Hit Another Home Run: In 18 Months Created $4 Million of Value
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:
- Increase Rents
- Decrease Expenses
- Increase Occupancy
- 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.