Despite Higher Prices, Mom-and-Pop Investors Are Still in the Market

Individual investors can still get into the apartment market in the San Fernando Valley, although buying an apartment building is a considerably more expensive proposition today than it was in years past.

Despite rising prices that have pushed up the values of apartment buildings as much as 14% in the past year alone (according to one study), experts say apartments are still within the reach of “mom-and-pop” investors who have long made up the biggest percentage of Valley apartment owners.

“It was a lot easier 20 years ago, but there is still money to be made [by small investors] in apartments,” said Dan Faller, president of the Van Nuys-based Apartment Owners Assn. of Southern California.

Faller and other experts say rising prices mean investors need considerably more to buy an apartment building today, while rent control can reduce the cash flow on some buildings. Under the L.A. rent control ordinance, apartments built before October 1978 fall under rent control, while those built after that are exempt.

Nonetheless, individual investors remain a vital force in the Valley’s apartment market. About 15,000 of Los Angeles County’s approximately 85,000 apartment owners are based in the Valley, Faller estimates, with the average landlord owning about 12 units.

Ken Francik, owner of apartment buildings in Van Nuys and Valley Village, is typical of the many investors who consider Valley apartments a good place to put their money.

Francik, a recently retired Los Angeles Police Department detective, bought his first apartment, a 16-unit property in Van Nuys, six years ago while still on the police force.

Francik financed the down payment on the $600,000 apartment building, which he described as a “fixer-upper,” with $120,000 he realized from refinancing his house in Simi Valley.

“I had immediate cash flow” from the apartment building, he said, but he figured he could earn more from the building if he upgraded it, so he spent an additional $60,000 on improvements.

Recently, Francik sold the Van Nuys property for $880,000 and put the proceeds into a $1.3-million, 10-unit complex in Glendale on which he is now in escrow. Once that deal closes, Francik will own two apartment buildings--the Glendale complex and a 15-unit building in Valley Village that he bought three years ago by refinancing his home again.

Francik said he started investing in apartments to increase his net worth and to provide income for his retirement.

“I knew some people who had been successful investing in apartments,” he said. “I was never tempted to put my money into the stock market because I didn’t want to invest in something that volatile. I see real estate as more stable.”

Francik now employs an outside property management firm and maintenance help, but he saved money in the early years by doing most of the maintenance and repair work himself, even though it meant a tough schedule.

“I was working eight hours a day Monday to Friday and then spending every Saturday and some Sundays working at the apartment,” he said.

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Despite rent control, Francik said, he boosted cash flow in his first building by upgrading units whenever anyone moved out and raising rents in accordance with the city’s “vacancy decontrol” rules, which allow landlords to raise rents when tenants vacate units.

Overall, Francik believes apartments represent a good opportunity for individual investors, but he cautions that buyers need to realize that buildings need a lot of attention.

“There is always the potential for things like washers and dryers and garbage disposals to break, and if you’re managing it yourself, you’re going to get the phone calls,” he said.

Another individual who sees Valley apartments as a good investment is Carlos Martin, a Porter Ranch resident and owner of Porter Ranch-based Professional Retrofit construction company. Martin bought his first apartment, a six-unit, $244,000 building in Van Nuys, in 1994 at the age of 26. He now owns 28 units, including his original purchase and buildings of 15 units in North Hills and six units in North Hollywood.

Martin said he borrowed $49,000 on a second mortgage to spruce up the Van Nuys building with a view toward boosting cash flow through higher rents. He figures he actually accomplished about $120,000 worth of improvements for his $49,000 because of the value of the labor he contributed by doing much of the work himself.

“For the long term, I don’t think there’s anything like apartments,” said Martin, who doesn’t like the unpredictability and lack of control in other investments. “It is harder to liquidate an apartment [than a stock market investment] if you want to get your money out of it, but it just takes a little more time, that’s all.”

Other negatives of apartment ownership are rent control, the need to maintain hands-on control, and legal liabilities “in an increasingly litigious society,” said Todd Schwartz, a senior associate at Hanes Investment Realty, Westlake Village.

But the advantages, Schwartz said, include monthly cash flow, the potential to boost the property’s value through improvements, profit on the building when it’s sold, and the capacity to borrow against the property.

Statistics from Hanes suggest that small investors account for much of the apartment sales activity in the Valley. Of the 439 apartment sales so far this year, the company’s figures show, 317 were buildings of less than 20 units. Of the 439 transactions, 190 required a down payment of $200,000 or less.

While better buildings in nicer neighborhoods may be out of reach of many small investors, some small apartment buildings are still selling at prices below the cost of a single-family home in some neighborhoods.

For example, some apartments in Panorama City have sold for just under $34,000 per unit this year, or about $136,000 for a four-plex--the type of building that many first-time buyers can afford.

That’s a bit less than the $37,500 per unit that Francik paid when he bought his first building in 1994, but thanks to the five-year real estate recovery and rising prices, he sold the property for $55,000 per unit.

When his Glendale deal closes, he’ll have a property worth about $130,000 per unit.

Those figures show that an individual investor can start small and build a portfolio of ever-larger apartment holdings, Francik said, provided housing demand continues, the economy remains stable and the investor does a good job of managing the property.