117-Unit Value-add in Phoenix Closed Today

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117-Unit Value-add in Phoenix Closed Today

Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes

Ladies and Gents,

We don't do too many deals, but when @Sam Grooms and I do a deal, it's something special.

Today we closed on 117-unit in Phoenix's South Mountain neighborhood. The complex is named South Mountain Square. 

Some Details:

  • Purchase Price:  $10.75M
  • Reno Budget:  $1.5M
  • Per sq.ft. Blended Price:  $140/sq.ft.
  • Financing: 70% LTV on the PP and 100% LTV on the Reno
  • Equity Raise:  $4.5M
  • Unit Mix: Essentially 50/50 of 1x1 and 2x2
  • Value-Add: $300 per door +
  • Going-in Cap Rate on T12: 4.1%
  • Cap Rate projected by end of Y1:  5.2%
  • Cap Rate projected by Y3:  8.25%
  • 5-year target IRR: 17%+
  • 10-year target IRR: 14%+
  • In-place LTL to reno Bump Ratio:  About 65/35

I want to thank our many partners in this deal. I am very bullish on this acquisition. We will do very well at South Mountain Square.

Feel free to reach out if anyone has questions.

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Sam Grooms
Investor · Phoenix, AZ · Member since 2017 · 583 posts · 919 votes
7y

To give you an idea of how conservative we underwrite, even with the $300 increase in rents: 

We met with the new manager at the property this morning, and she says our post-renovation rents need to go up another $50 on the 1x1s. We knew that going in, but it provides an additional $700K of upside to help us outperform. 

Don't be too aggressive with your underwriting; give yourself some cushion. 

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  • Yonah WeissPro Member
    Cost Segregation Expert and Investor · Lakewood, NJ · Member since 2017 · 1k+ posts · 1k+ votes
    7y

    @Ben Leybovich & @Sam Grooms Congrats on this property! Was your syndication seminar last month instrumental in pushing this deal through? 

    Very impressed with your conservative underwriting, and I'm sure you'll do great with this property as planned. #keepemcoming

    1Reply
  • Tommy Hoang
    Rental Property Investor · San Francisco, CA · Member since 2014 · 52 posts · 35 votes
    7y

    Cheers to number two @Ben Leybovich @Sam Grooms! Stoked that @Jeffrey Almonte and I were able to roll with you guys again!

    Flew out to Phoenix twice at the beginning of the month and drove the neighborhood in the am and pm and it's a really nice area. Not even an up-and-coming street but an already there street. 

    3Reply
  • Peggy Liu
    Investor · Los Angeles, CA · Member since 2013 · 354 posts · 98 votes
    7y

    Congratulations @Ben Leybovich and @Sam Grooms for putting together another amazing deal and closing it!  It is exciting to see.  Thank you for all the education and tips you have given the group.  Looking forward to seeing how this value-add plays out.  

    3Reply
  • Ben Leybovich
    OP
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    7y
    Originally posted by @Jason D.:

    You guys are my heroes! Keep doing what you're doing, its inspiring stuff!

    That's kind of you, Jason. Feel free to reach out if we can help! 

    1Reply
  • Ben Leybovich
    OP
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    7y
    Originally posted by @Account Closed:

    Congrats to you both and all of your partners @Ben Leybovich and @Sam Grooms

    I had the chance to tour this property. Ben is not exaggerating in the slightest when he talks about neighboring communities and retail presence. This property is directly in the path of progress and Ben and Sam have positioned themselves well to capitalize on these market dynamics. 

    I've worked with Ben and Sam closely, and can say that it really helps to have the localized knowledge that  these two bring. Coupled with their really strong property management team, these guys will be doing great things for their investors for years to come!

    All the best guys,

    Mike

    Thanks, Mike! 

    1Reply
  • Brendan M.
    Rental Property Investor · Chicago, IL · Member since 2014 · 68 posts · 17 votes
    7y
    Originally posted by @Ben Leybovich:
    Originally posted by @Brendan M.:

    Hey guys,

    Congrats! What sort of rehabs are you going to do with that  $1.5M? 

    - How many units are you going to be upgrading? 

    - What sorts of finishes are you going to be putting into the units? 

    -  Do you see an equal amount of upside in increasing income as you do in lowering expenses? 

    Thanks! 

    Brendan

    Brendan,

    Our scope on this is about $7500 per unit on the interior, and the rest on the common areas. On the interior, we do cabinets, quartz/granite tops, underhung sinks, flooring, paint, fixtures.

    The business plan calls for remodeling all units.

    The last comment is interesting. We are actually underwriting higher expenses by a good clip than the seller. Their expenses are not sustainable. This is why we need that $300 per door bump, some of which is to compensate for higher operating costs.

    Does this help?

    Very helpful, thanks!  That picture you posted above - is that what the units are going to look like after rehab?

    0Reply
  • Oleg Shalumov
    Rental Property Investor · Teaneck, NJ · Member since 2016 · 567 posts · 291 votes
    7y

    @Ben Leybovich @Sam Grooms congrats on another deal. 

    2Reply
  • Ben Leybovich
    OP
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    7y
    Originally posted by @Drew Wiard:

    Super exciting project!  It's a impressive opportunity, and I think @Sam Grooms and @Ben Leybovich have done a KILLER job, very specifically with their underwriting process on this.  I was hesitant to jump in the previous AZ deal, because I personally wasn't ready, but I couldn't pass on this one.   Glad that I've been able to be a part of this one!  It will be fun to watch it play out!

    Let's get moving on the next one!

     Glad to have you in this acquisition, Drew. Here's to many more!

    1Reply
  • Ben Leybovich
    OP
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    7y
    Originally posted by @Brendan M.:
    Originally posted by @Ben Leybovich:
    Originally posted by @Brendan M.:

    Hey guys,

    Congrats! What sort of rehabs are you going to do with that  $1.5M? 

    - How many units are you going to be upgrading? 

    - What sorts of finishes are you going to be putting into the units? 

    -  Do you see an equal amount of upside in increasing income as you do in lowering expenses? 

    Thanks! 

    Brendan

    Brendan,

    Our scope on this is about $7500 per unit on the interior, and the rest on the common areas. On the interior, we do cabinets, quartz/granite tops, underhung sinks, flooring, paint, fixtures.

    The business plan calls for remodeling all units.

    The last comment is interesting. We are actually underwriting higher expenses by a good clip than the seller. Their expenses are not sustainable. This is why we need that $300 per door bump, some of which is to compensate for higher operating costs.

    Does this help?

    Very helpful, thanks!  That picture you posted above - is that what the units are going to look like after rehab?

    No, those pictures are as-is.  This is what our scope looks like:

    2Reply
  • Ray Johnson
    Irvine, CA · Member since 2016 · 545 posts · 614 votes
    7y

    @Ben Leybovich and @Sam Grooms Congrats Guys!

    How aggressive are you on the remodel of the Unit turns? I didn't see what the current occupancy rate is, Will you get to do any substantial turns early on due to any vacancy? I see you get a 1.1% cap change by end of year 1, then it's more than doubled by end of year 3 at 8.25%, Am I correct to assume not many vacancies to turn in year 1? 

    I see your 10-year IRR target is 14%+, What did you underwrite as the holding period on this deal for exit?

    0Reply
  • Ben Leybovich
    OP
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    7y
    Originally posted by @Ray Johnson:

    @Ben Leybovich and @Sam Grooms Congrats Guys!

    How aggressive are you on the remodel of the Unit turns? I didn't see what the current occupancy rate is, Will you get to do any substantial turns early on due to any vacancy? I see you get a 1.1% cap change by end of year 1, then it's more than doubled by end of year 3 at 8.25%, Am I correct to assume not many vacancies to turn in year 1? 

    I see your 10-year IRR target is 14%+, What did you underwrite as the holding period on this deal for exit?

     The building is 100% occupied, with the exception of 1 unit which is down and the 1st on the reno list. This is what you get in a very strong market like Phoenix - even the most poorly managed and run-down buildings are basically at full occupancy due to very strong market fundamentals. This is why we need such extraordinary value-add otherwise the deal doesn't work.

    Having said this, this submarket is running about 2.5% vacancy. We underwrote 6% stabilized physical vacancy. The fact that the building is operating 0% vacancy tells you that the rents are too low even in as-is condition. We will immediately establish a "classic" rent that is much higher than the existing blended rate, thusly creating enough vacancy to gain possession of units to remodel.

    The holding period is a moving target and depends on market conditions. Preferred is 3-5 years. Although, we may test the market sooner, or stay in the deal longer depending on the market. The reason we underwrite 10 years is not that we want to be there for that long, but because we are operating in a seasoned cycle and we think it's important for investors to understand what things may look like if we do end up needing to stay in for longer than 5 years.

    Does this help, Ray?

    2Reply
  • Anudeep Yapala
    Rental Property Investor · Chandler, AZ · Member since 2017 · 39 posts · 9 votes
    7y

    Congrats to @Ben Leybovich , @Sam Grooms and to all our partners and investors in this deal. 

    South Mountain is a really great area with a bright future ahead. Before our deal i was looking for some SF or small MF in this area as i work in Tempe and this area looks promosing with all the new A class development going on and when Ben and Sam mentioned about this deal i was very positive as i already knew this area. Overall Phoenix is very bullish, that what made me move here last year and already being partner on your two deals, future looks bright.

    Thanks again for putting this deal together and all the stress Ben went thru and Sam laughed thru :P.

    Good job guys, now lets go find the next.

    2Reply
  • Ray Johnson
    Irvine, CA · Member since 2016 · 545 posts · 614 votes
    7y

    @Ben Leybovich Great explanation and insight into some of your strategy on underwriting this deal!

    Congrats! 

    1Reply
  • Tamara Rodenbeck
    Attorney · Phoenix, AZ · Member since 2018 · 13 posts · 4 votes
    7y

    @Ben Leybovich @Sam Grooms Congrats!! How will you go about raising rents with the existing tenants? Waiting until leases expire? 

    1Reply
  • Ben Leybovich
    OP
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    7y
    Originally posted by @Tamara Rodenbeck:

    @Ben Leybovich @Sam Grooms Congrats!! How will you go about raising rents with the existing tenants? Waiting until leases expire? 

     Hey, yeah. We will be increasing rents to create vacancy.

    1Reply
  • Ben Leybovich
    OP
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    7y

    Just received this message (edited but you get the point):

    "Hi Ben,

    Just saw your post on the new complex you guys just got. That’s amazing! I live in Glendale. I know a new Chick-fil-A just opened in the South Mountain area and they wouldn’t do that if Chick-fil-A didn’t know that it was a good area..."

    There's that, an LA Fitness, Target, Walmart, and all kinds of Class A infrastructure. This, ladies and gents, is what the path of progress looks like :)

    0Reply
  • Scott TrenchPro Member
    Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
    7y

    I thought you only purchased $30,000 properties!?!?

    Congratulations! And, great to finally meet you last week! 

    Podcast Guest on Show #223
    BiggerPockets
    4Reply
  • Ben Leybovich
    OP
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    7y
    Originally posted by @Scott Trench:

    I thought you only purchased $30,000 properties!?!?

    Congratulations! And, great to finally meet you last week! 

    HAHA  I tried to give this more than one up-vote, but it didn't work. 

    Yes, $30,000 pigs are my forte, but once in a while venture out :)

    I enjoyed meeting you as well, Scott. Quite enjoyed the conversation. Agree and support your ideas for BP, and admire the direction you're taking this company. Love the fact that you are a fellow viola player - it explains so much, dude!

    0Reply
  • Matt Ward
    Specialist · San Francisco Bay Area · Member since 2018 · 221 posts · 160 votes
    7y

    @Paul Choi @Sherwin Gonzales

    0Reply
  • Paul Choi
    Rental Property Investor · San Ramon, CA · Member since 2017 · 350 posts · 611 votes
    7y

    Guys are on fire! congrats!!

    2Reply
  • Ben Leybovich
    OP
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    7y
    Originally posted by @Paul Choi:

    Guys are on fire! congrats!!

     Thank you, sir!

    0Reply
  • Chris K.
    Attorney · Nashville, TN · Member since 2015 · 1k+ posts · 1k+ votes
    7y

    @Ben Leybovich @Sam Grooms

    Great job --- so proud of you guys! 

    Question: I heard it snowed in Phoenix, AZ. Does your underwriting account for such adverse weather conditions?

    Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

    1Reply
  • Matthew Baltzell
    Rental Property Investor · Denver, CO · Member since 2018 · 183 posts · 172 votes
    7y

    @Ben Leybovich Atta boi!!! Well done. Congrats, keep up the good work:)

    0Reply
  • Ben Leybovich
    OP
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    7y
    Originally posted by @Chris K.:

    @Ben Leybovich @Sam Grooms

    Great job --- so proud of you guys! 

    Question: I heard it snowed in Phoenix, AZ. Does your underwriting account for such adverse weather conditions?

    Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

     This is a very interesting comment. Let us explore:

    First, don't believe everything you hear. There hasn't been any snow in Phoenix. And secondly, yes, we brought in some capital to ensure that we are equipped to handle such an event...:)

    1Reply
  • Ben Leybovich
    OP
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    7y
    Originally posted by @Matthew Baltzell:

    @Ben Leybovich Atta boi!!! Well done. Congrats, keep up the good work:)

     Thank you :)

    1Reply
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