By Lee Barnathan, California Business Journal
Where others see dilapidation and distress, David Berneman sees dollars.
Like any investor, Berneman, 33, wants to make as much money as possible. But unlike many investors, he sees potential in areas others don’t.
Areas such as Leimert Park. Hyde Park. Hawthorne. Westmont. Inglewood.
These are not areas everybody thinks of when looking to invest in real estate. But Berneman, head of Golden Bee Properties in Culver City, has been buying properties in those areas for almost a decade, including a recent purchase of eight apartment buildings for $17.4 million: five in the City of L.A., two in unincorporated L.A. County and one in Hawthorne.
“I’m not going to sugarcoat it. There still are some areas and some pockets that have some gang activity, but generally speaking, this is the thing that I think is most impressive: South L.A. is a nice, working-class neighborhood,” he says. “You have a lot of families that have either lived in the area forever or others that just can’t afford to live in West L.A., Koreatown and Hollywood. It’s a question of how do we make South L.A. better and safer for the residents — and nicer and cleaner — while simultaneously making money for our investors?”
The answer, he believes, is to eschew areas such as Santa Monica, West Hollywood, the South Bay and the Valley in favor of areas that offer what he calls “value-add buildings,” meaning the properties have potential to increase in value quickly.
He buys apartments for between $130,000 and $180,000 per unit, spends some money beautifying the interiors and exteriors and, if he chooses, sells them some years later for a large profit. He guarantees his investors quarterly returns of at least eight percent. Mostly, though, he holds onto the buildings and rents the units using federal government housing programs such as Section 8.
“You’ve got a lot of disinvestment that’s been going on for decades. It’s good to see there are some new dollars flowing into the area,” he says. “We go into these buildings and they’re dirty, physically dirty and sometimes they’re dirty with a tenant base we don’t necessarily want. The objective is to make these clean, family-friendly, working-class neighborhoods, and if we have to help to clean up house, along with the police and others, we’ll do it.”
In keeping with his philosophy of trying to find a reason to invest someplace where few others look, Berneman looks at the public sector’s plan for development. In 2009, he learned that Metro wanted to build a light-rail line through the Crenshaw Corridor.
According to Metro’s website, the Crenshaw/LAX line, scheduled for a 2019 opening, will run 8.5 miles and connect the Metro Expo Line with the Green Line through Crenshaw, Leimert Park, Hyde Park and Inglewood.
“We realized it was coming, so we started looking at areas like Leimert Park, which is a very cool area that has been well kept for many, many years but sort of hidden — at least to the investment community,” Berneman says.
Once he identifies a potential area, he needs investors, so he syndicates using different sources. There are the usual friends and family, his own money and some high-net worth individuals — and a recent trend he uses is crowdfunding websites such as Patch of Land and RealtyShares. Crowdfunding is a way to raise money online with numerous people contributing small amounts.
“With these new crowdfunding vehicles, there is the ability for someone, even with as little as $2,000, to go in and invest in one of our buildings,” he says.
When it comes to renters, Berneman isn’t afraid of government help, if needed. Section 8 of the Housing Act of 1937 offers low-income people to live in buildings they couldn’t otherwise afford because without assistance, the rents would be too high.
Berneman estimates that a two-bedroom apartment in South LA rents between $1,625 and $1,795 a month at market rates. This can be way too much for some people, but if they have Section 8 vouchers, they can pay as little as $50 a month, and the various housing authorities pay the rest. So Berneman and his investors still get market rate rents and their eight percent return.
Beautiful buildings in areas without gangs, drugs and crime are attractive, so if the tenants need help to pay market rent, he sees nothing wrong with that.
“I don’t think Dave’s a person who does something just to make a lot of money,” says Colin Ford, a friend who has invested in Berneman’s South L.A. properties and is seeing at least eight percent paid quarterly. “He cares about quality of life for the tenants too. Everything he does is win-win.”