# When a foot isn’t a foot

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I’m mostly a price per sq foot buyer. Because I always renovate, I’m not very interested in the income of the building prior to acquisition. I am, however, extremely interests in the structure I am buying, since that structure is the raw material we will work with to produce the eventual product we are selling: Wonderfully renovated apartments.

I told the people who attended our seminar recently that I start to get interested around \$200 / sq ft. But that brings us to the subject of today’s post: The fact that all square feet aren’t created equal.

Here are some examples of situations where a \$200 price / sq ft still isn’t cheap:

1. Where you have wasted space. Picture a standard 1920s center hallway building. The center hallway is often 5′ wide. If the building is 100′ long, you’re wasting 5 x 100′ = 500 sq ft per level on hallways. No one pays rent for hallways, but, as a buyer you’re still paying for the space and, as a renovator, you’re still paying to fix it up. So, center hallway buildings need to be priced at a discount to \$200 / sq to be interesting.

2. When you have huge units. The economics of our business are to a large extent determined by the achievable rent per sq ft. What kind of units generate the highest rent per sq ft? Studios. Think about it: A renovated 375 sq ft studio in Silver Lake can get \$1300 all day – \$3.47 / sq ft. A renovated 600 sq ft 1 bed / 1 bath gets \$1700 – or \$2.83 / sq ft. A 1300 sq ft 3 bed / 2 bath gets \$3000 – \$2.31. As you can see, the larger the unit, the lower the price / sq ft achievable.* Therefore, the return to the buyer of a building priced at a given \$ / sq ft declines as the unit size increases. A building with lots of studios priced at \$200 / sq is likely to be considerably more attractive than a building with lots of 3 beds priced at \$200 / sq.

3. If there’s no land. Price per sq ft looks at the structure, but that’s not the only component of building value. For example: Look at our deal at 3212 Bellevue. We’re going to sell that thing at a price which will equate to \$425 / sq ft or something. Sounds really high, right? But you have to consider that Bellevue is on 10,000 sq ft of land. That much land allows us to give all the units parking, storage, private outdoor spaces, decks, etc. The result: Very high rents / sq ft. And very high rent / sq ft imply a very high price / sq ft on exit. The opposite is also true: If you have a \$200 / sq ft building with no space available for parking / outdoor space, then your rents are going to suffer, which means that \$200 / sq ft may not work.

If you start to consider the above rules in reference to lots and lots of deals, you will find that there are all kinds of interesting interactions that take place when you combine buildings of varying configurations with  units of varying sizes with lots of varying sizes. Deals which don’t look great reveal themselves as almost certain winners. And deals which superficially look like winners end up looking very risky indeed.

*Incidentally, this is one of the reasons zoning limits the number of units on a given lot… otherwise, developers would build huge buildings full of lots of very small studios.