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!