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

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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!