Moses Kagan on Real Estate

We just completed a move-out that came about as a result of going to eviction court.

As part of a settlement, the tenants who were under eviction agreed to move out, rather than face formal eviction / a judgment / etc.

These were not very nice people, to put it mildly, and we’re happy they’re out of our client’s building.

As a kind of parting gift to us, along with a ton of trash left in their unit, they left one of the pitbulls they had been breading in their backyard.

We’re obviously doing the right thing… we’ve got someone from the neighborhood who is going to adopt the dog. But, can you even imagine the kind of people who would just up and leave a dog?

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) 

Spent my morning at eviction court on behalf of one of the owners for whom we manage property. Not, strictly speaking, the highest value way I could be spending my time.

However, we try to manage properties the way we would if they were our own, and sometimes that means making no money and slogging through an eviction hearing.

You take a financial hit in the short term to improve the whole building for all the tenants (and the owner) in the long term.

Ancillary benefit: it does kind of excite the could-have-been lawyer I have buried in me somewhere. At least, it does in theory. Once I get under those florescent lights in 111 N. Hill St., will probably wish I was back at my desk running the numbers on some triplex in Atwater Village.

Anyway, wish me luck.

Just finished leasing up a 5 unit Echo Park project we did with some partners.

Leased all units between Wednesday and Sunday night of last week at rents ranging from $100-250 above forecasts. Read that again.

On this deal, after paying us our fee, our partners own a brand-new, renovated apartment building for under 9x the rents. That blows away what anyone can get just by buying a building on the market.

Here’s an exterior pic:

And an interior:

On to the next one…

A few days ago, I got notice of yet another type of inspection to which apartment buildings in LA are apparently subject. It turns out that the county Health Department makes it their business to inspect every building every year. Of course, despite owning and managing more than 20 buildings at various points over the past five years, this is the first I’ve heard of it.

I found out about this new kind of inspection because the inspector left a fairly annoying little form letter explaining that he had inspected a few units at a property I manage and that he was requesting that I make a few ridiculous repairs. Fortunately, the repairs he requested are cheap to do, so there’s no real reason not to do them.

I’m not opposed to the idea of inspections. There are plenty of jerky landlords who ought not to be allowed to own apartment buildings. But every building in the city is already subject to regular Systematic Code Enforcement Program inspections, so its pretty absurd to have yet another inspector coming through and asking for repairs. I kind of felt like telling him to get in line.

Anyway, just another example of the Kafka-esque world of Los Angeles real estate bureaucracy…

As of the 1st of the month, all Los Angeles apartments are required to have carbon monoxide detectors in addition to smoke detectors.

Regular readers know I’m not exactly the biggest fan of the way LA regulates landlords. That said, this one is kind of a no-brainer. There’s no reason people should be dying from problems the solutions to which costs $50.

If you own units and are trying to figure out the easiest way to comply with the regulation, my advice is to replace an existing, hard-wired smoke detector in each unit with a combo smoke/CO detector. A cursory search of Amazon shows a whole range of these available from around $35 a unit. The labor involved in installing shouldn’t cost you more than $5-10 / unit, or you can just do it yourself.

In case you’re wondering how the Housing Department plans to enforce the new regulation, my guess would be via the Systematic Code Enforcement Program (SCEP). That’s the controversial program where city inspectors visit each unit in the city roughly every three years. In years past, a SCEP inspector would write you up for missing smoke detectors; I’m sure missing CO detectors will just be added to the list of potential violations.

So go out there and get this sorted out for your units. You’ll think about it once and then never again. And let’s hope we save a few lives along the way.

Am helping a client close on a nine apartment building in Silver Lake tomorrow.

One of the tenants has given notice of his intent to vacate at the end of this month. When I reviewed the rent statemnt in advance of closing, I noticed that the current landlord allowed the tenant to use his security deposit as his last month’s rent.

This is a seriously terrible idea for the landlord. Why?

When you allow a tenant to use his security deposit as his last month’s rent, you are trusting him/her to vacate and deliver the unit to you in good condition. If he doesn’t, you’re going to have to eat the cost of any repairs, because you don’t hold a deposit and there’s no chance you’re getting any more money out of the tenant at the end.

And, to make matters worse, the kind of tenant who doesn’t have his act together enough to pay you the last month’s rent is exactly the kind of tenant you don’t want to trust to deliver you back your unit in decent condition!

So, what do you do when a tenant fails to pay rent on the first day of the last month of a lease? You immediately post a three day notice demanding your payment. Then, if the tenant doesn’t pay, you threaten to begin eviction proceedings and, if you still don’t get paid, you go through with your threat. Most people (sensibly) want to avoid have evictions on their records, so they will pay.

I know this sounds harsh, but the security deposit is not intended to be the last month’s rent. It’s your only leverage to ensure that the tenant returns your unit to you in decent shape. You’re running a business and you need to stand up for yourself.

Just had a client buy a building where we found out very late in the process that the owner had been allowing one of the tenants to pay on the 15th of each month. Nothing in the lease or estoppel indicated that this was the case, so we were able to get the seller to agree to prorate the final month’s rent as if the tenant had paid (making it the old owner’s job to try to collect rent for the month from the tenant – good luck!).

My client now faces a dilemma: Should he allow the tenant to continue paying on the 15th of the month, or should he insist that the tenant pay on the first and move for eviction if he does not?

To help answer, you need to understand one thing about LA rent control law: If you, as a landlord, accept that first late rent payment from a tenant, you will not be able to go back and force him to start paying on the 1st at a later date. This is because the tenant will rightly argue that you implicitly agreed to change the terms of tenancy. So, it’s now or never: Force him to pay on the 1st now (on threat of eviction) or accept rent on the 15th from now until you sell the building.

My client is a nice person. He feels bad about muscling the tenant into paying on the first. I told him to toughen up.

Here’s why: Allowing your tenant to pay late is effectively means giving your tenant a no-interest loan for half of each month. You have a lot of obligations as a landlord (particularly of a rent control building in LA), but being the lender of last resort every month is definitely not one of them.

Spent some time over the past few days looking at properties in Santa Monica and West Los Angeles for investors. As I looked at buildings in both places, I started to realize that you can’t really compare them easily. Why?

Theoretically, you should be able to. After all, a cap rate is a cap rate, right? If you buy a 4% cap in Santa Monica all cash, you’re getting 4% on your money. If you buy a 4% cap in West LA, you’re getting 4% on your money. So what’s the difference?

The difference is in the rent control regimes and how they affect rent growth.

In LA, the Rent Stabilization Ordinance sets the annual rent increase at between 3-8% every year. So even in a bad year for landlords, you get a 3% increase from your rent-controlled tenants.

Contrast that with Santa Monica, where the insane are running the asylum. In 2002, for example, Santa Monica granted landlords a whopping $11 increase. Not 11%. $11. Didn’t matter if your tenant was paying $200 or $2000. You got $11.

What is the practical implication of the difference in rent control regimes? To find out, I ran the numbers to compare a tenant who signed a lease for $1000 / month in LA in 2000 with one who did the same thing in Santa Monica. I looked at all the allowable rent increases for each year between 2000 and today and tallied up the results.

Here’s a graph showing the rents our sample tenants paid over the period 2000-2012:

The Santa Monica tenant is now, in 2012, paying $1,332.31. The LA tenant is paying $1,481.80. That’s a difference of $149.50 / month. Don’t think that’s a lot? Over on the West Side, properties are trading at 14x annual rent. That $149.50 is therefore worth $149.50 x 12 months x 14 = $25,116! On a 10 unit building, that’s a quarter of a million dollars difference in value.

When I look at those numbers, I feel like I would want a discount versus West LA to tempt me into buying in Santa Monica. But the market actually seems to charge a premium for Santa Monica properties. So, I’m out. If you ask, I’ll help you buy there. But I wouldn’t do it with my own money.

I got a call from a regular reader the other day about his building in Los Angeles. I’m going to share his story and I hope he won’t mind.

This guy has several great, normal tenants and one low-paying, rent controlled tenant who has a kid with pretentions to gang-bangerness. The kid has done all kinds of awful stuff to the building and the neighbors, enough to get the police involved multiple times. He told me he had initiated an eviction case, but that the problems with this tenant were driving him to the breaking point and causing him to consider selling.

I wanted to be sensitive to his situation, so I restrained myself. What I really wanted to say was “You’re an extremely lucky guy”. If I had, he wouldn’t have believed me.

So, instead, we did a back of the envelop calculation on the effect of winning the eviction case.

I’m not quite sure that he believed the numbers. But here’s how they work: The tenant was paying something like $500 for a $1500 apartment (actually, I think he could get more, but that’s just me). That’s $1k / month and $12k / year of potential rent increases. If you apply a (very) conservative 10x GRM to that number, you get $120k in value.

Now, obviously there are some costs associated with cleaning the unit up post-eviction. Let’s say he needs to spend $20k to make the unit really sing.

I know this guy’s time is valuable, but I’m pretty confident that all those hours of dealing with this miserable tenant were worth $100k.