Moses Kagan on Real Estate

How you know when you’ve trained your agents well

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At Adaptive, we take a very quantitative approach to brokering income property deals for our clients.

I’ve personally trained all of our agents to focus first on the achievable yield on the downpayment and only after that on other, more qualitative factors.

While this doesn’t guarantee that every deal will be a homerun, it does have the the benefit of screening out obviously stupid deals. You could make a good real estate investing career in LA by buying reasonable deals each time you have enough money and avoiding any horrible mistakes.

The downside is that, because all of them look at deals the way that I do, I sometimes find myself losing out to my own clients on deals! The reason is that some of them have lower return requirements than I have for my funds. And, the lower the return you’re willing to accept, the higher the price you’re willing to pay, and the more deals you’ll win.

While losing out to a client occasionally annoys me, it’s an incredibly good sign for our brokerage. It means that our agents are pitching strong deals to our clients and our clients are clever enough to recognize a good thing when they see it.

Written by mjkagan

04/23/2014 at 11:04 am

Posted in Brokerage, Buying

Knowing when to push and when not to

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Have been doing some thinking about what makes an “enlightened agent”.

One very important skill / talent is knowing when/how to push a client and when to back off.

What do I mean by “push”? I mean the times during the course of a deal where the client is unsure about whether to proceed and looks to the agent for guidance.

Obviously, the agent’s strong financial incentive is to advocate for moving forward. Bad inspection report? We can fix those problems post-close. Weird easement? Everyone on the street has one. And on and on.

The problem with “pushing” is, of course, that the client can (and should) lose confidence in you if you’re always pushing. Lose the client’s confidence and nothing else matters; it’s unlikely you’ll close and, if you do, unlikely you’ll get repeat or referral business.

The flip-side of the above is that, if you have the client’s confidence, you will almost definitely earn a commission from that client eventually, even if this particular deal falls apart. And, doing a good job for the client and in a manner that preserves / enhances trust is likely to mean repeat / referral business.

So, the enlightened agent almost never pushes. Instead, she goes out of her way to point out the problems with a deal, the risks, the downsides, etc. In most cases, it should be the client who loves the deal and wants to move it forward, while the agent covers the client’s back.

What’s an exception to the above? Every once in a great while, a deal comes up which is so good that you have to push a client who is hemming and hawing. This isn’t a once-a-month kind of thing… more like once every few years. And it has to be the kind of situation where, if the client backs out of the deal, the agent feels like she would call every single one of her friends and family to raise the money to buy the place herself.

In that one situation, it is not only appropriate but almost a requirement of enlightened brokerage that you grab the client by his (figurative!) lapels and drag him over the finish line. Believe me, as someone who has been dragged a few times… the client ends up thanking you for it.

Written by mjkagan

04/22/2014 at 4:50 am

Posted in Brokerage

All yields are not the same

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Sometimes I’m guilty of throwing around yield numbers on this blog without providing specifics. I’ll say “we legged into a 9% un-levered yield” or “the cash-on-cash yield on this deal is 6%”.

Some of you are probably sitting there thinking that you can compare those yields with, for example, what you can get by lending money on Lending Club or buying treasury bills or whatever.

Those aren’t apples to apples comparisons, but those aren’t apples to apples comparisons, because they don’t take into account the tax treatment of the cashflow coming in.

To start, you need to understand that interest income of any type is taxed at normal interest rates. That means, for someone in the highest marginal tax bracket, making a loan to someone at 8% nets you something like 4% / year post tax.

Rental income is also taxed at normal income tax rates, with one big difference: You get to take advantage of depreciation.

Consider the following example of an 8% yield deal:

  • Buy a property for $1MM cash
  • Collect net operating income (rents less all operating expenses, including property tax) of $80,000 / year
  • That’s an 8% yield ($80k / 1MM = 8%)
  • But we’re not done…
  • Assume of the original $1MM price, 50% of the value attributable to the structure (eg not the land)
  • Depreciate the $500k structure straight-line through 27.5 years, implying 18,182 of annual depreciation
  • To calculate the after tax yield, deduct the depreciation from the NOI…$80k – 18k = $62k
  • Pay 50% tax on $62k, leaving $31k after tax PLUS the $18k that was sheltered by depreciation
  • Total post tax cash of $31k + 18k = $49k
  • $49k / $1MM = 4.9% after-tax yield

So, two different investments, each boasting an 8% yield. But one gets you 4% after taxes and one gets you nearly 5%.

If you don’t think that’s a big deal, then I invite you to mail me an annual check equal to 1% of your post-tax income from investments.

Written by mjkagan

04/22/2014 at 4:15 am

Posted in Buying, How to

3210 Bellevue is in lease-up

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Regular readers will remember that Adaptive Realty Fund 1 bought four deals, three of which have been exited already.

The fourth, 3210 Bellevue, entered lease-up last Friday. Here’s the relevant CL posting.

The units are really special:

  • Brand-new bungalow style 2 bed / 1 baths
  • Efficient, open-layouts
  • Private decks
  • Private yards
  • 2 outdoor parking spaces each
  • Each unit has finished storage / studio space
  • Washer/dryer, dishwasher, AC, etc.

Jon and Nicole really outdid themselves this time… I don’t think we’ve ever created nicer living spaces.

As you might expect, two of the four units leased this weekend; I expect the other two will go extremely quickly.

If you know anyone interested in a spectacular apartment in Silver Lake for $2500-2700 / month (depending on the unit), have her/him reach out to Pua [at]

Written by mjkagan

04/21/2014 at 9:55 am

How to get started in real estate

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Get a sales person license.

Join a decent brokerage.

Get your personal expenses under control so you can survive for 6 months without earning.

Read voraciously to learn about the business.

Hustle like crazy to bring in your first deal.

Work your first deal as hard as you know how.

Ask questions of your broker if you think there’s a chance you might not understand something perfectly.

Deal honestly with everyone and put your clients’ interest before you own.

Close your first deal.

Put the money away so that you can survive for 6 more months.

Close your next deal.

Make sure the world hears about your success.

Keep hustling to meet people.

Keep reading / learning.

Keep doing deals.

Keep saving.

Repeat. You’re on your way.

Written by mjkagan

04/21/2014 at 4:57 am

Posted in Brokerage, How to

A disastrous HPOZ

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Every day, I drive to work along Washington and then up Hoover and then Alvarado to Beverly.

As I drive up Hoover, my attention is always drawn to the beautiful old Victorian and Craftsmen homes in that part of town. It’s always sad, though, because the few that remain are on horribly ugly streets surrounded by exactly the same kind of cheap, awful buildings and terrible signage you see in every poor part of LA.

Yes, those remaining buildings are beautiful, so I understand the impulse that drove the city to create the Historic Preservation Overlay Zone designed to protect those buildings in the area east of Hoover, north of Washington, south of Pico and west of the 110. But it was still an absolutely horrible decision.

Think about what’s going on downtown right now. There are 4,000 apartment being built with another 10,000 in various stages of permitting. Plus, office and retail players are moving in to provide work space and the kind of amenities residents love.

That area to the west of the 110 should eventually get better, because you can’t have downtown be great and the area just next to it be a total disaster.

But the HPOZ is going to cause major, major problems.

Why? An HPOZ acts as a major check on development, because:

  1. You can’t demolish the structures that contribute to the historical designation. This means those old Victorians have to stay… but they’re totally not suited to the area, which is practically screaming out for dense, multifamily development.
  2. If you want to renovate a “contributing structure”, you’re forced to go through a byzantine city process that dictates everything down to the color of the paint you can use. So, our brand of aggressive re-positioning is handicapped, because we’re severely limited in how we can re-shape the buildings. Without access to the full bag of tricks, the achievable rents are much lower, making renovating these properties pretty much a non-started.

If you can’t fix them up and you can’t tear them down, what you have left is a major, permanent brake on development in an area which is absolutely critical to the continuing transformation of the city.

I love beautiful old buildings as much as the next guy (fixing them up is my life’s work!) and there are examples of HPOZs that work OK (Angelino Heights comes to mind). But this one doesn’t. And a few old, dilapidated buildings ought not to stand in the way of the dense, multi-unit housing that LA so desperately needs.

Written by mjkagan

04/18/2014 at 10:56 am

Posted in Development

How to think about the future of inner-city multifamily

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Curbed LA had an alarmist piece yesterday re the increasing “un-afordability” of LA apartments that I think draws attention some important long-term trends shaping the apartment business.

First, here’s the money quote: “…[A] person earning median income in LA would have to spend 47 percent of that income on the median rent. That’s higher than any other city in the US.”

What’s going on? Let’s separate supply and demand.


  • A large portion of LA’s apartment inventory in “locked up” by rent control (if you’re paying 20% below market, you ain’t leaving… and the more rents around you increase, the less incentive you have to move)
  • No one built anything during 2008-2011 because the market was so bad
  • It’s incredibly hard to build now, because restrictive zoning makes land extremely expensive
  • So, supply is constrained (existing stuff doesn’t turn over, very little new stuff comes into the market, and all the new stuff is high-end to allow the numbers to work with extremely high land prices)


  • There is a major population bubble percolating through our national demographics… there were a lot of babyboomers, those boomers all had kids around the same time, and those kids are all in the apartment market now
  • Many of those kids, particularly the ones who graduated after 2008, were initially unable to find jobs, so they stayed in their parents’ homes
  • As the economy has begun to get better, those kids are getting jobs right alongside the kids graduating today… and all of them are looking for their own apartments
  • Plus, a whole bunch of older people in their 30s and 40s were foreclosed out of houses in 2007-10 and aren’t interested or able to get new loans to buy, so they’re clogging up the top end of the rental market (where people usually “graduate” into home-ownership)
  • Finally, and this is really important, there are a whole bunch of relatively well-educated “renters by choice” who could afford to buy homes but either don’t want to (because they saw friends / family get screwed) or, more interestingly, are priced out of owning the kind of homes they want to own in the neighborhoods they want to stay in… unwilling to compromise on either, they remain renters

So, in LA, we have a very slowly growing supply of apartments and surging demand. Hence, the price increases.

There is going to be a temptation to extend rent control to younger buildings to please increasingly strapped tenants. But this would only repeat the mistake we made in 1978- it would shrink supply further and thereby put even more upward pressure on prices in the spot market (rents).

The answer to our problem is to identify areas well-served by mass transit, dramatically increase the density allowable in those areas, and decrease both the required parking and the minimum unit size. We should be pumping out well-designed micro-lofts with 0 or 1 parking space(s) as fast as we possibly can.

Written by mjkagan

04/16/2014 at 4:35 am

Posted in Development

Happy tax day

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Every April 15, I go through the same emotional two-step:

1. Outrage. Since we’ve got Adaptive on a firm footing, I’ve been writing fairly large, annual checks to the IRS. It’s painful every year, because it feels like the government puts a major impediment in the way of anyone trying to turn earnings into wealth. It doesn’t seem fair that, as my income surpasses the level necessary for my family to have a decent lifestyle and begins to allow me to accumulate capital for investment, the government helps itself to 50%.

2. Acceptance / appreciation. If you look back through human history, our situation is quite rare. On the one hand, the government provides the safety, security and contract enforcement necessary to undertake our kind of complex projects. On the other hand, the government also allows us the freedom to do so, without requiring bribes or special familial lineage or anything like that. We live in an amazing country where, if you are ambitious, disciplined and honest, you can do almost anything. And paying taxes supports / enables that state-of-affairs.

Am I going to over-pay my taxes in thanks? Hell no. But I will think about the people who created this amazing place and the people who have worked so hard to keep it amazing, smile, and sign the check.

Happy tax day.

Written by mjkagan

04/15/2014 at 9:39 am

Posted in Building Adaptive

1012 N. Virgil is sold

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We’re very pleased to announce (belatedly!) the sale of 1012 N Virgil, a 4plex renovated by Adaptive Realty through our first investment fund.

Here are the numbers:

  • Purchased for $427,000 in November of 2012
  • Renovated for $380,000
  • Rent roll upon completion of $111,000
  • Approx. $40,000 in cash collected prior to sale
  • Sold for $1,274,000 at the end of March 2014

If you do the numbers, you’ll find this was an approx. 50% ROI deal. No the absolute best we’ve ever done, but pretty close!

The new owners are experienced investors with whom we have a very good relationship. We’re going to be managing the building going forward and we expect that the new owners will generate very attractive returns from cashflow, particularly given the cheap leverage to which they had access.

Written by mjkagan

04/14/2014 at 4:39 am

Thinking about retirement

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(Not me – don’t get excited.)

Over the past few days, I attended a conference for wealth managers. I won’t lie: My intention was to meet the people tasked with managing assets for affluent investors, with the idea of convincing some of them to steer their clients my way. Turned out to be the wrong decision; these guys can get sued to kingdom-come for putting clients into private deals that go bad, so they’re very reluctant referrers.

But just because the conference wasn’t right for me doesn’t mean it wasn’t interesting. One of the things that kept coming up was the fear that many investors have of outliving their assets in retirement. This got me thinking about how income producing real estate fits into a retirement plan.

The cool thing about income producing real estate purchased with a mortgage is that it is effectively a tax-efficient vehicle for forced retirement savings. What do I mean? Consider the situation of someone who buys a small apartment building in her thirties:

  • Say she puts down $200k on an $800k property with rents of $73k and net operating income of $45k (a 5.6% CAP)
  • To finance the deal, she takes out a $600k mortgage with a standard 30 year amortization and a fixed interest rate
  • Say further than she does a reasonable, but not spectacular job managing the building
  • Each month, before she pays out any cashflow to herself, she makes the mortgage payment, reducing what she owes the bank
  • The interest on the payment is tax deductible
  • And the principal portion of the payment, which is taxable, is more than offset by the depreciation
  • In addition to retiring the mortgage little by little, the building spits out some cash each year

Here’s what happens to our investor as she is hitting retirement age in her 60s:

  • The building pays off its own mortgage 30 years after the acquisition
  • The investor now owns an asset which is worth whatever 2044′s equivalent of $800k is (assuming it increases in value along with inflation; she should do better if the property is well-chosen) – whatever else she did with her money during her life, she has a big asset free and clear
  • Assuming rent and expenses grew at the same rate as inflation, once the mortgage is repaid, she’ll have an income of 2044′s equivalent of $45k / year

Whatever else our investor did with her finances during her life, she’s going into retirement with an income of $45k / year and an asset worth $800k. That doesn’t make her rich, by any means, but it does make her self-sufficient, particularly coupled with her government-provided healthcare (Medicare) and income support (Social Security).

Can you rely on just one apartment building to see you through retirement? That’s probably a bad idea. But, if you manage to get 1-2 of these deals done in your thirties plus behave reasonably responsibly over-all, you’re going to end up just fine.

Written by mjkagan

04/11/2014 at 8:23 pm

Posted in Buying, Uncategorized