Some thoughts on windows (zzzzz….)

Today, I want to talk about windows.

Still here? Good.

Windows are a controversial part of the repositioning process. Replacing them is pretty expensive (on the order to $400-500 / window) and, while new windows open / close easily and look nice, no one ever rented an apartment because of the windows.

Still, we intend to own our buildings forever, so we replace all the windows, as a rule. In the rare cases where tight budgets caused us to forgo replacement, we over-performed on the rent and then wished we have spent the additional money to do the windows when we had the chance.

So, we’re into replacing windows. But doing so is dangerous to your project, and here’s why: They’re a massive source of delay.

Think about what happens when you order windows for a small rehab project. The rep for the window company needs to come out and carefully measure each of the windows you plan to replace. Then, he needs to record these measurements accurately, along with your aesthetic choices (frame material, opening direction, etc.). Finally, he needs to forward your specs to the factory, where the windows are produced over the next 3-5 weeks and then shipped to you.

The above is a painful process and its easy to make mistakes. And here’s the kicker: If you make a mistake on the order, there’s no way to correct it quickly. If, like happened to us recently, the window guy accidentally orders the wrong frame material, your entire order may need to be re-done, imposing a delay of a month on your project.

And there’s nothing you can do about it.

Just another problem that you need to manage around if you want to reposition apartment buildings the right way.


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

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.