A tough loss

Just lost out on a deal that I wanted to do, despite being the highest bidder.

So, how did I lose?

Well, this was a development deal. And the land was super-hilly. So I wanted to have five days to get a geologist, an engineer and an architect out to take a look at the site and make sure it was buildable (well, anything is buildable if you’re willing to spend the dough… I mean “buildable” in the sense of “…and still make money”).

The other guys, whom I’m sure are also developers, were willing to offer almost my price but with no contingency period.

In other words, after examining the property once, for like an hour, they were willing to bet a big chunk of cash that they can develop the lot.

And you know what? They’re almost certainly right. I’m going to watch them build a profitable small lot project or small apartment building over the next 18 months and be filled with rage.

But our business is really about, to the extent possible, removing risk.  And this was one risk that we just wouldn’t take.

P.S.: Obviously, there’s a price at which I would be have non-contingent, too. But this was not a steal.

The rebirth of rooming houses?

Today’s Wall Street Journal has an interesting article [subscription required] on the re-birth of boarding houses [h/t to Manoj].

Back around the turn of the 20th century, as immigrants flooded into major cities, developers built rooming houses where you could rent very small accommodations, often with share bathrooms.

Eventually, zoning codes halted the construction of this type of housing, under the theory that it was too dense for human habitation.

Now, with young people coming into cities and housing prices in major cities going crazy, the reporter examines a group of companies attempting to build what are essentially 21st century rooming houses.

I, of course, would love to develop this kind of housing. After all, by cramming more people into a given space, you give yourself the opportunity to generate much higher rent per square foot than is generally possible in conventional apartments.

And LA obviously needs this type of housing. There are tons of kids coming into town who can afford $800-1,000 / month, which is not enough to rent a studio in most neighborhoods, but is enough to make the model work on a rooming house.

The problem, as with almost every type of development in LA, is the parking. So long as the city insists on having two spaces per 2-3 bed unit, developing rooming houses is infeasible.

And that means young people are going to continue to suffer in the rental market… and the city is going to suffer, too, because we’re going to be deprived of the talents and energy of a whole bunch of people who decide to move to Austin or Detroit or wherever.

363 S Leslie Way is done

We just entered lease-up on a fourplex we renovated at 363 S Leslie Way in Highland Park.

Embarrassingly, we had to put the breaks on leasing this weekend, because we leased two of the units in about two minutes and realized we were underpriced. (This is a high class problem!)

Anyway, here are some amateur pics… the pro ones are coming soon:

leslie outside

leslie kitchen

leslie bath

Forget about high paying jobs

I’m a closet Redditor (guess I’m out of the closet now, huh?). And today I saw a popular piece on there titled something like “The 10 Highest Paying Jobs”.

I get why people are interested in a piece like that, but they’re totally, utterly crazy.

Why?

With a few exceptions (almost all of which are in finance and require you to have attended one of a handful of universities), jobs won’t make you rich. The country is just not set up that way:

  • By definition, if someone is paying you a salary, it is because you are creating more value for him than he is paying you;
  • It’s incredibly hard to save a meaningful portion of your salary, particularly in expensive coastal cities where rent is high; and
  • The tax code works against you (by taxing labor income more than capital income)

If you want to be rich (eg have a high net-worth, whatever “high” means to you), you pretty much have to figure out how to get in business for yourself. That means finding a problem that people will pay to solve and then figuring out how to solve it better, cheaper, faster than the other guys.

The bad news is that this is tough, because business is super-competitive.

But the good news is that it doesn’t require any specific background. You don’t need to go to a high-end college. It doesn’t matter what your parents do. You don’t even need to speak English as your first language.

All of those things help, sure. But, because we live in an amazing country, anyone can get into business and make herself rich by being smart and honest and working really, really, really hard.

So, if you’re motivated by money (and, of course, not everyone is), then you need to forget about what job is the highest paying and figure out how to employ yourself.

A savvy deal I couldn’t do

Just got a flyer from a reasonably active local broker announcing a deal he closed with the following characteristics:

  • In Westlake, a rapidly improving neighborhood situation between Koreantown and Downtown
  • 10 units totaling 9,800 sq ft
  • 15,000+ sq ft lot
  • R4 zoning
  • $1.8MM price

The flyer didn’t specify the rents, but, as I recall, the rent roll was in the range of $8k / month, or $96k / year. That’s $1.8MM / $96k = 19x GRM (!).

This is an excellent example of the kind deal I like but can never actually do. Why?

Well, it’s clearly not an apartment repositioning deal. Between buyouts and rehab, you’d end up all in for, say, $2.7MM, with a rent roll of something like $235k, equating to a GRM of 11.5x and a cap rate of 5.5%. That’s not appealing enough to make the effort of repositioning the property worthwhile.

And it’s not really a development deal, either. 15,000 sq ft of R4 gets you 37 units (if you can park them!). $1.8MM / 37 = $49k / door for the land. Because construction costs are so high right now, I don’t think you can make that land price pencil in that neighborhood (where rents are still pretty low).

And yet… I like the deal. Why?

  • We are not making any more land in LA and every year more and more people are moving here. So, over the long term, the value of land here appreciates faster than inflation.
  • Even without a full repositioning, there is likely to be some cashflow… say, 2-4% / year. That’s not enough for a professional money manager, but it’s not bad for a rich person with money sitting around earning 0% in a bank.
  • And the property comes with the option to develop a 37 unit building at the appropriate time. When is that? My guess is it’s as we’re coming out of the next recession, when construction prices will be relatively cheaper and the neighborhood will have improved measurably.

Can you see what this is? It’s a relatively safe, long-term speculation with some yield.

Because we categorically refuse to factor appreciation or rent growth into any of our financial models, we can’t do deals like this. But someone else clearly did, and I believe she’ll be rewarded by a return in the range of 5-7% / year during the course of the investment (inclusive of both yield and appreciation).

That’s a pretty savvy deal.