How to Reposition an Apartment Complex and Add $2,000,000 in Value in 12 Months

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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).

Hammond Pictures

Before

hammond pool, old pic

image2-2

After

IMG_8759 IMG_8756 image1.PNG image1 hammond2

hammond1

Stay Tuned

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.

Your Task

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!

About Author

gino barbaro

Gino Barbaro is a father of six and the co-founder of Jake & Gino LLC, a real estate education company focused on multifamily investing. He has grown his portfolio to 674 units in three years and is the best-selling author of "Wheelbarrow Profits".

33 Comments

  1. gino barbaro

    Thanks Timothy,
    I forgot to mention that this would not have been accomplished without an excellent team. My partner has created systems to run our management company and we have great employees. It has taken a while to get there, but it is one of the most important things for long term success.
    Gino

  2. Sarah Donatelli

    Timothy,
    Thank you for the article! Your path toward repositioning is outlined clearly here and emphasizes the importance of planning and persistence. I appreciate that you included specific numbers in your deal analysis, purchase, and specific value-adds for the property. Great stuff, and I’ll definitely use it in the future. Your new property looks great-best of luck in the future!
    Sarah

  3. gino barbaro

    Hi Chudi
    The owners signed an exclusivity contract with the cable company 2 months before we closed on the deal. The contract is multi year and we were credited with whatever the length of the contract is during our ownership. If we sell before the contract expires, the buyers can request a credit for the remaining portion.
    On our last deal, the sellers did not credit us the cable money that was due. We still closed on the deal because it was a great deal. It is your call if you want to squash a deal for this. We decided it was against our best interest
    Gino

  4. Curt Smith

    hi Gino, B class in my MF education means expense ratio of 40% to 50%, C-D expense ratio of 60% plus, and this deal was a going in 67% 70/103. What was in the expenses that is running so high?

    NOI being 103k – 70k x 12 = $396k and 7% cap makes for $5.6M value. Where’s my error?

  5. Chris Newman

    Great stuff, Gino!

    I once operated one of the few privately-owned public dog parks in the country and think that you may be underestimating the value of the dog park in raising values: This is a very important resource for serious dog owners and gives them a strong reason to prefer your complex, rather than someone else’s. So, Demand goes up, quickly followed by prices. If the space is available on the site, creating a dog park is well worth the cost of a bit of fencing.

    Although I didn’t see signs on the gates, it looks like the dog park is split up into two different areas. One for “Active Dogs” and one for “Quiet and Small Dogs.” This is usually about the only source of conflict in dog parks, so letting people self-select the energy level does a good job of keeping things peaceful.

    A couple of ideas:

    If the park dynamic seems to need some active management (of clueless owners), consider launching a “Docent” program of volunteers who are empowered to act as referees. There are usually a few of these in any group and they’re often self-appointed guides. I did this and gave them gold bone-shaped badges that were inscribed with the word “Docent.” It cost me $30 for a dozen badges.

    When you mow the grass, consider only mowing pathways in a maze configuration, with tall grass and bushes in-between. Not only does this save on mowing labor, the tall grass gives the dogs pathways to chase each other through, which makes for great spectator sport.

    Looking forward to more of your posts. 🙂

  6. gino barbaro

    Hi Curt
    If you’re running a C property with 60% plus expense, I guarantee you won’t be owning that building very long. 50% expense is a rule of thumb. It costs us between 3600-4000 per unit in expenses.
    The 70k expense was the seller and a huge value play for us. There were 2 partners, one silent and the other was charging high management and had unusually high operating expenses, one of the reasons why the other owner wanted to sell.
    We knew that we could dramatically reduce the expenses. Our expenses are around 55k per month, a bit higher because we just took over and we are fixing some additional deferred maintenance.
    50,000 NOI per month, 600000 NOI per year=8.5 million value. The income will increase over next 12 months and expenses will increase gradually due to higher management fees from higher income.
    We know what expenses are in our market and that has allowed us to analyze deals and locate these value adds.
    Gino

  7. gino barbaro

    Thanks Chris!
    I will pass on your suggestions. I did not have enough experience with instituting a dog park. I just did not want to assume the effect of the park to draw in new tenants, so I did not expand too much. I’m glad you affirmed my assumption. The signs are up since the pictures.
    My partner told me that Knoxville loves their pets, so offering one seemed like a no brainer
    Gino

  8. gino barbaro

    Hi Dave
    We have yet to syndicate. I have one more big deal in me before syndication. I have used refi money to grow. If I was syndicating, my time horizon would be 3-5 years, I would refinance and see if investors wanted to be cashed out of the deal or stay in and continue. If I couldn’t refinance, I would have to sell and split the proceeds with the investors, with the investors being paid first.

  9. Mike Dymski

    Great article and nice work. Funding the re-position with closing proceeds and without bridge funding is awesome. If you are willing, please share your financing terms and refi plan to get that hard earned value add out…totally understand if that is confidential.

  10. gino barbaro

    Hey Mike,
    We got great terms from our portfolio bank, 15% down (everyone says you can’t do that, we just asked and the bank wanted the business), 12 months interest only, (We are cash flowing like crazy), 25 yr amort, 4.25%. I think after 12 months we should have no problem going to Fannie with this property. We want to get a 30 yr amort, 10 yr term, and rates should be in the low 4s. I think the property will be worth around 9 million, due to much higher income, and even if cap rates stay where they are, around 7 for a B asset. Fannie usually wants between 20-25% down with some money put aside as cap ex. We should not not very much cap ex, maybe around 100,000.
    If I could buy one property like this per year, I would never have to syndicate or use my own money. I would just keep using the refi money as the down payment.
    Even with the higher mortgage amount, the property will still cash flow a lot because of the 30 yr amort.
    We got lucky with the property because the sellers wanted to sell, and we identified all of the value adds.
    Gino

    • gino barbaro

      Hi Ward
      We have increased new move-ins $50, and once reposition is complete, we will increase an additional 50.
      I think it is partly the repositioning, partly the market in general, and partly the fact that they were below market when we took over.

  11. Mike Dymski

    Perfect, thanks. How do you balance and maintain your relationship with the bank when and if you take the debt to Fannie? You may be doing enough with them that it’s not problematic.

    Did you happen to structure the original financing with a low prepayment penalty in anticipation of a quick turn to agency debt?

    • gino barbaro

      We have no prepayment penalty on this loan.
      On our third refi, we tried to go CMBS because we wanted non-recourse. They jerked us around for about 8 months until this portfolio bank came in with great terms and an even better appraisal. He waived the prepayment on the loan and refinanced it for us.
      If you do have a prepayment, it might be worth paying it to refinance. You can always try to refi with same bank and have them waive.
      Sometimes, some assets can go to Fannie. Try to go to a portfolio that will give good terms. This particular deal is right in Fannie’s wheelhouse, all on one parcel, B asset, stable, shows well. We want Fannies because of longer term, lower rate and non-recourse, but sometimes it is hard to get a 2 million dollar jump in value in only 12 months, even though the numbers dictate. The portfolio lender understands the market better and has more flexibility

  12. Closing next month on a 24 plex C building and had many of the same thoughts. Hoping I am on the right track. Still feeling new to larger deals and don’t want to make any mistakes. Don’t have a lot of outdoor space to work with, but thought a small dog area with a few grills would be nice. We are replacing all windows which the tenants will love and putting in new high end boilers with hot water side arms. I believe all this will reduce costs and increase rents along with length of stay. Might even move me into the B category?

    Mike

    • gino barbaro

      Hi Mike
      You will make mistakes. That’s life. That’s how we learn. The fact that you jumped into a 24 unit is fantastic. Document everything you do and the next deal will be a little bit easier. Outdoor improvements are great. Create a community.

  13. Sergio A.

    Hi Gino,

    Great article and congrats on the project! Couple of quick questions; 1) How do you handle value-add opportunities when the upgrade opportunities are to the units themselves and there are existing tenants? 2) Is your financing being done under your name personally, or LLC? We are doing syndications and get 30 years amortizing loans under an LP with 25% down and 6% APR…would love to get your rates.

    Thanks,
    Sergio

  14. gino barbaro

    The debt is personally guaranteed. Banks all want personal guarantees. That’s why we are looking to go to Fannie to refi and go to non-recourse. An LLC is for liability.
    We upgrade the units as they are vacated or vacant. We took over with about 10 vacancies and through attrition lost a few more the first couple of months. We work on them as they come up. It doesn’t crush our budget and gives us the ability to see if the plan is working and where the rent rate should be.
    We are basically all full right now. Most experts would say that our rates should be raised with no vacancies. We try to be methodical and only bump a few per month, the ones that are coming off lease.

    • Sergio A.

      Thanks for the quick reply. I guess I didn’t ask my loan question correctly, but after I thought about it the answer was obvious in that you are getting commercial loans with a personal guarantee. All of our deals have bee 2-4 unit MF, so have you found the size of the deal to contribute to the rates your getting?

      My other question was in general about unit upgrades, but mostly on value add properties that need to be re-positioned and have tenants that have been in the under-market units for a long long time. I’m not one to displace people, so think of it as a catch 22.

      Thanks again,
      Sergio

      • gino barbaro

        I used to see it as displacing tenants, but then again i was not viewing it as a business. Just remember when the rental market gets soft and you have to offer concessions or drop your rates, it is tough on the owner. The tenant has the option to go look into the market, and one thing is certain. They know to the $$ amount how much the market rent is. Just make sure you offer a quality product to the tenant

        • Sergio A.

          True, but we have also run into challenges with inheriting bad leases that have no escape until they run their course. Thanks

  15. leo Khmelniker

    Gino,

    Have you looked into the HUD FHA loans?

    35 year amortization, non-recourse sounds very attractive – especially if they’re flexible and offer an interest only period to assist with the stabilization process.

    Best, Leo

  16. David Alvarado

    Phenomenal financing terms, but I know CMBS has its perks. I do loan review/consulting for b piece buyers, on the securitization side and have seen product like this come across my desk with strong terms. Good stories go a long way if you have the relationships, but I know we like to see some skin in the game. Great work!

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