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Commercial Real Estate

Property-Buying Firm Is Sold on Apartments

Investment: There's less hassle than with homes and usually a positive cash flow as well, one partner says.

July 14, 1998|BOB HOWARD | SPECIAL TO THE TIMES

Buying nearly 50 houses as investments has convinced Marc Paul of one thing: Apartment buildings are a better way to make money.

"If you do everything perfect in buying a house and everything perfect in buying an apartment, you will almost certainly make out better in the apartment deal," said Paul, who spent 17 years as a residential real estate broker before he and partner Robert Robotti started buying homes as investments in 1994.

Their company, Secured California Investments Inc. in West Los Angeles, has since switched almost exclusively to investing in apartments.

Paul says comparing houses to apartments is a timely exercise in Southern California because rising home prices, the widely touted real estate recovery and a desire to diversify out of the stock market are tempting many individual investors to look for ways to invest in real property.

Of course, homes and apartments are just some of the options. Shopping centers, office buildings, industrial properties and real estate investment trusts are some of the others.

But Paul and other real estate professionals say that beginning property investors most often choose houses or apartments.

"It's very easy for someone who has owned a house to understand apartments, which is why people coming into the market for the first time tend to gravitate more toward houses and apartments than shopping centers or small office buildings," said Katherine Bergh, a Grubb & Ellis broker in the San Fernando Valley who specializes in apartment buildings.

Most investors don't make any profit on homes until they sell them, Bergh said, but even small apartment buildings can generate a cash flow. Since owners must pay mortgages and such upkeep costs as insurance, gardening and pool maintenance, homes are often a cash drain.

"A lot of the people I know who bought homes as investments are disgruntled with them because they're not making a cash flow," Bergh said.

Paul said he learned the advantages of apartments over homes through trial and error.

*

From 1994 through 1996, he and Robotti bought dozens of houses, primarily foreclosed properties they snagged at rock-bottom prices. Many had been damaged by the Northridge earthquake.

Paul and Robotti would refurbish the homes, put them back on the market and sell them.

They made money, but Paul said the homes required much more time and effort--and generated many more headaches--than the apartments he and Robotti began buying in 1996. Since then, they've sold all but 12 of the homes and acquired 27 apartment buildings totaling 800 units in a portfolio valued at about $35 million.

Paul emphasizes that he is not anti-house. He recently added another one to his portfolio, and he says many people will continue to profit by investing in individual homes. He even says homes are rising in value faster than apartments are, especially in higher-priced neighborhoods.

"We're just saying that in our experience, apartments are so much easier and more profitable that we rarely buy a house now," he said.

According to Paul, one of the key differences between investing in homes and investing in apartments is that houses usually represent a cash drain or at best a break-even proposition until the investor sells, while apartments generate revenue even while being remodeled.

He explained that inexperienced investors typically buy "fixer-upper" houses and underestimate the cost and time it takes to remodel them.

"If you buy a house and put $50,000 into it, you're almost guaranteed to get $50,000 or more out of it when you sell it," he said. But the house usually must remain vacant during the remodeling, meaning the landlord is paying the mortgage and other expenses.

"Those holding costs are hard to recapture. You can easily lose 60 to 90 days waiting on permits or inspections," Paul said. "I've had brokers tell me I could get $10,000 more for a house just by redoing the kitchen, and they think they're really smart. But they don't realize that it will probably cost more like $17,000 to do that kitchen, plus the four months of time the house is vacant during remodeling."

In contrast, apartment buildings usually bring in money even when they're not fully occupied.

"Even if you buy an apartment [complex] that is 10% vacant, it is still 90% occupied while you're remodeling the vacant units, so you're still generating income," Paul said.

He said homes usually generate a profit only when they are sold, but apartments produce profit three different ways for the investor:

* Through cash flow that exceeds the cost of the mortgage and other expenses.

* Through appreciation.

* Through rent increases, which boost the value of the building.

Although apartment rents have remained relatively flat in Los Angeles County, even during much of the real estate recovery, they have started to climb recently. Paul said that since the selling prices of apartment buildings are typically calculated as a multiple of rents, any increase in rent means a corresponding increase in property value.

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