The Capital Stack
We pride ourselves in buying deals that allow for “conservative underwriting”. Conservative underwriting is a common phrase used in the multifamily industry referring to a cautious approach to projecting rents and other financial metrics. It involves making conservative assumptions about future income, expenses, and market conditions to mitigate risk and ensure that our investments can withstand potential downturns or unexpected challenges.
In practice, this means we project rents at lower levels than the current market might suggest accounting for possible market fluctuations and economic uncertainties. We also stress test our underwriting by overestimating expenses, vacancy, and exit cap rates. This ensures the property in review can perform well even under less favorable conditions.
We are excited to have exceeded our rent projections at Milford Village Flats. Let’s take a look at what this means for the property.
Milford Village Flats
Rent Target Overachievers
At Milford Village, we initially targeted rents of $1,250 in our underwriting and pitch to LPs when raising capital. Below is a screenshot pulled directly from our pitch deck. As we renovated these units, we continued to analyze the market and decided to push rents to $1,350—exceeding our initial rent comps. We leased our first two units at this higher price relatively quickly. Using this data, we had another unit just finish renovations, an upper unit with a balcony, which we leased for 2 years at $1,400 for Year 1, and $1,450 for Year 2 proving to us that the balcony is a premium feature, and we will target $1,450 on the 7 other units with balconies going forward.
Return Overachievers
At $1,350, we are $100 over the original target rent. For a property with 16 units, this equates to an additional $1,600 per month or $19,200 per year. Given the market’s ~6.5% cap rate, this translates to an added $295,000 in property value.
What’s even better is if we’re able to achieve $1,450 for the 8 balcony units it would bring the blended average rent to $1,400, which is $150 over our target rent. Using the same calculation, this increase would add $443,000 in additional value to the property.
This is one of my favorite parts about the apartment business. On the surface, $100 or $150 of rent doesn’t seem like much. But multiplied by 16 units, then 12 months, it adds up. Another $28,800 on annual cash flow isn’t going to be life-changing for our LPs, but when it translates to a sale at a $443,000 increase, that’s substantial. We raised $650,000 of LP equity for this deal so that additional $443,000 is 68% of the equity, which would substantially increase the returns.
This hasn’t materialized fully yet as we just finished our 3rd renovation, so we’re not celebrating yet, but it’s exciting to see the business plan coming to fruition.
Major Market News
Notable Leaders in Commercial Real Estate
In case you missed last week’s newsletter Emmie Sheffer our Director of Asset Management, was selected by Crain’s Detroit Business as a Notable Leader in Commercial Real Estate. Emmie is responsible for operations at our properties. For more details on her scope of work check out last week’s newsletter or the Crain’s article linked below.
Source: Crain’sDetroitBusiness. (2024, July 15th) Meet Crain’s Notable Leaders in Commercial Real Estate for 2024. https://www.crainsdetroit.com/awards/emmie-sheffer-notable-commercial-real-estate-leaders-2024
Tips and Tricks
Terms-
Target Rent: Target rent refers to the desired rental rate set for individual units or the entire property. This rate is usually determined based on a combination of factors, including market analysis, property performance goals, operating expenses, and the financial objectives of the property owner or management team. The target rent is the price point that the property owner aims to achieve in order to maximize revenue while maintaining competitive occupancy rates
