Property Marketing Tips
Reposition by Renovation or Redevelopment
Recently we talked to a successful investor who was interviewing property management companies.
Being new to our area, she was looking for help in doing her Due Diligence on a 49-unit property which was under performing and owned by an out of state seller.
This investor said her investment strategy was to purchase under performing assets in "C" and "B" locations, hire a management company to raise the rents, hold the property until it could be sold and equity exchanged to a larger property and start the process all over again. However, if the interest rates remained low enough, she would refinance the property at its increased value, pull cash out to purchase another property and hold he original property.
In real estate investing, there are many strategies all of which work in a particular market set of circumstances but each does not work all the time. To ensure your real estate portfolio produces the benefits you wish, you must develop a set of investment criteria that is feasible based on market forces.
While being interviewed for the above management position, we were able to design a management plan for this property based on the owners written goals.
The three 'L's" of purchasing existing residential property are Location, Location, Location and the three "R's" are Reposition by Renovation or Redevelopment. The location will tell you how much you can reposition by renovation or redevelopment.
When an investor is buying, they must first figure the costs of a given plan and decide if the market will pay high enough rents to justify the costs and then produce the desired rate of return. This brings us to the next step in purchasing an under performing asset and employing this value added strategy by enhancing its value through renovation or redevelopment.
Since the project will not break even at the close of escrow, you need a property management company that can assist in structuring the holding reposition and re-rent periods.
With this particular 49-unit, we have designed a program that will be funded by the owner as a deferred down payment. There are 8 vacant units that don't meet habitation standards and will be completely modernized and will be rented at the top of the market rates, taking the rents from $400 to $525 per month.
The project costs will be $5,000 per unit or $40,000.00 invested. The Return on Investment looks like this:
Rent increases:
Now this isn't the whole story. After we finish the 8 units, the balance of the units can be renovated and released. This holding period may be a long one with a refinancing in the near future.
If you are in the process of purchasing a property and need support in Due Diligence or you have purchase a property and want to develop your three "R's" plan, please contact us at "Ask the C.P.M.", Tom Loegering at tomsr@vel.net or call 623-374-2420.