The Capital Stack
232-unit portfolio, 12 locations, 1950’s-1970’s Value-Add Metro Detroit
Let’s take a closer look at Sheffer Capital’s first Multifamily purchase:
Sheffer Capital’s first acquisition was a 232-unit value-add portfolio in Oakland County, MI. It was called the Waldman Portfolio and all 232-units are in the class A and B+ markets of Royal Oak, Ferndale, and Farmington Hills.
Why We Liked It
This portfolio would be considered by some to be a once in a lifetime purchase. The portfolio was owned by the family of the original developer from the 1950s-1970s and had never been sold. Often, a property gets picked over as several investment groups will come in and make improvements and then sell it to the next group who makes more improvements and sells it, and the cycle continues until a stabilized buyer acquires and holds for a long time. This cycle then repeats itself every 20 or so years. In our case, the properties in the Waldman portfolio had never been sold or seen major improvements insuring there was a lot of room to grow the income. The properties are in some of the strongest rental markets in Michigan which allow us to complete high-end renovations and tap into the luxury rental market.
How We Found It
We were able to get in touch with the owner of the portfolio through a direct mail campaign. We had sent a letter to just over 500 apartments that we identified as target acquisitions. The letter hit on a 54-unit in Royal Oak. The family that owned this property also owed 11 other properties nearby. The owner passed my information along to their broker, who emailed me to let me know that they had 11 other properties in addition to the 54-unit and were looking to sell the full portfolio. I told him yes, we wanted all 12, which happened to be 232-units. I then underwrote all 12 properties individually and came up with a price that I thought made sense. The first LOI was sent for just over $13M. After a few back and forth, we went under contract for $15.6M. This was just as Covid shutdowns were sweeping the country. We experienced several delays and additional banking regulations, because of this the seller ended up agreeing to lower the price to $13,765,000.
Being new to the industry and to ensure a quick and efficient close for the seller, we decided to partner with another syndicator already regularly active in the multifamily space. This deal structure is one of the ways that we were able to gain knowledge on each step of multifamily acquisition. Working in partnerships with other likeminded real estate investors and participating in JV deals will always be a part of Sheffer Capitals business model.
While still under contract and approximately six weeks prior to closing we received an LOI from another investment firm expressing their desire to purchase 184-units from the portfolio for $1.4M higher than it was under contract for. This was great news for us as we could then arrange a “double closing” and walk away from the deal with $1.4M in profit and only ~$200,000 invested up to this point. We decided it was too good of an opportunity to pass up and transferred ownership at closing on all but 48-units.
Our Business Plan
Our plan was to do a traditional value add across all 232-units. After the 184-units were sold, we began the value-add strategy on the 48-units we kept. From our analysis we knew if we spent $10-$15k per unit we could increase rent by at least $300+. Average rents at the time were $800-$1,000, and comps were leased for $1,100-$1,500. We achieve our highest rent increase at Royal Oakland on a unit that was rented for $900, after renovations we leased it $1,850.
How It’s Going Today
Update since closing on the Ferndale 28 (28 units) & Royal Oakland (20 units)-
We sold Ferndale 28 in October of 2021 for $3.7M. 2.3X equity multiple in just 366 days. We held the property for exactly a year and a day to avoid short term capital gains tax. We then did a 1031 exchange into a 52-unit property (Altitude) located in Royal Oak.
We completed a refinance at Royal Oakland in February of 2022, and it appraised for $4,150,000. We got a new loan for $2.5m and were able to pay off the original loan of $1.3M, pay investors all their capital back $600k, and distribute an additional $500k in refi proceeds. We left the remainder of the funds in the deal as reserves and plan to hold forever.
Link here to several podcasts discussing this deal & others: https://sheffercapital.com/media/
The Capital Stack
The capital stack for this deal was a bit complex. My partners in the deal had put up all the earnest money which was $300,000. Our buyer for the 184 units lined up their own debt and equity. For Ferndale 28 and Royal Oakland we raised ~$600k of investor capital on each and got a loan for ~$1.3m on each property.
Major Market News
Cardone Capital purchases for $438,000 per unit:
According to Multi Family News, Grant Cardone and Cardone Capital recently purchased 1,688 multifamily units in Fort Lauderdale, FL. This total transaction reportedly cost $740 million dollars and is the largest deal in Grant Cardone’s career. “The Capital Stack” for this deal consisted of floating rate, 3-year loans issued by MF1, with the remainder funded by retail investors through Cardone Capital’s Fund model. Read the full article here >> https://www.multihousingnews.com/cardone-capital-buys-4-florida-properties-for-740m/
For reference on pricing, we recently purchased Hollyvillage Apartments in Holly, MI for $61,000 per unit & Altitude Apartments in Royal Oak for $107,000 per unit.
Tips & Tricks
Check out some popular real estate terms:
- Class A location– a term to describe the absolute best real estate market to buy in. There are also class B+- and class C+- locations. A building that needs updating in a Class A location is the perfect value-add opportunity, like the Waldman portfolio we talked about in this newsletter.
- LOI- stands for letter of intent. This document is used for almost all multifamily purchases and lays out the terms and price a buyer is willing to pay the seller for their property prior to officially going under contract.
- Double Closing– is when buyer A has their own buyer, Buyer B, who is ready to close on the property as soon as buyer A takes ownership. Buyer A can do this without having the full amount of funds needed for the purchase as Buyer B is the one providing full financing. Sometimes this happens in the same meeting or a day apart.
Seller > Buyer A > Buyer B
In retail terms this is Manufacturer > Retailer > Consumer
Thank you for reading and your interest in Sheffer Capital. We look forward to having you follow along on the journey.
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