Written by | Justin Sledd
As a multifamily agent, l get the same phone call about once a week: “New buyers coming into the market who are looking to spend about a million dollars on a building.” The conversation swirls around returns and cash flows, and after looking at a couple of options, the primary response from the caller is usually something along the lines of: “This property doesn’t work for me,” or “I don’t see the value.” Or my favorite response: “Find me a 10 cap.”
I spend a lot of time explaining that Richmond isn’t a high cap town, at least not anymore. In Richmond, the average multifamily sales cap rate in 2017 was around 5.8%, the job market is rising about 3% faster than the rest of the nation, and the vacancy rates continue to drop as rents actively climb. Rarely is the perfect deal just sitting out on the market.
What makes a lot of deals even more challenging is that sellers are dictating excessive pricing and terms. Meanwhile, most landlords are on the ropes playing catch up, with rental rates below market or pending capital improvements that need to be addressed.
But while the perfect deal is hardly ever dangling right in front of us, there are still plenty of opportunities to find value. A great example of this is a recent transaction One South performed in Union Hill. The property had three duplexes totalling 6 two bedroom units. The seller was looking for a high number though the property was underperforming dramatically. At the time of signing the listing, it was 50% occupied and rents were well below market at just $950 a month.
It was truly a privilege to work on this deal. The landlord lived out of town and did not hire a professional manager, and the potential upside for a new buyer was tremendous.
The property also had great curb appeal: It was in a great location, with walkability to local retailers and restaurants. Most importantly, it had been renovated about 10 years prior, so it wasn’t in need of any major repairs or upgrades. Plus, the average two-bedroom rent in the neighborhood was $400 per month higher, and all the units were separately metered, making expenses low. As potential exit strategies, buyers had the option of subdividing the parcel and selling them as individual duplexes or condos in the case of an even stronger market down the line.
As a result, One South Commercial stepped in and leased all of the vacant units at a rate of $1,275. This alone changed the gross income from $68,400 to $91,800. With some cosmetic upgrades and the management of some deferred maintenance, rents could have been even higher.
Once new rental rates were established, buyers began to believe in our narrative and we saw the offers gradually improve. The property quickly went under contract and closed shortly after. On day one, the new buyers were capping out around 7.3%, a figure that will continue to increase as all of the rents graduate to the market and the expenses are minimized over time.
We see deals like this all of the time. It can be difficult to have the vision or know what the market is doing, and we hate for buyers to lose out just because they don’t have the proper advocacy to analyze a property at more than just face value.
The smartest investments aren’t always the ones that look spectacular at first glance. After all, those are the ones that go quickly and for high premiums, particularly in the market Richmond is seeing these days. But having an experienced advisor to guide you through the process is the key. The greatest opportunities are often where you least expect them.