The Capital Stack
Our most recent acquisition, 11 Mile Flats, was officially acquired on May 30th for $815,000. This eight-unit property is located in one of our favorite suburbs of Detroit, Royal Oak. The area boasts a median household income of $93,000 and an average home value of $324,000, both of which exceed our buying criteria. The property was built in 1956 and consists of private entry one-bedroom units, each approximately 550 sq ft.
How We Found It
In March, Jason Appel, a real estate investor based in New York, texted me asking my opinion on an eight-unit property located in Royal Oak. After he provided the address and the asking price, I told him, “Buy it immediately. If you don’t, I would love to.” He then asked if I would be interested in partnering, the easiest yes of my life. We quickly agreed on a partnership structure and started working with the broker to get the purchase agreement signed.
What We Like About It
Location
It’s in one of the best markets in Michigan, Royal Oak. We’ve had tremendous success in this market with several properties, including Harvard Lofts and Royal Oakland. Harvard Lofts, the eight-unit property we purchased in January 2022 for $825,000, underwent renovations costing approximately $425,000 and was sold in November 2023 for $1.725 million. We still own Royal Oakland, a 20-unit property located just a few miles from 11 Mile Flats. We purchased Royal Oakland in August 2020 for $1,350,000 and completed a refinance in June 2023, with an appraisal valuing the property at $4,600,000. The thriving community, excellent schools, and vibrant downtown scene make Royal Oak an ideal location for real estate investment.
Price
We are acquiring the property at roughly 30% below its current market value, giving us substantial in-place equity. During our due diligence, the property was appraised at $1.05 million. The appraiser, during his site visit, said, “You know this property is going to appraise for way more than the purchase price right?” This assessment confirms that we have secured a great deal, well under the appraised value.
Value Add Potential
While the property is extremely well maintained, there is still substantial upside potential through strategic renovations. By enhancing the units and updating the exterior, we can increase rental income and overall property value.
Our Business Plan
We plan to conduct light renovations and lease the units at market rate. Currently, rents are over $400 below market value. With minimal upgrades and professional photos, we are confident we can achieve our target numbers, based on the performance of other properties we own in the same market. For instance, Harvard Lofts, which features 600 sq ft one-bedroom units, rented for $2,000 per month furnished when under our ownership. The current owners of this new property are leasing the units for $1,700 per month unfurnished. Given our target market rent of $1,300, we are very confident in our projections.
The Capital Stack
We secured a regional bank loan at 65% loan-to-value (LTV) with a 6.99% interest rate fixed for five years and a 0.05% fee. The equity portion is funded with $475,000 from limited partners (LPs), including several who have invested in multiple deals with us, as well as a few new investors. This deal attracted over $1 million in equity commitments in under an hour.
How It’s Going Today
We purchased the property at 100% occupancy and were pleasantly surprised when a unit became available just a few days after closing. We have met with our property manager on-site to review our renovation plans, and are moving forward with the renovation immediately.
The exceptional location, attractive purchase price, and opportunities for value-add improvements make this property an excellent addition to our portfolio.
Major Market News
“Steady-Eddy Midwest”
The article by Forbes discusses the current state of the real estate market, highlighting recent challenges such as WeWork’s bankruptcy, high interest rates, and increased office building vacancies post-Covid. Despite these issues, the author emphasizes that not all markets are struggling equally, pointing out the resilience of certain geographic and asset-specific areas.
The Sunbelt markets, which experienced significant growth over the last decade are now facing challenges. The high competition and low interest rates led to inflated property prices and low cap rates, making current returns less favorable. With the rapid rise in interest rates and an oversupply of new construction, these markets are seeing flat or declining rent growth.
In contrast, the Midwest is now emerging as a strong performer. While it did not see the same explosive growth as the Sunbelt, its steady and consistent growth has proven advantageous. Midwestern markets, including Chicago, are currently leading the nation in rent growth, largely because they avoided the unsustainable price surges seen in other regions. With fewer new construction projects compared to the Sunbelt, the Midwest remains supply-constrained, which supports continued rent growth. The Midwest’s stability and resilience amidst broader market distress highlight its potential as a promising area for real estate investment.
Source: Forbes. (2024, Feb 6th) Navigating Market Shifts From The Sunbelt To The Midwest. https://www.forbes.com/sites/forbesbusinesscouncil/2024/02/06/navigating-market-shifts-from-the-sunbelt-to-the-midwest/?sh=7116200864af
Tips and Tricks
Terms-
Target Market Rent: “Target Market Rent” refers to the rental rate that property owners or managers aim to achieve for their units based on various market factors. This rate is typically determined by analyzing comps, market demand, property condition, and location.
