Whatever Works
22 December 2023 | 12:28 am

Sometimes a story takes a number of years to ripen. And sometimes two or three stories merge in unexpected ways. I just had a moment of convergence when new infill development, sub rosa adaptation, and wartime migration all collided.

Back in the 1990s I used to live across the street from an old gas station. It was still functioning at the time, but some years after I moved it went dark and became little more than a parking lot. That lasted for over a decade. That’s how long it takes to get approval for new construction in San Francisco. Then one day a fence went up, the gas station building was scraped, and a remediation crew went to work decontaminating sixty odd years of petroleum funk from the soil. Benzene, toluene, ethylbenzene, xylenes, lead, heavy metals, MTBE, ethylene dichloride, naphthalene… Fun stuff.

I like to stop by and chat with the folks who do this kind of work. Evidently they inject various sugars and fertilizers into the earth to stimulate bacteria that eat the toxic hydrocarbons and break them down into simpler less troublesome elements. That took a few more years. And then, like a mushroom sprouting, an apartment building went up in a matter of months. The permit process and site preparation cost millions of dollars. Construction during the Covid supply chain period made the building significantly more expensive than it might have been. Radically lower interest rates on the construction loan help soften the blow, but none of this work is cheap. In the end, demand for new housing is powerful and the market gobbled up the units the instant they were completed.

Resistance to new buildings like this one come from all sides. Existing renters saw it as a sure sign of gentrification that would drive up rents in a priviously affordable neighborhood and push them out of the city. Existing property owners saw these buildings as too big, too out of place, and too full of people who will induce more traffic congestion and more problems. I always asked how they felt about the old gas station. Was that a cherished community institution?

Fast forward to this week when I helped a Ukrainian couple move into their new accommodations in the building. They arrived from Europe six months ago and were sponsored by my good friends. They were initially provided with a free space to crash so they had time to secure legal documents, find work, and establish themselves in a new country. I’ve also been busy sponsoring Ukrainians displaced by the war so I was already on board with the whole integration process. I reached out to the usual suspects and brokered some free furniture for them.

The sofa was donated by a friend who was ready to upgrade. He graciously helped deliver it to the building. And that’s where the sub rosa thing comes in.

This particular friend has spent his life carefully selecting properties, sometimes rented, sometimes owned, that were considered undesirable by most people. But they suit his needs perfectly. These properties always come at a deep discount that frees him to work as little as possible at a traditional job for income. This gives him the time he values more than money or a prestigious address to pursue his true passions.

He currently lives in a long defunct shopfront that he’s scrubbed clean, painted, organized and strategically upgraded. He fitted the back office with a kitchen (minus a stove) with second hand fixtures and appliances he scavenged for cheap. For something that only cost a few hundred dollars I think it looks quit respectable. I especially love the way he fitted mirrors to the fridge to transform it from a scratch and dent unit to something with a bit of sparkle.

His neighbors love him. He causes no problems. And he pays all his bills by working two days a week. This is the other way new living space is carved out of a wildly overpriced city. It works because it doesn’t exist on paper and the authorities haven’t yet discovered all the ways it violates a thousand cherished regulations.

I stopped caring about “solutions” a long time ago. There are no official remedies for much of anything these days. Our institutions are sclerotic and dysfunctional. The culture is divided. Shrug. Meanwhile, individuals do what they can. I’ve made peace with that.

The Kitchens of Distinction
3 December 2023 | 1:08 am

I was a scholarship student in the UK thirty odd years ago and there was a semi-well known band at the time called The Kitchens of Distinction. I have no memory of what their music even sounded like, but the name stayed with me. It was ironic and suggested a certain late 1980s anti-bougie sentiment. Hold that thought.

Two months ago my husband and I bought a new apartment. We’d been looking for a slightly bigger place for a very long time, but here in San Francisco the real estate market is tight and insanely expensive. Our incredibly patient real estate agent Loida probably showed us a hundred places over the last decade. Every once in a while she’d reach out, say she had a property we might like, and each time it fell short in one way or another. You want a great place? That’ll be $2,000,000. You want an “affordable” place? That will be worse than what we already have. So we did nothing.

Then this place appeared. It hadn’t officially been presented for sale yet. Loida had just received the keys. The sellers were out-of-town family who had inherited the property from an elderly aunt. They had a specific price in mind and wanted a quick sale. Loida put together a proposal for light renovations and staging of the property. If they spend $37,000 up front it would almost certainly sell for $300,000 more than in its current condition. The sellers wanted no part of that plan. They wanted to do exactly nothing so long as they got their price, even though that price was significantly below the market value. We offered precisely that number on the spot and they accepted the next day. There was no competition and no negotiating. Everyone got exactly what they wanted and the sale was fast and easy. This is the value of a really good agent who knows you, knows the market, and has the right personal connections. She earned every penny of her commission.

The sale wrapped up over two months ago. Since then we’ve done nothing to the place and continue to live in our old apartment. We’re currently getting official drawings and paperwork done in preparation for some renovations. We each have very different ideas about what needs to be done and how much time, money, and effort should be expended on the project. I believe the existing space is basically good the way it is. There are some mechanical issues that need to be addressed since some of the pipes and wires are a century old, but the general configuration is solid.

For me, once those health and safety concerns are corrected mostly the place just needs to be scrubbed clean and painted. Yes, a few relatively simple upgrades would make a big difference. But mostly I want to preserve the 1924 era character of the space because it has really good bones and functions perfectly well as is. I’m also not keen on dragging out the process in an environment of inflation, labor shortages, and supply chain disruptions. I don’t need or want a Kitchen of Distinction.

My husband has a different understanding of the situation. From his perspective we have a golden opportunity to transform the place into our Dream Forever Home. We’re in our 50s so this is the moment to prepare for our retirement years by making modifications that will help us age in place over time. And we’re currently living elsewhere so we won’t have to endure the misery of a construction zone. So why not take things down to the studs? These are all excellent points. But the devil is in the details.

We’re still in the process of sorting this out. In the meantime there was a unique opportunity to provide the apartment as it is to some of the Ukrainians we have sponsored, rent free for the duration of the process. They will have to tolerate the inevitable disruptions, but having access to good paying jobs in the city with no overhead is a good deal they embraced with both hands. By the time the apartment is done they should have a solid reserve of money and enough personal connections to make a smooth transition to independent living. I call that a win.

Madison #3
25 November 2023 | 10:25 am

For those readers who are struggling with housing affordability I’m going to describe a recent purchase that could serve as a potential template. My circumstances as a 56 year old investor preparing for retirement in about a decade may be different from yours, but some of the tactics are applicable to other situations.

A few months ago I bought a rental property in Madison, Wisconsin. This was my third purchase in as many years. The other two were single family homes, while this new one is a duplex. None of this would have been possible if it weren’t for my trusted real estate agent Ben and my local handyman Chris - both of whom are long term residents of the area.

In keeping with the usual pattern we identified a modest structure in a respectable location that has good long term prospects, but is still affordable for the metro. This property is a short walk to the public library, schools, local shops, parks, the lake, and is adjacent to several meaningful bicycle paths. It’s also really close to downtown, yet far enough away that the streets are quiet and tree lined and there’s a bit of garden space.

Madison’s population is growing faster than new homes are being constructed. What is being built is either luxury single family homes out on the suburban fringe or expensive downtown condos. Rental apartment complexes of the 200 unit variety are popping up, but there are too few and the rents are high.

The influx of new Madison residents is generally younger, better educated and better paid than the state average. There’s increasing financial pressure on the existing building stock. Home values and rents are going up as people compete over a constrained supply. As the traditionally desirable neighborhoods are pushed out of reach, second tier areas are receiving more attention. That’s my sweet spot.

This is one half of the duplex interior. When I bought the property I inherited the existing long term tenants and must honor their current leases until they expire within the year. This unit is occupied by an older gentleman who has lived here for over a decade. It’s his home. He’s happy here. The rent is genuinely affordable and he’s hoping to keep things the way they are. Upgrades and improvements suggest higher rent and eviction. That’s not good from his perspective.

This is the second unit in the duplex. It’s inhabited by an older lady who has been here for some years. She’s very happy with the accommodations. Her one request was that the heat be improved because she’s always cold in winter. Both furnaces were nearly forty years old so as soon as the sale was complete I had them replaced with new units. She was thrilled.

It’s unlikely these legacy residents will find equivalent rentals at the same price point in the area. They’d almost certainly have to accept lesser conditions and/or a higher rent elsewhere. I have no desire or need to ruin these people’s lives. My business model is based on properly maintaining the building for health and safety while doing very little discretionary work until they leave of their own accord. The real estate market will go up and down in the short term, but the long term trend is generally up. When the units are free I’ll assess the situation and respond with judicious improvements. It’s entirely possible to be a landlord and a decent person at the same time.

The median sale price for a home in Madison is currently $380,000. The duplex was originally offered for $280,000. That price was completely unreasonable given the current rents and general condition of the building as well as significantly higher interest rates than just a year ago. I watched as the price dropped to $265,000. Still, no one bid on it. It simply wasn’t worth what the seller was asking. It sat on the market a little longer. Then I offered $245,000 and the seller agreed. At that price the rents covered expenses and there was enough slack to justify future upgrades.

The most magical thing about this little house is that it actually exists. When it was built in 1951 it was legal, culturally acceptable, and cost effective for a mom and pop operation to construct a modest duplex. This vestigial housing stock supplied genuinely affordable market rate housing for tenants while also generating steady profits for the owner. This is capitalism’s happy place. Unfortunately, none of those things are true anymore. We’ve zoned, regulated and NIMBY protested them out of existence just as the cost of land, labor, and materials made them uneconomical to build.

Besides the initial price, which was too high, one of the reasons this place didn’t appeal to most potential buyers is that it didn’t show well. Buyers have gotten used to carefully staged listings with virtual 3D tours and professional photography. (I use those myself when appealing to prospective tenants. It’s money well spent.) Most buyers simply can’t see past other people’s furniture, decor, or outdated fixtures.

Here’s a news flash - most of that stuff goes away when the sellers or their tenants move out. What’s actually for sale is the structure and the dirt under it. This particular building isn’t perfect, but the things that are wrong with it are relatively simple to fix and can be addressed incrementally in a cost effective manner.

Other potential buyers were scared off by the existence of tenants. Being a landlord isn’t always fun, but it isn’t rocket science once you learn the basics. Tenants can be an asset rather than a problem if you approach the situation correctly. Even if the eventual goal is to vacate the premises it can be done peacefully where everyone ultimately gets what they need.

But mostly, people in search of a typical single family home just skip past these kinds of properties entirely. An old 1950s duplex doesn’t fit the image they have inside their heads. That’s a shame because these kinds of properties are real problem solvers, especially for people on a tight budget.

I made a very rough drawing of the floor plan. In its present form it offers multiple options for reinvention with modest amounts of construction. The simplest option is to leave things as they are and make small improvements each time one of the units becomes vacant. Paint, refinish the floors, upgrade appliances, replace fixtures… It doesn’t all have to be done at once. But each improvement builds on the others over time. The more attractive and functional the apartments are the more likely they will draw interest from better quality tenants at a higher rent. That’s currently my plan.

For people looking to buy their first home this could get them on the first rung of the property ladder assuming one of the units happens to be vacant. Living in half the duplex would allow the buyer to purchase a home at a reduced price relative to the median home in the area. ($245,000 vs. $380,000.) Plus the tenant in the second unit would cover a chunk of the monthly expenses. In the US any home with four or fewer units is treated the same as a single family home as far as financing is concerned so long as the buyer lives in the home for at least the first year.

I understand that most people have no interest in living in a small one bedroom apartment with strangers on the other side of the walls. I get it. But doing so for a little while allows for the possibility of another option. The duplex could easily be converted to a single family home, either legally or de facto.

In my experience, attempting to convert a single family home into a duplex induces the neighbors and local authorities to lose their minds. It’s as if rental units were small nuclear waste sites ready to melt down at any moment. But reducing rentals in favor of owner occupied single family homes is generally celebrated as an improvement since it weeds out “the wrong element.”

In this case one of the kitchens could become a bedroom or home office. Removing the excess fixtures and appliances is generally cheap and the process lends itself to a DIY approach. The two front rooms could be combined to form a single living/dining space. Not a lot else has to happen for this place to become a three bed, two bath home. The conversion could be as bare bones or as elaborate as the budget allows. Now the buyer has a home that’s much closer to the area median value even though it was bought at a deep discount. This is one of the options I have as an investor whenever I decide to sell many years from now.

Short version - don’t turn up your nose at small ugly properties. They may get you where you want to go faster than the McMansion you yearn for. But let’s face it, I thrive on other people not wanting these places. That leaves more for me.

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