Apartment Re- Positioning

[Al Cronemiller]

Huge profits with Apartment repositioning

Apartments seem to be on the top of the list for commercial investors. There a smart investment as you can tell by the players in the game. Just do your homework first.

Apartment repositioning is when you purchase a complex that is under preforming in some or all areas. The manager might not have a clue how to manage, let alone build a community where people want to live. The buildings and grounds may show disrepair and vacancy might be high.

The first thing I must have is at least a C complex in a C area or better. I want the war zones a good distance away. With that being said let’s start this article after we purchase a complex.

Fire the manager! Your new manager needs to be able to wear a few hats. Your success will hinge on manager selection and a system to manage your managers.

You will want to purchase a complex that has 30 units or more. This is the point where the complex will support an onsite manager. This person is not only smart but really likes people and has a great personality. You are laying the foundation of building a community people want to live in. Everyone wants to feel safe, live in a nice place and enjoy the management.

This move increases you tenant retention numbers, make ready’s are a leading cost in the maintenance section of the balance sheet.

It would also be a big plus if the new management company had repositioning experience but that might be asking for a bunch. I would prefer to manage my own project.

If you purchase an apartment building that is only 65 or 70 percent occupied (and that's what we are looking for) the chances of the NOI being much higher than the mortgage payment are not too good. This means that you will need funds for all repairs, and money to support the NOI when vacancy increases during project.

When repositioning an apartment complex you are also repositioning the tenant base. Some will not want to pay your higher rents, some may be people you don’t want there. Your income will decrease before it increases. Expect a reposition project to take 2 years, not for a positive cash flow but changing the neighborhood’s perception of the place, this doesn’t happen overnight.

I normally look at a project in 3 main areas:

1.Management

2.Building upgrade’s, repairs and landscaping

3.Reposition tenant base

Your tenant base is very important, this will be the people that don’t want to move and that tell their friends what a nice place they live in (free advertising). Building a community is one of your main goals.

When someone moves out you run the expense of a make ready, in other words your maintenance person will need to paint, repair and clean. Whatever it takes it to be rentable. This is big expense with many apartment complexes.

Remember, you have bought a 30 plus unit complex and it needs a bunch of repairs completed so we can raise the rents. Just don’t go into this blindly. There is a law that is referred to as the 80/20 rule. With repairs to an apartment complex 20% of the repairs will produce 80% of the revenue.

With this said just be careful where you put your money, once you have great cash flow some of the other things can be addressed.

Increase revenue and decrease expenses is the name of the game.

One thing that makes this so appealing is that you money is used for well leveraged down payments (unless we can get an owner second) carrying costs and repositioning funds. When looked at this from a cash on cash return, the returns are staggering.

Keep in mind most banks won’t lend on a place like this so your creative financing skills will have to come into place. Assumable loan, owner first, owner contract whatever it takes to bring the deal together.

Good Luck!