Well, here it is. Our first blog post! We wanted to take this opportunity to share a little bit about who we are, what we do, and why this matters to you.
Who We Are
LME Investments is a multifamily real estate investment firm, based in Los Angeles County, California. LME is composed of a group of seasoned real estate investors, led by Mr. Sanjeev Bhatia. We focus on purchasing properties in various submarkets in LA County.
Sanjeev has been purchasing, improving and refinancing multifamily properties in various local neighborhoods for nearly a decade. Sanjeev did this while working full-time, in an executive role, with a major transporation company in LA. Sanjeev built his portfolio to a sufficient size that he quit his job, and became a full-time real estate investor.
We should note that Sanjeev owns 95% of his portfolio himself, with little outside capital. He did not draw on any family sources of wealth, as he immigrated to the United States in the early 2000’s.
Sanjeev’s passionate belief in the power of multifamily investing to build wealth, led to the founding of LME Investments. Sanjeev wanted to help others create wealth in the same way that he held.
To achieve this goal, Sanjeev assembled an executive team which includes attorneys, foreclosure / distressed investing experts, escrow, title and mortgage professionals, and top-notch property managers. These individuals bring not only macro real estate expertise, but also deep local knowledge of the Los Angeles County investment market.
What We Do
So, how exactly does LME create value? Simply put, we implement the BRRRR strategy. What’s BRRRR? Besides being fun to say out loud (try it!), BRRRR is one of the most powerful real estate investing strategies out there. It stands for “Buy, rehab, rent, refinance, repeat.” Let’s take a look at each step of the process
Buy
The first step to succesfully implementing the BRRRR strategy is to purchase a property which is undervalued, relative to similar types of properties on the market. What does this mean?
Let’s say that we’re thinking about purchasing a 10 unit apartment complex, made up of six 1 bedroom / 1 bath units, and four 2 bedroom / 1 bath units. We would first want to take a look at what this property would sell for, if all 10 units were renting for market rates.
What are market rates? Basically, this is the price for which each unit can realistically rent, in that neighborhood. We use a variety of sources, from Rentometer and Zillow, to proprietary providers, to figure out what an apartment could rent for.
Since we focus on some of the 88 cities in LA County (and neighborhoods within those cities), we’re constantly looking at comparable rental units. This also gives us an idea of how small differences between one apartment and another (for example, more parking per unit, or greater storage space), can impact rental rates.
If we see that a property is renting for below market rates, we’re excited. This is the first criteria in figuring out whether a deal makes sense.
Next, we take a broader look at how the property is being managed inefficiently. Perhaps some tenants are not paying rent. Or, maybe the property isn’t well maintained, and thus can’t attract tenants who pay market rents. Additionally, tenant turnover (i.e. people moving out) could be high.
In other instances, due to physical deterioration and lack of care, the property’s expenses are very high. Utilities bills might also be too high.
Sometimes, there is room to build more units on a property, or to expand existing units. For example, a 2 bedroom, located in the right part of the building, might be converted to a 3 bedroom. This allows us to collect additional rent – and improve Los Angeles, by providing more quality housing, in neighborhoods that need it.
Once we’ve figured out whether a property makes sense, and at what price, we make an offer. After negotiating with the sellers (and their real estate broker, if there is one involved), one of two things happens.
Perhaps we don’t reach an agreement. In this case, we move on to the next deal. We enjoy cordial relationships with many folks who can bring us potential deals, including property owners, real estate brokers, contractors, attorneys, community members, and many others.
If we are able to reach an agreement with the seller, however, then the purchase process begins. We walk the property ourselves, to examine the quality of the various units. We review leases, and examine financial and tax statements. We hire inspectors, who scour the property for any possible issues.
In short, we make sure that the property we think is a good deal, really is. Due diligence lies at the core of every succesful multifamily investment.
In most cases, we’re financing the purchase of the property through a bank or lender. We work with a number of different lenders, from major banks to smaller firms to providers of agency debt. We use our relationships, and the quality of our deals, to obtain long-term, low interest (and thus low risk) debt.
Once we’ve checked all our boxes, and secured financing, we close on the purchase of the property. Our ability to close quickly and efficiently allows us to build strong relationships with sellers, and thus gain access to more deals.
Rehab
Rehab, or rehabilitate, stands for the process of upgrading and improving a property. For us, the rehab process begins with an assessment of which units we want to turn over (vacate) and renovate.
Once the unit is vacated, we begin the rehabilitation process. After having worked through so many rehabs, in the same neighborhood, we have a good idea of which contractors (and other vendors) might be good to work with.
We solicit several bids, review proposals, and get our team to work. Construction management is a hands-on job, and we treat it as such. We make sure all of our vendor contracts contain incentives for performance – both positive (bonuses) and negative (penalties), based on work completed.
Of course, we don’t just renovate units. Very often, the property as a whole needs some TLC. We’re here to deliver it.
Perhaps a roof needs to be replaced. The same might be true of plumbing and electrical lines. In Los Angeles, parking lots in apartment complexes can take quite a beating – after all, this is a car-obsessed city.
By making all of these improvements, we’re able to transform once-ignored properties into desirable places to call home. Of course, this means that the units we upgraded, will rent for more than they were before. This brings us to the next step,
Rent
Now, it’s time to find quality tenants, paying market rents, to rent these vacant units. Tenant screening is both an art and a science. However, after years of owning and managing these sorts of rental units, we have a strong set of criteria we look for in every potential renter.
First, we look at credit scores, and eviction history. We don’t accept an applicant with any evictions, ever. Period. We utilize a detailed tenant screening report, which not only taps into credit history, but also court records.
We also won’t accept any applicant with unpaid apartment collection accounts, or auto repossessions.While this might sound strict, both of these credit items can be a strong sign of future challenges in paying rent.
Outside of that, we look for an overall FICO score of at least 620. This is the minimum credit score someone would need to buy a home, using a conventional mortgage. We think it’s a reasonable metric for renters as well.
We verify every tenant’s income, and look for them to have income of at least 3 times the rent. This helps ensure that tenants can afford the rent.
As much as all of these metrics matter, more than anything, it’s important to sit down with a person, and get to know them a bit. We focus on having a conversation, to make sure that we can meet our tenant’s needs, and that they would be the right fit for our properties.
By having strong screening criteria, combined with an ongoing dialogue, we can ensure a smooth experience for all. In our view, choosing good tenants, and offering them a quality rental experience, is one of the most crucial ingredients of a succesful rental property investment.
We should note that our properties are managed in house, by our team. We don’t use outside management companies. We’ve found that no one is going to care about our investment as much as we do, and so it’s important that we are in control of the process.
Refinance
Through this process, we’ve improved the value of the property, quite a bit. It is now time to tap into that value. Typically, we target properties where our all in costs (to buy, rehab and rent the property) are at no more than 80% of the market value of the property.
Let’s use a concrete example. Let’s say we buy a property for $1.35 million. We put a down payment of 30%, or $405,000. Let’s also assume that we allocate $250,000 for improving the property, and for closing costs.
Our all in costs are $1.6 million. Remember, we target properties which we can improve, such that total costs are no more than 80% of the new market value of the property. Thus, the property would now be worth $2 million.
It is possible to refinance rental properties, at around 75% of their current value. What does this mean?
Basically, we are allowed to borrow up to 75% of the value of the property, through a new mortgage. This new mortgage is used to pay off any old mortgage. The remaining funds, we keep (tax free).
Let’s also remember, the value of a multifamily property with 5 or more units, is decided by the income generated by the property. So, income on the property has increased sufficiently to justify a value of $2 million.
In this case, we purchase the property for $405,000 down. Since the property cost $1.35 million, the difference is $945,000. That was the size of our original mortgage.
75% of $2 million is $1.5 millon. That is the amount of our new mortgage.
After paying off the $945,000 first mortgage, we have $555,000 left over. Now, let’s return to how much cash we originally put into the deal.
We provided a down payment of $405,000, and $250,000 for reserves, upgrading the property, and closing costs. That is a total of $655,000. Of the $655,000 in cash, $555,000 has been returned to us.
We continue collecting rents on the property, even though we have very little cash left in the deal. We can hold on to the property for the long run, and benefit from the natural appreciation we see in the Los Angeles market. Over time, this is how wealth is built.
Repeat
We’ve just completed a very profitable investment. What’s next? Well, what if we could repeat the steps above – over and over? What might that do to our income, and our net worth?
Remember, we were able to take the vast majority of the cash out of the previous property, and put it back in our pockets. We did not pay taxes. These funds are perfect for reinvesting into another deal.
We might purchase a small property, and use the entire $555,000 from the refinance, for down payment and improvements of the property. If we are purchasing a more expensive property, we might also put in a little extra capital, of our own, or other investors.
Over the course of several years, we’ll purchase, improve, and refinance another property. The, rinse and repeat. Over time, we build real generational wealth.
Investment Opportunities
So, why does this matter to you? Well, you can participate in what we do!
See, when we first got started, we just used our own money to purchase and upgrade properties. The thing is, we don’t have infinite funds. After all, properties in Los Angeles are expensive.
However, it’s more than that. Sanjeev, and the rest of our founding team, believe passionately in empowering others to build wealth, increase cash flow and enjoy financial freedom. We don’t just see it as an option, but rather, a calling. For this reason, we invite individual investors to partner with us – by investing your money alongside us.
For more information, please contact us at [email protected]. We’d love to see if we’re a fit to work together!