Last week I closed on the purchase of a 129-unit apartment complex in Orlando, Florida. Below is the story of how my partners and I made that deal happen and how I think about the current Multifamily real estate market today.
In March, I received the below email from a broker I've done deals with in the past. Over the years we have become friends and he sent me this email.
The opportunity was an apartment complex that had been bought by the owner almost 17 years ago. Around 2008, they tore down the property to the studs with the intention of converting the property to condos and selling each unit individually. However, with the GFC in 2008/2009, that door quickly closed and they re-built the property as apartments. The beauty is that they didn't spare any expenses -- they built the property with a strong foundation of all concrete and created beautiful landscaping which makes the property have a resort-type vibe. The property was located in a beautiful and upscale neighborhood called Maitland, six miles north of Downtown Orlando. The current rents at the property were around $1,400 on average, but the competition in the area is charging anywhere from $1,700 - $2,200 per bedroom. These are the kinds of opportunities I love!
The first question you always want to deeply understand is why rents are so low compared to competitors -- don't owners like making money? What we found on this property is that the owners had a portfolio of 30,000 units across the U.S. and given that they had held this asset for so long, they didn't have any more capital expenditures reserves that they could use to re-invest in the property. Without getting too much into the details, when you have a fragmented investor base over the years it can be tough to call capital on an asset that you've held for a long time. Because of the limited amount of Capex reserves, as well as their intention to prioritize the rest of their portfolio, they decided to keep rents low at this property and keep the staff happy. If you have low rents you're going to have high occupancy, low turnover, and little operational problems to deal with. To give you a couple data points: 1) the average resident has lived at the property for 3 years and 2) 30% of the residents have lived there from 4 to 12 years. These numbers are unheard of. Needless to say, we liked the deal.
We had a couple calls with the owner and we believed the purchase price was fair. These calls are like a first date. You're feeling out the other person to see, "is this someone I want to go on another date with?" I can confidently say, we really liked this owner. Very professional, organized, and was willing to provide us with any documents we needed throughout our due diligence process.
After that call, we brought the attorneys in to help go through all of the details in the contract and get going. One week later, we wired over 1% of the purchase price after signing the contract. Over the next 45 days we performed our due diligence, raised money from our equity investors, and arranged the debt financing. And last week, we got the keys to the property and officially took over. Now, we execute our business plan to increase cash flow and the property value.
Unlike single family homes, multifamily apartment complexes are valued based on the cash flow that they generate. So for example, if a property is generating $1M of Net Operating Income per year that property might be worth about $25M today (based on today's current market these types of properties are trading about 25x earnings). If I can increase Net Operating Income on this property by $200k to $1.2M, that means the new property value is $30M! I wrote more about how to think about this here if you're interested in learning more.
This acquisition was a relatively smooth one to work for because the previous owners were great to work with and took great care of an asset. It's always nice to see that.
Now, onto my brief thoughts about today's multifamily market. This was the first deal we did this year after underwriting about 400 deals this year. The market is hot! Lots of competition from buyers, a significant amount of capital looking for yield, and Class B multifamily has proven to be a resilient investment over the past decade and particularly during COVID. It's getting much tougher to find good deals and we remain conservative and patient. I've seen a lot of risky deals from sponsors and I don't think it will end well for some people. If you ever have a deal you'd like another set of eyes on, I'm always happy to help.
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Have a great Sunday,
Rohun