Last month I finished deploying my 4th LA RE Fund, growing my business over 40%.

For $6.7mm, this Fund adds 28 apartment units across 3 buildings plus $1.6mm of budgeted renovation work.

Instead of a list of takeaways or lessons learned, I just decided to tell the story

I went into 2020 thinking I'd focus on my personal life and operating Fund 2 & 3 assets.

I went from 0 to 58 units since 2019, and I had 10 weddings on my 2020 calendar.

Juggling this would be enough of a challenge, so I didn't have plans to raise more $$.

Then COVID hit. Everything shut down. I was scared to death about what would happen with our portfolio. Would renters stop paying? Would people move out, forcing me to release units at much lower rates, tanking our property value? Would crime return to our neighborhoods?

My thesis was that in a recession, our Class B apartments would do well because people would downgrade from Class A. This was a theory. I had never personally tested it. Fortunately, this mostly held true. However, not without hiccups....

Several tenants did break their leases & move out. I luckily was able to release those units at the same or better rental rates. Several tenants struggled to pay. I hired one to do handyman work and another to do leasing, giving them extra cash & creating important goodwill.

Govn't stimulus also helped us. The govn't sent a record amount of $$ to individuals & businesses, which helped people keep current on rent.

On the flip side, we've been hurt by the govn't edict that rents cannot be raised even on our units that are 50%+ below market.

A few months into the pandemic, I felt renewed confidence as my thesis of Class B apartments being recession resilient had been validated.

If we could thrive in a shock like this, the asymmetric risk vs. reward trade we were making was even better than I had originally thought.

This prompted me to raise Fund 4.

I did my 1st pitch mid-April 2020, and I started by reaching out to my existing >75 LPs from prior Funds.

By early summer, I had done over 50 pitches, and I knew I would have over $2mm in capital.

Time for deal #1 -->

A broker brought me a 7Plex off-market that was in serious distress. The owner was 97. She had a $30k unpaid utility bill. She hadn't done the 2017 required earthquake retrofit. She had a hard-money lender breathing down her neck, forcing a sale.

This was a fantastic, value-add deal that required a quick-cash close, which I was able to do since I had enough signed Subscription Agreements. I called capital and closed this deal late summer 2020.

I continued fundraising, and shortly thereafter came deal #2 -->

A 5Plex comprised of a single family home and (2) duplexes on a huge 15k SF corner lot. Here was another distressed situation where the owner died and handed the property off to his brother who couldn't manage it. There was gang activity on the property, increasing the urgency.

Again, we did a quick cash close, followed by financing. These two deals were the lowest PPSF deals I had ever done. My pitch was that COVID would create significant dislocation that I'd be able to capitalize on given my activity in the market before COVID. This was proving true.

There was less distress than expected, but still enough to quickly deploy LP capital.

As we headed into the fall, things slowed down b/c of the election and Prop. 21.

Prop 21 passing would have been devastating for the City of LA and for property owners. We held our breath.

(I will note that the distress that I found in these deals was more idiosyncratic and less market / COVID related. It was more the type of distress I have always found in value-add deals. Out of state or elderly owner, partner conflict, mismanagement, etc.)

Prop 21 failed 60/40. Going into Christmas, I did a few more pitches and rounded out the Fund, but I couldn't find the last deal or two. I bid in a few marketed processes, but I felt those properties traded too high. Dealflow also tends to slow down during the holidays.

Kicking off 2021, I had nearly $4mm of buying power, but still couldn't find anything that hit the LP return threshold. I was a bit concerned. Since buying in LA in 2019, I hadn't had more than a few months w/o finding a deal that I loved. This was an unusual dry spell.

Then came a 16Plex in North Westlake. The property had been sitting on the market for $4.5mm and then $4.25mm, but a broker I'm close with told me he could deliver it at $3.8mm. I went for it.

(LA RE in the sub-institutional market is very chicken & egg. To have the required broker relationships, you need to have done deals. To do deals, you need to have the broker relationships. It is hard, but not impossible to break in, and I have other threads about this.)

During diligence, I discovered that 4 units would be vacant instead of 2. With this information, I realized that after renovating these, we could quickly get to a 5% unlevered yield on cost. And we still had 50% upside in rents. We'd only need a few more units to get to 5.5%+.

This strong initial yield coupled with a low starting basis gave me the confidence to remove contingencies. I secured a 4.5% interest rate bridge loan at 60% of purchase price plus full funding for relocation assistance and renovation work.

We expect to hold these asset for at least 5 years, and LPs can expect to earn 1.60-2.0x on their money. Or a 60-100% total return. Mid teens annualized.

Often we do cash-out refi's, in which case costs decrease total return, but the return comes sooner, increasing IRR for LPs.

Cash-out refi's make sense due to our deal pipeline where we can quickly & effectively redeploy this tax-free cash. We also believe in the ability of the asset to carry more debt given its higher value. Our cash-out refi's are conservative (60-70% LTV, 1.25x DSCR, amortizing).

What's next?

I expect to raise Fund 5 later this year / beginning of 2022.

I may raise capital around an individual deal or two to round out 2021.

Stay tuned!