What happens to old crappy apartment complexes?

I live in the suburbs of an up and coming area that has seen a ton of recent growth. And there are these 30+ year old apartment complexes that are long past their prime. The apartments are on excellent land have a really good location next to some affluent areas, but these apartments haven't been updated since 2005 (no granite or wood floors) and as a result, lower income people live there and it's brought in crime to the area.

I know gentrification can be viewed as negative, but would it be foreseeable for these apartments to be redeveloped? I'm just a guy who wants to see his city be as beautiful and crime free as possible.

Comments (53)

Feb 27, 2019

yes, as soon as all the land for a similar use gets used up, these apartments you speak of would be the next thing to go. There is cost and financial risk associated with demolition, so all things equal, developers will look for open land first. If the apartments still have useful life and have decent design elements that are "timeless" it is also a possible candidate for renovations. Depending on how affluent your area has become, demo or value add will take place.
EDIT: One piece of the value add puzzle is that the value add takes place as units become vacant, not all at once, if there is crime, like you speak of, this is difficult because people dont want to pay "high rent" while the "cheap" tenants are still there... anyway... if that is the case, the property could be in a weird middle ground where the market has not improved to the point to justify demolition, but value add is not justified because the owners let the apartment go for too long.

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Mar 4, 2019

If the cultural difference between in-place tenants and future tenants is high enough, developers will allow all leases to roll before re-tenanting the building.

Feb 27, 2019

Wow, it makes sense, but definitely would add risk.

Feb 27, 2019

For some of those, you can't even build them the way you want with all the new regulations, permits and things like that. My company own a few of them on the beach and it is impossible to recreate them

Cash and cash equivalents: $7,286
Financial instruments and other inventory positions owned: $313,129

Feb 27, 2019

They become 15% caps that print money if you're willing to deal with constant repairs and shitty tenants.

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Feb 28, 2019

Is this the case in CA? I've always wondered. Because typically, these buildings are owned by long-term owners with built in Prop 13 protection. Because they're paying 1970-1990s property taxes, they're able to afford keeping the properties at an affordable level of rent. I'm not on the principal side, but my assumption is that most new buyers of these dinky properties would be underwater after paying 3-4% cap rates, putting in $20-50k a door for renovations, paying off tenants to vacate or hold until they turnover (rent control), and still they would be unable to achieve the level of rent needed to cash flow signficantly.

Feb 28, 2019

I have seen the exact situation you described many times in Southern CA.

Feb 27, 2019

obvious answer can be yes...of course the numbers need to be right.

you'd be surprised by the yield on some of these low level complexes...and equally surprised by how little some of those high tower class A resi deals generate...

but then again just as often there is some new developer with inheritance money who wants to get rich in RE...and soon invests and gets in over his head.

Most Helpful
Feb 27, 2019

Activists always have such a short-term view on real estate and affordable housing. They'll bitch and moan that you're knocking down 75 "market rate affordable" units and replacing them with 300 luxury units that won't be affordable to lower-income tenants, blah blah blah. What the activists don't recognize is that in 10 years many of those luxury buildings will have lost their luster, in 20 years you'll be left with 300 middle-class units, and in 30 years you'll have 300 units that are market rate affordable.

Don't ever feel guilty about bringing more supply to the market.

Mar 5, 2019

"10 years many of those luxury buildings will have lost their luster, in 20 years you'll be left with 300 middle-class units, and in 30 years you'll have 300 units that are market rate affordable."

slow clap Well-said.

Mar 11, 2019
nvolchek:

"10 years many of those luxury buildings will have lost their luster, in 20 years you'll be left with 300 middle-class units, and in 30 years you'll have 300 units that are market rate affordable."

slow clap Well-said.

Except it's cold comfort for the people who now cannot find affordable housing.

Moreover, if it happens at all like it does in NYC, there is often some illegal-ass shit going on to get those tenants out of their apartments in the first place.

Feb 28, 2019

It going to stay crappy. Crime will increase and your home will be devalued

Feb 28, 2019

San Diego is full of these buildings. Tons and tons of 10 unit smaller deals in need of re-positioning. This is a bulk of our pipeline. Prob 10 - 20 units at $225k - 275k a door. They will never hit a crazy caps as our bad neighborhoods aren't very bad compared to LA, Oakland, Chicago, etc. and like many markets, we just don't have enough housing.

To my surprise though, our city planning departments, in their brilliant wisdom continue to down zone these sites. I'm routinely finding, for a example, 8 unit buildings that are now zoned for 2 units. I just don't get it...

Rarely down here to you see multiple sprawling lots assembled to be demo'd and built up with higher density, which we greatly need.

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Mar 11, 2019

I don't understand? Of course they can be redeveloped. If your question is "is there a way to make these units market rate without doing any work or putting any money in," then the answer is no.

But if you want to do what thousands of MF developers before you have done successfully, then all you really have to do is look at one of the tens if not hundreds of thousands of similar transactions that have taken place in the last couple decades. Buy the buildings. Rehab the units in the way you describe (higher end finishes). Raise the rent. Rinse and repeat until your building is fully rehabbed.

If you want to deal with the crime, install cameras and partner with the local police. It'll disappear pretty quickly.

Feb 28, 2019

Lot's of them are depreciated to zero and spit off cash. Take LeFrak City (my favorite asset in NYC) for example.

Mar 2, 2019

Wouldn't being depreciated to zero mean it would throw off less cash?

Feb 28, 2019

No, you just lose your depreciation deduction...you pay higher income tax. But the building itself still, in theory produces the same income.

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Feb 28, 2019

As above they often yield a ton. Maybe not quite as much if in decent area.

Eventually redeveloped. But sit on yield for a while. Isn't there a doctor in la who owns all of Korea town? That is being redeveloped now. He bought cheap with good cash flow and now it's gentrifying. That's where a lot of fortunes have been made.

Also depending on the suburb these might have great rent appreciation. A now upscale suburb isn't going to want to zone low income housing if they do not need to. Those people do not pay much in taxes and costs a ton in education/public services. Plenty of affluent suburbs spend 20k a pupil for the public school. So there's fairly good demand to get into the good school system. And the cheap rentals are a way to do that versus buying expensive houses.

Array
Feb 28, 2019

Curious how people feel about the Prop 13 split roll bill up for 2020 in CA.

Feb 27, 2019
The_RE_Dude:

Curious how people feel about the Prop 13 split roll bill up for 2020 in CA.

My view is that Proposition 13 is garbage public policy. Capping property taxes has many of the same flaws as rent control, specifically that it provides incentive for people to stay put when they are otherwise at a point in their life to move on. This artificially reduces the supply of housing and increases the cost of housing and thus increases the taxes paid by newer home buyers.

But Prop 13 was a bad public policy response to bad public policy by state and local government that prevented the growth of housing supply to meet demand.

The free market almost always improves product and service quality while reducing the price. Markets that are impeded by govt or by activists via govt almost always inflate costs artificially. In addition to housing, we have seen this with higher education and health care in the U.S. As I've said a million times, the law of supply and demand is immutable.

California's housing market is so disrupted by activism that I think it's really beyond repair.

Mar 11, 2019

Well, health care's problems don't result from too much intervention, but too little.

And the other problem with Prop 13 is that schools tend to be funded through property taxes. In capping those, you cap the ability of local school districts to pay for the costs of primary education. Whether or not you agree with high property taxes, or what those dollars are used for, the quality of local education tends to be a major factor when families decide where to relocate to, so it makes sense at least to allow local communities the ability to determine where they want to fall on the spectrum of taxes vs quality of school system.

Mar 4, 2019

Yeah but the cap on property taxes for SFH was created to prevent someone who's owned the home for a long time from being hit with taxes on a new market value from which they aren't benefiting. If you didn't have it in place, you'd have the opposite problem where

It wouldn't make sense for someone who bought the home for $500,000 to be taxed on a 'market' value of $800,000 when they aren't getting any real benefit of the incremental $300K until they sell. If you want to tax the capital gains on the real estate at an accelerated rate because of this, I'd be open to that. But I think the only real argument against prop 13 as it stands today is would be increasing the annual cap %.

But, I've never really understood the logic behind the property tax set up to begin with. It doesn't make sense to me that a single person or married couple with no kids that owns a $1M home in a district will (in theory) pay more tax $ to the school system than a family of 4 in same school district that rents who actually has 2 kids attending the system.

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Mar 11, 2019

The answer can be yes, of course, the numbers required to be right.

Mar 11, 2019

Some old REIT you've never heard of buys them all up at a seven-cap and grows fat and happy off of the additional fees.

Mar 16, 2019

They become slums