| The proper action when things are going
| |
| | profits after paying all of his loan
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| well is to pay off debt and consolidate
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| | payments to buy and remodel more
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| your position. Then you will be
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| | buildings. Nick just couldn't wait and
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| financially strong and can go for further
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| | consolidate his position. He had every
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| expansion without fear of loosing what
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| | building he owned loaned up to the
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| gains you already have. When you are not
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| | maximum value that he was able to. The
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| deep in debt you do not have to worry
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| | rents were more than enough to cover the
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| about your creditors getting paid. Since
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| | payments on each individual building. So
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| the usual history of a business is cyclic
| |
| | what happened?
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| (boom and then every 7 years (plus or
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| | Two things. The first was his greed. We
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| minus) bust) you can predict when it is
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| | entered the 1991 recession, and the price
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| time to consolidate.
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| | of buildings went down. The banks were
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| When the prices are "too good to be true,
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| | starting to foreclose on buildings and
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| they are." In the two years just before
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| | put them back on the market for very
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| the top of the market is reached, prices
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| | cheap prices. Nick just couldn't let a
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| are going up at very incredible rate. I
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| | deal pass him by. He bought 3 of them. He
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| have seen real estate go up 25%, per
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| | borrowed the last dime he could squeeze
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| year, right at the top. This is
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| | out of every building he owned to buy
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| incredible and I guarantee you it cannot
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| | these buildings, thinking that he could
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| sustain itself, at that rate. As hard as
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| | do no wrong. One bank made him the deal
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| it is to give up a profit, it is harder
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| | of a century. They wanted a lot of money
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| still to sell an investment when it is
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| | down but the price "was just too good to
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| going straight up. But, understand this
| |
| | be true."
|
| is when you need to sell. If that is not
| |
| | Nick was so much in a hurry to get his
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| what you want to do then you need to go
| |
| | hands on this great deal he didn't bother
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| to plan B: pay off your debt and get
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| | to do his normal structural inspections
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| ready for the market drop.
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| | and research. After all, Nick owned 17
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| If you are debt free you can survive the
| |
| | buildings in Hollywood by now and knew
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| drop and then be solvent and financially
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| | the market better than anyone else, he
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| secure when the recovery comes. I would
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| | thought. He looked at the building and
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| like to tell you a story of the largest
| |
| | saw it was only 20 years old. The
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| apartment owner in Hollywood.
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| | building was empty, which meant it
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| It was 1980 when I met Nick. He owned 11
| |
| | brought in no income. That didn't bother
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| buildings at that time. He bought the
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| | Nick, he would just get it rented quickly
|
| worse buildings in town. These had the
| |
| | and the building would support itself.
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| best cash flow. He owned mostly brick
| |
| | What Nick hadn't noticed was that the
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| buildings. This was because they cost
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| | foundation was damaged and a $100,000
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| less money than stucco and wood
| |
| | repair was needed. This was a repair that
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| buildings. This lower price allowed Nick
| |
| | Nick couldn't afford. I begged Nick to
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| to generate higher profits. Nick would
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| | walk away from this building and let the
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| buy a building. He then did a market
| |
| | bank have it back. He refused and
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| study, and figured out what size
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| | squeezed more money out of his collection
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| apartments and what numbers of bedrooms
| |
| | of buildings.
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| were generating the highest rent, per
| |
| | As you can imagine, Nick was loaned to
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| square foot. Then he remodeled his
| |
| | the hilt and had no money set-aside for
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| building to get the highest price per
| |
| | an emergency. At his peak he owned 17
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| square foot he could. He spent over
| |
| | buildings worth $45,000,000 with him
|
| $100,000 per building to do this. He also
| |
| | estimating his net worth at $7,500,000.
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| had to earthquake proof all of his
| |
| | He was definitely worth a lot of money.
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| buildings.
| |
| | That was for sure. Before we get jealous
|
| One of the reasons that brick buildings
| |
| | of him, lets look at these numbers a
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| sold so cheaply was that they needed to
| |
| | different way. If Nick was worth
|
| be earthquake reinforced. When Nick
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| | $7,500,000 then his real estate loans had
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| finished remodeling a building, it was
| |
| | to be the difference. That is
|
| producing a very nice cash flow. Nick
| |
| | $37,500,000. These were sure big numbers.
|
| would use that cash flow to buy and
| |
| | Let's look at these numbers in terms of
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| remodel the next building. This was very
| |
| | their percentages. This $37,500,000 was
|
| smart thinking. Where did Nick fall off
| |
| | 83.3% of $45,000,000. $45,000,000 had to
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| the rails? First he would find a great
| |
| | be the retail value of all these
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| deal, while he was still in the middle of
| |
| | buildings. Nick would not think in terms
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| a remodeling job. He just couldn't pass
| |
| | of selling them. He never sold a
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| it by. He borrowed on one of his finished
| |
| | building. He only bought, and bought, and
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| buildings to get the down payment to buy
| |
| | bought. What Nick saw was the potential.
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| the building.
| |
| | If property values went up only 10%,
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| Then he would borrow on a second building
| |
| | Nick's net worth would go up $4.5 M.
|
| to get the money to remodel the new
| |
| | Property values had gone up over 20% in
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| building. Now he was remodeling two
| |
| | the 1980's but the recession that had
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| buildings at the same time. By borrowing
| |
| | started was of no concern to him. It is
|
| on two of his successful buildings, he
| |
| | clear that he had stretched himself to
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| now had to pay the loan payments on the
| |
| | the limit. The last building the bank
|
| two new loans. The rents from the older
| |
| | sold him put him in trouble. He might
|
| buildings now went to the lenders instead
| |
| | have even survived it if he sold one, two
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| of to Nick's remodeling project. The new
| |
| | or maybe three buildings. No, Nick
|
| building, just bought, didn't produce
| |
| | wouldn't do that.
|
| enough income to cover the new loan on it
| |
| | One year later the recession was not
|
| because half the building was empty due
| |
| | over. Unemployment in California went up
|
| to the remodeling. Nick now needed to
| |
| | and up. Businesses were closing,
|
| keep borrowing money to fix the buildings
| |
| | President Reagan was closing down
|
| and pay the loan payments on the
| |
| | Aerospace, and workman compensation
|
| buildings that didn't generate enough
| |
| | insurance was so high no one could stay
|
| income. When a building was completed it
| |
| | in business. Vacancies in apartments were
|
| then supported itself very nicely.
| |
| | going from 1% to 5% to 10%. Then it
|
| Was Nick happy with that? No, he wanted
| |
| | happened, we had the LA riots. Hollywood
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| more and more buildings. If at any time
| |
| | became a ghost town and then it happened
|
| Nick had stopped borrowing to buy new
| |
| | again, the earthquake of 1994. Brick
|
| buildings, and just finished all his
| |
| | buildings fell down on Hollywood Blvd,
|
| buildings in remodeling, he would have
| |
| | none of Nick's buildings. People moved
|
| been able to catch up with himself and
| |
| | away and vacancies rose in Hollywood too
|
| started expansion from a new level of
| |
| | as much as 17%.
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| security. That was, using the buildings
| |
| |
|
