807 N Madison is leased up

We just finished leasing up the front structure at 807 N Madison, our most recently completed renovation project.

Leasing the 10 units took us something like 31 days.

We began construction in mid September of 2014, so the entire process took approx. 300 days (a little longer than we would like, due to some unanticipated plumbing issues).

Rents ended up ~18% higher than we initially forecast. My gut feel is that something like 5-10% was the rental market tightening and the rest was good execution.

Move-ins are going well (a major tribute to our development and management teams) and so far the tenants seem to love their new homes.

Perhaps best of all, per four different neighbors who have approached us, the building went from being the source of all kinds of problems for the neighborhood to being the nicest building on the block.

We look forward to hopefully managing the property on behalf of the present owners forever!

What’s going on today

Just in case anyone thinks what we do is glamorous, thought I’d give you guys a sense for what I’m working on today.

Am working on securing four different loans:

  • Refi of a stabilized property so we can return ~70-80% of the capital invested to our investors
  • Two bridge / construction loans
  • One line of credit for Adaptive, itself

Am removing contingencies on a six unit deal and reviewing the diligence on a 16 unit deal we inspected late last week.

And, to top it all off, am arranging to pay the guy whose garage we moved for his time “supervising” (because everyone always wants a taste).

An irritating refinancing issue

Have just begun the process of refinancing 201 N Ave 55, a 12 unit property we renovated and recently stabilized.

Thought I’d share with you an irritating issue I’m running into, so that you aren’t surprised when it happens to you.

Let me begin by giving you some sample numbers. These aren’t actuals for the building, because I don’t want to give my competitors my real numbers, but they will serve well enough to illustrate the point.

The numbers:

  • Acquired for $2MM
  • Renovated for $500k
  • So, all-in for $2.5MM
  • New rent roll of $250,000
  • Stabilized valuation (in my opinion) of 12.5x GRM = $3,125,000

My starting point for a refinancing is to ask the bank for 65% of the new valuation, or $2,031,250.

Their counter is that, since the property has only been stable for a few months, they’ll only do 65% of my cost, or $1,625,000. Or, I can wait for a year, and then they’ll go off appraised value.

Can you see how irritating this is? At $1,625,000, they’re only at 52% LTV against my value… which is way too little leverage to lock in for 7 years (during which there will presumably be rent growth).

I can understand the bank not wanting to cash me all the way out (eg loan me $2.5MM). But 65% of cost is ridiculous.

Fortunately, I have good relationships with 2-3 banks who I think will see past this nonesense and look more at the value of the building and less at my costs.

Some advice I wish I had received

Going back to Princeton for reunions recently caused me to do some thinking about my personal network, which led me to thinking about advice I wish I had received when I was a kid.

The advice is this:

  1. Your personal network is the most important factor in your career;
  2. Your highschool and college years are the most important period for building your personal network; and
  3. It’s critical that you consider the above when deciding with whom to associate yourself during highschool and college.

Through a combination of being smart and (very) lucky, I managed to get myself into Andover when I was 14. While I was there, for reasons which I can not now remember, I made it a point to try to surround myself with people smarter than me. This wasn’t a financial calculation; I just liked being around interesting people.

Later, at Princeton, having kind of burned out on academics, I spent a lot of time drinking beer in a fraternity composed, to a large extent, of misanthropes and at Terrace, the “artsy” eating club.

Can you guess which of those networks has been most important to my career? Hint: It’s not the college ones.

In my business, early in your career, the most important factor in determining whether you will be successful is access to capital. Many of those smart guys with whom I spent hours clowning around in Andover dorm rooms went on to found companies, work at PE funds, etc. And that’s where the vast majority of my earliest real estate capital came from.

On the other hand, while I have raised money via Princeton connections, the amount is very, very small in comparison.

Looking back, I don’t regret the fraternity nor the eating club… I had a blast as part of both institutions. But I do regret not making more of an effort at Princeton to get to know people who were more ambitious and business-minded. God knows, there were plenty of them around.

Somehow, no one ever advised me about how important that was. But now I’m putting the advice out into the world, in hopes that you, my readers, will share it with the young people you know.

Why I intentionally have a bunch of vacant apartments

Right now, I have a bunch of apartments sitting vacant.

That sounds crazy, right? After all, we are in the business of renting apartments. Having vacancies means we’re intentionally not maximizing revenue, which means a lower return to us and our investors.

So what’s going on?

Well, we bought a bunch of buildings a few years ago in an emerging area we like very much.

So far, the rents in this area are not high enough to justify the costs associated with renovating the buildings, so we’re basically running them as-is while we wait for rents to rise.

When you’re running a building and a tenant vacates, obviously your move is to find another tenant.

But we still intend to renovate these buildings in the next few years, and here’s where the problem comes in.

All of the buildings are rent-controlled. That means, once we put a tenant in a unit, there is no way for us to make them leave, even if we want to renovate the whole building.

So, we’re faced with an annoying catch-22: If we want to maximize revenue, we should tenant the vacant units. But, if we do, it’s likely that we’ll end up having to pay those very same tenants a lot of money to move out within the next few years.

Right now, we’re in the process of doing a cost-benefit analysis to determine which of the units we should go ahead and rent. But, for the time being, we’re sitting there with intentional vacancies in a very tight rental market.

Just another one of the insane consequences of rent control…