This is a must-read article:
Hell Is an Underwater Landlord
Millions of tenants are trapped in a rotten cycle of overflowing trash, daily water outages, and a healthy rat population.
...four years earlier, Matt Picheny had been an internet advertising consultant in Brooklyn, Brent Ritchie was selling industrial motors in Canada, and Koteswar “Jay” Gajavelli had been running an IT consultancy in Irving, Texas, that claimed Qualcomm and ESPN as clients. But by the start of the pandemic, all three men had begun rebranding themselves as “finfluencers,” social media mavens who promised their growing audience of upper-middle-class telecommuters whose savings had been temporarily inflated by stimulus checks emancipation from wage slavery through the magic of “passive income” generated by apartment complexes. Like a lot of their peers, they immediately set their sights on Houston, which had topped the national population growth charts for decades and boasted such lax tenant protections that two law professors at the University of Texas at Austin wrote a study in 2018 on the city’s “epidemic of dangerous apartments.”
Gajavelli, Ritchie, Picheny, and friends bought the Estates in a package deal with three other buildings in Houston’s Westchase neighborhood, through Gajavelli’s company Applesway Investment Group. The 1,330 apartments in all sold for $119 million, or just under $90,000 a unit, a steep price for buildings that currently advertise one-bedroom apartments starting at $699 a month. But within a few months, Gajavelli would pay $56 million for a massive but severely dilapidated apartment complex across town in East Houston, where a police officer had just been killed trying to arrest a suspect on drug charges, in a transaction that would fail so spectacularly it would become the subject of city council sessions, newspaper editorials, and a tour from the lame-duck mayor.
As a syndicator of other people’s money, Gajavelli had a strong incentive to overpay for properties. His take of every deal, according to a lawsuit filed by 123 of his investors, was calculated as a fixed percentage of the acquisition price, plus a percentage of the monthly rental revenue, and then a percentage of the resale price. The Wall Street Journal reported last year that syndicators like Gajavelli raised $111 billion for real estate investments during the pandemic, and generally collected commissions of between 2 and 5 percent of each deal. In Houston, valuations surged to more than $150,000 per unit, from about $90,000 pre-pandemic, as transaction volume exploded to nearly $10 billion in the fourth quarter of 2021 alone.
The overheated multifamily market would take a devastating toll on apartment dwellers like McMullen-Clarke and her neighbors when the Federal Reserve began to hike interest rates in early 2022, quickly doubling and then tripling the interest payments on Gajavelli’s floating-rate loans. Sidney Beaty, a researcher with the Austin-based low-income housing information resource Texas Housers who previously worked for the state housing department, says it felt like the state was suddenly awash in squalid, barely inhabitable apartment buildings. “You just had a lot of buildings that maybe had decent inspection scores a couple years ago, that were suddenly so deplorable they’re making the evening news,” Beaty said.
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