In case you’ve been under a rock: The stock market has been in free-fall since the beginning of October. Here’s a handy chart:
The thinking among investors is that the world economy is slowing due to weakness in Europe and China.
Usually, when investors get spooked by stocks, they sell stocks and buy relatively safer government bonds. And, indeed, you can see the result in US Treasury bond yields:
Yields were around 2.50% and then fell very rapidly down to 2.15% (as of noon today).
What does all of this mean for real estate? Well, mortgage rates tend to be pegged to the yield on t-bills. So, as investors get spooked and flee equities in favor of government debt, they are driving down the rate at which you can borrow on homes / apartment buildings / etc. Here’s the relevant graph:
It’s a bit hard to see, but rates, which were as high as 4.4% in January, are down to 4% as of today.
In real estate, all else being equal, prices rise and fall in an inverse relationship with interest rates (the cheaper the debt, the higher the price someone can pay for the asset and get an acceptable yield, and vice versa). So, if we’re entering another period of low interest rate loans, you can expect prices to stay the same or rise, all else being equal.
For a long time, as young professionals aged into their late 20s / early 30s, they would move out of LA to suburbs in search of a big single family home with a yard, etc.
Demand for apartments in LA, particularly in the areas east / north of Hollywood, was therefore mostly constrained to professionals in their 20s and working people who did not have the income or assets to move out to the suburbs. (That’s not to say there weren’t / aren’t exceptions… we’re speaking in broad strokes here.)
It’s not clear what caused professionals to stop moving to the ‘burbs. The trend really began in earnest around the beginning of the Great Recession in 2007-8. So it may have been that professionals didn’t have the money to move or couldn’t get the loans.
Another explanation was that 2007 was when the first of the Millennials (the massive generation born roughly 1979-2000) hit the age when previous generations would have started to consider moving to the suburbs… but the Millennials basically said “nope” to the high consumption, high debt suburban lifestyle.
Whatever the reason, LA finds itself with a major problem / opportunity: The Millennials are staying in the city and competing with more traditional renters (the young and the working class) for housing, driving rents through the roof. So either the city is going to find some way to allow developers to massively increase supply, or we’re looking at rapid rent increases for the foreseeable future.
Have been thinking about holding another seminar / property tour.
Think this one would focus on one property we’re currently renovating.
We’d examine the initial listing, our thinking in pursuing the deal, how we got it, what the issues were in diligence, and our pro forma.
Then, we’d go walk the property to take a look at the construction underway.
I’m not sure we’re going to do this… It feels like we’d be giving away a lot of information. But I also think it might be great for the right kind of person: someone with considerable resources to invest and am interest in how this stuff works.
If that sounds like you, please email me at Moses (at) adaptiverealty (dot) com and let me know the following: whether you own properties already, your experience with renovation projects, how actively you are pursuing deals, and anything else that might be helpful for me in getting to know about your suitability for this kind of intense seminar.
We finally sold the last Fund 1 property yesterday and I thought I’d take the opportunity to share the (unaudited, unofficial) numbers:
- Purchased 5/23/2013 for $690,000
- Spent ~$410k renovating (including all fees to Adaptive)
- So, all in for $1.1MM
- Took in ~$40k from rents while we owned it
- Sold 10/9/2014 for $1.42MM
- Net sale proceeds of ~$1.32MM
- Profit of ~$260k on $1.1MM
- ROI of 24% in 17 months
As on the other Fund 1 deals, we did not use any leverage. That had the effect of hurting the ROI but, obviously, reducing the risk.
When Jon and I set out to raise Fund 1, we had no idea if we were actually going to be able to get the money together. There was no Adaptive brokerage or property management team. There were no fee-for-service deals. In fact, none of the people who now make Adaptive so awesome were with us yet. It was just Jon and me in a tiny office on 7th and Grand Downtown.
We went out and asked friends and family if they would invest with us. A bunch said “no”. Some said “yes”. And some people who are savvy investors but who were not then friends of ours said “yes”, too. It wasn’t that much money ($3.57MM), but it was enough to build a business.
Now, exactly two years later, it feels really great to be able to go back to those investors who believed in us, hand them their profits (they already got back all their capital) and say, as I always do in every single letter I ever write them, “Thanks for trusting us with your capital” and to know that that trust was rewarded.
One of our agents and I just signed a listing agreement on a 4plex we will be bringing to market shortly. (If you want to hear about it before it goes on the MLS, I recommend joining the mailing list right now.)
When we were preparing our pitch to the owner, my colleague pulled all of the relevant comparable sales over the past year.
There are 26 4plexes marked as “sold” by the MLS in the areas in which we are interested (the improving parts of NELA) in the last six months. That means there were 52 “sides” (each transaction has a buy-side broker and a sell-side broker).
Adaptive accounts for six of those sides. No other brokerage accounts for more than two.
And we also sold two others off-market (four more sides because we represented buyer and seller) and another on market deal is closing today (knock on wood!).
I’ve thought for a long time that we were better than any other brokerage at helping clients navigate the complexities of buying smaller income properties in NELA. Now, it seems, the market is catching on.
We’re looking for help in the following roles:
1. Assistant project manager. This one is pretty straight-forward. We have a ton of renovation projects going on right now and need one more set of hands to assist with purchasing and arranging material deliveries, liaising with contractors / subs, etc. We’re offering $15 / hr for this 30-40 hr / week position. If you know of anyone who might be interested, have them send a resume and short covering note to moses [at] adaptiverealty [dot] com.
2. Researcher / writer. Looking for someone to help with the blog. This role is all about coming up with creative ideas for content (written, video, infographic, etc.), executing, and then getting bloggers, etc. to link to the content. This is a part-time position for which I am willing to pay $30-40 / hr to the right person. Interested applicants should get in touch with me directly.
…would you have huge buildings on Broadway, where studios rent for $4 sq ft, totally vacant above the first floor.
Why haven’t the owners used the adaptive re-use ordinance to re-purpose these interesting old buildings as either condos or apartments?
Simple: Prop 13.
The owners probably bought the buildings a million years ago for pennies, their property taxes are likely incredibly low. And the rate of growth in the buildings’ values is dramatically outpacing the growth in the carrying costs (principally property tax, capped at 2% annual increases). If you have a $5MM asset growing in value at, say 5% / year ($250k) and costing you, say $25k in carrying costs, you’re in no rush to sell.
At some point, someone will tempt these owners will very high offers for their buildings and then convert them. But, in the meantime, in the midst of a dire shortage of housing, we have prime real estate sitting vacant.
If you manage apartment buildings, you can probably guess what I’m about to write about.
If not, here goes:
- DWP is criminally under-staffed / incompetent
- DWP makes huge numbers of mistakes
- Getting someone on the phone to correct the mistakes and/or request normal service changes takes 30-90 minutes, each time
For an individual trying to do something simple, like turn on the electricity in a new apartment, this is a pretty awful situation, but at least it’s only a once-every-few-years kind of thing.
For an owner who self-manages a few small buildings, the DWP-imposed delays probably take up a few hours a month.
For big property management companies that manage hundreds or thousands of units, the delays imposed by DWP result in employees spending tens or hundreds of hours per month. Pick an hourly wage and do the multiplication and you’ll see that DWP’s disorganization is imposing thousands upon thousands of dollars in costs on property management companies.
Econ 101: Businesses will attempt to pass increased costs on to customers if possible, either by increasing prices or cutting other costs. Management companies will eventually pass on the increased costs to owners. And owners will eventually pass on the increased costs to tenants, in the form of rent increases.
All because a city-owned agency can’t get its act together to answer the phone.