Flipping a 20 Unit Apt Complex

Back in November, my company acquired a 20 unit apartment complex in Davenport, IA. The goal of this property was to acquire it at a steep discount, remove the non-qualified tenants, make improvements, raise rents, and lease up. So far after a few months of ownership, the plan is right on track.

Acquisition

My company acquired this property for $750,000. When we bought it, this was a C Class property that we wanted to bring up to a B- through improvements and improving the tenant class. In terms of improvements, we calculated around $150,000 to be put into the units. Our first action was to raise rents at least $100 per unit. Within one month, this decreased our occupancy by 60% and we were able to go in and complete renovations to a good portion of the units. Our rehab teams added condo-style finishes to the units (new kitchens and baths, brushed nickel hardware and fixtures, and stainless appliances). We also added new flooring and paint throughout, and transformed the common areas. The plan was to transform a rundown property and make people actually want to live here. As you can see from the photos below, the units were not in the best shape.

Financials

This property turned out to be a great buy for several reasons. Any time we look at a deal, I make sure to conservatively underwrite it. This means that if there are any mistakes in the rehab, you're not going to have a big problem and kill your returns. Another way I do this is to understate rents and overstate expenses when I'm running the numbers through my model. In tight markets like today, you must stick to doing this to make sure you don't compromise your buying criteria. It's easy to overpay when there is a shortage of deals.

On this particular deal, we estimated the gross rents after the reposition to be around $193,000. At a 42% expense ratio, our net operating income would be around $111,000. After this property is stabilized, it will be just under a 12% cap rate. This is obviously a very good deal and one that is tough to come by. It did not come easy though, I was negotiating this deal for 6 months. The even more attractive part was we secured interest-only financing up until the time the rehab is done. Our projected cash-on-cash return for this property is around 24%.

Stabilization

The rehab is projected to be repositioned completed around June. That's when we anticipate everything being leased up at market rent and cash flowing very nicely. The rehab turned out very nice and it will lease up very quickly. With our in-house property management team and leasing agent, we will most likely be ahead of schedule on this project.

At an 8.5% market cap, the property will be valued at around $1,300,000. So we will have created around $400,000 in equity after the property is fully stabilized. Not bad for a quick turnaround for a 7-month turnaround!