The Capital Stack
36-units. Plymouth & South Lyon, MI.
Suburban 36 consists of two properties in Class A Metro Detroit, MI locations. There is a 20-unit property in South Lyon which is currently operating as “Meadows of South Lyon” and a 16-unit property in Plymouth operating as “Holbrook Place”. The South Lyon property consists of all 2 & 3 bedroom, townhome style units. These large units rent quickly in South Lyon as the primary demographic in this rapidly growing area is young families or young professionals who would benefit from the extra space. The Plymouth property has 1 & 2 bedroom, private entry, ranch style units surrounded by a beautiful garden. The Plymouth property is walkable to downtown Plymouth which offers many popular restaurants and festivals throughout the year.
Both Plymouth and South Lyon have median household incomes over $70,000 a year. The average home price in both Plymouth and South Lyon exceeds $420,000. The Suburban 36 portfolio is centrally located between Detroit, MI and Ann Arbor, MI. Both properties allow for a convenient commute (less the 30-miles) to both Ann Arbor, MI and Detroit, MI. Ann Arbor and Detroit are cities that are home to over 20 major employers including Ford, General Motors (Dearborn/Detroit) and the University of Michigan and University of Michigan Hospital (Ann Arbor).
How We Found Suburban 36
We are purchasing the Suburban 36 off market. We have been in contact and negotiations with the current owner since December of 2021. Our insurance agent who insures our entire Michigan portfolio introduced us to the seller over 6 months ago. After learning of the locations and size of property we were ecstatic as they meet our buying metrics perfectly. I quickly made an offer to the owner which did not excite him at all, but he was open to keeping the conversation going. A few months passed and in early 2022 he provided me updated financials for 2021. They were great. We were able to significantly increase our purchase price. Still, he was not ready to pull the trigger but noted that he would like to invest with us in the future. Fast forward a few months, he got an unsolicited offer from another group. He was kind enough to let us know about this new offer and to give us the opportunity to beat the offer. He said he felt we had built a solid relationship and he wanted to work together. We double checked every number we had and were able to beat his other offer by a small amount. He agreed and we had a deal! Immediately we involved our attorneys, and the deal was signed a few weeks later.
Our Business Plan
Suburban 36 is the perfect “operational value add” deal that many investment groups dream of. The properties have been extremely well maintained and the current owner has done an excellent job addressing maintenance issues and lightly renovating the units when leases expire. The current owner has owned both properties for 9+ years and has not been aggressive with keeping rent at market rate. Therefore, rents are now on average ~25% under comparable market rates. We plan to go through all the leases and bump the rent to full market value. We expect to replace some flooring and other small items in the units but overall, the renovation needs are almost nonexistent. With this project we can add value by simply changing up a few management practices.
We also plan to eliminate several unnecessary expenses. For example, the owner is paying $450/month at the South Lyon property for basic cable. As we all know, nobody uses basic cable anymore and this money is essentially being wasted. Without that expense at a market 5.5% cap rate, we add ~$98,000 of value to the property immediately.
How it’s Going Today
We are amid our DD period. We are planning to close late June or early July. The current owner’s pride of ownership was evident during our physical inspection as it went extremely well. We are working to obtain an updated ALTA survey for each property. We are planning to launch the capital raise on June 6th, 2022.
The Capital Stack
This is our favorite part of the deal. The seller does not want to be responsible for the full tax bill that he would incur by selling and cashing out all at once. He has agreed to finance 80% of the purchase price ($4,850,000). Even better, our interest rate is fixed at 4%. In the debt markets now from a bank or agency lender our rate would be in the mid 5% range at best. If we were using agency debt at 5.25% as a comparable rate and financing $3,880,000 which is our loan amount, we would be responsible to pay an additional $48,500 PER YEAR in interest to the bank. Instead, this money goes directly into the pockets of our investors.
We are budgeting for ~$230,000 in renovation costs and ~$300,000 is closing costs, fees, and working capital. To fund this project, we are getting the loan from the seller for $3,880,000 and will raise $1,500,000 from investors for a total capital stack of $5,380,000.
Major Market News
|Watermark Residential to develop 304 Luxury units in South Lyon, MI. |
According to an article by Cision, Watermark residential, one of the nation’s largest multifamily developers, has selected South Lyon, MI as its next development site. According to the article, Watermark Residential is developing ” a Class A apartment community which will include 19 two-story, farmhouse style apartment buildings”. The project totals 304-units and will feature resort style amenities. The article quotes Brian Southworth the senior vice president of acquisitions for watermark residential “Lyon Township is a growing market with great proximity to strong employment nodes in northwest Detroit and Ann Arbor,”. Brian continues by explaining that South Lyon has a growing number of single-family homes which leaves a gap for those that prefer apartment living. You can check out the community here https://www.thompsonthrift.com/properties/the-crossings-by-watermark.
|Tips and Tricks|
|Check out some popular real estate terms:|
Common seller financing is done through a land contract. This is where the seller holds the deed to the property and the buyer makes debt payments to the seller instead of a bank. Once the amount is fully paid, the buyer then receives the deed and is the recorded owner of the property. The seller can also make pass through debt payments to their lender or it can just be direct to their pocket if they don’t have any other debt. In this scenario, the seller could technically default on other debts where the property is collateral and that collector could come for the land contract interest which would not be ideal as our agreement was with the seller and this new lender could be very difficult to deal with.
We are doing seller financing through a mortgage. We like this a lot better because we hold the deed with full ownership and the seller is completely out of the ownership of the property. The seller for this property does not have any other debt on the property so he’s able to act as the bank and we pay 20% down and then will make monthly payments for the full loan amount.