72-unit Multifamily Investment in Dallas, TX

This an investment consisting of 72 units spread across 4 buildings. One of the buildings was completely vacant. It was this investment where we learned how lucrative physically distressed properties can be. We acquired this asset for $550K. The maintenance of this portfolio was completely neglected. The rehab cost was $300K. We immediately rehabbed the vacant building. We then strategically moved tenants of the other units to the rehabbed building. We then rehabbed those units as well. We replaced every appliance in every unit as well as pulled up the carpet and replaced them with laminate flooring. We did landscaping. We also painted every unit inside and outside. We then leased the portfolio up to market occupancy, effectively increasing the value of the property. We sold this building for $1.5M. 

Here's how this valuation is calculated.

72 unit with an average rent of $500

90% occupancy rate (This means that if you took the average occupancy of every building in the area, it adds up to 90% occupied)

90% of 72 = 65

65 units at $500 each equal $32.5K per month

$32.5K per month multiplied by 12 months annually totals $390K

Apartments currently enjoys a 50% expense ratio

50% of $390K is $195K net operating income annually.

The average capitalization rate for the Dallas area at the time was 11%. 

Definition of cap rate:

Cap rate is the amount of net income generated compared to the price paid for the building. 

Example: If you paid $1M for a building and the building currrently nets $100K. Your capitalization rate (also referred to as cap rate) would be 10%..

To Get the Value:

To get the market value of any property, you would take the net operating income and divide it by the market capitalization rate. In this case, the market cap rate in the Dallas market at the time of sale was 11%. So, you would divide the net operating income (NOI) of $195K by the market capitalization rate ot 11% (.11) to get a value of $1.7M.

In the case of our investment in Dallas, TX, the sales price was $1.5M to our end buyer. The property was worth $1.7M when you consider the market cap rate. This gave our buyer $200K in instant equity.

Conclusion:

A deal is not a good deal unless everyone feels like they have gained something (a win / win scenario). The end buyer wins because he has an instant $200K in equity with room to increase his equity over time. The rents the tenants were paying were below market rents by $75. Just bringing the rents up to market will substantially increase the value of the building by nearly $600K. 

The end buyer generates nearly $200K annually and nearly $280k once he brings the rent up to market. He also will have $800K in equity.

The investor partner made $260K in less than a year. He committed $850K for this project. He earned 15% on his investment dollars plus an additional 15% premium that he received once the project was completed. 

Our company generated $350K after closing and holding costs. It was a win / win scenario for all parties involved.