The Capital Stack
The most recent addition to our portfolio is Sugar Pine Apartments & Storage, a property that we officially purchased on February 13th for a total of $1,200,000. Sugar Pine is a nineteen-unit apartment complex with eight 12×24 storage units located in Holt, MI. Holt is a suburb of Lansing with a median household income of $83,000 and an average home value of $235,000. Sugar Pine was built in 1976 and the property comprises 18 one-bedroom units and one three-bedroom unit.
How We Found It
These deals don’t happen overnight; Sugar Pine has been on our radar for several years. In November 2022, I cold-called the owner, after some back and forth it was clear he was not interested in selling at that time. Despite the initial response, Sugar Pine remained a focal point, triggering periodic attempts to reestablish contact with the owner. I was never able to get ahold of him.
In June 2023, I received an email from a broker indicating that Sugar Pine was now listed for sale. I responded the next day by submitting an LOI for $1,050,000. The seller countered with their “best and final” offer of $1,350,000. In response, I countered at $1,150,000, stating it as my “absolute maximum,” the negotiations reached a standstill.
Come July, I followed up with the broker to inquire about any changes in pricing, but none had occurred. Fast forward to October, I received a notification of a price reduction, bringing the new asking price to $1,350,000 million. At that time interest rates were in the mid-7% range, my offer was lowered to $1,050,000, and we reached another standstill.
November 1st, the broker informed me that they had countered another group at $1,250,000 and asked if I could match that price. I replied the next day, stating that I would check with lenders for the latest rates. The first debt quote was bad, couldn’t get close. The second debt quote was also bad, couldn’t get close. The third debt quote, received two weeks later on November 17th, was excellent, approximately 100 basis points below all others, and included a 25-year amortization period. While it took a week for the third quote to materialize, I aimed for a solid figure to avoid potential re-trading if actual debt terms did not align with expectations. I informed the broker that I could go up to $1,200,000. The seller countered at $1,240,000. After 10 days, on November 27, I got back to him and said $1,200,000 needed to be the number. The next day, the broker called me and said we got a deal! The purchase agreement (PA) was sent out immediately and was fully executed at $1,200,000 on November 30th. The due diligence period was 45 days and did not present any issues. Following the DD period, we had 30 days which took us to our closing on February 13th.
What We Like About It
Location:
Situated in Holt, just outside of Lansing, Sugar Pine benefits from the economic advantages stemming from the employment base of the Michigan capital, Michigan State University, Sparrow Health, and McLaren Health. The combination of these factors, along with the inclusion of the Holt School district, is a recipe for success.
Immediate Value
The property was marketed with an in-place rent of $12,115, accounting for three vacant apartments and one vacant storage unit. During our due diligence period, the vacant units were filled and the rent roll had increased to $14,780, reflecting full occupancy for the apartments and one remaining vacant storage unit.
Proven Value Add
A proven value-add opportunity exists as the current rental rates for the apartments are, on average, $200 below the local market standard, with only three units being exceptions. Specifically, these three units are leased at $850, while the remaining units are rented at $645 or $700. The existing market rent for a one-bedroom unit in the area stands at $900, given the minimal vacancy in the region, we are confident in our ability to achieve the projected rents.
Our Business Plan
Our game plan for Sugar Pine involves renovating units as leases expire and renting them out for market rate. We’re also eyeing an adjustment in storage unit rents to match the market, targeting $200 per month compared to the current $100 per month. In order to achieve market rates, we’re investing in significant property improvements, including upgrading unit interiors to a mid-grade finish, refreshing hallways with new carpet, paint, and lighting, and addressing the potholes and broken asphalt in the parking lot.
Once we have a clean, mostly renovated property achieving market rates, we will look to sell. The local real estate market has a strong demand, especially from high-income W-2 earners like local doctors or government employees. This demographic is likely to be attracted to a turnkey apartment complex, and we believe our property, with an estimated value of around $2 million, will be a sought-after option for these buyers.
The Capital Stack
We acquired Sugar Pine for a total purchase price of $1,200,000. We secured a loan from a local bank amounting to $900,000. The terms of the loan include a fixed interest rate of 6.49%, a five-year term, and a 25-year amortization period. We successfully raised $655,000 in limited partner (LP) equity. This equity was secured in less than 24 hours through a single email and a few subsequent follow-up phone calls.
How It’s Going Today
With the recent closure of the deal this week, we are gearing up for the next phase. We will start by meeting with our property manager and ironing out the final few details of our business plan. We’ve already secured quotes for various renovations, including the construction of a new parking lot which will be completed once weather conditions allow.
Additionally, there’s one storage unit that the previous owner used for personal items. We plan to clean out and renovate this unit. Since it’s our first available unit it will serve as a testing ground for market rates. By pushing the pricing boundaries with this unit, we aim to gather insights that will inform our approach to leasing the remaining storage units.
Given the current full occupancy of the apartments, our focus is on updating leases for tenants whose terms have expired. As natural vacancies occur, we will renovate these units and lease them at market rates.
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Major Market News
Holt School District
With the help of Granger Construction, the Holt school district has been completely transformed. In 2021, the Holt School District secured approval for a $130 million bond. This bond includes significant upgrades to all school buildings and involves the construction of two new elementary schools. This initiative follows a $54 million bond that was issued in 2020 for the construction of Holt High School, now recognized as the largest high school in the Midwest. You can read more here.
Tips and Tricks
Terms-
Purchase Agreement: A purchase agreement, also known as a sales contract or purchase and sale agreement, is a legally binding document that outlines the terms and conditions of a real estate transaction between a buyer and seller. It typically includes details such as the purchase price, property description, financing terms, contingencies, closing date, and any other relevant terms agreed upon by both parties. Once signed by both the buyer and seller, the purchase agreement signifies their mutual acceptance of the terms outlined and initiates the process of transferring ownership of the property.
