When Jake and I first laid eyes upon Sunflower apartments, it was love at first sight. We both swore that we would never fall in love with another investment property, but this one was different. It was very well maintained, had a good tenant base, great location, was running high expenses and below market rents. It had the ingredients for a solid repositioning with minimal risk.
The asset was purchased with a 10% cash on cash return and an 8 cap, our standard criteria when underwriting an asset. These figures were based on actual performance, and for a B property in our market were excellent terms. At the time, B properties were trading for a 7 cap, especially assets in the shape and location of this one.
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Planning & Adding Value
The motivation of the owners allowed us to purchase the asset with favorable terms. Not to mention the fact that the group that put the complex under contract ahead of us had their offer rejected due to re-trading during the due diligence phase. This left the seller scrambling to secure a new buyer.
It was a long, drawn out process, but with patience and persistence, we overcame two groups ahead of us and purchased the asset with very favorable terms. What intrigued us about this property was not the performance of the complex, but the value adds that we noticed as soon as we first inspected the property. We settled on a $7,100,000 purchase price for the 156-unit complex.
We are going to focus on these value adds and demonstrate with planning and foresight how you can explode the value of your asset by following these simple steps. When you inspect a property, try to view it with an open mind and leave no stone unturned. I have noticed that most “experts” only view things from their perspective and rarely see things from a different angle. Beginners, on the other hand, don’t know any better and will try anything.
Related: 3 Simple Steps to Increase the Value of Your Multifamily Property
Repositioning a Property Successfully
The key to repositioning a property is to assemble a list with all possible repairs/upgrades and estimate the costs of these upgrades. Establish a time horizon for the commencement and completion of the upgrades, and try to choose upgrades that will only increase revenue or decrease expenses.
I consider an amenity that will aid in the retention of a tenant as increasing the revenue. Some improvements are difficult to quantify monetarily, but if the tenants enjoy the amenity, it may persuade them to stay longer. For example, a dog park does not directly influence the income. However, if tenants enjoy the amenity, it will build a community atmosphere among the pet lovers and will go a long way toward pleasing the tenants. I will also avoid the cost of having to “turn” the apartment and the lost income due to vacancy.
Our goal with this reposition was to upgrade the amenities for the tenants and make the property more appealing to prospective renters. Most of our competition in the surrounding area had the amenities we were lacking. The amenities would also allow us to increase the below-market rents, while making it easier for our leasing agents to rent out any vacant units.
Upgrades to Consider
When repositioning a property, the investor has to take into account the property classification. Many of these upgrades would be ineffective in raising revenue with a C property. But with a B property, the tenant base expects more from the community and is willing and able to pay for these upgrades. There is no quicker way to go bankrupt than to spend money frivolously on upgrades that don’t raise revenue.
Here are the items we focused on when analyzing and developing our plan to breathe life into Sunflower a.k.a. The Hammond:
- Stain decks
- Pool rehab-fence/boardwalk/new grills
- Elaborate sun deck with louvered privacy walls
- New outdoor pool furniture
- New fitness center
- Rehab new laundry room below clubhouse
- Rehab office
- New dog park fence and benches
- New barbecue park
- New maintenance shed (old maintenance area became new laundry room)
- Rehab clubhouse, add security cameras
- Re-stripe parking lot
- Re-brand property with new signage (property renamed The Hammond)
- Paint shutters/awnings
- New website, added Facebook page
- Convert three laundry rooms into three new apartments (increase revenue by $2,000 per month)!
The Hammond’s Numbers
We were fortunate when we purchased the property. We closed on the middle of the month, which allowed us to receive around $50,000 in rents as a credit. The inspection yielded around $30,000 in minor repairs, for which the seller also gave us as a credit. They did not want to be bothered with performing these repairs. It was a win for us because we had our maintenance staff address these repairs after takeover.
We also received a $50,000 credit at closing from an exclusive cable contract that the seller had just signed with the cable company, and we were able to receive money from a laundry contract as well. In total, we received around $140,000 at closing, not including the security deposits. We had already assembled our repositioning plan and knew the funds at closing would be sufficient to address all of the work that was scheduled.
The income of the property when we assumed ownership was $103,000 per month, and the expenses were $70,000 per month. Within three short months, the income has increased to $112,000, and the expenses are holding steady, even with the jump in revenue. The combination of filling the vacant units and the rental increase to tenants who renew expired leases has led to this surge in income. We have also begun to maximize the Ratio Utility Billing System. Remember, we have yet to turn the three laundry units into apartments (another $2,000 in monthly revenue).
We are hoping (optimistically) that the fitness center will be finished within a few weeks. We are also planning to have the laundry units turned into apartments by the end of the summer. Our main goal was to change the perception of the property by implementing our plan and then to raise rents to market due to the new and improved amenities. We are on track to hit our target by the end of the year.
We project revenue to hit $120,000 per month by the end of 12 months’ operation, a gain of $200,000! We anticipate expenses to maintain at current levels due to our hands-on management style. If the NOI increases by $150,000, then the value will have surged by over $2,000,000 (assuming a 7 cap).
These are a few of the strategies that we implemented to increase occupancy:
- Created website to attract tenants
- Used apartments.com and rentlinx.com for advertising
- Delivered superior customer service to attract and retain existing tenants
- Built new amenities and rehabbed existing amenities
- Enhanced the appearance of the exterior of the property along with the interiors
- Rebranded the property with a new name and new signage; created a completely new image and feeling for the property
We will have a follow up article in three months to detail the progress and include pictures of the reposition.
Related: Investors: Believe Me, You CAN’T Afford Property Management. Here’s Why.
Locate an asset that is underperforming. Seek out the value adds on the property, such as:
- Poor management
- High expenses
- Ability to generate fees from pets, application, storage, RUBS (Ratio Utility Billing System), renter’s insurance, move-in fees, late fees, laundry revenue
- Properties that have not kept up with market rents
- Above normal vacancy that can be remedied with proper management
- Additional units that can be created to generate additional revenue (for example, at another one of our properties, we rehabbed an empty commercial space that sat vacant and turned it into a two-bedroom apartment that rented for $675 per month)
- C properties located in a B market that can be repositioned into a B property (a step up in class is a huge value-add that attracts a better tenant class that will pay a higher rent — this is the holy grail of repositioning)
Next, create a repositioning plan to solve all of the “problems” on the property. In this instance, the more problems you can solve, the more money you will make.
Finally, begin to underwrite the asset with actual figures, preferably the last 12 months of profit and loss. Fill out a Letter of Intent based on your underwriting and be persistent.
I would love to hear your story of a successful reposition. Please include pictures!
Leave your comments below!