I'm in Escrow. I Can't Sleep 🏡💤😱

Brock's newsletter | August 23, 2024

We're in escrow on our second investment property of the year, closing this week. I should be excited, but I’m terrified.

It’s a fixer - another Los Feliz Spanish, and as usual, we paid full market price, which I’m happy to do for something I plan to keep.

To buy it, we sold a triplex in Angelino Heights and rolled the profits over to use as a downpayment. It’s called a 1031 exchange, and it works like this: sell an investment property, buy another one within six months, and the sale is tax-free. Well, tax-deferred (it’s complicated and irrelevant for this newsletter—we’re not paying capital gains for now).

We bought it from a “wholesaler,” which I’ve never done before. He had put the property in escrow off-market, “assigned” it to me (after Lori walked through for about 15 minutes), and padded a $50,000 fee for himself, which I am paying. A little annoying, but I don’t mind other people making money for a good deal.

My mentor always said to “leave a little meat on the bone” in a deal. We all know those guys that want every penny out of every deal - they end up with a bad reputation. You want people to call you with a deal.

Anyway, this Los Feliz fixer needs everything, and the reason I’m terrified is I’m not sure we can rent it for what it costs to own (Lori is much more confident). There might be a monthly shortage of $2K or so that I’ll have to cover. This is called “feeding” a property. The first rule of real estate investing - never feed.

Suddenly, I miss that triplex I sold. It was cash-flowing nicely with a 3.75% 30-year fixed loan on it. And since I bought it for $640,000 fourteen years ago, the property taxes were next to nothing.

Well, I don’t own it anymore, and I’m trading in a property with triple the insurance ($10k/year) and triple the mortgage (7% interest).

And another thing I remembered last night at 3 a.m. is that the loan comes with a 5-year prepayment penalty. That means if I refinance before 2030, I have to pay about $50K. These penalties aren’t allowed on owner-occupied properties, but with investors, lenders can do what they want. It was the best I could get—in 30 days anyway.

But this was the plan. We're trading our properties into bigger better ones, and diversifying the types of properties we're buying, and that comes at a cost.

So as I’m tossing and turning, I remind myself property purchase anxiety is normal.

I saw it first-hand 20 years ago, watching my boss and mentor Leslie (RIP), who owned 50+ rental houses in Silver Lake and Echo Park. She was a nutty old lady, smart as a whip and utterly fearless.

But every time she bought a house, she turned into quivering jelly and would badger me for validation while eating lunch at her desk. “This is a good buy, yes? Do you think I’m overpaying? I just don’t know about this one. I think I’m making a huge mistake.”

I was 24, and my real estate experience was limited to having read “Rich Dad, Poor Dad,” but I would nod supportively, wondering why someone so rich was eating cold tuna from the 99-cent Store.

I didn’t get it then, but I get it now—you can’t be sure. She wasn’t sure then, and I’m not sure now. Because a real estate purchase is a bet—a big bet.

It’s a bet on the future. That someone will rent it. That the area will improve. That when it comes time to sell it or rent it, someone else will pay you for it.

It’s also a bet on yourself. That your ownership will make a difference. That your choices and upgrades will pay off.

And it’s a bet on other people. That your streetscape will get upgraded. That your neighborhood will go up in value. You can spot an opportunity, but for that bet to pay big, others must spot it, too.

Every purchase I’ve made in the last 25 years, all my chips went into the pot, and I prayed.

As it turns out, they all have worked out - I hit some singles and some home runs, but I never knew, going in, which one it would be.

After 25 years, I have better sense of it. And I have found that if you make informed investment decisions in a market you know, with a plan, magic happens.

Lori & my first investment together was a Frogtown triplex that, mere months after we bought it, ended up being the hottest corner in the area, starting with the opening of Wax Paper sandwich shop, followed by an explosion of surrounding commercial.

I had some sleepless nights about the Silver Lake office building we purchased and renovated at 3020 Sunset two years ago. Since then, a luxury apartment building is almost finished next door and a high design commercial center with Klein Architecture, Akila Eyewear and New Balance opened a block away. Last month, all the wooden power poles were replaced with much cleaner-looking metal ones. They re-striped the street for bike lanes. Oh, and I called 311 and got two old newspaper “Hollywood Xpress” boxes and a payphone hauled out.

I'm now thrilled to own my small piece of Sunset Blvd. (and confident that it was a good investment - thank you hindsight).

“Many a false step was made by standing still.”

We'll see how this one does. We signed loan docs and wired the money today. At this point, I’m all in, and something tells me I’ll be fine.

Our Top Weekend Open House Picks

🔑 3824 Udell Ct, Los Feliz - Charming 1928 Tudor in Franklin Hills - Listed at $1,799,000 - Open Sunday 12-2pm

🔑 274 Acacia St, Altadena - Craftsman Compound offering three unique homes on a 12k+ sq ft lot - Listed at $1,995,000 - Open Saturday & Sunday 1-4pm

🔑 4730 Angeles Vista Blvd, View Park - Stunning hilltop French Tudor - Listed at $2,699,000 - Open Sunday 2-5pm

🔑 244 Marguerita Ln, South Pasadena - 1927 Spanish Colonial Revival home in the Marguerita Lane Historic District, designed by Burton and Denman Schutt (Hotel Bel-Air) - Listed at $1,599,000 - Open Sunday 2-5pm

Until next Friday,

-Brock

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