About two weeks ago a pair of apartment buildings hit the market in the Hermosa Beach sand with mind blowing asking prices. Take a look at the beautifully remodeled 6-unit at 1534 Manhattan Ave and the 7-unit at 1542 Manhattan Ave listed for $6.8 million and $7.7 million respectively. We watched these buildings gutted and rebuilt over the past year by, what looks to be, an investor who purchased the buildings for $5.6 million per title records. The buildings turned out great, and truly offer fabulous apartment units that command top of the market rent due to the contemporary finishes, floor plan, and wonderful ocean views.
We are still left wondering….are these prices worth it? The two highest comparable income property sales since 2014 were a 10-unit sale on 131 10th Street for $3.621 million, and an 8-unit sale of $3.825 million on 226 2nd Street. Compare that to the 1542 Manhattan Ave 7-unit property and they are asking more than DOUBLE the highest sale in the area.
According to the listing, the estimated cap rate is about 3%. That is the return you would receive on your money if you bought the property all-cash. Since the property has been fully updated, there is little upside to raise rents or fix-up the property to increase the value of the building. You are betting that the general market will continue to drive rising rents and property value.
The question you want to ask yourself: would you rather own a Hermosa Beach apartment building paying 3%, or own Exxon Mobile stock that pays a 3% dividend? Perhaps Wells Fargo? IBM? Kraft Heinz? General Motors? They all will produce income similar to these buildings.
Some people would say that you can borrow from the bank on real estate to boost your returns, but even if you were to put down half of the $7.7 million asking price, you would probably break even for quite some time (and pray for appreciation after paying one of the highest prices ever for this product type).
To be fair, the new Manhattan Avenue listings have a million to two million dollars of updates along with fabulous views worth more than the other comparables. And furthermore, those lower comparables actually provided fairly similar 3% returns when sold as-is, although it can be argued they have better future growth prospects in remodeling and raising rents.
My point is this: Apartment buildings require work above and beyond owning stocks or other traditional investments. The time taken to manage property managers, refinance debt, and handle the accounting among other things, along with inherent risks of fire, tenants, lawsuits etc. all need to be taken into consideration when looking at the returns of an income property investment. And to me personally, I would need a lot higher of a return in exchange for all of the work and risk. My bet would probably be placed with an Exxon Mobile type stock that requires very little effort to own.
BONUS: The listing agent on these high-priced income properties sold a 7-unit apartment building at 821 Manhattan Ave for $2.7 million a year ago this month, and the mailing address matches the investor’s on the $6.8 million and $7.7 million listings. It has already been totally remodeled; if their high priced properties sell, will this property be the next one to hit the market?