Cedar River Properties Newsletter (1/7/23)

In this week's newsletter, I wanted to provide a peak behind the scenes when it comes to investing in apartments to show what my company does and the business model we follow.

Investing passively in real estate through syndications was originally an exclusive club that not many people knew about.

However, with different securities laws now in place, these alternative investments are more easily accessible and publicized.

Value-Add Apartment Investing

Below are the 4 main things my company does to create value and profit through apartment investing.

• Purchase an outdated apartment community in need of interior/exterior renovations.

• Renovate the units one by one to bring the rents up to the market rate.

• Decrease expenses through improved operations

• Refinance and eventually sell the property at the higher value

After reading the next few paragraphs, you should have a better idea of how this works.

1) Purchase an outdated apartment community in need of interior/exterior renovations.

Instead of buying a distressed single family house and flipping it, we will be purchasing an apartment complex and refinancing it after renovations are completed, followed by a sale in the years that follow.

Deals are sourced through commercial broker relationships and the underwriting is done using software to make sure the numbers work out to provide the expected return.

For financing, we work with local lenders to find the best debt to use on the property. This also involves using a loan guarantor to sign on the loan.

2) Renovate the units one by one to bring the rents up to the market rate

This work will be completed by professional contractors that are budgeted for in the initial business plan. They will renovate each apartment as residents move out.

The onsite property management team will be working closely with me to make sure there is a system in place to complete all apartments.

Once each individual unit is renovated, it will then be rented out at market rates. This will increase the overall income of the property, which will increase the value of the property.

3) Decrease Expenses through Improved Operations

Once renovations are completed, this should lead to less capital expenditure costs and repair/maintenance costs moving forward.

The property manager will also be in charge of making sure actual income and expenses are being tracked and compared to the budgeted income and expenses.

This way, if numbers get off track one month, we can see where the discrepancy happened and how we can get back on track for the next month.

Lower expenses and higher income will create a larger Net Operating Income (NOI) for our property, which is how apartments are valued.

4) Refinance and Eventually Sell the Property at a Higher Value

Once the renovations have been completed and the NOI has been increased, this will allow us to pull money out of the deal through a refinance which will pay our investors back with some of their capital.

As we continue to hold the apartment, the investors will receive quarterly distributions at the preferred return rate agreed upon at the beginning.

A few years after that, we will be selling the property to cash out of the deal and provide extra returns to the investors.

These are the 4 main steps that are followed in the value-add apartment syndication business.

It is a difficult process to implement and execute, but one that countless others have systemized and used to create a well-oiled investing machine.

A typical hold period for an investment like this can range anywhere from 5-7 years.

Having experienced team members helps lower the risk of the investment and increases the chances of the business plan succeeding.

As always, if you are interested in learning more about this process, feel free to reach out to me!

Caleb Smith

If interested in learning more about my business and how I can help, check out my website using the link below.