Archive for the ‘Uncategorized’ Category
Sorry, have to vent:
1. “So and so grew the value of the business from $100MM in 1985 to $500MM today”.
That sounds really impressive, but it’s only a roughly 5.9% annual growth rate with compounding. Any time a journalist quotes two numbers divided by a period of time, s/he should automatically give you the compound annual growth rate. This would allow you to very easily distinguish between a truly remarkable result (of the type Warren Buffet created at Berkshire) from someone who was just buying t-bills or something.
2. “Target’s profits dropped 46% as a result of the hacking scandal over the holidays”
Obviously, a 46% percent decline in profits is a bad result. But retailers have very high fixed costs (they pay lots of rent and salary) and work at very low margins. So, relatively small declines in revenue have major impacts on their bottom lines.
For example: Say you’re a retailer with $100MM in revenue and $90MM in costs, implying $10MM in net profits at a 10% margin (that’s actually high for retail). Of your costs, assume $50MM fixed (rent, salaries, etc.), and $40MM variable (cost of goods sold), implying a gross profit of $60MM on $100MM of revenue, or 60% (again, not that unusual). Now, assume your sales drops by 5%. Revenue is now $95MM, gross profit is $57MM, and net profit is $7MM.
Your net profit just declined from $10MM to $7MM, a decline of 30%! But that was off a decline in sales of just 5%, which is pretty small and easily explained by changes in the weather, economy, etc. So, business journalists ought to be required to put in some kind of a disclaimer about how high-fixed cost, low net margin businesses can experience large swings in profitability on relatively small changes in sales.
For the slow posting.
We’re enmeshed in several deals right now and I can’t really share any of the details on the blog.
More next week; for now, enjoy the weekend!
In lieu of writing here today, I’ve written a sponsored post on the Eastsider, a blog covering goings-on in most of the neighborhoods in which we are interested.
Here’s the link. (Note: If you read Kagansblog regularly, the Eastsider post may be a bit repetitive.)
Today’s NY Times has an interesting piece about the effects certain types of affordable housing has on the lives of the people lucky enough to benefit from it.
Of course, the main benefit is that the tenant is able to live in a neighborhood which would ordinarily be totally out of reach.
But there is something else going on as well, a kind of limiting of life options. When the most important thing you have in the world is a cheap place to live, you are wedded to that one place as if your feet were nailed down. You can’t move to chase a job, a better climate, a creative project, or a love interest.
Yes, you have somewhere to live. But that place constrains your choices, which ultimately warps your life.
You’d be amazed at how many tenants I see moving out of places they’ve lived for a long time who end up doing something radically different with their lives, like moving out of state, or buying a house, or renting a totally different kind of apartment (usually larger!).
Just a quick note to welcome readers who stumbled across my most recent post on the Eastsider.
This blog is all about my experiences buying, renovating, managing and selling apartment buildings in Los Angeles. Because I tend to write about issues that arise in my business every day, the topics can range from taxation to rent control to permitting to valuation analysis.
If you’re just discovering the blog, I recommend:
- Checking out the “Essential reading” posts over there on the right of the page –>
- Signing up for the mailing list, which I use to send out interesting deals probably once every 1-2 months. You can sign up by clicking here and then entering your details at the bottom of the page.
Our new mayor has an interesting proposal: Phase out LA’s notorious gross receipts business tax. This would be a wonderful development for real estate investors in the city and an even better one for small business owners generally.
What is the “gross receipts tax”? It’s a tax the City of LA charges all businesses on gross revenue. Depending on the business, this ranges between something like $1.27 / $1,000 of gross revenue (for rental real estate) all the way up to $5.07 / $1,000 (for professionals like lawyers and architects).
Why is this tax stupid? Many of the businesses that generate the largest numbers of jobs are low margin. For example: A car dealership probably makes a gross profit (revenue less the direct cost of the goods sold) of something like $250 for each new car it sells. On a $20,000 new car, that’s a margin of 1.25% (dealerships make most of their money on used cars and service). But the gross receipts tax for “selling businesses” is $1.27 / $1,000, or $25.40.
The City of LA is basically making itself a first dollar partner and taking 10% of the dealer’s margin!
For low margin businesses, losing that amount of profit to the city makes locating here stupid, which is why there are tons of car dealerships in, for example, Glendale.
In general, you want to tax the things you want less of and avoid taxing the things you want more of. Car dealerships, for example, employ hundreds of people in relatively high-wage jobs (mechanics, salespeople, etc.). We want those jobs in LA, so we ought to work on improving the business climate for those types of employers.
If you need to make up for the lost revenue, how about raising taxes on liquor, cigarettes, gasoline, fast-food, soda, etc.?
Sorry for the lack of posts here in the last two days. We moved out of our rental and into the new fourplex on Wednesday and have been dealing with the aftermath since.
Last time we moved, we had no children and it was still fairly painful.
Now, with two kids and two dogs, it’s a lot worse, even with the help of Lucy’s amazing parents Jo and Richard.
I have been juggling the move and my work responsibilities, making it hard to find time to write. But I promise to be back on the horse on Monday.
Have a great weekend.
My very patient wife Lucy and I are moving this week to a new home just north of Washington and just east of La Brea.
When I tell people where we’re moving, they get sour looks on their faces and say things like “Oh, I guess it’s improving” or “It’s not that bad”.
The truth is, it’s not that bad, but ain’t Shangri-La, either. So, why are we doing it?
Because it makes sense financially. Here’s how it works:
- We bought a fourplex
- We’ve joined the top two units for ourselves
- Our downstairs tenants pay a total of $3600 / month
- The total mortgage / taxes / insurance ends up around $4,000 / month
Obviously, there are additional costs (water, maintenance, etc.). But we’re going to end paying something like to $1,000 / month to live in roughly 2,000 sq ft of space upstairs. Once you consider the depreciation of roughly $1,200 / month, we’re creating losses of $26,000 / yr. At our marginal tax rate, that’s worth approximately $13,000 in tax savings. So, we’re living for free.
I’m not sure how long we’ll be able to tolerate living in an apartment (Lucy is incredibly patient, but there are limits!). When we’re ready to move, we’ll rent out the upstairs units for $1800 each and net something like $25,000-30,000 / year on our $250,000 investment ($200k down plus another $50k or so in renovations).
Deals like ours don’t just fall off trees. You need to know what you’re looking for. If you’re interested in trying, get in touch.
The NY Times has an interesting article today about a group of homeowners in Hollywood who are trying to stop charities from feeding homeless people in their neighborhood.
Adrian over at Curbed responded with a fairly reasonable take-down of the homeowners. After all, particularly at this time of year, it’s pretty hard to sympathize with people who are upset over the hungry being fed.
That said, I think the locals have a legitimate point. Put yourselves in their shoes: Every day, hundreds of homeless people congregate in the area immediately adjacent to their houses. These people are fed from a truck. Sure, someone picks up the trash afterward. But, where are people using the bathroom? What happens after they’re done eating?
Anyone who’s ever tried calling the police about quality of life crimes in LA knows that those kinds of issues end up pretty far down the LAPD’s list. They’re chasing murderers; they don’t have time to deal with someone pooping on your driveway.
And yet we all have a right to safe, orderly, clean neighborhoods. So, what is the city supposed to do?
The answer is that the city ought to put some sensible restrictions on free food distribution. For example: It probably ought to take place in commercially-zoned areas, as opposed to residential ones. Portapotties probably ought to be provided. And the charities involved ought to have to cover the cost of clean-up and some extra policing, in the same way that film productions do.
Obviously, it ought to be legal (and encouraged) to give away food to people who need it. However, the process of doing so ought to be designed in such a way as to minimize impact on our communities.
… for me, anyway.
Regular readers know I tend to buy beat up buildings. It’s not like there aren’t plenty of beat-up buildings on the market, it’s just that the sellers think they ought to be paid prices that don’t reflect the fact they’re beat up.
Interestingly, there are several reasonable buy-and-hold deals floating around, where someone can put down $200-500k and get a solid return.
If you’re interested in something like that, get in touch and we can see if any of the deals we’re eyeing fit your criteria.