Rent vs. buy

This article in the Times is worth reading.

The argument is basically that we’re entering bubble territory in single family home pricing in the main coastal cities.

I think the rent estimates they’re using may not reflect the rents that are actually getting paid.

That said, when I see small houses on small lots in B+/A- areas trading at $1MM, I get nervous for the buyers.

What’s wrong with downtown?

I just came from a conference called the “Future of Downtown”. Onstage were a whole bunch of the key players in the development boom downtown, including the head of Mack Urban, the West Coast guy for Brookfield, the head of EVOQ, etc.

All the talk was about how great downtown is / will be. Cool – I get that.

To the extent that any problems were discussed, it was mainly around whether the convention center will be expanded / improved and whether or not the market can absorb all 3,000 hotel rooms currently under construction.

No one mentioned the two biggest problems with downtown, so I guess I will:

1. The insanity of the parking requirements. This one is pretty obvious. There is an incredible amount of pent-up demand from people who want to live, for example, in the Arts District. But it’s incredibly hard to develop anything there, because the city insists on absolutely insane parking requirements. Why on earth are we mandating parking and thereby restricting development of the dense, in-fill housing that people want and that society needs, in one of the few places in the whole county where a car is not really necessary? It’s mind-boggling. Expand the adaptive reuse ordinance to the whole of downtown, and watch as an incredibly vibrant city emerges.

2. Skid Row. Back in the 1970s and 1980s, the city decided to concentrate services for the mentally ill and homeless population right in the middle of downtown. The result is that there are approximately 3-5,000 people who spend their days hanging out on public sidewalks, using them as toilets and open air drug markets. Concentrating poverty and distress goes against every single thing we know about healthy societies. For downtown to reach its full potential as a walkable, 24 hour / day series of interconnected, multi-use neighborhoods, someone is going to have to break up this tangled knot of pathologies. It’s going to take a lot of money, persuasion, and will, but it absolutely needs to be done.

3210 Bellevue is done

Signed the last lease on Monday. We’re at $122,160 / year gross, a bit better than I expected when we bought the property last summer.

I’m estimating the unlevered yield at around 8.7% / year… not amazing, but definitely a big win in today’s market.

If lending markets were rational, I’d be able to refi out a bunch of cash, something like:

  • Pull out $1MM in cash and return it to my investors
  • Interest rate of 4.75%
  • Annual debt service of $63k
  • NOI of around $96k
  • Free cash of $33k
  • Around $100k of cash remaining in the deal
  • So, $33k / $100k = 33% levered return

Irritatingly, banks are really painful about cash out refinancings, particularly for 1-4 unit properties.

I’ll probably hunt around for some options and then compare them with what I can get from just selling the deal.

If you know of a bank that understands Silver Lake / Echo Park and makes 1-4 unit loans, drop me a line!

A terrible, terrible feeling

Was looking through some public records yesterday and came across this little bit of heartbreak:

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1516 Micheltorena LLC was us, through our old entity, Better Dwellings. We purchased the property from Kinsling in September of 2010. We bled and sweated over that property, transforming it from a beat-up old dump into a beautiful place to live. Then, we got very high rents.

So far, so good. But Better Dwellings had a fatal flaw: All of the money came from one investor (one of my best friends in the world). Because he put up all the money, he got the right to liquidate the portfolio at the time of his choosing. And he chose the second half of 2012. I wasn’t happy with the timing, but he had both the legal and, even more important, the moral right to liquidate.

I found a buyer and rushed to get a sale done by the deadline, accepting an outrageous, last-minute price chip because I had promised to be fully-out by the end of the year.

Turns out I left $475,000 of totally unearned profit on the table by selling early. Ouch.

Why did I sell?

That’s how I feel about nearly every one of the deals I’ve ever sold (16 so far, 13 renovated through Better Dwellings and three completed through Fund 1).

Why did I sell? Because I’ve always done deals with investor money, and investors always (understandably) want to get paid. And, because we don’t really make a lot of money on a deal until we sell, we’re not exactly going to dig our heals in and refuse to exit.

But, looking back on our deals, I think selling is often a mistake.

Why? By the time we’re done with a deal, it’s:

  • Newly renovated, with permits
  • Full of credit-checked tenants with good security deposits, on modern, reasonable leases
  • Yielding 7-12% / year, un-levered (the range is mostly dependent on the entry price; the hotter the market, the lower the yield is likely to be)

If you can get yourself into that position in a decent neighborhood in LA, then you probably ought to put some reasonable debt on the property and hold it, right?