camila October 24, 2021

(BLOOMBERG) – Billionaire investor Charles Munger made a well-timed bet on suburban apartments in California – thanks to a neighbourhood teenager who showed up at his house with a Hebrew Bible.

Mr Munger couldn’t read it. But the encounter led to an improbable friendship and, over a decade later, an investment in apartment complexes in the west coast US state before the coronavirus pandemic sent values soaring.

The young man’s business, Afton Properties, has become a force in the market in the past few years. It bought more apartments in California than anyone else last year, on its way to building a real estate portfolio with an estimated value of US$1.2 billion (S$1.6 billion).

Mr Munger and Afton declined to comment on how much of that growth was funded by the 97-year-old investor, who’s best known as Mr Warren Buffett’s longtime business partner.

Still, his public remarks and other data provide a glimpse into a little-known chapter in his storied investment career.

Afton, which is run by Mr Avi Mayer and Mr Reuven Gradon, has concentrated on a rather unglamorous corner of the real estate market: garden-style apartment buildings in the vast sprawl of Southern California. They spent US$423 million last year on more than 1,700 units, and the purchases have continued this year. They’re still on the hunt and are prepared to make all-cash offers for apartment complexes.

“Avi and Reuven, they were one of the first to see the secondary markets” had potential, said Mr Otto Ozen, executive vice-president at the Mogharebi Group, a multifamily investment banking firm in California that has closed deals with Afton.

“They’re buying with a long-term hold strategy.”

With Americans struggling to find affordable properties to buy, demand for apartments is at the highest level since the 1970s.

That’s pushing rents higher at a startling pace and boosting the value of apartments. Prices for multifamily buildings gained 15 per cent in the year through August.

In the Antelope Valley and Inland Empire – north and east of Los Angeles, respectively – rents climbed about 16 per cent from April of last year through this June. In downtown Los Angeles, rents fell 8.1 per cent during the same period. In all three areas, the prices that investors are paying for apartments have jumped since the start of the pandemic.

The story of how Mr Munger came to invest in apartments began about a decade-and-a-half ago.

“One day, into my house, a very young 17-year-old Hasidic Jew came by and gave me the Hebrew Bible – in Hebrew,” Mr Munger recalled during an event last year in Redlands, California, referring to Mr Mayer.

They struck up a friendship and, years later, Mr Munger suggested they partner to purchase buildings. Loan documents for one of the first properties they bought show how things have improved. Occupancy rose to 98 per cent last year, from 95 per cent in 2019, while net operating income rose 15 per cent to US$6.9 million.

Part of the strategy is to upgrade the complexes they buy, Mr Munger said, noting that they spent US$600,000 on trees in the first year. There’s more money to be made taking care of the customer, he added.

“It’d be nice if I were Mother Teresa and did something I didn’t like doing, because I’m a noble soul,” Mr Munger said.

“But my life is organised so that time after time, what works for my pocketbook works for every moral teaching that I’ve been taught.”