Why the Fed’s growth forecast matters

If you follow macro-economic news, today was a big day.

In addition to raising short-term interest rates, the Federal Reserve bumped up its estimate for economic growth in 2018, from 2.1% to 2.5%.

The question for LA landlords is whether this increased growth rate will result in additional jobs / wage growth.

Why should landlords care?

Employment growth is the single most important factor driving rents. It’s pretty obvious why… more people with jobs means more people looking for apartments. More people looking for apartments means more demand, and more demand without additional supply means higher prices (eg rents).

Wage growth is probably the second most important factor. Over the past several years, rent growth in core LA has outpaced wage growth by a pretty large margin… like 5-8% vs. 2%. To the extent that wage growth accelerates, landlords ought to be able to keep pushing up rents, too.

We have a bunch of smaller projects going into lease-up in January / February. Will be interesting to see what effect the “animal spirits” loose in the economy have on our lease ups.

My on-going pain in the ass

In general, I find managing apartments to be the most painful thing we do. No one calls up his landlord to thank her when everything is great in the apartment. But when something goes wrong, it’s like you just killed the person’s dog.

So, why do we continue to manage, rather than outsourcing?

Well, the answer is that we already tried outsourcing, with three different companies, with results ranging from very bad to disastrous.

The first time was on one of the very first buildings we ever bought. Because we had no experience, the bank required we hire their preferred management company. That company employeed to use a leasing consultant who was, to put it bluntly, creepy… like, the kind of person you wouldn’t want to have around kids. Not surprisingly, the units took forever to lease and, when they did lease, did so at lower rents, to worse people, than I would have preferred.

After that experience, we took management in-house, first at Better Dwellings (my original company) and then, later, at Adaptive.

But I hadn’t learned my lesson, yet. Around 2012, we partnered up with an investor to buy a bunch of properties in an interesting neighborhood which did not, at that time, support rents sufficiently high to justify our brand of gut-renovation. Because these properties were going to remain un-renovated (with all of the attendant problems with maintenance, rent collection, etc.), I figured it would be best to hire an outside company with experience with these kind of buildings.

Big mistake. By this point, our internal team had got really sophisticated in terms of financial oversight / reporting. When the monthly reports started coming in from our new company, my controller’s head nearly exploded. The company was improperly classifying expenses, helping itself to money that should have been ours, failing to collect rents, etc. We got the hell out of there. Am sure they still have plenty of clients who are being ripped off and don’t know it, because it’s hard to understand what’s going on without a lot of expertise.

After a big search, I hired another management firm to take over our portfolio. This company’s tenant service was so shocking, we were later sued by a tenant on a habitability claim. And, by the way, they helped themselves to late fees which were rightfully ours.

Having had my fingers burnt three times, I have finally learned:

  1. Because we handle large amounts of precious capital for investors, we have very high standards for how we want buildings run and records kept (if we didn’t, our careers would end, quickly)
  2. Normal property management companies are just not set up to provide this level of service
  3. So, we need to do it ourselves

And, since we need to have this function internally for our deals to function, it makes sense to provide the service to other owners who are serious about running high quality buildings.

And that’s how I found myself in a business which is, objectively, a pain in the ass.

Getting sick of crime again

In theory, I am a fan of reducing the number of people in prison.

In practice, I am getting pretty sick and tired of having tenants’ cars and mailboxes broken into.

These are not crimes of impulse, like seeing a nice bike unlocked and riding away on it.

If you break a car window or take a screw-driver to a mailbox, you know you’re doing something wrong.

I have little / no sympathy for people who commit these kinds of crimes.

First time offense? OK, maybe a ticket and a stern warning will do.

The second time? Jail is in order.

Why we love (our) property management business

A lot of people in real estate HATE residential property management.

Why?

Tenants understandably get pretty upset when they’re paying good money for an apartment and things break. And, on the flip side, no one calls up her landlord when things are going great and says “Hey! Thanks for my apartment! It’s wonderful!” So the business is pretty rough emotionally.

And the money often isn’t that great. If you’re managing an apartment building for 6% of the rents and you have a tenant paying $1,000 for an apartment, you’re getting paid $60 / month to collect the rent, respond to maintenance requests, handle the accounting, etc. That’s a very bad deal.

So it’s kind of a messy business… all hassle and not enough compensation.

But, at Adaptive, we love property management. Why?

  1. Our buildings are in great shape. The vast majority of our units are recently gut-renovated. And I don’t mean slapping some lipstick on… we replace plumbing, electric, windows, roofs, etc. So, while we obviously have maintenance issues (particularly in the period immediately following renovation, while we’re still shaking out minor construction issues), in general, we deal with many fewer maintenance problems than companies that manage older buildings. That means less hassle for us and generally happier tenants.
  2. We attract tenants who appreciate our product. Our buildings have a point of view. The design choices aren’t random. They tend to appeal to a specific type of person who sincerely appreciates design and is willing to pay for it. What we’ve found is that, in general, these kinds of tenants pay their rent on time and take care of their apartments. So, we spend comparatively little time dealing with tenant-related nonsense like evictions, collections, etc.
  3. The product commands high rent. Because the units are great, we can charge good rent. 6% on a $3,000 apartment is $180 / month, which is a MUCH more reasonable amount to be paid for the effort involved.

I understand why other companies see property management as kind of a red-headed stepchild, something they have to do but don’t really like.

But we actually love the business and intend to be in it (and happily so!) forever.

Dealing with tenant mental health issues

In light of the UCLA shootings, thought I’d spend some time today writing about an under-appreciated problem in property management: Dealing with tenants with mental health issues.

If you supply rental housing in Los Angeles, your tenant base will skew towards people in their 20s and 30s.

Unfortunately, the mid 20s is usually the time in which schizophrenia manifests itself. And schizophrenia is implicated in many of the mass shootings you read about in the newspaper.

If you manage enough apartments for long enough, even with very strong tenant screening, you will end up having one or more tenants who begin acting strangely.

Now, there are plenty of strange people in the world who don’t hurt anyone. But obviously there are others who do.

So, when you have a tenant who starts acting weird, particularly in that target demo, what do you do? You don’t want to violate someone’s privacy. But you also want to make sure that someone who is having mental health issues gets the help they need.

We kind of handle this on a case-by-case basis. If someone is acting really oddly, our first move is generally to contact friends or family whose contact info we have. If that doesn’t resolve the problem, we escalate to county mental health authorities.

So far, that’s been enough. Let’s hope it continues!