76-unit building Diary

[Mo Karney]

So, this is one of my first LARGE out of state deals. I'm based out of NE but the problem is that class C properties have been trading at sub 6.5% cap and north of $65,000/door which is insane. These same buildings were exchanging hands at $40-$50k a door.

Anyways, back to this building.

I ended up going into contract on this building in late December of 2019. Here is the macro view details on the property:

Deal Facts

• Built 1985
  
• 76 units total (68 1BRs/6 2BRs/2 Studios)
• ~40,000 sq. feet 

Purchase Price: $2,900,000 (I own 50% of the property and the other 50% was investors. I did get an assignment fee so my 50% was as if the building was valued at $2.1M) 

Down Payment + Closing + Misc. Expenses: $775,000

Financing: 25% Conventional Loan

Pictures (since everyone loves these!):

Info:

Here is the T-12 from 2019:

2019 PnL: NOI of $202,000 on $448,000 on gross rents

The monthly NOI for 2020 so far has been right at $22k-$24k/mo.

Our gameplan for this building is to get the rents up because we have a lot of grandfathered tenants. The final rents should be:

6 Studios at $550 per month = $3,300

68 1BR at $600 per month = $40,800

6 2BR at $650 per month = $3,900

Total Monthly Rents = $45,000 x .92 = $41,500

Our goal is to bring the NOI to a consistent $25,000 per month meaning we run it at a 36% expense ratio and we have done that at our other buildings, however those were much smaller. (8 and 12 unit buildings)

We have an onsite property manager that is amazing. He's paid $2,400 per month and does an amazing job screening the tenants, turning units quickly and is just on top of things. He takes care of the property like his own and it shows. We also have a live-in handyman that is given a discounted rate on rent just to keep an eye on things overnight if a leaky pipe pops up or something. He does handyman stuff turning units such as replace flooring and etc. at $12/hr just part-time. 

Rather than broker out the management and pay 7.5% on the 500k gross rents, we are able to get a much higher quality management by keeping it in house. We have about 50 units left to install flooring at about $600 per unit, and another $150 for paint and another $250 for misc. touch ups. All in the unit CAPEX over 2020 is expected to be $50,000 in order to bring rents to market value or above market value by renting out blocks of apartments to local housing authorities or churches or charities in order to maximize rent while also having a stable tenant base. The other CAPEX is some landscaping, exterior paint, relocating trash areas and fencing off the property line. This exterior CAPEX is expected to be another $50,000.

We are CF+ now, for the month of March, factoring in pro-rated rents, out NOI is $20,000. April will be our first full month of ownership so will post those numbers as we go.

The end exit for the plan is to again, get the gross rents to $500,000 which should be doable as it's on track right now for $488,000+. Assuming a 40% expense cost, that's an NOI of $300,000/yr or $25,000 per month. Our end goal is to sell the property at a 6.5% cap rate which is $4.8M.

If anyone has any questions, would be glad to answer them.