Posted 5 months ago

Expectations on Re-Positioning a Property

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I was helping an investor the other day, just really take a look at a property that he actually has under contract and you know, this isn't a call the investor out. It was just some points that I made and there was a pretty aggressive, rent bump year one and he was ultimately assuming that he was just going to capture all of the rent bump all by year one, that he would be able to turn all the units or 50 or so units and be able to renovate all those units and turn all those units and then capture all of those rent pumps.

Sounds great, great plan, but in real life, when you're turning a building, ultimately that plan can't always happen unless you're going to vacate the building day one and you're on month a month leases. However, this is a building it was quote unquote stabilized has four vacant units and everyone's on your leases. So ultimately his plan to align this is going to be difficult to accomplish because how many units can be possibly be turning a month to achieve this where he's a factoring in that he's going to capture almost a $200 rent bump throughout the year when ultimately he may not even get to a third of those units in year one. And it may take him all the way through year two, possibly even the year three by the time he's able to turn all of these units to accomplish this.

And if you factor that into your underwriting and factor that into how you're looking at your repositioning phase, well that's going to grossly change your returns that you're anticipating. Because instead of capturing that in year one, that's going to factor all the way throughout. And those lower rent that you're going to be capturing day one based on just current tenants and just with the operation of the project is well, you're still going to have that same expense structure that's going to be throughout. So you're going to have your same spend structure but lower rents instead of having that huge rent bump that's going to wash out that expense structure. So for yourself when you are taking on a property is it's important for you to just really be honest and you can get this approach from just thinking about, well, okay, if I'm going to have construction going on, how much of that construction can actually get accomplished?

Does any of this require permits? Does these unit turns. If management property manager is going to handle this in house and they have the capability to turn five, 10, 20, 30 units, in a month and a two months in a year was their capability and passed that, what does it take to, to lease a property? Because if their turn to go in there and turn a unit takes a week or two weeks, well are they able to pre-leased or get those units leased prior or are they actually need another week to three? What's it like in that market? So if you're trying to turn three, four, or five units a month, well okay that leads, four units a month times 12 months, that's 50 across a year. But you're not going to capture all that in your warmup. It takes them two to three weeks to be able to lease a unit beyond that.

And what kind of lease specials, concessions, how's all that kind of play into your process. So working with your team to understand what is actually going to be possible for you accomplish is just so important. So you can make sure that you have in your mindset in your capabilities and in your underwriting the best process for you to be able to succeed and also made the best process for you to tell your investors what could, what can and will happen. Because you don't want to come out with a story that we're going to achieve these massive rent bumps. We're going to turn a hundred percent of the units in year one and be blindsided when you turn a third of them and you have half the building that you're, or more that's still based on just current rents. So be true to yourself. Get some guidance, make sure you're following through on what is actually possible to be accomplished.

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