I am thinking of investing in a syndication that is buying a 157 unit apartment project located at 3117 S 192nd St. in SeaTac, WA 98188.
It appears the property last sold in 2015 for $1.8Mn….the syndicators now plan to buy this property at a price that is about 60% higher and around 10.8X trailing 12 months gross rental income or 9.7X gross income projected over the next 12 months.
They plan to renovate the units and increase gross rental income by 11-13% in each of the next two years and then level off at 3% annual rental growth thereafter. There does not appear to be room for reduction in operating expenses.
I am doing my own due diligence but would also like feedback from others in the local area as to what they think of the location, the property and prospects continued growth in the area and for increasing rents. Do you think the local market can support $1100 for a studio, $1500 for one bedroom, and $1775 for 2 bedroom units?
Also, what would be a reasonable expense ratio (operating expenses/total revenue) and cap rate be?
Thanks in advance for your input.
The cap rate and reversion cap rate was manipulated to artificially raise the total returns up by 30%.
Those proposed rental rates seem a bit high for SeaTac. There have been huge rent hikes in Seattle and surround areas over the past few years, but it is still area-specific. SeaTac is not the nicest suburb of Seattle. As the name suggests, it’s right by the airport and is ~45 min to 1 hr commute to Seattle.
A quick Craigslist search for housing shows a 1br at $1000, a 2br at $1500, and a 3br at $1600. These may not be representative of the entire market, but your potential renter pool is probably price shopping too.
I’d recommend digging into SeaTac rents and see if what they’re proposing is actually feasible.
@David S. You can use rentometer and/or call local realtors to gauge the current market rents for the area. They do sound to be on the higher side and a bit stretched out.
Good catch. When evaluating a syndication, always look at the projections to ensure they are conservative in nature!
Thanks to all who have commented so far!
@Lane Kawaoka . Not sure about your comment re reversion cap rate. can you please elaborate?
@Reed Kelly . I also thought SeaTac had a reputation as being "blue collarish" but it reportedly is right in the middle of Seattle and Tacoma offering great path to progress and easy commute to Seattle (via rapid transit)....Alaska Air's HQ is right next to property and there are massive expansion plans, which looks to be a plus...On the other hand, I cannot help wondereing how many potential tenants want to next to an airline construction activity and a casino. Yet, 10% of the units have already been remodeled and they are reportedly getting the rents.
@Alina Trigub . Thanks for the tip on rentometer. Have you ever come across a syndication where projections are conservative in nature?
@David S. Yes, I have seen a number of syndications where the calculations are conservative. A lot depends on the strategy that a particular person is implementing and on the a syndicator as well.
Feel free to PM me if you'd like to discuss it further.
@David S. Looks like you've received some great feedback thus far. I would add that if you don't know the answers to the questions like acceptable cap rates, reversion caps, expense ratios, etc than you haven't personally underwritten enough deals. Unless you're working with someone you trust (via personal network/relationship) I would encourage you to underwrite more deals before participating in one.
It's 15 min walk to the angle lake light rail station. Its also next to angle lake park/angle lake which is pretty nice. The park is the only public access to the lake. I've heard there is no other way to access the lake besides those who live on the lakefront.
You've got two good rent comps VERY CLOSE to your subject property. the hanover apts, and landing at angle lake. About $1250 for 1bd and $1500 for 2bd is the going rate at this time but depends on finishes used for the renovation.
You should talk to more people about the neighbhorhoods in Seattle. SeaTac is like the armpit of Seattle. When I show houses in the 250k range (very low range), we're most likely going to SeaTac. There is no where else close to Seattle where you can buy a house that cheap except for the skyway area where you'll find some 2bd/3bd homes for 300k.
Another thought to add - do your due diligence and check for new building permits in the area. The angle lake light rail station is one of the newer stations so I'd be curious if the station will bring in lots of developer $. Think transit-oriented development.
It is a nice building in a crappy neighborhood. It will be hard to force any appreciation there IMO. Do some in depth due diligence.
Appreciation has been 100K on my SFH in SeaTac in the last year but rents have gone down....
Originally posted by @David S. :
A nice building in the armpit of SeaTac with rents dropping and lots of rental incentives in Seattle....hmmm...could be tough to raise rents and therefore appreciation in this scenario.
Yah, that's why I said rents have gone down on that SeaTac SFR I own.