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Property Management Blog

Case Study

Mendell Gosnell - Tuesday, September 15, 2015

In this month’s Blog I would like to showcase a property that is in the process of being repositioned.  This property was purchased in December of 2013 by a local investor and client.  Centurion was involved in the pre-purchase evaluation process and was entrusted with the oversight and management of the property.  Here are the details of the deal…

Purchase price: $1,361,000
Down Payment: $561,000
Loan: $800,000
Interest Rate: 4.5%
Amortization: 25 years
Term: 5 years

The client spent months searching for, evaluating and analyzing numerous deals.  The client had a hard working knowledgeable Real Estate Agent by the name of Donna Megy with Grace Real Estate, LLC in Corvallis, OR.  

Once the client honed in on this particular property, we pulled together to take an in-depth look.  Upon examining the property’s rent role and other financial statements, the team was ready for an on-site tour of the property inside and out to determine if this was truly a potential deal in the making.  Over the course of the due diligence process the Real Estate Agent and Owner came to find out that the property had an average of 8 units vacant over the past 12 months along with a list of deferred maintenance as a result of problematic management issues.  After some leg work by Centurion in evaluating the current state of the property and analyzing the rents we felt confident that this property was a great candidate for repositioning. We decided that the property was well situated for a turn around story and we were ready to write the first chapter.  We would begin by taking over the management and forming positive connections and a strong working relationship with the current on-site manager and the entire tenant base.  Centurion completed a thorough evaluation of the property and made recommendations to the owner for improvements as well as needed repairs and safety concerns.  We decided to take the first 3 months to “learn” the property before making any major changes or doing any immediate rent increases.  In the process of purchasing the property, we had some hurdles to overcome with the bank on account of the property inspection report that indicated a mold issue in part of the property.  We were able to tackle and resolve these challenges and the loan was approved and we set the plan in motion.  Upon taking over the property we had 3 units vacant with more potentially coming.  We used this challenge as an opportunity to test the market and see what kind of rents we could get upon re-leasing these vacant units at higher rent amounts.  Our assumptions proved correct as we were able to rent up the vacant units in short order with rent increase amounts that brought great excitement to the new owner.  Over the course of the Spring we plodded along with the working of the plan.  We methodically checked off one box after another on our to do list while being careful to accomplish the needed improvements out of the monthly cash flow from the property.

We kept the lines of communication open between our office and the owner as we progressed along.  We made great strides in turning the property around in regards to the tenant base and the overall curb appeal of the property.  Repairing rotten upper patio decks and completely tearing out and replacing lower patio fences were among the long list of Capital Improvement items. 

Looking at the current income and expenses for the property at the time of this writing we are very happy to say that thus far has been a huge success.  Judge for yourself as we let the numbers speak for themselves.

Estimated value after one year…$1,592,571

Purchase Price: $1,361,000
Current Estimated Value: $1,592,571
Value Enhancement = $231,571

I ran a 5 year projection on the property making some conservative estimates and assumptions about the market.  Upon running the numbers and using 10% as the Owner’s Required Return (The Discount Rate) and assuming a holding period of 5 years, assuming modest rent increases each year along with appropriate increases yearly for expenses and what we see is some great results.  If you take a look at the attached Before-Tax Cash Flow Analysis Table in the center at the bottom you will see the Four Tests of Investment Return which shows the following:

Cash-on-Cash (1 year measure) = 8.12%
Value Enhancement = $359,472
NPV = $207,927
IRR = 18.14%

What these numbers tell us is that this is looking like a very good deal.  The cash-on-cash return the first year looks to be a little over 8%.  Over the course of the 5 year holding period the property value will be increased by $359,472 which translates into a present value of $207,927 and yields an incredible rate of return over the forecasted 5 year period (IRR) of 18.14%.

It has been just shy of one full year of ownership of this property as well as management.  We are optimistic that these numbers can be even better.  We will continue to analyze and evaluate the properties performance as measured against the local market and we will be diligent to monitor changes in the overall apartment industry.  Things are very strong and the mid-term forecast looks very promising. 

It’s a great time to Invest in Real Estate!!!

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