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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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.