Value Add Case Study (2 Apartment Communities)

[Ben Leybovich]

@Sam Grooms and I syndicate apartments in Phoenix. IN that I am sure you are hearing lots of different things from lots of different people, which can confuse and paralyze the mind, I thought a bit of concrete good news might be welcome.

I am sure at some point I'll write something for the blog, but below are some numbers you might find interesting, reassuring, or entertaining.

VALUE ADD CASE STUDY #1 - Canyon 35 Apartments

Purchased 20 months ago

- 98 Units in Phoenix.

- Purchase Price $8.15M

- Renovation Budget $1.5M.

- In-place Income $60,000/mo.

Current Status

- Revenue $86,000

- T-12 OpEx $430,000 ($36,000/month)

- Community Reno complete

- 49 Interiors Complete.

- 1 interior in process (pre-leased)

- Remaining LTL $14,000

Upon Completion

- Projected Income $100,000

- T-12 OpEx $36,000

- Projected NOI $64,000Annual ($765,000 annually)

Valuation 

- At 5 cap: $15.3M

- At 5.5 cap: $13.9M

- At 6 cap: $12.75M

By the time we've recovered the remaining units (12 months or less) and materialized the $14,000 of LTL, we will have increased the NOI from $25,460 at acquisition to over $60,000. This will be finished in under 3 years, unless we sell the asset before as a proven value add. April revenue was 105% of March.

VALUE ADD CAS STUDY #2 - Haven at South Mountain Apartments

Purchased 11 months ago

- 117 Units in Phoenix

- Purchase Price $10.75M

- Renovation Budget $1.5M

- In-place Income $90,000/mo.

Current Status

- Revenue $107,000T

- 12 OpEx $470,000 ($40,000/month)

- Community Reno complete

- 61 Interiors Complete

- 6 interiors in process (pre-leased)

- Remaining LTL $19,000Forced 

- Vacancy $4,500 (due to Reno)

Upon Completion 

- Projected Income $135,000

- OpEx $40,000

- NOI $95,000 (Annual NOI $1.14M)

Valuation 

- At 5 cap: $22.5M

- At 5.5 cap $20.5M

- At 6 cap $19M

CONCLUSION

Guys, both of these are obviously proven value adds. We are at this moment, in April of 2020 in the middle of the COVID-19 pandemic leasing these units and getting these rents. Furthermore, none of these numbers include any future rent growth, which we will have.

A good deal is a good deal. A good strategy is a good strategy. In any environment. 

Good luck to all of you, and please take the news with a grain of salt. At any time someone is making money. Why not you...?!

[Ben Leybovich]

Originally posted by @Christopher B.:

@Ben Leybovich

That's great news. Very nice. I'm looking forward to details. What type of renovations did you do? Only renovations, or other things to cut expenses?

 Chris, cutting expenses is a myth by and large. I know it's sexy to talk about on BP, but it rarely is possible. Furthermore, it doesn't do much. Let me give you an example.

HMS is 117 units and runs about $470,000 OpEx on T-12, so basically $39,000 per month. If I were to find a way to lower costs by 10%, which would be extraordinarily hard to do without cannibalizing some part of operations that would negatively impact performance, I'd save about $4,000 per month.

This is savings of $48,000 per year that would flow to the NOI. Capitalized at 5% cap this would create about $1M of additional value, which sounds great. The problem is that I'd have to hire a cheaper manager, cheaper maintenance, cut marketing, do less remodeling, etc. I'd have to find these savings somewhere, right?

On the other hand, a better fixed up unit, that is maintained by a better maintenance tech and represented by a better leasing agent with more marketing budget allows me to lift rents by $350. For a 117-unit property, this represents $40,000 of additional monthly income, or almost $500,000 per year. Capitalized at the same 5% cap this additional income represents $10M of value. I could not do this with less budget.

So, the real question is: Do I want to race to the bottom, cut corners, and hopefully pick up $1M, or do I want to run the property as it should be run, make it the best asset in a 3-mile radius, and potentially pick up $10M of value.

Does this make sense?

We install new cabinets, granite, stainless appliances. Build offices. Build gyms. Etc. We are vertically integrated and do interior construction completely in-house.