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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  • Marlen Weber
    Specialist · Plano, TX · Member since 2020 · 2k+ posts · 861 votes
    6y

    @Ben Leybovich @Sam Grooms Congratulations on this amazing deal. 

    1Reply
  • Ben Leybovich
    OP
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    6y
    Originally posted by @Marlen Weber:

    @Ben Leybovich @Sam Grooms Congratulations on this amazing deal. 

    Thank you! 

    0Reply
  • Jamie Oliver
    New to Real Estate · Phoenix, AZ · Member since 2020 · 12 posts · 5 votes
    6y

    @Ben Leybovich & @Sam Grooms nice work on this complex! I live in Downtown Phoenix and commute(d) to Chandler pre-coronavirus.  Sometimes I bring my gravel bike and ride a loop that includes that canal after work.  When I first started I was really surprised and the number of "nice" areas sprinkled throughout the South Mountain area.  With easy access to recreation, shopping, Chandler, Tempe, and Downtown this area is sure to continue to explode.

    1Reply
  • Ben Leybovich
    OP
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    6y
    Originally posted by @Jamie Oliver:

    @Ben Leybovich & @Sam Grooms nice work on this complex! I live in Downtown Phoenix and commute(d) to Chandler pre-coronavirus.  Sometimes I bring my gravel bike and ride a loop that includes that canal after work.  When I first started I was really surprised and the number of "nice" areas sprinkled throughout the South Mountain area.  With easy access to recreation, shopping, Chandler, Tempe, and Downtown this area is sure to continue to explode.

    Jamie, I agree. This area is very exciting right now. 

    0Reply
  • Ben Leybovich
    OP
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    5y

    Well, we've just sold this property. Once the final accounting is done I am sure we will have a more in-depth conversation. But, this was a 20-month hold and it looks like the investors will net about 1.8x and 40%+ IRR.

    As you can see in the image, we improved the revenue from about $82,000 to $120,000, and there was still more value-add left. But, we couldn't say no to the offer - too good.

    Feel free to reach out with questions and comments.

    3Reply
  • Jermaine Southern
    Investor · Phoenix, AZ · Member since 2016 · 11 posts · 8 votes
    4y

    Are you still happy that you sold the apartment complex a year later? Could your investors have returned an even higher return if you had held longer? Very bullish on South Phoenix. Personally live in a gated community on 32nd St/Baseline and have a SFR in another community on 24th St/Baseline.

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

    Are you still happy that you sold the apartment complex a year later? Could your investors have returned an even higher return if you had held longer? Very bullish on South Phoenix. Personally live in a gated community on 32nd St/Baseline and have a SFR in another community on 24th St/Baseline.

     That's a really good question, Jermaine. I'll begin by identifying a key element in the way WhiteHaven interprets our mandate - delivering the highest return possible on a risk-adjusted basis. The main element here is risk. We know what our return hurdles are because we identify those before we enter the transaction. Risk, however, is not so easy. 

    In any transaction, there are 3 factors that define the risk profile: Location, Vintage, and amount of Value-add. So, in order to have some mechanical control over market risk we can improve the location, improve the vintage, or improve the asset. Obviously, we cannot force the location or vintage to change, hence improving the asset is all that's left. 

    Value-add = counter-risk mechanism.

    Thusly, as we run through the value-add program we continually evaluate the remaining value-add relative the risk of keeping the asset, and we eventually reach an inflection point whereby the remaining upside may not be worth the risk. Most important risk to understand is the unknown, which is difficult to qualify or quantify. While hindsight is always 20/20, but relative to risk, we don't know what I don't know, and at the time, we thought we'd made enough money in this deal and should take profits. We never want to get gridy. We can never lose money by taking profits. So, what did we do?

    We sold Haven at South Mountain and moved this money into a community in Arrowhead called Haven at Arrowhead (Strayhorse Apartments). This community is obviously much better located, and being 1998 it's much newer. And, while the renovations now are very Class A, there was/is a ton of value-add. To give you a sense, the unit depicted in these pics went from $1,250 prior to renovation, to $1,975. And, this floorplan is now going to over $2,200.

    At the moment, we are currently under contract for another community in the same location. This one is even younger, being 2007 construction. And, also has a ton of value-add. 

    So, what we are doing now is cycling the 80'es stuff in transitional locations, where we've done very well, into Class A locations. And, by doing so we are shifting the inflection-point math. Would I want to keep these two assets past value-add completion? Perhaps, considering they are newer. sit next to Arrowhead Town Center, and a few miles from the TSMC site. 

    Long answer, but there is a lot of perspectives here. Hope this makes sense.

    4Reply
  • Sam Grooms
    Investor · Phoenix, AZ · Member since 2017 · 583 posts · 919 votes
    4y

    Clearly investors would have received higher returns had we held onto the property for longer. However, not many people will complain about a 40%+ IRR. And not many people would want to put those kinds of returns at risk in the hopes that the market gets hotter. Plus, we were able to provide them with another opportunity to roll their money into, that's looking like it might produce even better returns.

    I just think of that old idiom: pigs get fat, hogs get slaughtered. 

    1Reply
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