The Capital Stack
Silver Lake Hills
Silver Lake Hills is a 310-unit apartment community built in 1999 and located in Fenton, MI. We are currently under contract with a projected closing in mid-October.
Fenton is an upper-middle-class suburb located an hour NW of Detroit, 40 minutes north of Ann Arbor, and 15 minutes south of Flint. The median income in Fenton is $88,196 and the average home value is $354,000 with a current median list price of $490,000. If you have been following along for a while you may realize the income and home values mentioned surpass our strict buying criteria. The standards we set for income and home values ensure that we are buying properties in areas where the market lease rates are affordable for residents, and offer significant discount to ownership. By purchasing properties in locations with a larger population of higher earners we increase the likelihood of receiving high-quality rental applications and reduce the likelihood of carrying a delinquency balance. In January, we wrote an entire newsletter about the importance of our buying criteria check it out here.
Fenton attracts a significant portion of the white collar employment base commuting to nearby employers such as General Motors, Ascension Genesys Hospital, McLaren Regional Medical Center, Hurley Medical Center, University of Michigan, and more. In addition to the full-time residents, Fenton attracts lakefront vacation homeowners who can enjoy the summers on Silver Lake, Lake Fenton, Lake Ponemah, and several others.
Strong Growth Potential
Value Add Opportunity
Silver Lake Hills offers a true value-added opportunity. The current in-place rents are less than those of competing properties and average $1,271 while our competitors are achieving over $1,500. By conducting light renovations and enhancing the amenities we are projecting rental increases to meet and exceed the competitive properties.
Silver Lake Hills currently has an in place rent per sf at the same price per sf as our 24-unit property in Fenton, Creekside at Fenton Heights. Creekside is a great property but there are no amenities and the location is not on par with the Silver Lake Hills location. Creekside is also built in 1969 & 1989, while Silver Lake was built in 1999. The first-hand market knowledge learned through operations at Creekside further affirms our confidence in achieving the projected rental increases at Silver Lake Hills.
Strong Occupancy – Supply/demand imbalance
The Fenton, MI market surrounding Silver Lake Hills has a vacancy rate of less than 3% which is nearly unmatched. Royal Oak, MI is known to be one of the hottest rental markets in the state and still comes in second to the Fenton area carrying a 4.5% vacancy rate.
Nearby properties that are direct competitors to Silver Lake Hills are fully occupied. As it sits Silver Lake Hills is 99% leased.
No new supply is currently under development. However, one upcoming project has been proposed, featuring 2-bedroom units that will rent for $2,000 – $2,300. This property will not offer any amenities. Our underwriting assumes a full market rate of $1,700 for the two-bedroom units at Silver Lake which would still be a strong discount to the new product if it gets built. That project is in conceptual phase so it’d be ~3 years to completion. Check out the news section below for more information on this potential development.
Discount To Ownership
Renting at Silver Lake Hills comes at a steep discount to ownership in the area. A mortgage for an average home in the market surrounding Silver Lake Hills would have a monthly cost of $3,000 assuming today’s mortgage rates of 8%. Assuming a renovated full market rate, choosing to rent provides a savings of ~$1,300 per month. Now let’s assume mortgage rates come down to 3% again, the cost to own an average-priced home in the market now costs $2,000 a month, and renting a renovated unit at Silver Lake still saves them $300 on a monthly basis. Being able to provide high quality rental housing at a discount to ownership significantly increases the demand for rental units as demonstrated through the area’s market vacancy of just 3%.
Below Replacement Cost
We are under contract on Silver Lake Hills for $121.72 per SF, significantly below the estimated replacement cost of $180+ per SF. The increases in hard construction costs have made it significantly more challenging to replicate this product. Moreover, the rise in interest rates have introduced a new barrier to entry, making cost of construction even more expensive and further deterring potential development. As evidenced by the potential development 1.5 miles to the west, they are targeting $2,000 to $2,300 for 2 bedroom units, at a likely build cost around $180 per sf. They will also not have any amenities. The rental rates they need to charge to compete with their new product are a significant premium to where Silver Lake will lease at. This is an overall positive because we will be well positioned with a true value offer of a lower rate and fully amenitized property.
Investment Opportunity Summary
310 units built in 1999, Fenton, MI
$88k median income, $354k average home value
Out-of-state owner and manager, rent ~25% under market rate
2.77x cash on cash return
Avg cash flow: 10.27%
Preferred Return: 8.0%
Hold Period 7 years
Planned Distributions Quarterly
Capital Due October 2
Closing October 13
Major Market News
Fentons Proposed Development
In a recent news article published by The Tri-County Times, it has been reported that a rental property company named Redwood is actively pursuing plans to develop on Silver Lake Road. The article notes that since 1991, Redwood has effectively owned and managed a substantial portfolio of over 15,000 units spanning 32 neighborhoods in Michigan and several other states. Redwood’s intention to extend its presence into the Fenton area serves as a solid indicator of its confidence in the Fenton market. According to the article, this development initiative comes in the midst of a landscape where rental supply is seemingly constrained, as indicated by the lack of ongoing construction projects. The proposed development is set to feature units with two bedrooms, projected to command rental rates ranging between $2,000 and $2,300. This pricing tier notably surpasses the current market rates, signaling a potential upward shift in rental values.
Source: Rental property company seeks to build on Silver Lake Road. https://www.tctimes.com/news/rental-property-company-seeks-to-build-on-silver-lake-road/article_3f5d730e-25b8-11ee-952d-1b31f598a829.html
Tips and Tricks
Age Matters– Silver Lake Hills, constructed in 1999, has been well-maintained. Roofs were replaced in the last 3 years, and most furnaces and hot water heaters have been updated, leaving minimal deferred maintenance. Compared to our older properties from the 60s and 70s, we expect to have fewer ongoing maintenance issues due to its modern construction materials.