Here’s a question that’s been popping up all over the place: Why do developers only build apartments for the rich? The answer, as with most things in our business, is in the math. Imagine you can buy enough land to build 10 units for $1MM, or $100,000 per unit. Let’s say you have two options: … Continue reading “Why developers prefer to build luxury apartments”
Category: Real Estate Math
Uh-oh… they’re baaaa-aaaccckkkk
We’ve now reached the point in the cycle where brokers describe their over-priced apartment deals as “condo conversion opportunities”. Why would a broker do this? Well, if your client demands a price so high that no buyer could actually achieve any kind of yield on their investment, you don’t really have many options. But, in all … Continue reading “Uh-oh… they’re baaaa-aaaccckkkk”
How to value a vacant building
A friend of mine from college called me late last week with an interesting problem: He wanted to know how to value a vacant building he was considering buying. There are two good ways to think about this problem: The first might be thought of as “price per pound“, where we are looking at the … Continue reading “How to value a vacant building”
Why every last dollar of rent matters
Sometimes people question why it’s so important to get that last dollar of rent. On a $2800 apartment, does an extra $100/month matter? After all, $100 is only 3.6% of $2800… no a big deal, right? Wrong. Here’s how we think about rent in our business: All buildings are worth some multiple of their total … Continue reading “Why every last dollar of rent matters”
How low interest rates are changing the multifamily market
Had a quick conversation with a loan broker last night about the loans available on 5+ unit apartment buildings right now. You can now get a 5 year fixed, non-recourse bank loan for 3.62% interest. Let’s take a look at what that means by using the example of a 5% cap deal, which is a … Continue reading “How low interest rates are changing the multifamily market”
The $100,000 eviction
I got a call from a regular reader the other day about his building in Los Angeles. I’m going to share his story and I hope he won’t mind. This guy has several great, normal tenants and one low-paying, rent controlled tenant who has a kid with pretentions to gang-bangerness. The kid has done all … Continue reading “The $100,000 eviction”
How one little equation perpetuates slum conditions
Dave C commented on yesterday’s post asking, in effect, what can be done about a rent control building which is deteriorating. The short answer is: nothing. The reason is one little equation. If you’re the owner of a rent-controlled building with below-market tenants in Los Angeles, your tenants are never leaving. You can’t raise the … Continue reading “How one little equation perpetuates slum conditions”
Never, ever reduce unit count
One of the contractors I use a lot recently did a rehab of a small apartment building in Silver Lake. He bit a lot of our style, but that’s life. When I asked him about the project, what he told me shocked me. Apparently, the genius who bought the place paid my contractor to turn … Continue reading “Never, ever reduce unit count”
How to be a bad broker (episode 387)
Am working with a client considering buying a duplex in LA. The listing broker has the building on the market at $500k. He has no idea what the rent is on the one occupied unit (in what is a rent control building). To illustrate how insane this situation is, let’s review the numbers: List price … Continue reading “How to be a bad broker (episode 387)”
I have a bone to pick with all of you
I’ve been recommending to every single reader that they check out my post on “How to value an apartment building” for six months now. In all that time, no one noticed that I had got the equation for calculating a cap rate wrong. Here’s the relevant text with corrections: “To calculate a CAP rate, you … Continue reading “I have a bone to pick with all of you”