Successful Multifamily Real Estate Value-Add Case Study

Investing in real estate can be an intricate dance of opportunity and strategy, particularly within the realm of multifamily properties. Understanding how experts like RealtyMogul navigate this landscape can offer invaluable insights, especially for those looking to leverage crowdfunding to enter the real estate market. In this journey, we’ll explore a fascinating case study that exemplifies the value-add strategy in multifamily real estate investment.

Whether you are a seasoned investor or someone just beginning to explore real estate crowdfunding, this deep dive into the processes, metrics, and outcomes of a successful project will equip you with the knowledge needed to make informed decisions.

Value-add multifamily: An investment strategy on the rise

In the world of real estate crowdfunding, multifamily properties have emerged as a favored asset class, particularly those that follow a value-add strategy. This approach is designed for properties that are not fully optimized in terms of operational efficiency or rental income.

A value-add strategy typically involves:

• Identifying properties that are underperforming relative to market potential.
• Implementing various improvements to enhance property value and cash flow.
• Realizing returns primarily upon the eventual sale of the improved property.

RealtyMogul’s project, Terrace Hill, serves as a prime example. This case study illustrates how strategic renovations and management improvements can transform an aging property into a lucrative investment.

A thriving submarket with strong rental demand

Terrace Hill, a 310-unit apartment complex situated in El Paso, Texas, was acquired by RM Communities in May 2019. Before diving into the specifics, it is important to understand the criteria that RealtyMogul evaluates when selecting a submarket for investment.

Key factors RealtyMogul considers for submarket evaluation

• Population growth: The area should attract a steady influx of residents, particularly young adults.
• Declining unemployment rates: A healthy job market with large employers is vital.
• Average household income: Sufficient income levels ensure residents can afford the cost of living.
• Housing demand: A low vacancy rate indicates a strong demand for rentals.
• Quality of life: Safety, accessibility to amenities, and neighborhood walkability enhance desirability.

The submarket surrounding Terrace Hill met these criteria effectively, being in proximity to a local university, which typically generates robust demand for student housing.

Transforming a tired property into a modern living space

Upon acquiring Terrace Hill, the condition of the property revealed that it had seen better days. The previous owner, having neglected maintenance, left the units looking outdated and uninviting.

To assess potential improvements, the RM Communities team examined rental comparables (or “rental comps”) within the area. This analysis unveiled that similar properties were commanding significantly higher rents, justifying a value-add approach.

Following this assessment, the team developed a CAPEX budget, detailing necessary upgrades and repairs aimed at elevating property standards and increasing rental income. This budget is crucial for understanding both the immediate costs and potential future revenues.

Once the CAPEX budget was finalized and projected rental rates were determined, these insights were compiled into a document called a “proforma.” This analysis serves to forecast the property’s potential profitability based on current and projected operational metrics.

For Terrace Hill, a planned investment of approximately $4.1 million was needed to achieve the desired enhancements. With this plan in place, RealtyMogul officially acquired the property for $18.7 million.

Executing the value-add strategy: Upgrades and renovations

The value-add strategy for Terrace Hill encompassed a comprehensive plan of both interior and exterior improvements.

Interior upgrades that make a difference

Out of the 310 units, a total of 219 underwent renovations. Key upgrades included:

• Modernized kitchens with new cabinets, appliances, and stylish backsplashes.
• Resurfaced countertops in kitchens and bathrooms, along with updated fixtures.
• Installation of water-saving features in the bathrooms, such as new showerheads and toilets.
• Fresh paint throughout the units to enhance visual appeal.

It’s common for real estate companies to renovate only a portion of the units; these remodeled spaces often serve as a showcase to entice potential buyers and highlight increased rental potential.

Exterior enhancements that attract tenants

The property also benefitted from substantial exterior improvements, including:

• Replacing outdated swamp coolers with efficient refrigerated air systems to lower operating costs.
• New roofing and updated landscaping to improve curb appeal.
• Renovation of recreational facilities, including a revamped swimming pool and transformation of an old tennis court into a vibrant resident lounge area.

Significant rental income growth following renovations

After completing the renovations, the rental income at Terrace Hill surged from an average of $688 to $820 per unit, reflecting a remarkable 22% increase in rental rates.

Demonstrating enhanced revenue through strategic upgrades often leads to higher property valuations. This upward shift provides various exit strategies; properties can be sold or refinanced to return capital to investors.

In the case of Terrace Hill, RM Communities successfully met its projected returns, selling the property in the fourth quarter of 2021 for $27.325 million. This represented a 46% increase in property value in just 2.5 years.

Note: The total investment in the property, including acquisition and renovation costs, totaled $22.8 million, resulting in a gross return of **20%**.

Understanding return metrics in real estate

When assessing any real estate investment, three primary return metrics should be evaluated:

• IRR (internal rate of return): This metric indicates the expected annual return on investment, accounting for the time value of money.
• Equity multiple: This reflects the total potential earnings on the invested capital.
• Cash-on-cash return: This shows the pre-tax cash flow relative to the total cash invested.

These metrics can provide a clearer picture of the investment's performance and potential profitability.

Final returns from the Terrace Hill project

For Terrace Hill, the initial projections included a property-level IRR of 17.4%, a 2.04x equity multiple, and an average cash-on-cash return of 8.05% over a five-year hold period.

Ultimately, RM Communities anticipates achieving approximately a 21.8% property-level IRR and a 1.58x equity multiple, with a cash-on-cash return of 5.3%.

This success also set a record for the sale price of a 1980s-built apartment complex in El Paso, highlighting the remarkable potential of value-add multifamily investments.

Real estate remains a top choice for wealth-building among investors due to its ability to leverage strategic improvements for enhanced returns. Unlike stocks, where investors can feel like passive spectators, real estate offers the opportunity to directly influence property values through renovations and operational enhancements.

Given the complexities of property renovation, from obtaining permits to managing contractor schedules, platforms like RealtyMogul provide invaluable support, allowing investors to benefit from their expertise without the hands-on involvement.

Diversifying into high-quality private real estate investments

While stocks and bonds are traditional staples in retirement investing, diversifying into real estate offers a unique blend of income stability and growth potential.

Platforms like Fundrise allow investors to engage in passive real estate investments across various sectors. With over $3 billion in assets under management, Fundrise focuses on regions with favorable investment conditions, particularly in the Sunbelt where property valuations are typically lower and yield potentials are higher.

As the economic landscape shifts, particularly with the anticipated changes in interest rates, real estate demand is expected to rise, offering additional opportunities for savvy investors. With a minimum investment as low as $10, diversifying your portfolio has never been more accessible.

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