💰 You Can Go Broke Making Money. 💸

Brock's newsletter | December 13, 2024

This will be my last newsletter of 2024, so let's finish the year with a good one, shall we?

I've truly appreciated all of your readership and engagement over the past year. Something I've noticed is that the highest response rate to my newsletters falls under two categories: stories about 1) my investing mistakes, and 2) buying something (a property, car, etc.).

This recent story combines both. Let's dive into it.

At this time last year, Lori and I were doing our 2024 business/life planning, writing out our goals & financial benchmarks for the upcoming year, as we're doing right now for 2025.

The list was long (401k maxed, kids' 529 accounts maxed, grow business, new roof, x amount in high-yield savings, etc.), but our real estate plan focused mainly on identifying a couple of buildings that I had bought 10-15+ years ago and using the 1031 tax-deferred exchange program to buy better, heirloom-quality buildings with higher gross rents.

With long-term real estate investing, you want to focus on GROSS rents (not short-term net) because as the building gets paid off and rents go up (not to mention inflation working on your loan balance), you want the highest gross rents possible.

So that was our plan, and come January 2024, we started working it.

In January, we sold a commercial property in Silver Lake that needed a substantial renovation and traded it into a vacant historic triplex in Los Feliz. We had the seller “carry” the loan on the triplex at 5% IO ("Interest-Only"), did a little construction (upgraded electrical, HVAC, painted, remodeled kitchens), put tenants in, and now we're in the process of landscaping and building a 1-bedroom ADU out of the existing 3-car garage.

We plan to have it designated historic under the Mills Act which will save us roughly 30-40% on property taxes.

This one was a home run. Heirloom-quality, cash-flowing rental real estate. ✔️

Next for our investing detour.

In August, I sold a Craftsman-style triplex that I had owned for over 15 years. It was making about $10k/mo gross, and I had about $750,000 in equity, so we were working our 2024 plan to trade into a property with higher gross rents.

As I was searching for my replacement property for my 1031 exchange, I got a call about an off-market 4-bedroom untouched Spanish house in the Los Feliz Knolls. I’m not a fan of selling off-market, but generally buying off-market is a good idea.

I’ve spoken extensively about how my only real estate regret was not buying better buildings when I started investing over twenty years ago. Looking back, I wish I had bought single family homes.

Why? They’re not building any more of them, at least not in this area, which makes them rare, and thus valuable. I look at how houses have appreciated vs. 2-4 units, and it’s night and day. Also, for apartments, the heavy hand of compliance and rent control (which gets heavier every year) doesn’t apply to houses. Single-family homes are great investments (with a caveat, keep reading).

With this at the forefront of our minds, we decided to buy this fabulous off-market Los Feliz Spanish single-family home, sort of impulsively as it turns out.

Once we actually owned the home, it soon became clear it was going to be very expensive to make this thing pencil. We were paying around $12k/mo to hold it. Comparable homes tended to hover around $10k/mo, which wasn’t enough to cover our nut. But, a high-end house could potentially be rented for double that (we projected around $15-20k a month).

So we got to work - maybe it would get that kind of rent if it was beautifully finished and furnished, with a pool.

We brought out the big guns: Lori contacted her dear friend Molly at Orca for a pool/landscaping plan.

We had our designers at Matters of Space in Highland Park working on a kitchen renovation.

All in all, we were on track to spend $300-400k extra out-of-pocket in addition to the $750,000 we had put down in the purchase, plus holding costs and managing yet another renovation 🤢. And then manage a high-end rental, which is a lot of work and unfamiliar to us, which with three kids and a growing business (thank you all!) we frankly don’t have time for.

You can go broke making money guys. Trust me, I've been broke time and time again buying real estate, but I'm at an age and point in my career/life where I just don't want to be cash poor anymore.

Back to the house we bought: the project was losing air fast, and I was losing sleep. The investor, George Soros, famously said he knew it was time to get out of a trade when his back started hurting. For me, it’s lying awake.

And then, a real estate miracle happened. As our renovation was just getting underway, Lori was standing outside of the home when neighbors walked by and asked, “Is this house for sale?” Within a week, we were in escrow, selling the Property for the price we purchased it for plus our holding costs and their agents’ commission (yes, we paid the Buyer’s Agent’s full commission of 2.5%).

We cut it loose, kept the 1031 going, and found a 5-unit building two blocks from our Silver Lake office that needs nothing and is closing next month. Like our January purchase, it is also a beautifully-preserved Spanish multifamily with a turret, stained glass, and walnut wood flooring…and the product (apartment buildings) is much more up my alley. The whole detour was a break-even, but with so much work, and so many lessons. Here are a few:

Single-family homes are great investments for long-term appreciation, not cash-flow, unless you have owned them for a long time (i.e., you buy a new house and rent out your old one) or you’re paying cash.
Renovations are money sucks. You need to know what you’re getting yourself into time-and money-wise at the outset....then double it. (A lesson I already know, but worth repeating.)
Stay in your lane. As investors, we know apartment buildings. Perhaps a specialist in high-end single family home rentals may have done better with the house, but we're more “set it and forget it”-type investors, and this deviation was a lesson in sticking to what you know.
Make a plan, and work it. Lori and I set out to 1031 these specific buildings last year, and we did. Building and growing wealth takes making big financial moves - which is hard. But if you have a plan (a written plan, with specific goals/benchmarks), and you focus on and work the plan, you will achieve it.

When I was doing my walk-through last week for our new building, a tenant asked, “What’s your plan for the building?” I said, “To take your money every month and leave you alone.” As it turns out, this is my kind of rental.

Here’s to a great 2025 for everyone. Thank you to all our clients (and all of you who referred clients!) who helped us sell over 80 homes in 2024, the slowest housing market in three decades, but our best year ever. Each deal was a labor of love, and we are honored that you chose us to help you make one of the largest financial decisions of your life.

And, to those who didn’t make a real estate move this year and/or are looking to in 2025, reply back. We got you.

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