In defense of gentrification

We spent the last 3-4 years on the front lines of gentrification in East Hollywood, Silver Lake and Echo Park. We’ve paid around 65 tenants to move out of rent controlled apartments so that I could renovate and raise the rents. When I tell some people this, I can see from their facial expressions that this bothers them.

Well, here’s the net result of our efforts over the past few years:

  • Gave a bunch of relatively poor people serious nest-eggs of between $10-35,000 each, some of whom blew the money but others of whom used it to buy homes of their own, pay for colleges for their kids, etc.
  • Employed the equivalent of probably 10 construction workers through the worst construction bust in living memory, all of whom were supporting families who would have been in big trouble without that money coming in;
  • Employed several other independent contractors in maintenance, book-keeping and property management;
  • Bought probably a million of dollars worth of appliances, flooring, paints, etc. from suppliers big and small, helping them survive the construction melt-down;
  • Gave more than 100 tenants (some of the buildings were vacant when we bought them) new, wonderful apartments to live in;
  • Supplied neighborhood bars, restaurants, boutiques, etc. with new customers to patronize their establishments (believe me, the prior tenants weren’t drinking $4 ice teas at Intelligentsia);
  • Generated hundreds of thousands of dollars in commissions for local real estate brokers who helped us buy and sell assets (yes, I often work with other brokers!);
  • Increased the city’s property tax base, since property taxes go up when values go up;
  • Paid a bunch of income and capital gains taxes and fees to the state and federal governments;
  • Made money for our investors;
  • Made money for ourselves.

I’m very happy and proud of what we’ve done for the people and communities we’ve worked in these last few years. We’ve created a lot of positive change. And we’re going to keep moving forward, because we see nothing but opportunity in Northeast LA.

Good reading on zoning and sprawl

Happy Monday!

Have recently read two great, short pieces on the effect of terrible zoning on cities, in general, and LA, in particular:

  1. David Leonhardt’s interview with Matthew Yglesias in the Times. Yglesias talks about how parking requirements and artificial limits on density conspire to drive up the cost of housing (and, thus, living) in attractive coastal cities where the best jobs are located; and
  2. Jeremy Rosenberg’s series, Laws Tthat Shaped LA, covers the 1908 zoning regulations that separated residential from industrial uses. This zoning regulation led to the banning of mixed-use buildings (retail or office on the first floor, apartments upstairs) that are so common and beloved in other cities, but that are very rare in LA.

I personally love the few walkable parts of LA, notably Larchmont, Sunset Junction, the part of Sunset that runs through Echo Park, and Downtown. We, as a city, need to make some changes to how we regulate land use to promote these kinds of dense, walkable neighborhoods.

Why do people hire dumb brokers?

Buying a home or income property is a big deal. You’re committing a chunk of your (or your family’s) hard-earned capital, plus taking on an enormous amount of debt. All kinds of things can go wrong, from structural problems, to tenant issues, to badly structured loans, to city inspection concerns, etc.

So why do people insist on working with their friend’s cousin, Steve. Or Beth, the lady their mom knew in highschool?

OK, with a house, it’s somewhat understandable. There are fewer moving parts to a deal. And many people don’t approach buying a house as an investment, so getting the best deal isn’t super important to them. (Can you see the steam coming out of my ears as I write this?)

But I really, really don’t understand why anyone would allow a stupid or inexperienced broker to advise them on the purchase or sale of an income property. The acquisition of an apartment building of any size is akin to a leveraged buyout (the kind carried out by Carlyle Group or Blackstone).

One difference: You use MUCH more leverage when you buy an apartment building! On a typical leveraged buyout, where the target is acquired for, say 10x profits, the debt piece is maybe 5x, meaning that the acquirer puts down 50% of the price in cash. Compare that to using an FHA loan to buy an apartment building, which you can do with 5% down. (Which is why it’s so potentially tasty!)

Leverage (debt) magnifies both upside AND downside. It’s awesome when it works, but it can kill you when it doesn’t.

So knowing this, why on earth would you have your brother’s sister’s cousin who sells condos in Reseda help you evaluate and execute the acquisition of an apartment building? It’s insanity.

All about FHA loans, with Justin Brown, loan broker

[MK: You really, really can buy income properties with as little as 3.5% down through FHA loans. Interested? Read on.]

We’ve spent so much time talking about FHA loans, I figured I’d bring in a pro. Meet Justin Brown of Nu Home Financial. Justin’s a loan broker who has recently done some very good work for my clients. I sent him some questions and he responded. Here they are:

What’s the minimum credit score you can work with to get an FHA mortgage? What can you do for someone with a score below that level?  

For an FHA loan it is ideal to have at least a 640 fico score, however there are programs available for credit scores down to 580, they can be very restrictive and almost impossible to get funded. For those that have a sub 640 fico score I will typically offer a free credit evaluation and give them a plan of action that will help them reach the targeted score, in some cases in as little as a month.

Is there a rule of thumb for how much personal income you need to carry a mortgage on a 2-4 unit building? How does the rent from the units play in to that?

Typically with FHA you need to have enough income so that your total reported debt obligations including the proposed mortgage payment will be less than a certain percentage of your income. Depending on your credit score and other factors your total obligations can be as high as 50-55% of your monthly gross income, or as low as 43%, however the great thing about an FHA loan on a multi unit property is that you are allowed to use the proposed rents as income, even if the units are vacant!

How many years of income do you need to see to do an FHA loan on an income property? What kind of documentation do you need?

The lender will typically need to see a 2 year work history, unless there is evidence you are a recent graduate. Typically for an employee of a company you will need to provide your most recent 2 years tax returns, most recent 2 years w2’s, and a recent 30 day period of paystubs. For those that are self employed, on a fixed income, recipient of benefits or other sources of income, the documentation will differ. Basically the lender just needs to see a 2 year history with evidence supporting it, and they need to reasonably be able to determine it is likely to continue for at least the next 3 years.

Besides income and credit score, are there any other things that stop people from getting FHA mortgages? What are they?

Although Income and Credit Scores are the two main factors that prevent most people from qualifying, but other factors can include assets or late rent payments in the last 12 months. An example of how assets can hinder a buyer from closing, if your down payment cannot be sourced and shown to have been seasoned for 60 days it will be an issue,  i.e. selling goods for cash with no documentation or tangible proof to support it, mattress money (cash saved for years, then suddenly deposited into your bank account) assets must be able to be sourced with an official paper trail. Assets must also be seasoned for 60 days, any large deposits typically more than 1,000 will need to be explained and sourced.  If you plan on buying a home it is best to have a recent 60 day statement period with no unusual activity or large deposits. Do not make sudden transfers or deposits without first checking with your lender if you are planning on buying a home in the next few months. Also if you are currently renting make sure your rent history will not show any late payments over 30 days late this will disqualify you from buying a home for 1 year from the most recent late payment.

What is PMI? Who needs it? How much does it cost?

PMI (Private Mortgage Insurance) and MI (Mortgage Insurance) are types of insurance that protect the lender from losses resulting from a foreclosure. If not for mortgage insurance companies and providers you would not be able to purchase a home for less than 20% down, it makes loans with as little as 3% down available. For FHA loans and Conventional loans the amount of monthly mortgage insurance can vary, depending on the down payment, loan term, credit scores and other factors. Although FHA loans have had the mortgage insurance cost change quite a few times in the last couple years, as of April first for a 3.5% down homebuyer they can expect to pay an up front fee of 1.75% of the loan amount, and a monthly fee that is calculated by taking 1.25%  of the loan amount and dividing by 12.

If people want to get in touch with you to find out if they qualify for a loan, how can they do that?

A pre-approval can be a quick 5-10 minute phone call in some cases, the best way to start is by calling me at 909-833-3200 ext 2, cell 714-494-5322, or by going to my website www.nuhomefinancial.com and clicking on APPLY NOW.

My problem

I have a problem: I find good deals every week but I don’t have the money to buy them all myself (even though I want to!).

So my solution is to find like-minded people who want to own apartment buildings and help them buy the deals I find. But how do I find these wonderful souls? This blog, of course.

Here’s what I do: When I see a deal I really like, I write up a short piece detailing the numbers and why I think it’s a good deal. Then I send the piece out to the people on the mailing list. I’d say I do this a few times a month or something… only when I find things that are worth my time and my clients’ money.

How do you get on the list? Enter your name and email address in the form below and click “submit”.