Investing in multifamily real estate can be very rewarding, but what happens if you see a building you think needs too much renovation? Will it ever work?
When I first looked at a multifamily property in Lake Jackson, south of Houston, it showed lots of promise as it sat on nine acres of premium land between two exits on a great freeway. As I looked further into it during due diligence, however, I discovered it needed considerable repair and would need lots of tender loving care. I passed on this property initially and bought a more stable complex of 128 units down the road. I continued to look into more potential purchases in this same general area and purchased three more multifamily complexes. In the meantime, I kept driving by this property on the way to my other apartment buildings. Then, a couple of years later, I decided to revisit the nine-acre property I had passed on initially and had been driving by all this time. So we crunched some numbers to see what it would take to renovate and fix the major issues in this complex.
Two years later the price had risen $2 million
It was now two years later from the time I first did the due diligence on the property and now the seller wanted $2 million more for the complex than the original price. However, even with the price increase, with a planned $800,000 renovation budget we estimated the numbers could still work on this 160-unit property. We worked with a local bank that gave us an 80 percent loan with a $400,000 repair allowance even though the complex was only 76 percent occupied at the time. Through some additional negotiation we got another $250,000 at closing for a repair allowance. Both these extra funds made it very nice to renovate and take care of the various needs as we were close to double our original $800,000 estimate of renovation costs. And we made this community an award-winning community of Lake Jackson.
7 keys to a renovation of apartment buildings
It took a lot of hard work and several contractors to renovate this property into the beauty it is today. We learned a lot from this undertaking, and I want to share some of those lessons with you:
No. 1 – Do your underwriting numbers
Typically the major renovations take 20 percent to 30 percent more time to complete than you think. Also, the budget should be increased by that amount.
No. 2 – Keep the staff motivated through the process
Make sure that you take care of your staff and the contractors during the renovation. Encourage them to work efficiently and with purpose of providing a great community for the residents.
No. 3 – Make sure the residents see it first
Make sure that the current residents see the major renovations first so they can visualize how the new owners are putting money and value into their community. Remember, it is their home. In this community, the parking lot needed lot of repairs.
No. 4 – The parking lot can be a huge win
Fixing the parking lot was a huge hit with the residents. Plus, everyone could see the complex looking better with pressure washing, painting the doors and railings. We also reopened the leasing office to the residents after it had been closed for more than two years.
No. 5 – Hold contractors to their due dates of completion
Be sure that you put deadlines in the contract as the job progresses; also put penalties if the job is not finished on time. For example, $200 rebates per day from the invoice for going over the deadline.
No. 6 – Definitely take three bids
Take three bids, then ask for their “Best and Final Bid.” Then, don’t stop there. Negotiate more. Use language such as “it’s just not fitting our budget numbers.” Many contractors will come down anywhere 15% to 30% lower than their lowest bid. It’s amazing. “Ask and you shall receive,” as the saying goes.
No. 7 – Keep the residents involved
Do special activities for children and parents. Breakfast on the run is a good idea on Fridays. We make cafes and media centers in all our communities. Community managers provide snacks, cookies and coffee during business hours. Residents like that in the leasing office club house. Be sure to adhere to all codes and inspection requirements for all renovations. Local regulations can vary, so be sure you check to see what the local inspectors want to see. After everything is done, hold a ribbon-cutting ceremony. Lunch time is the best time for a ribbon cutting. Invite the mayor, city officials, building officers, Chamber of Commerce officials, Rotary Club members or other appropriate clubs’ members and try to get some media coverage focusing on how you are improving the community.
How the numbers worked on the deal
This complex sits between two B/B+ class multifamily assets, great frontage, location, location and location. Can’t miss it as you enter into town. There are 500,000+ single-family homes behind this complex. I knew we could renovate and make this complex the darling of the town. And we did! Lake Jackson is a bigger town, and more jobs are here. The rents average $125 to $175 per month more as compared to other smaller towns nearby. Another thought I have is that maybe in three years, if there is demand for retail space and if city allows, we can build a shopping center on the nine acres as it is a prime strip easily approachable by shoppers. Overall, we had great factors and exit strategies as we underwrite it.
The Monaco Villas Apartment Homes
- Number of Units: 160
- Purchase Price: $6,310,000
- After Renovation Valuation: $11,550,000 in 2 years
- Purchase Date: June 12, 2015
- City: Lake Jackson, TX.
- Area: A
- Date Sold: N/A
- Equity Gain: N/A
- Pref. Rate Class A: 9.5%
Value-Add: This asset had many value add features. The leasing office building was down, two buildings had underground plumbing issues and were offline. The parking lot needed to be repaved. Many units needed major make-ready work. Two buildings had foundation problems. We knew we could correct these and more things and make it a great community to live in. We were able to increase rents to market rate and for the major upgraded units we are charging higher.
Actual Performance: The returns to investors have been strong. The job market was and is very strong. We were able to increase rents as the leases came due for renewal. By bringing a strong management team, the asset has been performing very well.
Cash Flow Distributions: We are very excited that the asset is managed by a top community manger with a strong staff under our supervision. The investors have been getting regular quarterly checks since the purchase.
Renovations: Since we bought the asset, the renovations have been going on constantly to make it an excellent community to live in. In the first three months, we initiated 37 renovation projects and successfully completed many of them. We are changing the signage, curb appeal, trimming and removing trees, changing balconies, doors, staircases and landings. Sidewalks and low grounds have been repaired also.
The beautiful leasing office and clubhouse have been renovated. We are very happy to report that we received an award from the city for making it a great community in Lake Jackson.
We have increased the NOI to a very high mark and brokers tell us that we have appreciated this property by approximately by $5 million. We are not selling it even though we have had many requests from purchasers/brokers.