Detail on a 48-Unit Property - Investing from Afar
It has been about 15 months since I purchased a 48-unit property in Wichita Falls, Texas. I want to share my story to inspire other BiggerPockets members and hopefully you can learn a thing or two from this acquisition. This is not the first multifamily property I’ve owned, but it has been one of the smoothest projects I’ve purchased and operated.
Property Details
- Purchase Price - $3,400,000
- Renovation Budget - $150,000
- Total Equity Raise - $1,530,000
- Assumed a Fannie Mae loan and had to bring roughly 33% to close.
- Syndicated deal and filed a 506(b)(2)(ii) of Reg D with SEC
- In first year, returned 13.3% CoC return to investors.
- Estimated new value from BOV – Greater than $5,000,000
The property was built in 2005 with minimal deferred maintenance so going into the underwriting process I thought it would be a solid yield play that I might investigate further. The deal was truly off market so I didn’t have a broker OM or any marketing material to browse through. I had the Costar report and 3 years of financials to analyze. At this time, I was also unfamiliar with the market I first investigated to see if I was comfortable with before I started analyzing the deal. The further I dug into the data and understood the property and market the more I realized it was actually a value-play deal!
Reasons why it turned into a value-play
The previous ownership group lived 3 hours away from the property and had a full-time property manager and maintenance man on site. Typically, I like to staff one FTE (full-time employee) for every 50 units. I know this number can be skewed on smaller deals, but I thought there was some room to reduce overhead. They paid the manager a salary and let her live at the property for free. They hadn’t increased rents in about a year and a half so I felt like both the manager and maintenance man had a lot of free time on there hands where we could reduce hours.
I was told the previous owner had a small basis in the property and were fine with the NOI it was generating and didn't want to push rents. When we purchased the property, effective rents were roughly $.79/square foot. The comps which were older with smaller unit sizes ranged anywhere from $.84/square foot to as much as $1.09/square foot. Being a smaller property, it doesn't have a gym or some amenities a tenant might want, but we knew we could raise rents substantially based on the property condition and comps.
Business Plan to Improve Property
I live in Dallas which is 2 hours away from the property so I knew from the get go I needed a strong team to be my boots on the ground. With technology at our fingertips, I knew I could asset manage from afar, but wanted to make sure my property manager already had a presence in Wichita Falls and preferably had an office in Dallas. I interviewed a couple property management companies that met my criteria and I selected one. I still go to Wichita Falls on a regular basis to make sure the management company knows I’m pushing the pedal to the metal to ensure the property performs well and I can execute my business plan for my investors.
Renovations
Being 2005 vintage, the property was in excellent condition compared to most value-add deals. There were a few items that needed to be address on the exterior of the property and we tackled those issues immediately. I always like to start the exterior renovations/capex immediately after takeover because they can have a huge impact on how a property looks to future residents. These issues consisted of:
- Adding a pergola and built in barbeque grill to the swimming pool area
- Resurfacing and restriping parking lot
- Installing three French drains to solve a water draining issue
- Build maintenance shop
- Repair retaining wall along east side of property
The interiors are in good shape, but to get the rental increases we needed to take the property from 2005 to 2019. The interior fixes have been simple and we “put lipstick on a pig”. The interior renovations consist of:
- Installing vinyl plank floors in living room instead of carpet
- Installing pulls and knobs on the kitchen cabinets
- Resurfacing the kitchen counters to have a faux granite look
- Backsplash in kitchen with new kitchen faucet
- Repainting the apartments from a cream color to gray on the walls with white on baseboards
- Updating other items as needed like lights, fans, appliances etc.
How Value of Property has Increased.
As I mentioned above, rents were below market so with the interior and exterior improvements we’ve been able to increase rents when each lease turns. I believe we can continue this process and increase the value even more over the next few years.
One of the biggest reasons why our income has increased significantly since takeover has been corporate leases. Our property is close to an Air Force base and for our benefit this Air Force base trains other militaries from around the world. We were able to get one country to lease our units for their married military members. Since they are from overseas, we decided to furnish the units and charge a premium in rents. The number of corporate leases has fluctuated, but by the end of June we will have 5 corporate leases. We are able to significantly increase rents in the corporate leases because we are providing furnished housing, all utilities, plus internet for one price. Initially, we were renting furniture from a rental company, but after analyzing the cost of gently used furniture versus rental I determined the payback period was roughly 9 months if we bought the furniture instead of renting it. This was a no-brainer to purchase furniture for all units. It is a capital expenditure, but it boosts income, reduce expenses, and has a big impact on NOI.
Another factor that has helped us increase the value of the property is having resident appreciation events. These events start day one. When a tenant moves into the property, we provide them with a welcome basket of goodies for them to enjoy as the move. I also want our residents to be proud of where they live and know the people, they live next to. Every month we will have resident appreciation events to show them we care. We have had food catered, painting/wine events, Christmas decorating contest, Halloween costume contests and any other event you can think of. Through these events the tenants have gotten to know each other much better than before and have become friendly with our staff. This has also generated more referrals from current residents.
At takeover, I wanted to run the ship as efficiently as possible so this meant reducing expenses. The third-party property manager we hired immediately fired the two previous employees and staffed with a new property manager and maintenance man. The new property manager does not live on site so we were able to have another revenue generating unit and the maintenance man is only part-time. We’ve also negotiated or replaced the old vendors to provide better pricing for good/services. IE – Pest control and electricity, cable/internet.
Issues of Property
Even with all the success we had in year one of ownership, there are still issues we’ve faced. The first issue has been a catch 22. We have not been able to stay on track with our interior renovation schedule because we have had fewer residents move out than we projected. This is great in keeping monthly cash flow up, but we haven’t been able to get the maximum rent premium for the nonrenovated unit.
The biggest issue I’ve dealt with since takeover was having to fire the first third-party property manager I hired. They are a growing company that spread themselves too thin. This impacted communication and I believe they became complacent or too busy to care about the property. Our occupancy rates shifted significantly from month to month. The highest rate we achieved was 96% all the way to 81%. According to Costar the average occupancy rate for the market is 93.3%. Being such a nice property, our occupancy numbers should have been more consistent than what they were. Another reason our occupancy fluctuated was because lack of marketing of the property. The old manager only marketed through Facebook so we were missing a significant amount of traffic that could have been driven to the property using other avenues to market the property.
Even though we had success with the previous property manager we left a lot of “meat on the bone”. There is a saying that says sales cover sin and this was happening with this property. Our income was significantly higher because of the corporate leases so the property manager felt like they could coast. I have a fiduciary duty to my investors and if the property isn’t performing optimally a change must be made.
We’ve now had a new property manager in place for 2 months and the property is performing better than it ever has. I was hesitant to change property managers since we were beating budget, but their recent performs is a testament that making the change was needed.
Future
Since we’ve owned the property for a little over a year, I am looking into options to take out a supplemental loan. This is essentially a refinance where I can return a portion of the investors initial capital back without having to pay a prepayment penalty. If for some reason we can’t get a supplemental, I will look at refinance options, staying put and let the property cash flow, or potentially listing the property with the broker who brought me the deal.
