Inspection day (again)

We have a buyer inspecting one of the properties from Fund 1 today, so I thought this would be a good opportunity to discuss how you ought to behave when you, as a seller, attend a buyer’s inspection of your property.

Here are the key things to keep in mind:

  1. Be honest. You never, ever want to lie during a sale process. If you get caught, the buyer instantly loses all faith in what you’ve told him through the entire process, making it much harder to make a deal. If you don’t get caught, you’re setting yourself up for a lawsuit later on, once the buyer finds what you’ve hidden from him.
  2. Admit when you don’t know something. It’s ok not to remember something about the property. A perfectly fine response to a question about, say, whether you replaced the sewer line in addition to the drain lines is to say “I don’t know. Let me get back to you in writing by tomorrow afternoon.” That’s a much, much better answer than lying.
  3. Don’t ramble. I’m guilty of this one all the time. When someone asks you a question, answer it. But there’s no need take off on a major lecture. The buyer is there to see the property, not interview the seller.
  4. Give the buyer privacy with his inspector(s). Don’t hover / eavesdrop. It makes everyone uncomfortable and possibly causes the buyer to doubt the veracity of what his inspector tells him (“maybe he was holding back because the seller was there…”). If there’s something wrong with the property, believe me, you’ll hear about it in writing from the buyer or his agent.
  5. Don’t take things personally. Some buyers like to spend the inspection period pointing out niggling little issues with the property. That’s their trip; you don’t need to go on it with them. Just smile, nod, and move on.
  6. Be personable, but not overly friendly / jocular. You would be amazed at how many deals go bad because buyer and seller interact and decide they hate each other. It’s hard enough to make a deal without that kind of interpersonal nonsense getting in the way. So, keep it calm and friendly, but also business-like. No need to risk screwing up a deal by rubbing the other guy the wrong way.

Why most Angelenos waste water

Our on-going drought was a big part of Gov. Brown’s State of the State speech today.

One of the iron-clad rules of conservation is that people only conserve when they directly feel the cost of not doing so. And yet, in LA, the majority of households do not pay their own water bills, and therefore have zero incentive to conserve water.

Why don’t people pay their own water bills? Because 60% or so of households are renters, most in multi-unit buildings. Very, very few buildings are separately metered for water, so the landlords eat the water bill for the entire building each month.

Why aren’t buildings separately metered for water?

  1. DWP makes it incredibly difficult / impossible to do so for all but the largest buildings; and
  2. Tenants groups would resist a change, because they would be worried about landlords putting this new expense on tenants

But there is an easy solution: Force DWP to institute a program whereby water can be separately metered, just like they already do for electricity and just like the Gas Company does for gas. DWP already charges for new electrical meters; there’s no reason they couldn’t charge for water meters as well. And owners would pay, because even a relatively high upfront cost would be offset by the permanent savings in operating costs.

But what about the tenants? Under the law, you can’t unilaterally change terms of an existing tenancy, so landlords have no right to spring a water bill on tenants while they are in residence. However, if a landlord separately meters his building and a unit turns over, then she can include in the new lease that the tenant will pay for water.

The change outlined above would not correct our conservation problem immediately, since very few units turn over year-to-year. However, over time, as more landlords separately metered their buildings and more units turned-over, we would gradually move from being a city that wastes water to one that conserves it.

What do I think you should do?

Go buy a 2-4 unit apartment building in reasonable condition, at a reasonable price, with reasonable debt.

Don’t sell it, even when the price goes up.

Save money.

When you’ve saved enough, buy another one.

Do this four times, after which you won’t be able to get another 30 year fixed mortgage.

Then move on to larger buildings.

Don’t sell those, either.

If you carry out the advice above, you will 100% die rich. How long it takes for you to get rich will depend on how quickly you can save up down-payments. But the outcome is not in doubt, so long as you have the fortitude to stick to the plan.

The problem for most people is that they don’t have the fortitude. Do I? Not sure.

Do you?

What is a good NOI?

I see what people search on Google that brings them to my blog. This was a question yesterday that I thought begged for an answer.

First, let’s review what “NOI” is. It’s “Net Operating Income”, or what’s left over after you take in your rents and pay out all of your expenses, including property taxes, but not including mortgage payments or income taxes.

For example: Say you have a duplex where each unit brings in $2k / month. Let’s say the property taxes are $6k / year and the other expenses (property insurance, maintenance, utilities, etc.) are $10k / year. The rent is $2k x 2 = $4k / month x 12 = $48k / year. The expenses are $6k + $10k = $16k. So, the NOI is $48k – $16k = $32k / year.

Sounds good, right? Well, knowing the NOI number without know the price of the asset is kind of meaningless, and that’s the problem with the question that is the title of this piece.

Imagine you paid $5MM for an apartment building, all cash (so there’s no mortgage payment). If the NOI is $32k / year, the return on your $5M investment is $32k / $5M = 0.6%. 0.6% / year is a horrific return. [Note: Regular readers probably recognize this calculation as a CAP rate, which is NOI divided by price.]

Now imagine you paid $350k for that same asset. Now you’re making $32k on a $350k investment, or $32k / $350k = 9.1%. Getting to a 9.1% cash-on-cash return is pretty incredible!

Bottom line: Knowing the NOI alone is somewhat meaningless. You need to know what someone is asking you to pay for that NOI to figure out if you want to own it.

Catching up

There are a lot of new readers here recently. Welcome.

You may have noticed that the topics here jump around some. I tend to write about whatever I’m working on at any given moment, and that can vary. But it’s important to me that you get what you are presumably here for – an education about buying, managing and selling apartment buildings in Los Angeles.

Here are some pieces I think are particularly important, grouped loosely by topic. Note that there’s a lot more in the blog… I’ve been writing almost every day for nearly 18 months now, so there’s plenty to dig into if you have the time.

Enjoy!

Why you should own apartment buildings:

How to think abiout value and how it increases:

The buying process:

Thinking about managing buildings:

Selling: