Wading through crap


Regular readers know I deal mainly in apartment buildings between 2-20 units. In doing so, I run across all kinds of issues, including missing financial records, bad leases, lack of estoppels, un-permitted construction, city violations, etc.

Many of these problems just don’t exist when you deal with larger assets. That’s because larger assets tend to attract more sophisticated owners, brokers, managers, lenders, etc.

So, why do I persist in working on smaller deals? After all, I’m good enough at my job now to buy, renovate and sell 50 unit complexes more or less as easily as I do 12 unit complexes.

The reason has to do with returns. There is a limited number of large assets in Los Angeles. All the relevant players know about every sale. And all the relevant players bring more or less the same ideas / financing / etc. to bear on every opportunity. So, the buyer of big assets is typically the guy who was willing to accept the lowest return.

In contrast, there is an almost infinite number of smaller deals. The people who buy and sell them are generally less sophisticated. The properties themselves are typically managed in a sub-optimal fashion (to put it mildly), with low rents, deferred maintenance, bad design, etc.

Guess what that means? The opportunity to earn out-sized returns if you are willing / able to wade through all the crap and sort these smaller buildings out.