Investment Type:
3 unit brick multifamily that will be a rental property.
Overview of Building:
23 Warwick street is a 3 unit brownstone located in Roxbury. The building was in rough shape, and will undergo a full gut renovation that will include brand new framing, plumbing, electrical, and all finish work. The location is stellar, as it is right next to the Ruggles T Stop and Northeastern University Campus on the Roxbury/South End line. Due to the location, we expect strong student and young professional demand once the units are ready to be rented.
Deal Sourcing:
This deal had a very long sale cycle. We had initially heard of the building through a local broker when it was off market in late 2017. We had signed a purchase and sales with the seller, but later found out that the building had some serious title issues. Almost two years later, the seller called us back informing us she had taken care of these title issues but was putting the building on the market with a broker. We quickly got in touch with the listing broker and secured the deal before too many parties became involved.
Financials and Capital Structure:
Purchase price: $960,000
Construction Loan: $250,000
Bank Loan Amount: $970,000
Equity Contribution: $240,000
A local community lender was brought in as the lender on the deal, providing 75% of the acquisition and 100% of the construction funds with favorable terms (including interest only year 1 during construction/stabilization). Capital partners were brought in the deal as equity partners.
Immediate Strategy:
The building will undergo a full gut renovation, which will include new framing, plumbing, electrical, carpentry, and finishes. The roof of the building was in good condition so it will not need to be fully replaced (and since this will be a rental building and not a condo building, we can save this expense) and since the exterior is brick, there will be no need for new siding (some minor brick repointing will be done).
Once the construction aspect is finished, the building will be rented out, with each unit containing 2 bedrooms and 1 bathroom. Key rental amenities will be included, including central air, in-unit laundry, and basement storage. Timing will be key with rentals, as this neighborhood’s rental market is on a 9/1 lease cycle, meaning we will need to be done with renovations by July latest to ensure potential tenants have time to walk the finished product prior to lease signing.
Long-Term Strategy:
We are predicting that the units will rent out for $2850-$2950 per month. Using a cap rate calculation along with an estimate of operating expenses (30% operating expense margin as a soft rule of thumb), we estimate the building will be appraised at around $1.45M to $1.5M.
Given our all in cost of about $1,280,000 ($960,000 purchase, $250,000 construction, $70,000 soft costs), we will have built in about ~$200,000 of equity from the project. Additionally, once stabilized, the building should be cash-flowing at about $1,300 per month after all operating expenses (maintenance budget, vacancy budget, snow removal, property management, and PITI).
Within 2 years of stabilization, depending on exactly how the real estate market around Boston continues to grow, we project a cash out refinance that will allow us to return capital to our equity investors.
More Info:
Check out the video we made for this project for more info:
