Our favorite deals are value add deals where we improve the property, which then improves the quality of life of our tenants and also creates value for the investors.
I wanted to share with you one such success story, which is a 321 apartment community in Memphis. I’m super proud of our team and the results for our investors. It will give you a good example of what I’m talking about.
Multiple Problems with the Property: An Opportunity
When we bought this apartment complex in December 2017, it was 32% vacant and suffered from mismanagement.
The place looked tired, rents hadn’t been increased in a while, and 25% of their units weren’t rent ready because the owner wasn’t renovating them. There was lots of opportunity to add value.
We purchased the property for $6.8M and raised $3.4M from individual investors – both accredited and non-accredited.
The property needed a lot of work. Vacancy was about 32%, and it also required a heavy facelift. We had a total renovation budget of $4.4M to make this property shine like the one just down the road that was getting $150 more in rent per month.
The Renovation Plan
The first thing we did was replace the roofs and parking lots and to paint all of the buildings. We also replaced the 70’s style Mansard roofs – you know, the ones with the shingles on the side of the building. Once we were done, it changed the entire look and feel of the property.
When tenants moved out, we completed renovated the interior of the units and immediately got rents $100 higher than before. We renovated the vacant units and filled those.
Because we were improving the property so much, we qualified for the Memphis PILOT program which locked in our taxes to 50% of what they were before we purchased the property. That translated into massive returns for our investors.
Amazing Results for Our Investors
Even though we had only spent $1M of our $3.4M renovation budget, we had increased the occupancy from 68% up to 95% within 6 months of owning the property. We were, on average, repairing and leasing up 20 units per month.
After we had stabilized the property at both higher occupancy and at higher rents, it was time to refinance the deal. The original plan was to refinance the deal 24 months after purchase, but we were ahead of schedule and did the refinancing only 15 months after purchase.
At the beginning of 2019 we refinanced the property. Because of higher rents, better occupancy, and favorable cap rates, we received an appraisal of $15.0M (if you remember, we bought the property for $6.8M and had used $1M of our renovation budget).
As a result of the refinance, our investors received 84% of their principal back. So if an investor put in $100,000 they got $84,000 back 15 months later.
And they’re not out of the deal: they still have 80% equity, which means they’re still getting distribution checks every quarter. But because they have most of their principal back, the cash on cash return is 35%!
These are the kinds of deals we love: buy a property, add value, improve the quality of life for our tenants and increase the value of the property. Then refinance at a higher valuation, return all or most of the investors’ capital back, and continue making distribution – essentially giving the investors an “infinite” return on their money.
The investor can now take their initial investment, invest it in a second deal, get another 8% cash on cash return. Then a couple of years later, maybe there’s another refinance that returns the principal back that now can be reinvested in another deal.
So that same $100,000 investment is getting like a 50% cash on cash return on multiple deals over time.
And your taxes on all of these distributions are going to be close to zero because of our tax laws.
Truly amazing, right?
We’re happy with how this property has performed and hope we can have many similar deals in the future.
Why Not Join the Club?
If you’re a sophisticated or accredited investor with at least $50,000 to invest in a multifamily syndication, then I invite you to join our Nighthawk Investor Club.
Before we can share investment opportunities with you, it’s important that we get to know you better. Please complete our short investor questionnaire and then schedule a call with us.
We look forward to having you in the Club!
CEO, Nighthawk Equity