For a long time, as young professionals aged into their late 20s / early 30s, they would move out of LA to suburbs in search of a big single family home with a yard, etc.
Demand for apartments in LA, particularly in the areas east / north of Hollywood, was therefore mostly constrained to professionals in their 20s and working people who did not have the income or assets to move out to the suburbs. (That’s not to say there weren’t / aren’t exceptions… we’re speaking in broad strokes here.)
It’s not clear what caused professionals to stop moving to the ‘burbs. The trend really began in earnest around the beginning of the Great Recession in 2007-8. So it may have been that professionals didn’t have the money to move or couldn’t get the loans.
Another explanation was that 2007 was when the first of the Millennials (the massive generation born roughly 1979-2000) hit the age when previous generations would have started to consider moving to the suburbs… but the Millennials basically said “nope” to the high consumption, high debt suburban lifestyle.
Whatever the reason, LA finds itself with a major problem / opportunity: The Millennials are staying in the city and competing with more traditional renters (the young and the working class) for housing, driving rents through the roof. So either the city is going to find some way to allow developers to massively increase supply, or we’re looking at rapid rent increases for the foreseeable future.
We have a reasonably interesting, off-market 4plex deal that we’re going to send out tomorrow.
It’s not going to set anyone’s world on fire, but we think it’s a worthwhile project for someone who likes Silver Lake and is willing to do some work to add value.
And the end result would be a fully-renovated building in an area which is already great and still improving rapidly at a material discount to the cost of just buying something similar on the open market.
We finally sold the last Fund 1 property yesterday and I thought I’d take the opportunity to share the (unaudited, unofficial) numbers:
Purchased 5/23/2013 for $690,000
Spent ~$410k renovating (including all fees to Adaptive)
So, all in for $1.1MM
Took in ~$40k from rents while we owned it
Sold 10/9/2014 for $1.42MM
Net sale proceeds of ~$1.32MM
Profit of ~$260k on $1.1MM
ROI of 24% in 17 months
As on the other Fund 1 deals, we did not use any leverage. That had the effect of hurting the ROI but, obviously, reducing the risk.
When Jon and I set out to raise Fund 1, we had no idea if we were actually going to be able to get the money together. There was no Adaptive brokerage or property management team. There were no fee-for-service deals. In fact, none of the people who now make Adaptive so awesome were with us yet. It was just Jon and me in a tiny office on 7th and Grand Downtown.
We went out and asked friends and family if they would invest with us. A bunch said “no”. Some said “yes”. And some people who are savvy investors but who were not then friends of ours said “yes”, too. It wasn’t that much money ($3.57MM), but it was enough to build a business.
Now, exactly two years later, it feels really great to be able to go back to those investors who believed in us, hand them their profits (they already got back all their capital) and say, as I always do in every single letter I ever write them, “Thanks for trusting us with your capital” and to know that that trust was rewarded.
The owners probably bought the buildings a million years ago for pennies, their property taxes are likely incredibly low. And the rate of growth in the buildings’ values is dramatically outpacing the growth in the carrying costs (principally property tax, capped at 2% annual increases). If you have a $5MM asset growing in value at, say 5% / year ($250k) and costing you, say $25k in carrying costs, you’re in no rush to sell.
At some point, someone will tempt these owners will very high offers for their buildings and then convert them. But, in the meantime, in the midst of a dire shortage of housing, we have prime real estate sitting vacant.