Real Estate Investment Case Study

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Acquisition + Arranged Financing

Stark Street Apartments (13 Units)
TiMeline
2011 - Current
Engagement Type
Acquisition & Arrange Financing
Realty Yield Role
Buyer’s Agent, Mortgage Broker
Investor Cash/Capital
~$425,000 (Cash-On-Hand)
Client
Clinton L

Investor Profile

As of 2011: Client interest was in continued asset class diversification by reallocating additional funds (capital) that was currently invested in the stock market and purchasing another income-producing investment property. Client is a passive investor, hence a suitable property would be one that either required minimal active owner management or could effectively be managed by a third party property management firm. Newer/quality retail (single & multi-tenant) and apartments were the likely target property types.

Engagement Objective

Reallocate capital that was currently invested in the stock market and acquire another income-producing investment property. The target price range was $1M-$1.75M.

Process

Many properties were both financially and physically screened from April-June, 2011. The initial short-list included three-3 apartment properties, a multi-tenant retail property and a few high revenue producing vacation rentals. We were not able to come to terms on any of the properties on this initial short-list.

The Opportunity (the property ultimately acquired)

A developer owned condo project missed the market (not completed until 2008) and was now sitting with a handful of temporary renters and many vacant/new units. The developer was hoping to “wait-out” the market and ultimately sell the individual units as condos (value= ~$200,000+/- each). However, the underlying lender was putting pressure on the developer to liquidate. The developer reluctantly agreed to sell as a condo grade apartment complex. The asking price was much less than the once projected sum of individual condo unit sales, but a seling a near half-empty apartment complex still proposed challenges. But, once fully rented (@ market rents), the property would immediately be worth 20%+ more than the list price (even as apartments).

The Challenge

Since this was a non-performing apartment complex (vacancy at time listing time was 38.4%), any conventional lender financing would not be able to be secured. Hence, the amount of investor cash required to purchase would be considerable, and out of play for many private investors. And, to make things even more challenging, the existing loan amount exceeded any reasonable current market sale price. Lender approval (and release) would need to be part of any deal.

The Execution

Purchase & Sale Agreement was executed with necessary provision-s (including lender release). Terms and a timeline for lease-up was also detailed. Contract language was such that our Client would have the authority to participate in the lease-up in order to secure needed tenants if the seller failed to do so by the deadline in the PSA. The contract was drafted with language that would make it difficult for a “reluctant” seller to purposely kill his own deal.

The Result (Property Acquired)

Though a long and arduous contract period (June 21st through November 15th), the deal got done. The final purchase price was $1,466,000. The appraised value came in at $1,650,000. As of February, 2012 the property was fully leased up (@ full market rental rates) and monthly collected rents increased from $8,675 (June, 2011) to $14,459 (February, 2012). Based on current market capitalization rates, a value of $1,775,000+- is suggested (2/2012). This numbers tell it all.

Realty Yield Comments

Though opportunities like this do transpire from time-to-time, it is not the norm where also instant equity (capital) gains of this level can be realized. However, the learning point is that with proper and experienced guidance such opportunities can be spotted (and exploited) even when the majority of the market often simply misses. This property was clearly listed on RMLS. Still, it just sat there, primarily just because there were some holes in the presented sales package and it took some time and work to fill in the blanks.

NOTE: As of December, 2020 the same investor still owns this property, the estimated current value is ~$2.7 million up from an original purchase price of $1,466,000 in 2012.

Stark Street Apartments, Acquired 2011 - $1,466,000. Realty Yield arranged acquisition financing. Client still owns this property, estimated value as of December 2020 - $2.7 million.
Stark Street Apartments, Acquired 2011 - $1,466,000. Realty Yield arranged acquisition financing. Client still owns this property, estimated value as of December 2020 - $2.7 million.