20-unit, Royal Oak MI – NO DEAL

April 18, 2022

The Capital Stack

Lone Oak Apartments

Lone Oak Apartments

Lone Oak apartments is a 20-unit community located in Royal Oak MI.  The property offers all 1-bedroom units around 460 sf. Lone Oak apartments are located across the street from our 8-unit property (Harvard Lofts) that we purchased in February of this year.  Lone Oak apartments were recently listed on the market through the Marcus and Millichap brokerage and closed for $2,200,000 in January of this year. We were not the buyers to acquire this property. However, we did complete extensive underwriting on the property for two reasons. The first being that we love the Royal Oak market, and secondly because it showed significant rent growth potential of $300/unit.

Why We Liked It

At first glance the Lone Oak apartments seem like a great fit for us. They are in a A+ location in which we already own 80-units. The average income for the area as well as the home values for the area are in line with our requirements. Additionally, all the properties we currently own in Royal Oak have been extremely successful with a very high occupancy rate. We also have a great property management company already in place that could easily take on the management responsibilities.

Why We Did Not Like It

An immediate concern we notice when reviewing the OM is the size of the units. Because the entire property is made up of small 460 sf, 1-bedroom units the property will most likely not appeal to families or individuals looking to share a unit with a roommate. Once we reviewed the rent roll, we knew the property would not be a good fit for us at the asking price of $2.3M. The current owner was already achieving ~$1.64 per sf which is over the market average. Our experience with other properties in Royal Oak & Ferndale has shown us that a target rent of ~$2/sf on renovated units is a safe estimate. The spread from current to renovated market rate was just too small for us to go after. 

Our Offer

According to our analysis the most we would be willing to pay for the property is $1.5M. This allows us to purchase below replacement cost at $163 per sf. Considering the property sold for $2.2M our highest offer falls short by $700K.

We don’t claim to know everything so it’ll be interesting to see what angle/strategy this buyer has and their plan for the property. Differences in price like this often come down to cost of capital. 

Major Market News

Value-add Multifamily Syndication
A informative article by Good Egg Investments does a great job of describing each phase of the value add syndication process. The article says “The acquisition phase starts with the sponsors getting a real estate property under contract. This can be one of the toughest parts of the core real estate strategy, as it can be very difficult to find a great value-added property”. We underwrite and review hundreds of value-add multifamily investment opportunities a week and on average will purchase 5 properties a year. Finding the right property to purchase is by far the most difficult task. As our newsletter continues we will review more multifamily properties and explain why we did not end up purchasing them. You can read the entire article by Good Egg Investments with this link https://goodegginvestments.com/blog/the-5-basic-phases-of-value-add-multifamily-real-estate-syndications/.
Tips and Tricks
Check out some popular real estate terms:
Cost of Capital- Our cost of capital definition is the rate at which our debt will be combined with the expected returns for our investors. Large companies buying properties over $10m are able to often borrow .5%-1.5% lower than what we would typically be at. Their equity partners (investors) are also family offices, endowments, pension funds, and other vehicles that are only looking for a 4-5% annual return. 

We are typically paying 3.5-5.5% interest on our debt and we target a 15% or great return for our equity partners (investors) so the numbers on a deal for us need to be significantly better than Blackstone.

 Comp- Short for Comparable. This is just a similar unit, similar property, in a similar area. For example, a 1 bedroom in Royal Oak will rent for $2/ft while a 1 bedroom in Fenton will rent for $1.30/ft. It wouldn’t be accurate at all to compare Fenton prices with Royal Oak prices. 

Market Rent- This is the expected price of rent with the unit as-is. If we were to not do any renovations, this is what we could expect the apartment to rent out for. 

OM-OM stands for offering memorandum. This is a document can range from 5-20 pages that is created by the listing broker in order to help market the multifamily property they want to sell. This document will usually contain photos of the property, financial information, a market overview, and nearby comps. We will also create an offering memorandum for investment offerings to give investors an overview of what we’re investing in. 


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