Project Tour: Saturday, May 12

OK, team. Here’s the plan:

On Saturday, May 12, at 1pm, my partner, Jon Criss, and I are going to lead a project tour. The idea is to show you how we do what we do. Here’s what we’ll cover:

  1. The math behind our business: We’ll do a quick, in person explanation of how you can buy a building, spend money renovating it, and have it be worth much more than the combined cost of buying and renovating (this part will take place in our office, where we have whiteboards)
  2. 1239 N. Westmoreland: We’ll take you to the property (which is still for sale, although there are multiple offers), give you all the numbers, and then show you how the renovation worked
  3. 4443 Willow Brook: Same as Westmoreland. We’ll show you how the numbers worked, what we actually did to the building, what we think it’s worth today and why.

Expect the whole thing to take two hours or so.

Why are we doing this? We’re always on the look-out for people to partner-up with on deals, brokerage opportunities, contracting gigs (Jon is a general contractor), etc. So we’re very happy to educate you on how we do what we do in order to start a relationship with you that will hopefully be profitable for you and for us.

Interested in coming along? We’re limiting this to seven people to keep the discussion lively and intimate. We have three spaces already reserved. So, if you want one of the other four spaces, please email me ASAP at moses@betterdwellings.com.

Miracle Mile Apartment Rules of Thumb

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.

Tour our projects?

Quick question for you regular readers based here in Los Angeles:

Would you be interested in taking a guided tour of some of our projects?

In my mind, I’m envisioning looking at 1-3 of our projects in detail. We would discuss:

  • The forecast that led us to buy the property
  • The cost of relocating the tenants
  • The design choices we made
  • The construction process
  • How the project turned out financially

The idea behind the tour is to give you some insight into how a re-positioning project works from beginning to end.

If this is something you’d be interested in, pls shoot me an email at moses@betterdwellings.com and let me know what days / times are best for you. If we can get a group together, we’ll definitely go ahead.

Brokerage Etiquette

I’ve got an offer out on a 4 plex for a couple I’m working with.

It’s a pretty amazing REO (bank-owned) property in Miracle Mile. Knowing that the list price was a bit low for the area, we offered $115,000 ABOVE list for the property. We also jumped through a series of increasingly annoying hoops set up by the broker, including, inter alia,¬†writing a letter setting out the comps for the property and guaranteeing that we’d make up in cash for any shortfall caused by the property’s failure to appraise.

It’s been around 10 days since we put the offer in and we haven’t heard a word from the broker, despite following up 3-4 times by phone and email.

I know that REO brokers are busy people, because they have loads of listings to service and offers to review / counter / etc. But some of them manage to do a great job of communicating throughout the process. And, of course, some of them (like this guy) are pretty lousy. And because they do a lot of volume, the bad ones can manage to alienate a lot of people over time.

I wonder if, over the long term, alienating a lot of other brokers is bad for business?

Why would I sell real estate?

I often joke on this blog that you should never sell apartment buildings. The main reason is that the transaction costs of selling real estate are high (brokerage commission, transfer tax, etc.). Also, in CA, there’s a major benefit to holding on as your rents increase, because your NOI margin increases (see here for more details).

But, obviously, there are a few reasons that you might want to sell:

1. To return capital to investors: This is the reason I’m selling 1239 N. Westmoreland. Once you’ve added a bunch of value to a building, holding it for a long time just serves to drag the IRR down towards the new yield on rents. So there’s a point where it makes sense to sell and let someone else collect the yield.

2. To shift capital to a higher-upside property (using a 1031 exchange): You might find yourself owning a property in an area where the rents are stagnant. If debt is cheap and the market is good (like now), it can make sense to sell your property and do a 1031 exchange into another property in an area with more upside.

3. When your depreciation is used up (or has shrunk): The government allows you to deduct an amount equal to 1/27.5 of the initial value of the structure on a property each year from your taxes for 27.5 years (more info here). Once you’ve reached the end of that period, your asset is fully-depreciated (from a tax perspective) and you lose the tax shield that depreciation provides. At this point, it probably makes sense to 1031 into another income property, which re-starts the depreciation clock (on the new asset). Another flavor of this is the situation where the rents are increasing but the depreciation allowance isn’t (because it’s pegged to the original purchase price), meaning that depreciation is shielding less and less of your income from taxation.

Can you think of any other reasons to sell?