Archive for the ‘Success’ Category
David Walentas of Two Trees Management.
Walentas was in the business as small-time owner / developer in NY in the 1970s. Then, in the early 1980s, he made a deal to buy a bunch of warehouses in a then-ignored part of Brooklyn called DUMBO (“Down Under the Manhattan Bridge Overpass”) for something like $6 / sq ft.
He spent 15 years fighting with the city to get approval to start turning the warehouses into apartments. His partners gave up and he bought them out. Then, finally, the city relented and let him start re-developing the buildings.
He gave away retail space on the ground floor to cool shops and restuarants to improve the neighborhood. Then he developed condos upstairs which are now selling for $1,000 / sq ft.
Now, he’s a billionaire. Read more about him here.
The short answer is, if it’s in Los Angeles, its probably worth more now than it has ever been worth in the past.
Because everyone with cash and a brain is sick of getting 0.01% interest in his/her checking account and is therefore chasing yield by buying buildings, because even a so-so deal on a building is going to generate 3-4% / year, (hopefully) with room to appreciate.
But what does that mean for you, dear apartment building owner? Well, let’s give you some rough numbers:
First, take the total monthly rent you collect from your building. If you live in one of the units, add to that total rent a fair estimate of what your unit would rent for on the open market if you moved out.
Now multiply that total rent number by 12 to get the total annual rent. With me so far? Now multiply the annual rent by 10 – that’s the lower end estimate of what it’s worth. Now multiply the total annual rent number by 13 – that’s the higher end estimate.
For example: Say you own a fourplex with four identical units and you live in one of the units. Say the other three units each rent for $1500 / month. Your total monthly rent is $1500 x 3 = $4500 + $1500 for your unit = $6000. Now multiply $6000 x 12 = $72,000. Your building is worth between $72k x 10 = $720k and $72k x 13 = $936k.
I recognize that’s a pretty broad range of values. The reason it’s so broad is that all buildings are different. A renovated building in Silver Lake with rents which are a bit below market easily hits that 13x number (and probably goes past it). A disaster in Boyle Heights probably goes for 10x or maybe even less.
If you’re really serious about finding out exactly what your property is worth, whether out of curiosity or because you’re thinking of selling or re-financing, get in touch. If you give me the address and the rent roll for any building in Los Angeles and answer a few other questions, I can give you a rough sense for the value in five minutes or less. It’s like a party trick, but for really, really boring parties.
When I first broke off from my job in investment banking and went into business for myself, I negotiated like a jerk. I was convinced that winning the early rounds of negotiations about setting things up was incredibly important, because doing so would set a precedent for how things would be in the future. I still have a long letter James Palumbo, the owner of Ministry of Sound, wrote me, which explained, at great length and in painful detail, how my aggression and short-sightedness were going to ruin my career.
Obviously at the time, I thought James was a dick. Now, I realize he was 100% right and looking out for me. Why? Because if you insist on always winning battles, what happens is that you end up only working with the type of people who are willing to allow you to bully them into accepting bad terms for themselves. Seems pretty obvious that these are not the type of people you want to be in business with!
So I have a new policy with potential partners. You can think of it as “Yes, and…”. Here’s how it works:
- If a potential partner with whom I want to work offers me terms, my default setting is to accept them if at all possible. I figure either the terms will work for me or, if they don’t, we can re-negotiate after I’ve demonstrated the value I bring to my partner;
- If I really can’t accept the terms as offered, then I try to figure out how to accept them but add something that makes the deal work for me. That’s the “Yes, and…” part.
Now, obviously there are times when a deal can’t be reached. No, I’m not selling your property for 2%, or giving you half of my buy-side commission.
But most of the time, and particularly when I’m dealing with experienced, successful people, my strategy works really well. Why? Because you have to be a real idiot to strike a partnership arrangement where your partner is getting screwed. Successful people know this, so they bend over backwards to create situations where they prosper when their partners prosper.
As between (1) entering into win-wins with successful people, or (2) brow-beating inferior people into accepting bad terms, I’ll take Option 1 every single time. You get further in life swimming with the current, rather than against it.
P.S.: Thanks, James.
A few days ago we closed the sale of 1516 Micheltorena, an 8 unit building in Silver Lake.
Here are the relevant numbers:
- Bought for $954k in September 2010
- Renovated for $645k
- Total capital outlay of $1.6MM
- Stabilized rent roll of $215k / year
- Took roughly $200k in cash out of the building while we owned it
- Sold for $2.1MM gross, a hair under 10x
- Total pre-tax profit of roughly $640k
- Return on investment (ROI) of $640k / $1.6MM = 41%
I was sad to see this one go. The location, just north of Sunset on Micheltorena, is prime. I have zero doubt that I will look back and wish I had not sold the building. However, the tyranny of IRR meant that it was better to sell and take the profit than to re-finance and hold.
One other interesting note: We bought this one off-market and sold it off-market, which is kind of unusual. I feel good about having sufficiently strong broker relationships that I can do deals like this now. It certainly wasn’t always the case!
Best of luck to the new owners!
We’re recording today on the sale of 2241 Branden St., a 5 unit apartment building we renovated in Silver Lake.
Here’s a pic:
Here are the numbers:
- Units are four 2/2s and one 3/3
- Bought for $797k
- Renovated for $308k
- All in for a hair over $1.1MM
- Rent roll of $128k / year upon sale
- Sold for $1,383,000 (asking was $1.35MM)
- Net proceeds of approximately $1,327,000 (after cost of sale) plus cash taken out during ownership of $100k
- So, profit of approximately $320k on $1.1MM invested
- ROI of 29% using no leverage (not our best deal, but still pretty damn good)
Some final thoughts on Branden:
- We over-improved it. When we bought the property, the units were 2/1.5 and 3/2.5. We spent a lot of money to make those half baths into full baths and I don’t think the rents we got are any higher as a result
- I love this property. It’s non-rent control and I believe there is room for the rents to increase over time. If I had the cash, I would have bought this one from my fund. Sad to see it go, but…
- …We’re going to be managing Branden for the new owners, which we’re very excited about. All things being equal, I’d prefer to manage a building we renovated over a random one, because we know the buildings we do are in good shape.
We just exited another deal: 4443 Willow Brook, a 12 unit building in rapidly gentrifying East Hollywood.
Here’s an exterior pic:
Here are the numbers:
- Acquired for $925k in July 2010
- Renovated for $700k
- All in for $1,625,000
- Rent roll of approximately $217,000 / year when we stabilized it
- Extracted approximately $200,000 in cashflow while we owned it
- Sold for $2,095,000 on Friday
That makes the ROI 36% after costs of sale and with no leverage.
And you know what else? The new owners got a great deal. They bought it from us for less than 10x the rents, so their return is going to be 10%+ / year.
People always ask me why I haven’t expanded our business into the Valley. After all, there are tons of buildings out there and clear opportunities to make money.
The reason I haven’t is that I don’t understand the tenants in the Valley, so I’m not comfortable that our organization would know how to deliver a desirable product for them. Now, don’t get me wrong: I like large sections of the Valley (Ventura Blvd is basically like Sunset without the heroin addicts). I 100% understand why families looking for more space and less hassle move out there.
But our target demo, the people who we design our buildings for, usually don’t have children yet.* They’re willing to pay a premium to live in / near walkable areas filled with hip bars, nightclubs, coffee shops, vintage clothing stores, etc. They don’t need Viking or Bosch appliances, but they do seriously appreciate clean lines, open spaces, eco-friendly finishes, in-door/out-door living, etc.
No one has accused me of being hip lately – it’s pretty hard to stay current on the latest music, etc. when you spend your non-work time chasing a 19 month old around the house. But I can relate to our tenants, because they’re a lot like I was when I was until pretty recently.
A better real estate developer might immerse himself in the preferences of other demographic groups in order to open up additional opportunities. But, for better or worse, I haven’t done that yet. I’m maniacally focused on creating product for which a one certain, specific kind of person is willing to pay a premium.
*Note: We are 100% happy to rent to any qualified tenant willing to sign a lease, pay the rent, and be a good neighbor.
Am doing a bunch of deals right now and keep running into the same problem:
Buyers Sellers being slow to disclose issues with their properties. Bluntly, this is stupid.
I’m not a lawyer, but I can tell you with 100% certainty that, by not disclosing problems with your property during the sale process, you are exposing yourself to all kinds of liability. Why? Because the buyer can turn around and sue you for fraud.
The remedies available to the court include everything from forcing you to pay to fix whatever problems you hid all the way to forcing you to take the property back and give the buyer his money back (even if you’ve already spent it). Ouch.
The standard residential income purchase agreement is set up to give the buyer a chance to investigate the property. As a seller, it’s in your interest to give the buyer as much information during that time as you possibly can. Let him inspect the hell out of the property. Give him all the docs. Tell him about problems in writing. Answer questions in writing. Be totally, 100% transparent.
The downside to all this disclosure is that the buyer may decide not to buy the property or ask for a price reduction. But those are definitely NOT the worst things that can happen. The worst thing is that you end up wrapped up in a long, expensive lawsuit that ruins your life for years.
When you sell, you want to be able to walk away from the closed transaction with your money AND be able to sleep soundly at night. The only way to do that is to disclose, disclose, disclose.
One of the coolest things about what we’ve done with the Better Dwellings apartment portfolio is that we’ve created an honest-to-goodness apartment brand without doing anything besides banging out distinctive projects over and over again.
Need proof? Here’s a list of the keywords people have searched on Google over the last six months to find the Better Dwellings website, where we list all of our vacant units:
As you can see from the pic above, more than 1,000-1,500 people have searched for us on Google over the past six months.
There are all sorts of companies that try to brand what they do in apartments, but I bet you can’t name even one. So, it’s pretty amazing to me that prospective tenants know to search for our company name when they’re looking for stylish, modern apartments in the Silver Lake / Echo Park area.
It’s kind of an article of faith in business that, if you create a quality product at a fair price, word spreads. But it’s still cool to see it happening for us.
Yesterday’s LA Times had an interesting piece about boomers day-trading their retirement accounts in an attempt to beef-up their nest eggs in advance of retirement. Here’s the money quote:
“”A lot more frequent trading is happening,” said Chad Carlson, a financial planner based outside of Chicago. “People are saying, ‘I’m that much closer to retirement so I have to do something.’”
If your plan for retirement is to suddenly become so great at trading stock that you can beat the market, you have some major problems.
Sadly, I can’t help someone nearing retirement age with no assets. But I can help younger people who are looking to avoid being in that position.
Here’s what to do:
- Instead of buying a big house (a 30 year liability), buy an apartment building for a reasonable price using reasonable leverage
- Live in it for a while and save money
- Buy another one, move out of the first one and into the second one
- Rent out the unit you used to live in; now the first building is cashflowing to you every month
- Rinse, repeat, as many times as you can stand it
Do you know what your finances look like at 60 if you do this a few times in your 20s and 30s? Your assets are worth a few million bucks. You have a strong stream of passive income coming in from your portfolio of buildings. You don’t have anything to worry about in retirement.
The only limits on how rich the above strategy can make you are how quickly you get started and how quickly you can save up additional down-payments to accelerate your acquisition strategy.