Solar Powered Apartment Buildings / Acres of Diamonds

Solar Powered Apartment Buildings / Acres of Diamonds

I was going door to door selling solar panels last year. I was looking for a hook to make the sale. I started wondering how much coal was being burned each year to power an average home? The answer is roughly 10,000 pounds, or 27 pounds each and every day. If your local power plant burns natural gas, you are burning 316 cubic feet of natural gas per day.  

I am in the apartment business as a few of you might know. I started researching the energy usage in our apartment buildings. Please pardon the pun, but the light bulb went off for me. What if we went solar on a 10 unit apartment building? Multiply the numbers above times 10 units, then by 12 months and you can see how dramatic an effect we could have on the environment by going solar. We could stop burning 82,440 LBS of coal per year, or 515,700 gallons of natural gas. This is enough natural gas to fill over 200 swimming pools a year, and this is just one apartment building. Ask yourself if you think this is sustainable?

FINANCIAL BENEFIT example: We purchase an $850,000 10 unit building. We install solar, and then we increase the rents to reflect the tenant’s old utility bill payments.

1. The increased revenue represents a 33% equity return on our down payment.
2. Our operating income almost doubles, giving us the ability to borrow more in a re-finance. Hypothetically, we could borrow $110,000 with the increased cash flow, replacing 42% of our down payment.  

GREEN BENEFIT: We buy energy (in the form of electricity) from the electric company. Electricity is sold in units of the "kilowatt hour". If you run a 1000 watt (1 kilowatt) appliance for an hour, you have used a kilowatt hour. If you light a 100 watt bulb for 10 hours = a Kilowatt hour. 1.2 LBS coal creates 1 KW, and 75 gallons of natural gas create 1 KW.

Step one:

Go solar: Fill the roof with solar panels.

Step two:

Reduce the electric and gas consumption at our building. We can do three powerful things to reduce demand:

1: Solar Thermal Hot Water Heater: Solar water heating systems can typically reduce natural gas demand by 60% to 70%, and Solar Thermal Panels produce four to five times as much energy as solar photovoltaic panels of equal size. Solar thermal uses the sun’s energy to pre-heat water and transfer it to a hot water storage tank. A buildings conventional water heater then draws out the pre-heated water, and boosts the temperature “only if necessary.” Heating represents 40% of a typical gas power bill.

2: Replace lightbulbs: LED and CFL light bulbs: About 20% of your electric bill is lighting. LED and CFL bulbs draw about 85% less energy than a regular incandescent bulb.

3: Energy Star rated appliances: Changeover to refrigerators with an Energy Star rating that can use less electricity more efficiently.

The Financials:

10 one bedroom units together spend roughly $8,880 per year on electricity/ gas. A Kilowatt hour costs roughly 13 cents in California for tier one. 573 KW x .13 cents = $74.00 per month for our one bedroom unit electric bill, x 10 units x 12 months = $8,880. If we convert to solar, then pay for the utilities ourselves and charge the tenants, AKA: “master meter” the financial aspects are remarkable. If you email me I will send you two spreadsheets showing before and after.

There are two formulas that are important in the apartment business; The Gross Rent Multiplier and arriving at the Net Operating income/ debt coverage ratio.

“GRM” = Gross annual Rental Income multiplied by a factor = an indicator of the value of an apartment building. If we go solar, increase rents to tenants to cover their old utility bills the formula is this: $8,880 x a 9.5 GRM = $83,600 increase in the buildings value.

Net operating Income: This is cash flow after expenses. Generally, a bank will loan you roughly 80% of the “NOI”. In our example: NOI of $8,880 x .80% = $7,104 available for annual loan payment. Figure a 30 year amortization at a 5% interest rate: $7,104 / 12 months = $592 monthly payment @5% = loan amount of $110,278.

There are Acres of Diamonds waiting for us who go GREEN on apartment buildings. The power that drives this machine is the flipping of the utility bill payments from the utility company to the landlord, giving the landlord the ability to allocate the increased cash flow as they see fit.

Enjoy-

How I lost 20 pounds dealing with my tenant the gang member-

In the apartment management business it usually starts with a phone call…

We had a building in Central California a few years ago. We were on our 3^rd management company and by this time and I realized I better take it over myself. We were having rent collection problems, only 5 of the 14 units were paying rent. Our previous management company had not supervised their on site manager properly, and she loaded up the building with tenants who had no job and no ability to pay a second monthly rent. The manager then stole the initial deposits and the few rents paid, so it fell to me to stop by and speak to the tenants in person.

When I pulled up the tenants were all outside their units, each waiting with their individual complaints. I had been told we had an “alleged” gang member, but I thought, no big deal, I can reason with him. Let’s refer to him as unit #2. How did he get into a unit you ask? He was on his girlfriends lease listed as “boyfriend.” He provided no social security number and his credit was never checked.

I saw him standing patiently in the corner. Looking back, making him wait his turn in front of the other tenants may not have been my finest hour. I was busy trying to look and act brave, but facing off nine angry tenants who were not paying rent is quite an experience. The alleged shirtless gang member was tattooed from top to bottom. He explained to me that his swamp cooler was not working properly and the hot water was slow coming online. These two issues are what is called a “Breach of the implied warranty of habitability for their failure to tender rent per the rental agreement.” Bad news for any landlord.

We gave out 9 three day notices to pay rent or quit. Unit #2 did not pay his rent as requested. Fast forward a few days and I get another call: Most of the tenants have now moved out on their own. Apparently Unit #2 had been swinging around a baseball bat and shooting his squirt gun at the tenants whenever they opened their doors. The only tenants that stayed were friends of Unit #2’s. We made the decision to start unit #2’s eviction. We hired the best eviction lawyer we could get: $1,200.

Soon after we served Unit #2, he obtained my home phone number and the threatening phone calls started. This was the beginning of my weight loss. I would worry day and night, getting up in the morning dreading what would be the newest bad news. His first call to me was really chilling. Unit #2 informed me that he was taking over the building, then he made some veiled threats, but nothing you could really put your finger on. He also informed me he was recording my calls, had a high priced lawyer, and he was considering suing us for discrimination.

I still had some confidence we could handle Unit #2 at this time because we had met with the city gang task force, who let me know they were on the job. I thought O.K., no problem; the police will handle this and they are on my side. The gang task force wanted all the information we had, which we were more than willing to give them. We later found out that without someone actually coming forward and fingering Unit #2 with some infraction that they had witnessed, the police were powerless.

Didn’t you write letters and make calls asking for help you ask? Yes, we wrote 8 letters, from the Governor on down the list to the chief of police and the Mayor explaining our situation and begging for help. How many responses would you guess we received? Zero. I cannot fault any these city and state officials, my guess is they are buried in endless gang problems with a lack of personnel and limited financial resources.

After numerous threatening calls from Unit #2, trying to deal with him and offering him money to move, we finally had an eviction court date. Talk about raw fear, I could visualize a 14 year old gang member sticking a knife in my side and getting away with no penalty. I actually hired an armed guard to escort me to and from court. I got in late the night before court and checked into a hotel, dreading my next day’s court appearance. I woke up in the middle of the night for a bathroom break and saw moving shadows under the front door. I froze, thinking Unit #2’s minions had tracked me down, only to realize I was looking at my own shadow, backlit under the door.

I met my guard in the morning and we headed to court. It was jammed.  I was standing by a lawyer and I asked her what happened to all the good tenants? She informed me that a lot of the Farm jobs were gone. “The Bush administration, in December 2008, agreed to divert more than 150 billion gallons of water from the fertile Central Valley to the San Joaquin Delta in an effort to protect the endangered Delta smelt.” When the fish injunction took place the farming stopped. You will be interested to know that now instead of vegetables and nuts; one of the main cash crops is now marijuana.

Before presenting your case to the judge you meet with the tenant to try a work out. Our lawyer came back after this meeting and informed me Unit #2 was not going to make any deal. Our case was called and we took our places in front of the judge. We had been told we might get a “Gang Letter” from the police to present to the judge and help our case, but unfortunately the letter never materialized, there was a problem with the unit # on the letter and it was never received....Unit #2 stated that his swamp cooler was not working at 100%, and he had a witness to corroborate his story. I looked up at our lawyer and realized we just lost the case. The judge gave Unit #2 a reduced rent rate until we made his unit “habitable,” and then he would resume paying the full rent. Unit #2 was required to pay 1/3 of the total back rent, and he showed up all smiles the next morning all smiles with his $600 in cash.

Now the problems were really about to begin.

We started getting complaints about late night partying at the building in the vacant units. We would call the police and the partier’s would vanish before the police could get there. We found out later Unit #2 had a police scanner that he would listen to 24 hours a day. Unit #2’s friends proceeded to vandalize the vacant units at night, which now numbered 11. Windows were broken, holes kicked in walls, toilets torn out. I soon got a call from code enforcement explaining that Unit #2 was complaining to them that the entire building was not habitable, and he was demanding an inspection. Code enforcement also knew of Unit #2. The head code enforcement officer was apologetic, but informed me he had to do his job. He brought 3 inspectors with him and they spent all day at the building, writing us up.

Fortunately we had vandal insurance. That State Farm is a first class company. Their rep came out and figured the damages at $32,000. We thought we better start fixing this building up so we can collect some rents even with unit #2 there, which we did. Keep in mind, it is illegal to turn off the utilities to your building just because you have non-paying tenants, so it was a race to fix the building, get some rents and start paying the mortgage again. We started the fix up during the day, which then would get destroyed in the night. The police scanner really came in handy. We soon stopped attempting to make the repairs.

As you can imagine we were unable to make the mortgage payments, and the lender foreclosed. The lender hired a management company to handle unit #2, unsuccessfully I might add. The lender eventually sold the building. I never heard from Unit #2 again. Now when I see a boarded up apartment building I have a pretty good idea what happened. In answer to your question, no, I was not able to keep the weight off

Big Frank, the Irish Operator

My friend Frank is one of the best apartment buyers I have ever encountered. Frank was my first multi-unit buyer. Frank loved to buy in SanPedro California

When I was starting in the business in 1998, I ran an ad in the Daily Breeze saying something about “2 to 20 unit’s, good deals”…Frank called on the ad, and it turned out to be the best $100.00 dollars I ever spent. Funny enough, I had just finished a book on real estate sales that emphasized: “get-em in the car” and that is exactly what I did. Frank did not drive so this worked perfectly, Frank needed me. We looked at over 20 buildings together and made a few low-ball offers. Frank is the king of the low ball offer. For any realtor just starting out this is the fastest way to get a real education, writing and presenting offers.

After the frustration of endless turn downs Frank called one day and said a good one just came on the market, let’s roll. This is heaven for a realtor when you receive this kind of call. Frank had found a 5 unit non rent control townhouse style building in San Pedro. The asking price was $396,000. True to form, we made a low offer and ended up paying $325,000. The property was in a package being liquidated thru a bankruptcy by the builder, poor guy lost about 10 buildings. If only he could have held on a few more years…but that is the real estate cycle.

After escrow closed Frank took over the management of the building. The units were all two bedroom two bath, 1,350 Sq.Ft., with a panoramic San Pedro Bay view. As Frank always told me: “Two bathrooms are the best, because when all the tenants get up early in the morning and NEED to use the bathroom at the same time, if there is only one, the tenants will eventually move to a two holer.” A tid-bit of wisdom if ever there was one.

The rents were $750 per unit when Frank took over. Over the course of the next year Frank would move the tenants out, paint, carpet and add ceiling fans with a remote control. Frank felt the tenants loved this type of fan. Frank would then re-rent the units at $1,200 to $1,400. Of the five tenants Frank moved out I sold apartment buildings to two and a home to one. More on that in another blog.

Now this is where the story gets fun, but you have to understand how the “Gross Rent Multiplier” works. Basically you add up the annual rent received and multiply by a factor that represents the quality of the area. In Beverly Hills the “GRM” might be 14, in San Pedro at this time the GRM was 9. So, Frank was raising rents from $750.00 to $1,200, increasing the rents $450.00 per month. $450 x 12 months = $5400 per year. Multiply $5,400 x 5 units = $27,000. Multiply by the GRM of 9 = $243,000 increase in equity. Frank put down 20%, or $65,000. This increase in equity represented a 400% return on Frank’s down payment in less than one year, not to mention the increased cash flow.

At this time Frank owned two other buildings in San Pedro. There were days when Frank would call me, tell me he re-rented three units at some increased rental rate, we would do the same math we just did. I would tell Frank “You made $30,000 today in increased equity!

Frank sold the building about four years later for almost $700,000, and the buyer got a pretty good deal.

One newspaper ad, one phone call, 4 sales and a lifetime friend.  Ahh, the Serendipity of Real Estate.

Steve Nauert Ca. Real Estate Broker

Technorati #PFJFYS69FHCE

Bed Bugs! You will Laugh, you will Cry, you will Itch!

My first experience with bed bugs was in one of our Fresno Buildings a few years ago. We had a problem tenant who complained her unit had bed bugs. She had just finished taking possession of an old sofa from the dumpster, AKA: Dumpster Diving, which made her complaint more credible. We immediately called in an expert pest control company who upon inspection of the dead pest labeled it “crabs.” This was GREAT NEWS for our on-site manager, who immediately let the tenant know she had a case of crabs. As you can imagine, the rumor spread through the building like a wildfire. This did not go down too well with the complainer as you might imagine. We paid for the $500 bed bug spray to calm her down after the false accusation.

About 9 months ago we found bed bugs in one of our other buildings. Elimination of bed bugs can be very, very expensive, (roughly $200+ per unit to spray, $500 to heat treat), and time consuming. You have a few options to remove them: Get-Rid-of-Bed-Bugs.

To see a picture of a bed bug: Bed Bug Picture

We chose the heat treatment in combination with a spray. In the heat treatment, you need to get the room temperature above 120 degrees for a few hours. You can pay for the service at $500 per room, or, our inexpensive solution: My friend the fireman suggested purchasing a few $25.00 portable heaters at Home Depot. We found that if we plug in 4 heaters and run them for 5 hours we can hold the room temperature at120+ degrees, which then kills the bugs. The big expense is in the extension cords, not the heaters.

We were doing this treatment methodically through the summer and we noticed the roach and flea complaints were both increasing exponentially. The roaches usually stay in the walls but they started coming out in full force. After we researched this a bit we found the roaches got stimulated by the heat, which made them reproduce faster. The fleas I do not know, maybe just the summer season. We now had a building creeping and crawling with all three pests at the same time! Long story short, we now do the heat treatment and spray every two weeks.

Steve 

Benefiting from a lazy agent on the other team!

The world is full of good real estate agents and bad real estate agents. It is the luck of the draw when you enter into a transaction which one you will deal with, and what side of the transaction they will be on. We were fortunate to encounter a lazy agent on the seller’s side of our Wilmington Blvd. deal. After the initial walk thru we never heard from or saw the agent again….

In 2001 the market for income property was a bit soft with the giant gains far off in the distant future.10% down payments for investors on 2 to 4 units had just come into play. In our current environment it is 25% down or more.

I was searching the Multiple Listing service daily looking for our next deal, and out of the blue popped 4 units for $229,000 in Wilmington, our target market. In the remarks section of the listing sheet the agent stated the rents were low due to rent control. The building was grossing $26,400 per year. The price reflected an 8.67 Gross rent multiplier, (Annual rental income divided into price = GRM). The remarks also mentioned an illegal 5^th unit. I had been doing quite a bit of research on rent control for other buyers and the fact is any building constructed prior to November 1978 is rent control. The occupancy certificate on this building showed 1979.

The building was actually constructed in 1960 as 5 units and moved to its present location in 1979, when the owner simultaneously converted it to a legal 4 units. Had the listing agent gone to downtown L.A he would have found this out; all the permits for the conversion were on the record.

We immediately offered somewhere in the $220,000’s, and ended up at $225,000. We met the original owner at the walk thru. He was a sweet old man. I felt bad for him having selected this selling agent.
I rounded up 3 partners who each put in $8,500. I contributed my commission. We took over the building with a “tenants in common” ownership structure. I still have the agreement if you would like a copy. We turned the management over to Sherri whom we had used before on Sanford.  We closed down the 5^th illegal unit and merged it into one of the 2 bedroom units making it a 3 and one. The unit mix was great, two 3 bedroom one bath, and two 2 bedroom one bath.

The owner had not registered with rent control department in L.A. so we were free to fix up the building and raise rents. We went from a $26,400 gross annual income to $48,000 in the first 18 months.
The market was heating up in 2004, to the point where the gross multipliers had increased from 8’s to an average of 13’s.  I was concerned we were topping and we would not be able to hold on to our gain. We sold the building we purchased for $225,000 3 years later  for $664,000, a 13.8 GRM, We did a 1031 tax deferred exchange with our profit.


When you combine 10 to 1 leverage with increased rental income and increasing rental multipliers you can have a tremendous gain in relation to your down payment. Every once in awhile you hit one out of the park, and that is what we did on this deal!

Part two- Taking over the building and selling at profit

Taking over: The tenants were a pretty tough breed. At the time I was too intimidated to even attempt to manage the building on my own. Funny enough, I currently manage 54 units. I had heard about a good management company that was a perfect fit for the building. Call me if you need the name of a great management company in the South Bay area of Los Angeles. Anyway, Sherrie, the owner, agreed to manage our building. At the time I think rents were averaging $365 per month for our 500 Sq.Ft 1 bedroom units. Sherrie ran the building for a year with no dividends, but we did not have to put in any repair funds either. She was able to do all the repairs out of cash flow and run the building at about 95% occupancy.

Roughly 18 months into our ownership, all four partners started receiving monthly dividend checks. The dividends started at a few hundred per month and by year 4 we were each receiving $500 per month. Sherri had the building grossing over $120,000 per year and our average rents were up to $500 per month.

We had been fixing up the building out of cash flow and that was going pretty good. We did not expect the health inspector to drop by. In our case, the health inspector stood on the sidewalk and the tenants lined up with complaints and requests for new carpet, new kitchens and on and on.

We received a repair demand from the health department totaling roughly $30,000. It took a 3 man crew about a month to complete repairs. Fortunately for us we now had some equity in the building; we had been spending the cash flow. We made a decision to refinance the building, pay for repairs and take some cash off the table. We did the repairs and the four of us split $80,000.

During my pleading for extra repair time, I found myself in downtown L.A. at the “hearing room.” I was amazed at the amount of new (foreign language speaking) landlords that found themselves the new proud owner of a “rent control building.”  Over and over they voiced the same complaint: “the real estate agent never told me it was rent control!”  

We decided to put the building on the market in 2004. We sold the building for $1,040. I felt like a genius and the partners could have not have been happier. We sold to an experienced flipper fluent in the Spanish language. He added an on site laundry facility and started improving the units. He would knock on each tenant’s door, ask the tenants if they would pay an additional $50 per month if their unit was repainted and they got new carpet. The tenants went along with the program and over the course of a year between the increase in rents’ and laundry income our flipper put the building back on the market and sold it for $1,500,000! I did not realize the last half million was on the table when we sold the building to the flipper, but the market was heating up and he cleverly increased the gross income.

There is a lot of serendipity in each and every real estate deal. You start the process and roll with the punches. Sometimes it goes your way and it turns out great as in the case.

Should you have a interesting real estate purchase story to share please do. No fibbing!

Safari Steve the Apartment Guy:

Learning from each transaction-

There is a lot of serendipity in every real estate deal, and a lot to learn. A 2001 memory…

My first multi-unit transaction was in 2001. I had been selling homes for two years while studying the apartment market, not to mention getting up the courage to make my first apartment building offer. Apartment building owners are a tough, smart group to deal with. I started checking out the L.A. Times “Income Property” section of the classified ads. When this property ad “20 Units $360,000 call….” showed up, I immediately drove over to a frightening looking one story building in showing signs of neglect. The building was located in an Industrial area, none of the tenants spoke English, and you could see stacks of outhouses from our front units, not to mention an auto repair shop right next door.

We made a full price offer of $360,000 on the building the next day: The price worked out to $18,000 per door. I was inexperienced about commercial financing at the time, and in the offer we asked the seller to carry back a 20% second TD, thinking we could put 15% down and get a 65% loan conventional or hard money loan. Our offer was accepted. Nervously, I went to three of my friends and they each kicked in $18,500, totaling $55,500, equaling the 15% down. Talk about leverage!

After an offer is accepted the buyer has the right, and obligation to do a physical inspection. This is sometimes called “The second bite of the apple,” and it is this second inspection where you ask the seller for repair money. Our deal was so good we did not ask. We did a unit by unit walk thru led by the buildings on site manager. The building was full which I took as a good sign at the time. During the inspection we found the tenants had rat holes in the walls and pictures of rats in their units. One tenant had a picture of a rat by her sleeping daughter! 

Although the building appeared full during our walk thru inspection, it turned out the seller thought the building was running at a 50% vacancy. His on – site manager was “creaming the rents” and not turning in all the money each month. I would guess he was “creaming” over $3,000 per month the seller never saw. The lesson was you have to visit your buildings and “trust but verify” as Ronald Reagan used to say.

I did not realize or pick up on the desperation of the seller at that time. I can still remember negotiating with the seller and his realtor in his panoramic view 25th floor office in Santa Monica. I was outclassed by these smooth talking operators at the time.  They were using real estate terms I barely understood. I remembered the old saying about not speaking so they would assume I was smarter than I was. I asked for a typical termite inspection assuming that the seller would pay for any repairs, thinking, in my naiveté, they would have to bring the building up to snuff. If a termite inspection finds dry rot around the toilets you can have the seller repair. The seller agreed to the termite report, but cleverly had the report done “with the exception of the toilets.” I am still not sure how he pulled that off, but keep it in mind when you order a termite report.

When you purchase a building your lender requires a current rent roll, plus 2 years of income statements.  As you can guess, no bank will loan on a 50% vacancy rate. We went back to the seller and asked him to carry a note. He ended up carrying an 85% First Trust Deed. Almost unheard of! We saved the appraisal fee and the loan commitment fee, and we made the note for 4 years. 7% interest only year one, 8% year two and so on.

Taking over: The tenants were a pretty tough breed. I was too intimidated to even attempt to manage the building on my own. Funny enough, I currently manage 54 units. I knew of a good management company and I met the owner at the property for a walk thru. She was one tough cookie. Call me if you need the name of a great management company in the South bay area of Los Angeles. Anyway, Sherrie agreed to manage our building. At the time I think rents were $365 per month for our 500 Sq.Ft 1 bedroom units. Sherrie ran the building for a year with no dividends, but we did not have to put in any funds either. She was able to do all the repairs out of cash flow.

I will discuss the operation and the $1,000,000+ sale of the building and the sale in my next blog.