All Forum Posts by: Moses Kagan

I'm not qualified to advise you on the deal itself, but I can assure you that, if you've carefully studied the market, you know more than the appraiser.

I could go on all day about ridiculously low appraisals, but I'l give you just one: Had an appraisal for a buyer on a building with $126k or so in annual rents in Silver Lake in LA (a hot neighborhood). Purchase price was $1.4MM or so. Appraisal came it at $1.2MM, eg less than 10x gross rent in a 12-14x gross market. Totally, utterly, insane.

Appraisers are chosen by reverse auction, where the lowest bid wins. It's a volume game, where doing minimally acceptable work very quickly is the strategy... do not take what they say too seriously.

Saw that one - nice work!

What did you do about the foundation settling? The beams looked pretty terrible as I recall.

@Bill Exeter - I stand corrected.

First: I'm not a lawyer or accountant, so don't rely on this advice.

That said: you're within the cap gains allowance for primary residence. In other words, you don't need to 1031... You won't pay tax on your gain anyway.

Try $200-220 per sq ft

1 year is probably about right

Properties in Santa Monica, Culver City and West Hollywood will also not appear on ZIMAS.

I own a prop management business with approx. 300 units under management (though many are in various stages of renovation).

It's a pretty terrible business. No one calls their property manager out of the blue to compliment them on running a safe, clean, attractive building. Instead, the calls you get are of the "what the f#$^ is wrong with you? I broke my toilet two days ago and never told you about it. Why haven't you fixed it yet?"

We have the prop management business because it supports our development business, which is lucrative.

If you're going to enter the property management business, here are some tips:

1. You should have a brokerage license, too. You will end up with close relationships with owners. It is only natural that they should turn to you for advice buying and selling, and this is a good source of additional margin.

2. Do not compete on price. Position your company as a high-end solution. Provide good service and charge a reasonable amount for it. Smart owners don't mind paying a bit more if it means they can sleep easier at night.

3. Accept only high quality buildings. You are going to be paid a %age of the rent. The work is the same to manage a cheap one bed and an expensive one bed (in fact, it may be more work to manage the cheap one, because lower paying tenants tend to be harder on apartments). You might as well focus on the expensive ones so that your take is higher.

4. Ruthlessly exploit opportunities to use technology to lower cost / complexity. Systematize EVERYTHING.

Assuming we're talking about using a loan, the equation is:

(annual rent - annual operating expenses incl. prop tax - annual mortgage payments) / cash invested

In other words, divide your free cashflow by your out of pocket cash invested.

The only problem with the above is that it does not take into account loan amortization (eg equity build up). For that, I would use the following:

(free cashflow + year 1 loan amortization) / cash invested

This will give you a "total return" number. Note that this number will go up automatically over time, because you amortize more and more of the loan every year.

Finally, note that the above is a little misleading, because, when you sell, you'll pay 7-8% transaction costs. So, the first 5 years or so of equity build-up disappear when you sell.

The longer you hold, the closer the internal rate of return will fall to the yield. So, if you have 100% forced appreciation now, but the yield on the cash invested is, say 10%, then, the longer you hold, the closer the total return will come to 10%.

So, if you're a purely rational investor, you probably sell.

However, it's important to consider a few other factors:

1. Transaction costs. Each time you buy or sell, you're paying brokers, transfer taxes, etc. These take a big bite out of your equity (usually 7-8% of the gross in CA).

2. Future appreciation. My note above about the yield assumes no appreciation going forward. In real life, you need to decide whether you think that there will be appreciation. My personal view is that there's not a whole lot of room for additional appreciation in CA going forward, but I could easily be wrong. (Also, as a personal preference, I refuse to include appreciation in any of my forecasts, because that amounts to speculation and I am not a speculator.)

3. Opportunity. One way to think about the situation you're in is to consider the yield you're getting on your equity (as opposed to the cash invested). Say you buy and renovate for $100k in cash (eg no debt) and are getting $10k / year in free cashflow, a 10% yield. Say that the property is now worth $150k. You're actually getting a 6.7% yield on your equity ($10k / $150k), not 10%. If you could sell for $150k, net $150k x 93% (to account for cost of sales) = $139,500 and then invest that amount in a deal which yields you more than $10k, then you might be better off doing so.

Whether to hold is all about the yield you're getting on your money invested. If, after all expenses (including mortgage and a reserve for repairs) you're getting a decent yield, then why would you sell? For me, decent would be 7-8% on the cash you have in the deal. If it's any less than that and you can sell profitably, then sell.