Moses Kagan on Real Estate

What can go wrong with an apartment building

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Anyone who tells you that any investment is risk free is full of ish. People thought government bonds in Europe were risk free and look where that got them.

In order to make sure you don’t think I am full of ish, here’s a list of the things I can imagine going wrong with an apartment building investment in LA, in no particular order:

  1. Earthquake. Earthquake insurance is very expensive, so most owners choose not to get it. While older buildings have all lived through earthquakes, you never know when a big one could hit and cause damage you have trouble paying for;
  2. City inspection nightmares. Owning a building exposes to all the bureaucratic BS Los Angeles Housing Department can throw at you. Mostly, it’s fine. But you can find yourself in messy situations with them… which is when you should call Tom Nitti;
  3. Rents go backwards. This happened on our Reno deal. When we bought, rent for a one bed was $1,200 and for a studio $1,000. Then the economy went in the tank and we went as low as $950 for a one bed and $850 for a studio (I think). If you’re highly leveraged, this can cause you problems!
  4. Unforeseen repair / maintenance issues. We recently had to shell out $6,000 for a boiler that broke. It’s tough to negotiate a low price with the boiler company when 16 tenants have no hot water and are calling you about it.
  5. Your interest rate jumps. Not a problem for standard, fixed 30 year loans on 2-4 unit buildings. But on bigger ones, you might come to the end of your rate-lock period (after 3-, 5- or 7 years), only to find that loans are a lot more expensive than they were before.
  6. Bad tenants. Sometimes bad apples slip through. They cause trouble or don’t pay rent and it takes you a few months to get rid of them.
  7. The market tanks. Maybe you bought at a 6 cap and now the market is a 7 cap. As long as you don’t have to sell, no problem. But if you do, you’re taking a loss.
  8. Can’t sell quickly. If you have a stock you want to sell, you can always find a buyer quickly. Not so for an apartment building. Even at a fire-sale price, it takes a minimum of 2-3 weeks to sell; much more if you want a fair price.
  9. Crime. I had an idiot break into one of my buildings a few months ago. No harm was done, but he scared the sh*t out of my tenants, a few of whom broke their leases and moved out.

Unless you’re as dumb as the guy who broke into my building, you know that there’s no such thing as reward without risk. Owning a building is really owning a small business, and businesses sometimes have problems. That’s life.

But the reward is you get a 8-12% return on your money, instead of the 0.0034% you’re getting from a bank right now. And, as a landlord, you learn a hell of a lot about the world and about yourself along the way.


Written by mjkagan

02/22/2012 at 9:37 am

Posted in Uncategorized

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