Theoretically, THE EASIEST $100,000 YOU WILL EVER MAKE!

I wrote a Blog a few years ago entitled: “The Stars have aligned for Solar Panels on Apartment Buildings.” At that time I was excited about the development of Virtual Net Metering: a method in which one solar power system feeds one master meter, sending electricity back to the grid. The power company then applies the credits from that energy to each of the tenants in the building, thru sub-meters, offsetting each tenant’s electricity cost. 

Recently I completed the National Association of Realtors GREEN designation course, I highly recommend this class. At any rate, I became aware of two more profound positives for making apartment buildings energy efficient. Fannie Mae has come out with their Green loan program, which among many great features has the ability to finance future GREEN improvements in a purchase or refinance loan, plus discounted preferential pricing!

The second light bulb was a graph demonstrating how solar and renewable power are now less expensive in many cities than conventional electricity rates.

How does this all work together to create $100,000?

Example: You own or purchase a 10 unit apartment building. You spend $50,000 on retrofits and solar panels. Your additional loan payment on $50,000 @4% 30 years = $238 per month. You change your leases to collect the electric bill form your tenants: 10 units x $60 electric bill per month x 12 months = $7,200 increase in annual rental income, less $2,856 loan pmt.  = $4,344 EXTRA annual income. You also reduced your water heating, lighting, and interest rate expenses roughly $4,000 per year.

Additional net income of $8,344 per year at a 5 cap rate = $166,000 equity.

THANK YOU FANNIE MAE!

Buffett and Einstein would agree on solar panel cash returns!

Imagine this conversation:


Warren says to Einstein, “Albert, I look for investments growing at 20%+ a year.”


Albert replies, “Using my “rule of 72 formula, I calculate you double your money every three or four years!”


Warren replies, “How do you think I became one of the richest people in the world?”

Warren Buffett quote: “Investors are always looking for stocks that are going to double in a year or two years- that’s why they want tips. Instead, they should be looking for stocks that are going to go up a more reasonable amount, such as 20% or 25% a year for the next twenty years. That’s where fortunes are made.”

“Einstein’s rule of 72”: if you divide your desired compound rate of return into 72 you get the number of years required for your investment to double. Conversely, if you divide the number of years in which you wish your investment to double into 72 you get the required compound rate of return.”

In our previous Blog: How to Double your net Income by installing Solar Panels, We established that we can create a 15%+ annual cash on cash return on the solar component of our apartment building investment by utilizing Virtual Net Metering,( Installing solar panels, then charging the tenants for their electricity). This return can increase along with electricity rate increases, eventually hitting 20%+ returns yearly for the life of the solar panels.

Number wise, I think Buffett and Einstein would both approve and appreciate the extra returns created by our “solar panels on apartment buildings” investment strategy.

Interesting Einstein story: Einstein wanted a divorce. He could not afford the money Mileva wanted for child support of their two sons. Confident that he would win the Nobel Prize for his 1905 work, he promised her that he would give her the prize money when he won, if she would grant him a divorce. Einstein won the Nobel Prize for his work on the photon (not for relativity theory). He kept his promise and gave all the money to Mileva Maric, holding up his end of the contract. She bought three apartment buildings in Zurich, one for her and one for each son.

If Mileva were alive today, I would like to think she would enjoy the extra return on her investment that net metering would bring, and be delighted to be improving the environment by not burning coal to power her electricity usage.

Steve Nauert

How to Double your Net Income by installing Solar Panels on your Multi-Family Building-

As you know, the cash flow after you purchase an apartment building is slim at best. Typically on a 25% down deal you can expect a 3- 4% return on your cash invested, if all your expenses stay in line.

With the addition of solar panels and a few “tweaks” you can almost double your annual net income. We are not counting debt reduction, loan amortization, excess depreciation or appreciation in our example, we are only counting the cash left over at the end of the month.

Given:
Los Angeles-10 one bedroom unit’s
Gross annual income of $90,000
Landlord pays $250 per month to heat the buildings water with a Gas Water heater.
Tenants pay an average of $74.00 per month for electricity: (573 KW Per month @.13 cents per KW).

Step #1: Install a solar panel system, using Virtual Net Metering. Definition: Virtual Net Metering is a method in which one solar power system feeds one master meter, sending electricity back to the grid. The power company then applies the credits from that energy to each of the tenants in the building, thru sub-meters, offsetting each tenant’s electricity cost.

Step #2: Add a Solar Thermal Hot Water System, which can typically reduce natural gas demand by 60% to 70%. (Solar thermal uses the sun’s energy to pre-heat water and transfer it to a hot water storage tank. Heating represents 40% of a typical power bill).

Step #3: Replace light bulbs with LEDand CFL light bulbs. About 20% of an average electric bill is lighting. LED and CFL bulbs draw about 85% less energy than an incandescent bulb. Additionally, you can make your building a Wi-Fi Hot spot for $60.00 per month, a real money saving treat for the tenants. Add a recycling program and you are now a Green landlord!

Step #4: Re-write the leases so you now collect what the tenants used to pay the electric company: in our 10 unit example, $8,400 per year. Add the direct savings from your old gas hot water bill of $3,000 per year, and you have created an additional $10,400 which falls to the bottom line. In our example, using an $850,000 purchase price with 25% down payment and 44% expenses you netted 4%, or $10,000.  Your expenses after these changes now fall to 37%, and your net income increases by an additional $10,400 to $21,258 per year.

Of course there are costs to getting here: Assume you purchase as much used equipment as you can, and pay $250.00 per new solar panel, (assuming 125 panels). Estimate $70,000 for the installation and equipment, and we have a 7 year payback on your investment, or 15% cash on cash return. If you prefer to borrow the $70,000 @5% for 30 years the monthly payment is $375.00  x 12months = $4,500 per year, netting an additional $5,900, which adds 50% to your bottom line with no out of pocket cost on your part, and the interest is a write off as you know.   

Environmentally- or the “Catnip” as I have seen it called: you would prevent the burning of roughly 80,000 Lbs. of coal per year.

Steve Nauert

Solar Apartment Buildings! “Maintain a firm grasp of the obvious at all times.”

When Jeff Bezos, founder of Amazon, made this quote, it was my understanding he was referring to selling books over the internet, a new concept at the time. He was looking for a reasonably expensive item relative to size and weight. A book became the obvious thing, and Amazon was born.

A whopping 33% of the U.S. population lives in a rented apartment, and they are paying the electric company every month for their power. What if the landlord could supply their tenant’s electricity needs using solar panels? The landlord could increase the rent from each tenant to cover the solar installations cost, plus some profit. 

I would like to think Jeff Bezos would agree on two points:

1) There is going to be a rush to put solar panels on apartment house rooftops. The internet was the catalyst for Amazon, and Virtual Net Metering, (a method in which one solar power system sends electricity back to the grid, then applies the credits from that energy to each of the units in the building), is the catalyst for solar panels.

 2) Environmentally, this is a way to reduce the carbon footprint of 50 to 100 people per building

When you put solar panels on your own personal rooftop it is to save money, and do right by the environment. When you place solar panels on your apartment building, the tenants pay you for their electricity thru increased rent, and you are producing their electricity inexpensively from your panels. This also increases the value of the building.

The great wealth shift from the utility companies to the landlords is happening. This transfer of wealth will take place as the utility company’s stream of revenues starts shifting to the landlords, the Proverbial Gold Mine. Utility companies need a 20, 30 or 40 year investment payback period, while a “solar landlords” payback is 5 to 7 years.

• “The Stars Have Aligned” for Solar Panels on Apartment Buildings!

Virtual Net Metering is the Game Changer:

TIME: solar panels have continued to drop in price and gain wider acceptance. The cost of solar panels today is about 100 times lower than the cost of solar panels in 1977.

TECHNOLOGY: Virtual Net Metering is a method in which one solar power system feeds one master meter, sending electricity back to the grid. The power company then applies the credits from that energy to each of the tenants in the building, thru sub-meters, offsetting each tenant’s electricity costs. The utility handles all the record keeping, while the landlord collects the utility payments from the tenants. One of the great advantages of solar multi-tenant housing is education. Tenants at the solar apartments learn and understand how they are using energy and how solar energy can help.

LEGISLATION: Utilities are on board with the California Solar Initiative, in giving the go ahead thru the MASH Program to Virtual Net Metering. This is similar to the scene in the movie the Graduate when the advice given to Dustin Hoffman is, “One word:Plastics”

This is a game changer in the solar industry. Apartment owners can now become a Utility Company. Assume rents increase roughly 3% per year, and electricity prices increases about 5%: "We are now in an era of rising electricity prices," said Philip Moeller, a member of the Federal Energy Regulatory Commission. .. “In California, residential electricity prices shot up 30% between 2006 and 2012, adjusted for inflation, according to Energy Department figures. Experts in the state's energy markets project the price could jump an additional 47% over the next 15 years.”

For EXAMPLE: Historically, rents and electricity are both rising in price at an average of 4% per year. You purchase an apartment building and install a VNM system. In your purchase, you used 4 to one leverage, (a 25% down payment), so a 4% price increase becomes a 16% leveraged return. You have now almost accomplished what Warren Buffet recommends for a good investment: “Investors are always looking for stocks that are going to double in a year or two years- that’s why they want tips. Instead, they should be looking for stocks that are going up a more reasonable amount, such as 20% or 25% a year for the next 20 years. That’s where fortunes are made.”

Currently, there is a bestselling book by Thomas Piketty: "Capital in the Twenty-First Century.” Per The Economist summary:"Mr. Piketty derives a grand theory of capital and inequality.  As a general rule wealth grows faster than economic output, he explains, a concept he captures in the expression r > g (where r is the rate of return to wealth and g is the economic growth rate).” To boil this down, the landlord owns the apartment building = wealth, receiving a leveraged return of roughly 16% per year, compounded. The economic growth = wages, hopefully grow at 3% per year, giving landlords a 5 to 1 financial advantage over their tenants. Landlords and tenants have historically been a good example of Mr. Piketty’s theory.

Steve Nauert, the GreenLandlord.org

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.