The Capital Stack
At Sheffer Capital, we typically purchase value-add properties with the goal of increasing rental rates by 20-100%+. A value-add property is a real estate investment that requires improvements, renovations, or operational enhancements to boost its value. In most cases, the anticipated rental rate increases have not yet been proven at the property, meaning the higher rental rates are based on projections rather than current performance. Our strategy involves implementing the necessary changes to realize this potential and achieve the projected returns.
To illustrate this process, let’s take a look at our recent acquisition, Sugar Pine. We successfully achieved our target rental rate of $950. After our renovations, the unit received tremendous interest resulting in several applications and a quick lease.
Rent Projection Achieved: The Process
Market Analysis
We use platforms like Apartments.com, Zillow, and other sites that provide current leasing data to analyze the market. We want to make sure we are comparing our building, which is typically a 1950s-2000 built apartment, to something similar. We assess both the “as-is” and “as-completed” rental rates. For instance, we acquired the Sugar Pine property in February 2024. The average rent for occupied units was $739, with three units rented at $850 following renovations by the previous ownership that did not meet our standards. Based on this information, we determined an “as-is” rate of $800 and an “as-completed” rate of $950.
Value Add Plan
Setting an “as-completed” rate of $950, which is $100 higher than the current high rent at the property, involves executing a detailed value-add plan. We thoroughly examined the market to identify comparable properties and their rental rates. This helps us determine the extent of renovations needed to compete effectively and achieve our target rates. Sugar Pine’s renovation involved new paint, flooring, cabinets, counters, appliances, and bathroom finishes. Since closing we have had just one unit become vacant and after the renovation, it leased quickly at our projected market rate of $950. This success validated our pricing projections, and we are eager for the next vacancy to repeat the process.
Execution and Outcomes
Since February we’ve signed renewals on 12 units, with increases ranging from 5-24% and consistently reaching $800. This demonstrated that even without renovations, units could be leased at the “as-is” rate of $800. This outcome is ideal for Sugar Pine, as our primary goal is to prove the value-add potential, increase rents across the board to boost NOI and position the property for a future sale.
In Conclusion
In short, when we undertake a value-add project, nothing is a “sure thing”. We make calculated investments and assumptions based on our underwriting/ experience and work diligently to push the renovations across the finish line. We have now owned 24 different properties in the Metro Detroit area and have been very active on the buy and sell side. We have a strong pulse on the market with many of our current or past properties becoming the comps used in appraisals for new properties we are buying.
Major Market News
Fisher Family Sells for $27.1 Million
The Fisher family prominent in Detroit society and associated with the landmark Fisher Building sold their longtime lakefront home in Palm Beach for $27.1 million. The sellers, and heirs to the Fisher Body Company, included Michael R. Fisher, Christine Fisher Grow, Judith Fisher Knudsen, and Alfred J. Fisher III. The 5,100-square-foot home at 1010 North Lake Way features five bedrooms, four bathrooms, a pool, a dock, and 110 feet of waterfront. Initially listed for $38 million in 2023, the price was reduced three times before the final sale.
Source: TheRealDeal. (2024, June 18th) Revved up: Auto industry family sells lakefront Palm Beach house for $27M. https://therealdeal.com/miami/2024/06/18/auto-industrys-fisher-family-sells-palm-beach-house-for-27m/
Tips and Tricks
Terms-
“As Is Rental Rate”: The estimated rental amount for a unit in its current condition without any renovations. This is also the rate at which we will increase renewal leases.
“As Completed Rate”: The amount we estimate a unit will rent for after our renovation is completed.
