I'm currently looking at an apartment complex in Lakewood, and am curious how it compares to Tacoma. I'm obviously not local to that area, so curious as to any feedback from locals or people familiar with the area. Does it operate as it's own city? What are the perceptions? It seems to be dominated by the joint military base.
Here's a link to my post in the multifamily forum to analyze the deal; any and all input is welcome and appreciated.
Hi @Pete M. This is so much like the deal I recently did in Shelton. Heres a link so you can see what we did and what you could expect here.
While I don’t prefer Lakewood to Tacoma, they are both neighborhood specific -and can serve you well.
I think the key to this deal is not what it currently is but what it should and can be. Yes, rents are WAY below market even for Lakewood. My 10 units put off $6100 the month I bought it (in Shelton!) and it is now at $9000/mo. Lakewood should be better, I think your $10k/mo is a valid assumption.
Hi Pete. I’m with @Curtis Bidwell . My wife and I actually put an offer in on this yesterday and just got word they went with another offer. Our offer was actually above asking. We have done a couple properties with this model and in each scenario, the purchase cap rate was not stellar, but you have to look at how much money will it take to get the property operating at peak performance. If you are able to raise rents with little rehab, and reduce costs without much money invested, you may think about being a little more competitive with your offer. We just look at what our all in will be, and if that will produce the returns we are looking for.
As for the Lakewood market, we have a 12 plex in the other side of I5 in Tillicum. This is definitely not the best area but we really like the way things are trending. We have many military tenants who are great. Since we went through our renovation, we have had great demand for our units from really solid tenants. We do get a lot of applications from less than favorable tenants, but we just hold out until we get the solid ones. So far, things are going great.
Best of luck!
@Curtis Bidwell Thanks for the input! The major difference I see with the example property you bought a couple years ago is the purchase price being less than half of what's being asked for this one. That means this one would be running at a loss for a while... which is where I'm wondering what should be expected.
@James Lusk Thanks as well. This one was wide open and out there, so I'm not surprised it's already gone! Would you have deemed it acceptable to have negative cash flow for potentially a year until you could raise the rents?
I've always heard to pay what the property is worth now, not what the seller thinks it could be worth; is that a myth in this market?
We had it calculated with a positive cash flow from the get go. Not great but still positive. Most the leases were month to month so we would be looking to increase rents right away. Month to month leases are good. They give you as the landlord, a lot of flexibility in terms of increasing rents or eliminating problem tenants. Then, we lock in year long leases.
I believe that people get too caught up on what the cap rate is, and you should only pay what the going rate is. Well, if someone else will pay more than that, then I guess that means that cap rate isn’t very accurate, right?! If you can find off market deals, you will have more control in the negotiations. Like I said before, I go for the lowest price I can, but know what my top end is to still hit my desired returns and don’t go above that.
Hopefully that all makes sense.
For an example, we purchased our 12 plex for $500k. This seems cheap, but based on the income at the time of of purchase, this was about a 4.5 cap. Nothing to brag about. We put 240k into a rehab, and raised rents from 375-450 up to 750-800 a unit. We also bill $50 per unit for utilities which the previous owners did not do. Now, we gross right around 10k and at a 7 cap (which is conservative) it is valued at over $1M. If we looked at it at the beginning strictly from a cap rate perspective, we most likely would have been stuck in a stalemate with the seller and missed out on an great opportunity.
@Pete M. True, However... the rest of the story is on page 5 of the link above. We refinanced with a $750k value in just 10 months -bringing us much closer in values. Today’s value is in excess of $1m and free cash flow is running $3k.
With the Lakewood property I could easily see it valued at $1.3m in less than a year and free cash flow (after all expenses) of $2500+/mo.
So, the bottom line is: are you willing to take a property that is underperforming, at an “inflated” cap rate (based on current rents) in order to create half a million dollars over the next year ... and you get $2500+/mo in perpetuity as it continues to grow in value!
The current market is not following traditional rules. But you can still create value with these types of properties, -and there are a lot of them out there! I was introduced to several this past week where the owners are in their 80’s and 90’s. They don’t keep rents up to market, and the properties are typically neglected. If you can create a willingness to sell, you can create a deal that benefits them, their heirs, and yourself.
@Pete M. - I agree with @James Lusk and also have a favorable opinion of Lakewood. My wife and I own a duplex in Tillicum and I’ve helped a couple investor clients purchase property in the area. It definitely still varies by neighborhood but we all seem to agree about the upward trajectory overall. When I drive the neighborhoods there is a noticeable difference compared to even just two years ago!
A quick word of caution with using rentometer for apartments. Be sure to filter rents specific to apartments. Then go and check out said apartments and determine what ammentities they have and how it compares to your building. You do not want to comp a C class building against an A or B class building without adjusting for the differences.
Good points from all. I didn't realize those units were on a monthly lease, which certainly makes raising the rents and removing problem tenants a much easier affair.
@James Lusk Would you be willing to share the numbers you ran for that property? I had it running at a hefty loss to begin with, assuming a sale price of $795k and 25% down.
Hey Pete. I would be glad to share. PM me and I will send it over!