In 2017, Coso Capital Group purchased a 20-unit apartment community (pictured above) from an owner who had it listed for some time. Our initial offer was not accepted due to a higher counter offer. Several months later, the property was still listed so we decided to submit another offer.
The owner submitted updated financials from the seller (the financials were only updated once per year). Surprisingly, we noticed the income had gone up a bit from the year before. This higher income allowed us to increase our offer closer to the sellers asking price and we were able to execute the contract.
The investment was purchased with a community bank with financing at 75% loan to value. We now needed the remaining 25% of equity. We reached out to a few real estate investors who wanted to be capital partners of a multifamily property with an experienced company. The raise was about $265,000 in equity for the down payment, renovation funds, reserves and working capital. The plan was to use about $75,000 of our own money and obtain the rest from capital partners. As a sponsor or organizer of the investment, we like to have skin in the game. Additionally, we also were the guarantors on the loan which means only we would be responsible for it, not our partners. The offer to investors was an ownership position which included part of the cash flow and back end profits at sale.
The strategy with the property was a value-add investment. This means the value of the property is increased by improving the operations and renovating the exterior and interior of the property. The value of commercial real estate is based on the net operating income it produces and a market capitalization rate. Increasing the net operating income of the property, increases the overall value of the investment.
When the property was acquired the property, the curb appeal by was improved by removing old palms and making sure the lawn was kept sharp by finding a new lawn service company. Additionally, several capital improvements including parking lot repairs, replacing old carpets, HVAC units, water heaters and installing a new drain field were completed.
After owning the property for three years, we consulted with our capital partners about the sale of the property. It was agreed to put the property up for sale in late October of 2019. Capital partners were given the option to receive their profits at the sale of the property or buy another property with the company via 1031 exchange. All partners agreed to reinvest the funds into a new property.
Comments