How we forecast the rents

One of our key advantages in this business is our ability to accurately forecast rents for renovated units.

We’ve previously discussed the importance of this skill: It’s understanding the rents that allows you to properly underwrite deals.

We are able to do such accurate forecasting because we are constantly leasing renovated units in the neighborhoods in which we are doing projects. By looking at how fast our existing units move, we get a good sense for how similar, future units would move (with the obvious caveat that the rental market could always change).

If you think about the above paragraph, you will realize that our degree of confidence is highest in neighborhoods where we have loads of units and lowest in neighborhoods where we have few / no units.

And that’s why I’m so excited to have projects totaling 27 units finishing up in the next 30-60 days or so in East Hollywood, Silver Lake and Highland Park.

The resulting leasing data will help us determine whether we can afford to pay the extortionate prices owners are already seeking in those neighborhoods, or whether I’m going to have to move to Pacoima.

Another trip to SF and why I hate setbacks

Just got back from a trip to NorCal, during which I drove through San Francisco twice.

Could not stop staring at the buildings, which are generally built all the way to the lot lines in the front and on the sides of the parcels.

It’s just shocking how much better a city looks with no front and side setbacks.

With no empty space in the front and no way for intruders to get around the sides of the buildings, you can dispense with the fencing… don’t think I saw a single chain link the whole time I was there.

Also, with no front and side yards, SF must be consuming far, far less water per acre, since there’s no temptation to try to recreate New England by planting water-hungry grass.

I know this type of dense, urban development isn’t right for the whole city of LA. You wouldn’t want people to suddenly start building to the lot lines in a residential neighborhood.

But I don’t see why we can’t encourage this kind of building on our main commercial streets. Everyone wants walkability and this is how you give it to them.

A little taster from the front lines of LA’s parking wars

If you’re wondering why we have a shortage of housing in Los Angeles, I’m here to shed a little light.

We recently bought a duplex with the plan of adding a second story and two more units. This is exactly the type of deal the city should love: We’re adding additional housing to a neighborhood that desperately needs it.

The business plan calls for building a funky parking structure at a cost of around $80k to create enough new parking to allow us to add the new units.

However, we knew going in that there was a reasonable probability that we would be able to avoid building the parking structure, which would allow us to reallocate a portion of the $80k to the building (while pocketing the rest of the savings as increased margin on the deal).

But the city is not going to make it easy on us. Check out this email from the architect working on the project:

“So I met with a different preliminary plan check guy at the city yesterday about the parking. He said technically the design meets the parking requirements but he did say that during plan check they might question the actual ability of a car to maneuver into the end spots. They might not say anything, but he said it was possible.  He also said that the way to be 100% certain is to hire a traffic engineer that uses some type of software to prove that a car can do it.  My feeling is it won’t be an issue at all, but he wouldn’t 100% guarantee anything.  Let me know if you want to just submit the plans and see if any issues are raised or hire a traffic engineer first.”

The city is saying: Yes, your design meets the (ridiculously strict, suburban-style) parking code. However, we’re still not willing to absolutely confirm we’ll approve it. We might. Or we might not.

Now we have a choice: We can go ahead and submit the plans without the parking structure. The city will take a few months to review. They may approve. Or they may force us to re-design to add the parking structure and then re-submit, burning even more time.

Or, if we want certainty, we can spend a bunch of money and time on having a parking engineer (what a job!) build a software model of the design and determine if a car can back out of a spot which already meets the city’s own published code.

All of this to add two more units (with parking!) to a neighborhood where many, many units have no parking provided at all and where rents are skyrocketing because of the lack of supply.

…And people wonder why LA can’t build enough housing to keep up with demand!

The two sides of our business

One of the weird things about our business is how different it looks to Jon and me.

On my end, most deals are almost abstract.

I can tell from the location, the building, the existing rents, and the price whether we can make money and how much. For me, then, it’s mostly about passively looking at endless numbers of deals until I spot one where the above factors line up, then trying to win the auction for the property before someone else realizes it’s a good deal and steals it away from me.

Once I’ve got the deal, because I have the luxury of working with Jon and an incredible team, I’m pretty damn sure the numbers will end up where I forecast them, if not better.

For Jon, the business looks entirely different.

For him, buildings are most assuredly NOT abstract. They are collections of fiddly, annoying problems that need to be solved. The solutions don’t necessarily need to be 100% optimal, but there’s an enormous difference between 50% and 95%… a difference we count on to make our numbers work.

To make matters worse for Jon, he’s not working with automatons. He has to find, employ and manage contractors, each of whom has his own agenda, needs, level of experience and expertise, etc. Even under the best of circumstances, when we’re working with an experienced, (mostly) honest contractor with whom we have a long relationship, there are inevitable disagreements about scope, change orders, timing, etc.

Obviously, the thing that makes us a good team is that I set up the deals and then Jon knocks them down.