Moses Kagan on Real Estate

Today, we’re looking at rents in the USC University Park area. It’s an older neighborhood, centered on the University, with loads of old Victorian and Craftsmen homes in various states of repair.

Situated between downtown and South Los Angeles, there is easy access to the 110 and 10 freeways and the Expo Metro line.

Given the proximity to campus, much of the rental housing is geared towards students, pushing rents higher than usual for an area where the median income is under $20,000. Unlike many of the other neighborhoods surveyed recently, there is quite a bit of inventory, albeit at much higher prices.

Here are the highlights of our survey:

• Median asking rent for one bed / one bath units was $1395 / month
• Median asking rent for two bed units was $1900 / month.
• Median asking for three bed /on bath units was $2,200 (the sole 3/3 unit was listed for $3,000)

Aspiring landlords in the area ought to remember that renting to students is not like being a normal landlord. You end up dealing with turn-over every year, loads of wear-and-tear on the assets, and rent collection issues. My strong advice if you’re thinking of becoming a student housing landlord is to get the parents to co-sign all leases and collect very large security deposits. Consider yourself warned!

The fine print: For our rent survey, we looked at apartments for rent in the area defined as USC University Park by the LA Times neighborhood mapping project. Here’s the raw data: University Park Rent Survey 3-12 (1) 

Small apartment building pricing in Silver Lake continues to be very strong, driven by continued gentrification-driven demand, low supply and historically low interest rates.

We ran the numbers on deals for 2-4 unit buildings in Silver Lake (as defined by the LA Times) that closed between September 1 and December 31, 2012, are here’s what we found:

1. 17 deals closed. That’s an active quarter, but not a crazy one. 

2. Sale prices came in at 99% of list. There were very few instances where buyers got real bargains; mostly, sellers got what they asked for.

3. Median price per square foot was $286. This one was influenced by REOs and at least one property that is a tear-down and sold for land value only.

4. Median gross rent multiple of 15.2x. Unbelievable. There’s little to no return on the cash used for a downpayment if you pay 15x. So these buyers are basically betting on appreciation. Not a crazy bet, but why not just buy a house and save yourself the hassle of dealing with tenants?

If you own one of these properties, now would be a good time to think about investing to see if you can capture higher rents and, thereby, increase the value. But we’re not quite at the point in the cycle where I would advise selling, unless you’re a pro looking to crystalize profits you’ve already created.

The fine print: This data came from a search of closed deals on themls.com, augmented by my estimates of rents for units which were vacant at closing. Here is the underlying data: Silver Lake 2-4 Unit Sales Q4 2012.

I’m on the record repeatedly extolling the virtues of owning in East Hollywood. I generally think owners there underestimate the achievable rents and that buyers can therefore occasionally find deals that makes sense, even at today’s inflated prices.

Today, I figured I’d check in on the income properties on the market in East Hollywood to see what I can see. Note that, for the purposes of this piece, I am using the LA Times neighborhood map for East Hollywood but excluding the area to the west and south of the 101. Why? Because I don’t think those areas have the same appeal to tenants as the areas closer to Silver Lake.

Here’s a map of the area under consideration:

As of November 25, here are the numbers on 2-4 unit income properties in the area:

• 12 total properties (excluding what is technically a duplex on Sunset but which is being used as a commercial property currently)
• Median price per square foot of $249
• Median gross rent multiple of 14.6 (ludicrously high, in my opinion)

This week, we’re looking at rents in West Hollywood. Keep in mind that West Hollywood is its own city, separate from Los Angeles and with its own rent-control law. Also, West Hollywood has historically had a fairly progressive view on development, meaning that the city is dense and there are lots of apartments.

All of that said, let’s check the rents for November 2012:

• Median rent for a studio apartment was $1225 / month, with 50% of the units having parking
• Median rent for 1 bed / 1 bath apartments was $1599. There was quite a range – the cheapest 1/1 was $1195 and the most expensive was $3550;
• Median rent for a 2 bed / 1 bath was $1900. Supply was limited, with only nine units on the market when we checked.
• Median rent for 2 bed / 2 bath was $2298. Almost all units had parking and there were plenty to choose from, with 34 units on the market
• Finally, for families, there were five 3 bed / 2 bath units on the market with a median rent of $3200.

The fine print: Our survey was based on a search of Craigslist apartment listings using the keyword “West Hollywood” on 11/4-5/2012. We checked all addresses to ensure the units were in West Hollywood (as defined by the LA Times neighborhood mapping project); any units without an address specified were removed from the survey. For the raw data, click here: Final West Hollywood Rent Survey – Nov. 2012

Time for another look at rents in a gentrifying (gentrified?) neighborhood in Los Angeles. This time, we’re heading over to the Westside to take a closer look at Venice.

Here are the highlights:

• Median rent for studios was $1,275 (lower than I would have expected);
• Median rent for one bed / one baths was $2,575;
• Median rent for two beds was $3,690; and
• Median rent for three beds was $4,300;

Interestingly, for 1/1s and larger, almost every single unit came with parking, which is definitely not the case in some other gentrifying neighborhoods (Silver Lake and Echo Park, for example).

The most expensive unit on the market is the Venice Beach Penthouse, a pretty amazing two bed on top of a building right on the beach. That one will set you back $12,500 / month. (For what it’s worth, that’s your payment on a $2.5MM mortgage!)

The cheapest unit was a $900 studio about a block from the beach. But don’t get too excited… you have to share a bathroom with the other units on your floor. Still, it’s $900 in Venice.

Finally, a note about the data in this survey: It’s only the 17th of September as I write this. Usually, apartments don’t rent until the third weekend of the month. But when I went back to pull out the best deals to post here, all of the ones I liked were already taken. That, right there, may be the most salient data point of all about the Venice apartment market.

The fine print: Our survey was based on a search of the apartment listings on Craigslist for the word “Venice” on September 13, 2012. We only included listings where an address was available and the property fell within the boundaries of Venice as defined by the LA Times neighborhood mapping project. For the raw data, click here: Venice Rent Survey – September 2012.

As you know, I’m not a developer; I do rehab deals. That said, I’m a curious guy and I used to spend a lot of time looking for construction deals.

Pretty often, when I was looking at potential projects, I used to find myself wishing for some simple way to estimate the cost of building a structure.

After speaking with a lot of “people who know things” (architects, developers, contractors, etc.), I got to the point where I felt comfortable using $150 / sq. ft. built as a rough estimate.

Now, you need to be careful when you use this number, because it doesn’t include a lot of major expenses that any developer is going to have to cover, including:

• Due diligence costs, mainly soil and environmental
• The land (obviously!)
• Architectural services
• Entitlement (getting the relevant government permissions to actually build)
• Permit fees
• Interest costs on your land acquisition / construction loans

Another thing to keep in mind is that $150 / sq. ft. doesn’t get you the Hermitage. It doesn’t even get you subterranean parking! This is for simple, stick and stucco construction with on-grade parking.

All of that said, that $150 / sq. ft. estimate does get you to a rough approximation of what it would cost to physically build a small apartment or condo project. Happy developing!

Do you disagree with the above? Do you think I’m full of it? Let us know in the comments!

It’s time to continue our regular survey of Los Angeles rents. We do these surveys to give renters, landlords, developers, lenders, and appraisers access to up-to-date information on the rental market. This time, we’re focusing on Los Feliz.

Things to note:

• This was a whopper of a survey, because Los Feliz is a huge neighborhood, stretching from Western all the way over to the LA River;
• There are different sub-neighborhoods in Los Feliz, including the apartment-dense section to the west, the extremely pricey single family homes north of Los Feliz Blvd., and the walkable, restaurant- and bar-studded Los Feliz Village at the northern ends of Vermont and Hillhurst;
• Generally, supply decreases and price increases as you move from east to west west to east.

Here are a few great deals that we came across:

• A nicely renovated 1/1 at $1,250 with all utilities included
• A studio with parking near the Silver Lake border for $750
• A two bed / 1 bath with parking on Griffith Park for $1,400

The fine print: Our survey was based on a search of Craigslist apartment listings using the keyword “Los Feliz” on 7/24/2012. We checked all addresses to ensure the units were in Los Feliz (as defined by the LA Times neighborhood mapping project); any units without an address specified were removed from the survey. For the raw data, click here: Los Feliz Rent Survey – July 2012 

When I re-position a building, the numbers often look something like this: I buy the building for $1MM, spend $500k on renovating it, and then ask a lender or buyer to believe that the building is now worth $2MM, based on the rents I am achieving from the new tenants.

Now, obviously, the lender or buyer is going to have some questions, the most important of which is: “How do you expect me to believe that this building you just bought for $1MM is suddenly worth $2MM?!”

The answer to this question is that the new valuation is justified by applying a market cap rate to the new net operating income or a market gross rent multiple to the new rents. (For more information about how this work, please click here.) So the new valuation is entirely dependent on the new rents.

The goal is to be in a position to demonstrate the true profitability of the building to a lender or potential acquirer. You do this by sending them the actual profit and loss statements (P&Ls) generated by your accounting software, often called the “actual P&Ls” or “actuals” (as opposed to “pro forma P&Ls”, which are estimates of profitability).

Why are actuals important? You’re not going to believe this, but there have been occasions where people in the real estate business have fudged those new rents. They’ve signed leases with higher rents and then kicked the tenants back cash under the table to reduce the effective rents. Or they’ve got their friends to move in and sign leases at high rents, knowing that the owner won’t evict them for non-payment. Or the owner is successful is tricking people into signing leases but the tenants break their leases and move out after living in the building for a short time because it’s not worth the money.

So, lenders and buyers are justifiably nervous about accepting the new rent roll as gospel. Instead, they want to be able to look at your actuals and see the money flowing in from the rents and out to cover the expenses for a reasonable period of time, usually 3-12 months, depending upon the lender or buyer. The more months of P&Ls you can show, the more apt they are to believe you.

Why? Like almost everything else in real estate, it comes down to interest rates, affect the market in two discrete ways  right now:

1. Low rates on savings causing money to flow into the apartment market generally.

This one doesn’t need a lot of explanation. If you’re earning 0.25% on your cash right now, even a 5% cap apartment deal looks pretty damn tasty.

2. FHA funny-money on 3-4 unit buildings.

Right now, the federal government, through the FHA, is propping up the residential housing market with incredibly cheap debt offered up to very high ratios of loan to value (up to 96.5%, incredibly). The government defines “residential” properties as including apartment buildings with 2-4 units. This is why using FHA loans on smaller buildings is such an amazing deal right now (assuming you avoid these problems and your broker isn’t dumb).

All of that cheap debt is pushing prices up for smaller buildings. Prices in NE LA have gone from around 10x rents last year to 12-13x this year. You can still find good deals to do with FHA loans, but it’s much harder than it was.

But what if you have a bunch of cash and you’re not planning to use FHA (either because you don’t plan to live in the building, you already own something else, or you don’t qualify)? You’re going to have to put down 25% like the big boys do, because the loans on larger properties don’t receive the same kind of subsidies from the government.

This is where the problem comes in: if you try to put down 25% on a 2-4 unit income property, you will be competing with a bunch of buyers who are only putting down 3.5%. Guess who’s willing to pay more?

Meanwhile, larger deals are trading at a discount to smaller ones. You can buy good, 5+ unit buildings for 10.5-11.5x gross rents. And, on a price per unit basis, you’re almost certainly going to get a better deal. For example: There are two deals in Echo Park a block away from each other listed at $1.5MM, one a triplex (at $500k / unit) and the other an 11 unit building (at $136k / unit). Which one would you rather own?

So, what’s a buyer with a lot of cash to do?

If you have the cash to put 25% down, I strongly, strongly recommend going for more units at any given price point. (Just please remember to use a broker who knows what he’s doing, so you can avoid the kind of mistakes I made on my first big deal.)

*Note that this analysis doesn’t necessarily apply to very high-priced areas in West LA and Beverly Hills, where sellers won’t look at FHA offers but where rich people are throwing huge amounts of cash at smaller properties anyway.

Have been spending a lot of time looking at 2-4 unit apartment buildings in the Miracle Mile area recently and let me tell you: That is one ridiculously hot market.

First, let’s define what we mean by “Miracle Mile”: It’s the area loosely bordered by Wilshire to the North, Pico to the South, La Brea to the West and Crenshaw to the East.

Within that area, smaller apartment properties are listed at around 14-15x annual rents. So, if you have a fourplex with each unit renting for $1,500 (so $6,000 total rent per month and $72,000 per year), your building would list at $1,008,000-$1,080,000.

To put this in perspective, Silver Lake buildings tend to list in the 12-13x range right now. The same $72,000 / year in rents would therefore go for $864,000-$936,000 in Silver Lake.

This bogles my mind. Intuitively, it seems to me that, over the next 5-10 years, rents in Silver Lake will grow considerably faster than rents in Miracle Mile. Costs in both areas are roughly similar. So, I would expect to pay a premium for Silver Lake properties. Instead, the market is saying they’re worth LESS.

Now, there are a lot of great things about Miracle Mile. I live there myself (although, depending on whom you ask, that may not be one of the great things about it!). But any time I see a price discrepancy like that, it makes me think that there is something going wrong in the market.

In this case, I believe the answer is that there is still a lot of Westside money that has not discovered the Eastside rental market. And when it does, I believe we will see a large run-up in prices (and corresponding decrease in cap rates) on the Eastside. If you own on the Eastside when that happens, things could get pretty interesting.