Student Housing Fix & Flip - 84% Return in 18 Months
This is a success story I wanted to share because it typical of the returns we've been able to create in our marketplace over the past few years.
When we look for deals in our marketplace, we often look to find off-market or private deals, but sometimes the best deals actually show up on the MLS. This deal is one of those. A couple of years ago I came across this property when I was looking at the multiple listings, and it immediately stood out to me as an opportunity.
The property, a six unit apartment building about a mile from the USC campus in LA, was being marketed by a residential real estate agent at $1.250 million. The property had a lot of deferred maintenance and in-place rents that were well below market as a result of absentee owners and strict LA rent control laws.
The building was comprised of (4) 2+1 and (2) 1+1 units with average rents of $919. Luckily, the property was just inside of the USC patrol zone, a zone set up by the university that also pays for a private police force to monitor it, along with the LAPD. This zone, while still somewhat sketchy, enjoys some relative quiet and safety as a result, and is more attractive to the university students compared to buildings outside of the zone. The owners had moved out of the city to retire several years back and the property had fallen into bad repair as they did not have professional management or someone close by looking over it. The deferred maintenance included exterior damage to the stucco and woodwork, plumbing and electrical systems that were substandard, and interiors that had not been updated in 25+ years.
Numbers:
List Price: $1,250,000
Purchase Price: $1,080,000
Rehab & Operating Budget: $378,000
Total Project Cost: $1,458,000
Total Equity Raised: $361,066
Total Debt: $1,100,000 combination of purchase & construction debt
Post-Rehab Sale Price: $2,127,500
Immediately upon close of escrow, we set out to accomplish two things as quickly as possible and at the same time. First, negotiate lease buy-outs with the existing tenants - since the building is rent controlled, we had to pay some big bucks to persuade tenants to leave. Second, to work with our architects and contractors to create plans for the remodel and get them approved by the city. As I said above, the unit mix at the time of purchase was (4) 2+1 and (2) 1+1 units. We worked with our architects to get plans approved to add one bedroom to each unit, since bedrooms are the key income metric for student housing. The final approved plans, which took approximately six months to obtain, had (4) 3+2 and (2) 2+2 units, for a total of 16 bedrooms vs the 10 bedrooms at time of purchase.
About six months after the purchase, we were ready to start work on the property. We had successfully bought out four of the five units, received our building permits, and assembled our construction team. We started the comprehensive renovations by gutting the vacant units and preparing the exterior. Unit interiors were reconfigured to the new bedroom count and upgraded with all-new flooring, recessed lighting in all rooms, and decor. Kitchens were updated with new cabinetry, fixtures, and appliances, while bathrooms were either re-built or built from scratch. We removed bath tubs and replaced them with walk-in showers.
Building components were also updated with a new plumbing system that included all new drain lines and water main. The electrical system was updated from the previous 120A main panel to 400A, as well as new wiring and sub-panels throughout. The units did not have any air conditioning when we purchased the building, so we installed new air conditioning and heating throughout. The occupied unit was not updated, though.
The exterior of the property received new stucco, new windows, improved lighting, and security gates.
The construction process took approximately 4 months, and we were pre-leasing the units to students for the Fall semester throughout the construction process.
Average Rents at Purchase: $919
Average Rents Post-Rehab: $2,530 (this number is actually low because the one tenant that refused to leave was paying less than $750 per month. Had we been able to vacate and renovate this unit, average rents would have climbed to $2,933.)
Following completion of the remodel and stabilization we marketed the property for sale and found a buyer within three weeks of marketing. We closed escrow 18-months after purchase for $2,127,500, realizing an 84% return on equity.
