Student Housing BRRRR

[Hooman Ghaffari]

This is a project I completed last year - a student housing BRRRR apartment building near the University of Southern California (USC). This was a great success and I wanted to share the story of what happened to inspire others to do the same. This is an L.A. property, so the values and rents may seem absolutely insane if you're not from here; but if you look at it on a percentage gain basis, it may be repeated elsewhere for less money and similar returns.

Some background on myself: I am a full-time real estate investor and founder of Iconic Capital Group. I syndicate apartment projects here in Southern California, and focus on value-add and opportunistic plays. I am new to BP, and am looking to expand my network here.

A couple of years back I was going to a meeting at USC and had some time to kill, so I drove the neighborhood around it. For those of you who are not familiar with USC, it is located in the heart of one of LA's worst neighborhoods - full of crime and overall a very low demographic. The neighborhood around the university actually has a private patrol that is run and paid for by the university - students almost exclusively insist on living in this patrol zone. The property I purchased, a 6-unit apartment building with all 2-bedroom units, fell in a portion of the zone that had just been expanded into by the patrols, so it was definitely a neighborhood in transition. The property was listed by an agent who lived 90-miles away and the owners were absentee as well. The property had major deferred maintenance and needed a new roof, new plumbing, new electrical, and all new interiors.

Numbers:

List Price: $1,400,000

Purchase Price: $1,294,360

Rehab Budget: $310,000

Loan: $802,500 (Chase purchase money loan)

Total Equity Raise: $925,000

When I acquired the property, it was comprised of six two-bedroom/one-bathroom units (total of 12 bedrooms). Bedrooms are the key income metric for student housing. Following years of inefficient management, the property suffered from significant deferred maintenance and neglect.

My experience in the USC market led me to believe that the property was well-suited for student housing use, and I worked with our architects and engineers to re-design the building, adding bedrooms and improving common spaces, to lead to increased rental income. I reconfigured unit floor plans to increase the overall bedroom count from 12 to 18 bedrooms.

Property renovations included comprehensive work to both interiors and the exterior of the property, as well as upgrades to key building components. Unit interiors were upgraded with all-new flooring, paint, recessed lighting, and decor. Kitchens were updated with new custom cabinetry and quartz counter tops, stainless steel appliances, and professional-grade fixtures. Bathrooms received new floor and wall tiling, large walk-in showers, and modern-style floating vanities, and modern design fixtures. The exterior of the property was improved with new stucco and all-new energy efficient windows, as well as improved lighting and security gates. Key components of the building were also updated, with new air conditioning and heating units, completely updated electrical main and sub-panels and new high-grade wiring, providing tenants with ample electrical service. All new copper plumbing and ABS drain systems were also installed. The renovation process was completed over a 90-day process.

Average Rents at Purchase: $1,550/month

Average Post-Rehab Rents: $3,250/month

Following stabilization, I refinanced the property. I received an appraised value of $3,200,000 (147% increase), and obtained a cash-out refinance that returned 102% of the initial investment. No money left in the deal and it it generates excellent cash flows consistently. 

The property continues to operate smoothly and is fully occupied year-round - I lease up units in January-February for August move-ins, so it is fully leased 7 months in advance. Here are some images:

[Patrick Fraire]

@Hooman Ghaffari

I'm typically listening to a horror story when I hear about an investment that included this much rehab. You killed it on this. How many partners did you have on this deal? When and how did you realize this property was in the expanded patrol zone? Were you already analyzing the deal when you gained this knowledge? Did you involve the architects/contractors before you made your offer? If so how did you pay them to do a preliminary design/cost proposal? If not how did you make it worth their time?

Did you get the added bedrooms approved by the city of LA? Did the city send an inspector out to check the contractors work? Did you have any issues during the construction? Sorry for the slew of questions. This is the type of post that makes me crack open a modelo and start looking for deals on the mls. 

Since college, I always felt there was opportunities in student housing. I have struggled to find a partner that is not afraid of students destroying the property, throwing parties, etc. Returns like this are exactly how the higher risk of student housing (if there even is one) can yield a higher return. Thank you for posting. I needed this.