Every once in a while, I take a look at the Google Analytics for this site to try to get a sense for what people are searching for to end up here.
Turns out a ton of people are trying to figure out what their apartment buildings are worth.
This is the kind of question we’re always happy to help answer.
Why? Well, we do run a brokerage. And, while we are probably the only real estate brokerage in the world that discourages people from selling, we do, on occasion list and sell buildings in our areas.
And, more importantly, we’re always happy to discuss real estate with people who own buildings… you never know what kind of business opportunities will emerge.
So, if you have a building in LA and you want to know what it’s worth, get in touch with me: moses [at] adaptiverealty [dot] com.
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.
Further to my earlier post about the amount of opportunity available for Millennials who want to seize it… thought I’d share with you the experience of one of our leasing agents this weekend.
Keep in mind this woman has a full-time job she works during the week.
Instead of sitting around all weekend (like I did), she worked on leasing two new buildings for us.
My guess is that she worked something like 30 hours over both days posting ads, responding to inquiries, arranging showings, taking applications and filling out leases.
When all the dust settles, I believe she will have completed 4-5 leases, which ought to net her in the neighborhood of $3,000 in commissions. That’s like $100 / hour.
To give you some context: The tuition for in-state students at the UC schools this year is something like $12,500.
Remember that when you hear people talking about how impossible it is to pay off student loan debt.
Have some bad news for those of you who love vaulted ceilings in apartments… they’re almost always illegal in LA.
First, what do I mean by vaulted ceilings? They’re the ones where you can look up and see the structure of the roof. Here’s an example:
Beautiful, right? So, why should that be illegal?
- There’s almost certainly no insulation. Usually, insulation goes between the drywall that you see in a normal ceiling and the plywood supporting the roof. If there’s no drywall, it almost always means no insulation (unless the owner installed a foam roof over the top of the original one, a step that few owners take). No insulation violates CA and LA building codes.
- No fire separation between the living space and the wood supporting the roof. In a fire, without drywall to protect them, those roof members would burn quickly, potentially bringing the roof down on the heads of any people still inside the building.
We know people love ceilings like this, so we have occasionally gone to the trouble of making them with permits. It’s super-painful, which is why I know that almost all of the exposed ceilings you see in LA apartment buildings are un-permitted.
With single family homes, having some un-permitted work is not the end of the world, because no city inspectors enter your home. But, with an apartment building, every 2-3 years the Housing Department inspects. If the particular inspector you get knows the building code (many don’t), you’re screwed.
So, unless you’re prepared to spend a lot of money either returning the ceiling to its original condition (and thereby making your units uglier and damaging your rent roll) or jumping through the hoops necessary to permit the open ceilings, avoid these buildings.
Don’t get excited. I’m not breaking my prohibition against selling any more properties.
4443 Willow Brook is a 10 unit complex Jon and I renovated in 2010-11 via our old entity, Better Dwellings. We sold it in 2012 for $2.1MM, which was around 10x the rent.
We made a bunch of money on the deal, but nowhere near as much as the new owners are going to make if they get anywhere near their $3.2MM asking price. (Note that the equity partner forced us to sell, which is why we don’t give that right away any more.)
For what it’s worth: 4443 Willow Brook is a pretty good property. It lacks parking, but the neighborhood is improving rapidly (partially due to us!) and the units are pretty well designed (despite being small) and have private outdoor space.
I would not pay $3.2MM for it. But I think someone could pay $3.0MM and feel like they’re getting a decent deal.
If you have ~$1MM and want to buy an apartment building in East Hollywood, get in touch and we’ll help with this one… we definitely know where all the bones are buried!