Hit Another Home Run: In 18 Months Created $4 Million of Value

51 Replies

I am happy to report the recent sale of a 240 unit apartment complex for $13.25 million located in Stone Mountain, Georgia a suburb of Atlanta. 

Last year I shared details about the purchase of this deal, here is the link: Just Closed a 240 unit Apartment Complex

To save you time by not reading the full thread and over 170 replies, here is the short story of the deal:

  • Bought 240 unit deal for $9.4 Million that appraised for $9.9 million at purchase
  • Value add deal
  • $3 million capital raise through a syndication
  • Time horizon for the asset was a 3 to 5 year hold
  • Upgrades were mostly focused on interior such as new flooring, painting the cabinets, new hardware, new lighting

Here is a before and after of the kitchen upgrade:

BEFORE

AFTER

We were able to increase our rents almost $90 per unit. 

Working with my third party management company, we instituted a detailed marketing plan to fill vacancies as well as bring current and new leases up to market rents. 

What I have learned over the years with apartment investing, on day one of takeover you can’t just go in and jack the rents up. You’ll create resident resentment and push good residents out. You’ve got to take your time and demonstrate that while rental rates might increase, so does the value of what tenants receive in return.

In about 18 months of ownership, was able to create value of almost $4 million in equity.

Question you might be asking if you aren't familiar with this type of investing is how can value be created so quickly??

High level view: to determine the value of commercial deals and specifically apartments, value is calculated by taking NOI (net operating income) divided by cap rate. Cap rate is expressed as a percentage and determined by local market.

VALUE = NOI/CAP RATE

So for this deal and way before I even purchased the property, I knew the market, had a clear understanding of income potential and built extra cushion in for expenses in my underwriting analysis.

My strategy for value add deals is I follow what I call the "Fabulous Four".

I buy assets whereby the property has one or all of these core elements, the ability to:

  1. Increase Rents
  2. Decrease Expenses
  3. Increase Occupancy
  4. Fix Deferred Maintenance

Summary, my team was able to increase rents by fixing deferred maintenance items. As a CPA I am constantly looking at expenses and cash flow, so we were able to operate more efficiently than prior owner. Was able to increase occupancy from 93% to about 95%.

The result is a higher NOI. Also with a better cash flowing property that is looking good, the cap rate was aggressive and lower.

This statement might confuse you, there is an inverse relationship of value to cap rate. What this means, as cap rates drop, value increases. The inverse is true, as cap rates increase value drops.

My strategy is very simple for my syndicate deals, I buy deals where my primary goal is to make money.

And to expand a bit, we make money when we buy at the right price and in the right market. That’s because I take the extra time to truly understand the market and do my homework. I take the responsibility of finding, acquiring and managing these investments seriously.

The challenge I have now is to find the next one, but I will continue to be patient and financially disciplined to find the right asset in the right market that is a WIN.

I'm sure it feels good to finalize it. Great job, Brian!

Brian, congratulations on another great success. Can you share what the returns were for your investors?

@Paul B. the returns exceeded expectations and don't feel comfortable sharing returns on a public forum like this - appreciate your understanding.

@Austin Fruechting - thanks

@Brian Adams thanks for sharing! When you say you take the time to truly understand your market can you explain what the key elements are that you look for in a market for larger multi’s like this? What resources do you use to obtain that information?

I am always curious to see what others look for, especially in the multi family realm to see how it might differ from what I think is important As it relates to market analysis for where I live. I always learn great new info when I hear other people’s market analysis!

nicely done !!!!

@Brian Adams Great job on the investment. Eventually I would love to have a similar success story. Everything you discussed in this post is exactly why I love the idea of commercial multi family. I am excited to start my journey and start small until I can build to be a larger player. Great inspiration in this post.

Originally posted by @Brian Adams :

What I have learned over the years with apartment investing, on day one of takeover you can’t just go in and jack the rents up. You’ll create resident resentment and push good residents out. You’ve got to take your time and demonstrate that while rental rates might increase, so does the value of what tenants receive in return.

 I like this part. I have been investing in similar types of projects, and the business model works a lot better in jurisdictions that aren't excessively tenant-friendly (in both laws and culture). But I have a fear that a reckless operator could create some negative publicity (Think of the headline: "Rich landlord from out of state pushes out grandmother from the only home she's known for the last 50 years") which could potentially lead to local policies that put a damper on what you're doing, when all you're really doing is improving the property. It's all about perception, and local officials should welcome someone taking a financial risk to make a community a better place to live. 

Brian, it has been a good ride as an investor in Hairston Woods.  I was impressed with the property when I visited early this year, and I've been impressed with your investor communications from the beginning of this syndication until now.  Returns are looking good, too.  Thank you for the opportunity to come along and be part of the success of the Hairston Woods venture.

@Ken P. I really appreciate your kind words and look forward to us doing another deal together.

By the way, thought I had something good for us, but the deal was HUGE and decided to pull the plug.

@Brian Adams nice work man! Question: I assume you did a sale vs refinance analysis.  What lead you to sale outright vs cash out refi on a freedie or fannie loan? Just curious.  I'm up to about 1700 units and continue to work to extract cash for investors via a refinance vs sale.

Thanks for sharing and happy hunting! Good deals are few and far between right now. :)

Well done Brian,

Nice to see solid examples of what syndication can do.  Leverage, value add, conservative underwriting / assumptions and the commercial valuation model itself can make small changes into significant returns in a short time.  Thanks for being a great example to others on what syndication in MF can do and that investors can essentially ride along without having to do anything...truly the benefits of being passive.

@Brian Adams

Seeing deals like this really excites us real estate folks!!  I am happy for you and your team Brian, keep up the good work.  As a former accountant, the profession definitely helps us when it comes to our overall analysis and strategies. Best of luck and look forward to hearing more great stories!

Congrats! @Brian Adams , I remember your last post!

The beauty of commercial RE: Forced Appreciation!

I don’t see renting out 7 additional units and raising rents 90 bucks a unit after that much rehab as much of a value add or brilliant strategy. I assume there was a lot of appreciation or a great sales presentation to unload it at that much of a price increase. I don’t see the numbers listed here supporting the 40% increase in price so I assume the the prime driver in appreciation isn’t noted in this post.

@Ivan Barratt awesome job man on your success - very cool.

Yes good deals are harder to find and the exit strategy on this asset was tee'd up as a sale.

I have done refi's as well and it is a great strategy.

@Steve B. I don't recall mentioning that we only did 7 units, my apologies if my post was confusing to you.

@Brian Adams Congratulations on the sale.Few more like that and you'll stop being the syndicator and you can just invest while other people work. 

@Steve B. Making a lot of assumptions here, but if all of the $90 raise filtered through to the NOI due to operation efficiencies and the property sold at between an 7-9 cap, the rent raise gets him most of the way to $4M.

$90 bucks over 228 occupied units gives you an extra $246k a year. That's between $2.7-3.5M. 

The 2% bump in occupancy yielded another $300-500k depending on expense ratios and rent rates. 

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