewer, larger deals

So, what do we do? We:

  1. Keep in mind that, all things being equal, diversification is better;
  2. Are willing to concentrate, because we:
    1. Limit ourselves to deals where we believe there is a considerable margin of safety (eg deals that are sufficiently profitable to absorb bad news)
    2. Limit leverage, which is the factor most likely to lead to disaster in our business
    3. Refrain from doing deals on brick- and un-reinforced soft-story buildings (because these can both collapse in earthquakes, the other major risk)

Will the above prevent us from losing money for our investors? No. There is always the chance we screw up. But we believe the above gives us a reasonable degree of safety while allowing us to chase attractive returns (which, after all, is the whole point of doing this).

Written by mjkagan

11/19/2014 at 2:10 pm

Apologies for the lack of posts

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Didn’t write Friday or Monday because I’ve been slammed.

We were finishing up diligence on the first deal for Adaptive Realty Fund 3, our latest investment vehicle.

Late last night, we removed contingencies, with closing to come early next week.

On top of that, my very capable assistant has been out sick, so I’m doing more of the grunt work than I usually do on one of these deals.

Anyway, we’re super-excited about this latest building and will provide details when its prudent to do so (eg not for a while).

Written by mjkagan

11/18/2014 at 12:45 pm

Posted in Buying, Development

See awesome construction pics

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Adaptive finally has an Instagram account with tons of pics of our ongoing renovation projects.

The tech-savvy among you can follow @adaptiverealty for on-going updates.

The less tech-savvy (including, for example, me), can check out the pics here:

Going forward, we’re going to document all of our on-going projects (and there are a ton!) roughly once every three weeks. So, you’ll be able to watch the progress of all of them, which I think will be pretty cool.

Written by mjkagan

11/13/2014 at 11:09 am

Beware of setbacks!

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Apologies, in advance, for a fairly technical piece, but this is very important information for anyone doing remodeling in LA.

If you’re rehabbing a property, you need to be extremely careful about touching anything located in any setbacks.

What do I mean by setbacks? They are the parts of any lot in which the city prohibits you from building. Depending on the zoning, they’re typically the areas 3-5′ from the property line on the sides and 15′ from the property line in the back. In the front, the setback varies a lot, but it’s typically 10-15′.

Why is it so important that you take care before touching anything in the setbacks? In a word, “grandfathering”.

There are many properties in LA that have important features that were built prior to the imposition by the city of setbacks. These features include decks and walkways, some of which are essential for accessing parts of properties.

Because these features were built prior to the imposition of setbacks, they are grandfathered in.

The problem is that many of these features, particularly those built in the 1920s, are at the end of there useful life. They are rotted out by moisture, termites, etc. As a rehabber, you will be sorely tempted to rip them out and replace them.

Careful! If you entirely rip out one of these grandfathered features, you will forfeit your grandfathered status. You will then have a hell of a time getting the city to allow you to rebuild it, because the city will hold you modern codes which require you to avoid building in the setback. Getting approval to do so would involve zoning variances, plan approval, etc… not something you want to go through.

So, what’s the solution? Instead of entirely ripping one of these features out, pull a permit for “replacing termite-eaten wood”. Then, replace only the worst areas, leaving the rest, and get the permit finaled. Later, you can repeat the process if you have to.

Side note: Can you see how insane the above situation is? The city is basically incentivizing you NOT to replace potentially dangerous decks, etc… a recipe for unnecessary injuries / death. Instead, they should change the rule to allow you to replace grandfathered features without going through plan-check so long as you do not expand the footprint.

Written by mjkagan

11/12/2014 at 2:24 pm

Posted in Development, How to

Some stats on our business

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Jon and I are hiring a photographer to go back and document all of the buildings we’ve renovated.

She asked for a list, so I went back through my records to produce one.

Thought you would be interested in the results of my research:

  • Completed gut-renovations on 25 buildings totaling 156 units
  • Renovations in progress on 10 buildings totaling 103 units
  • Six buildings totaling 40 units awaiting renovation
  • In escrow on two buildings totaling 16 units

Assuming all goes well, by this time next year, we will have completed 43 buildings comprising 315 units in seven years.

I’ve excluded from the list another 10 properties totaling 61 units which we bought renovated or intend to renovate at some point in the indefinite future.

Not bad for starting in this business in early 2008, huh?


Written by mjkagan

11/11/2014 at 11:03 am

My thoughts on the anti-gentrification march on York this weekend

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So this weekend a bunch of residents held an anti-gentrification march on York Blvd. in Highland Park.

Here’s a description from the Eastsider: “A group of anti-gentrification protestors – some of them masked and waving banners – paraded down the sidewalks of York Boulevard tonight, taping “Eviction Notices” on new businesses…”

Neither I nor anyone in my immediate family have ever lived anywhere long enough to form an attachment strong enough to cause me to protest if I were forced to move. But I’ve spoken with enough people going through relocation to know that being pushed out of your home can bring feelings of sorrow, powerlessness and, for some, rage.

While I think that posting mock eviction notices on the windows of new businesses along York is obnoxious behavior, it says something quite positive about the people who protested yesterday that they were able, despite their feelings, to keep things more or less under control.

There’s always going to be disagreement about the morality of gentrification. But we should all be proud to live in a society where people can lawfully protest and where that protest can take place without property destruction or loss of life.

Written by mjkagan

11/10/2014 at 10:59 am

Posted in Development

Are there any good deals out there?

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Well, I’ve written 4-5 offers this week.

And I just stumbled across a deal that’s going to end up being somewhere between an 8.5-9.5% unlevered yield (eg cap).

Of course, these things aren’t just falling off trees.

You need some combination of superior local knowledge, skill / experience, and sufficient capital.

Inventory is definitely tight, but, if you have what it takes to add value, there are good moves to be made.


Written by mjkagan

11/07/2014 at 11:51 am

Broker lunches

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Every six months or so, I set up a round of lunches with relevant brokers and agents.

Who are relevant brokers? Well, they’re the ones who sell the deals that we want to buy… beat-up properties in interesting areas that are priced (semi-)fairly.

Why do I do these lunches? The idea is to build trust / relationships BEFORE I offer on their deals.

Remember, when you make an offer to a seller (and her agent), what you’re really saying is: Would you please allow me to tie up your valuable property for 2-8 weeks while I decide whether to buy it?

Phrased like that, you can see why establishing a relationship with the listing broker is important. You want the broker to be able to advise his client that you are a credible buyer who can be trusted to deliver.

The best way to establish this kind of trust is to do a deal together. And, as we have done more and more deals (50+ for me personally, at this point), we have definitely built strong relationships with many of the most active brokers.

But, obviously, there’s first deal with every broker. So, to make sure we have the best possible shot at making that first deal happen, we do lunches.

Lots and lots of lunches.

Note to readers: If you are a broker or an agent who regularly represents sellers east of, say, Western, and you’d like to sit down for a coffee or bite to eat, get in touch and we’ll get something in the diary.

Written by mjkagan

11/05/2014 at 10:35 am

Posted in Building Adaptive