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Originally Posted by thenewsavman
Do you mind talking numbers on the deal you invested in? Not your specific investment, but the overall purchase price, equity required, financing terms, etc. Also, if there was rehab involved was that an additional equity investment, or covered in the financing, or a some combination? Lastly, what was the length of the investment and ROE?
I was very much not involved in the day-to-day aspects of the deal, so I couldn't go into too much detail about the rehab stuff or the day-to-day management stuff, even if I wanted to. But, here's the gist of the numbers and the pro-forma:
180+ Units
5.5M Purchase Price
$150K Renovation Reserve
$150K Closing Costs, Prepaids, Inspections, etc
$165K Syndication Fee (the operators get 3% at closing for putting the deal together)
So, it was about $6M all-in on the acquisition and rehab. And I believe they put 25% down (around $2M including closing costs) and got a 75% loan (around $4M).
Pro-forma had an exit at about $7M with about $300K principle paydown over the hold term. After all selling expenses, I believe the pro-forma profit target was about $900K after 3-5 years.
Pro-forma annual cash-flow distribution scaled from about $120K to about $200K from year one through year five.
So, according to the pro-forma, on a five-year exit, the investors would have made about 75% of $750K in cash-flow and 75% of $900K in profits, for a total 5-year return of about $1.25M -- or about 13% annualized return for the investors.
In reality, we made nothing in year 1, about $80K in cash-flow in year two, and between cash-flow and sale in year three (it was sold in the third year), we made about $180K. So, the return was about $260K in three years, or about 4% annualized returns for the investors. We were given a preferred return, so the operators wouldn't have made much (if anything) on the deal -- but we renegotiated towards the end to give them some profits to keep them motivated and moving forward.
Honestly, I thought we were going to lose money throughout much of the investment, so I was thrilled with those returns.
That said, had we not sold in 2011 and were still holding it, I imagine we'd have a ridiculous amount of equity right now. If only I had a crystal ball...
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You say the deal didn't meet expectations and mentioned something about 2008; was it a matter of buying and selling the property at different points in the "apartment cycle", i.e. you were buying at when similar properties were selling at X cap and sold at a higher cap? Or was there a failure to keep costs contained during the project? Or were the rent/expense projections unrealistic?
During the 2008-2010 housing cycle, there was a ridiculous number of single family homeowners who were renting out their houses to try to avoid foreclosure. This drove market rents down, and especially hit the apartment market pretty hard in a lot of areas, as renters much prefer single family homes over apartments when the costs are about equal.