8 Darling Street, Mission Hill
This case overviews a full service client representation where Charlesgate Multifamily assisted a client in finding an off market property in poor condition Once a property was identified, we helped in negotiating the sale in a dual agent capacity, analyzing the floor plans, working with a contractor on the plan for full gut renovation, designing the new units, renting the entire building and, lastly, managing the property during the lease up and initial stabilization period.
The client in this case was a finance professional looking to create a portfolio of student rental multifamily properties as a way to Segway out of the financial world and into real estate. The client had purchased a few multi families in the past but had just gotten an appetite for large construction projects realizing the potential to create value by taking on the project. This was one of his first large scale projects.
8 Darling is located in a highly desirable student rental area of Mission Hill. The building is a 3 family of 5328 total square feet with a large attached additional lot that was being used for parking. We located the property through our landlord/owner outreach program and, over several meetings, negotiated the listing contract and representation with the owners. All 3 units were occupied by the family in a partnership agreement. At this time, the property was configured as a single 2 bed on the first floor and 3 beds on the second and third floors. They were not generating income as an entire family lived in the house; however had it been rented in its current condition, its expected rent would have been a total gross in the neighborhood of $6,000. The house also had a large attached lot with parking that was potentially buildable. At this time the units were all in outdated condition in both finish and layout and we knew that this was a full gut renovation project. As it currently sat, the unit would rent out at low rents and the building did not make sense for an investor. We immediately saw the value add opportunity and went to work on a renovation and highest and best use plan. Initially we had hoped the lot was buildable so we brought in our zoning and development consultant to give us a feasibility analysis, however after having this done we found that the additional lot was short by a mere 6 inches to build another 3 family as the lot was slightly triangular in shape.
The next step was to come up with a plan to reconfigure the current structure to generate max income. After creating floor plans and looking at other projects we and others had done in the area we determined that it was possible and best to turn the building into two, 4 bedroom 2 bathroom units and one, 3 bedroom 1 bath. The total estimated rent in this layout would be $11,000 and our expected cost for renovation was $400,000 based on our experience and contractor estimates.
Once we had the plan in place, we took the project to our list of clients that we knew were interested in this type of project and received offers from several of them. We presented all of the offers to the current owner and negotiated the best deal for the current owners in terms of price and timing. It was very important to the owners that they had ample time to arrange for other housing and move all of their things since they had lived there for 20 years. We paired them up with the right buyer who was willing to pay the best price and be flexible on closing date. In the end, the sellers and buyer both walked away very happy with the sale price of $951,000.
Since the building was solely occupied by the family, the owner received a vacant building upon closing and was able to start construction immediately. The roof, siding, windows, foundation and major structural components of the building were all in top shape so this project was comprised of an interior gut. The owner had his own contractor lined up whom he had done other projects with so we did not negotiate the construction contract. However, the owner did follow our advice on layouts, finishes and pricing. We performed periodic walkthroughs of the construction with the owner to ensure that the units were being transformed the way we felt the market demanded for top dollar in rent.
Lease Up and Management
The owner closed on the building in mid-September and was able to get substantial construction done by early December. Once this point was reached, we got our rental team on board and immediately began showings using floor plans, renderings and example finishes to paint the picture for the potential tenants. We quickly got all three units rented for January 1st and were ready to hand the building over to the management team for move in. Unfortunately, the builder ran into some final inspection issues with the city at the end of December the owner did not have his final certificate of occupancy on January 1. The tenants were obviously not happy and we had a big problem on our hands. Thankfully, our management team was able to work with both the owner and the tenants to find an amicable agreement and push the move in dates back while helping the tenants find short term housing. The net result was that the tenants moved in mid-January and the owner got his certificate of occupancy. The owner did have some additional work to do in the common areas post tenant move in and the tenants were not thrilled about it, but our management team was able to work with the tenants the entire time and keep them happy, thus eliminating that headache for the owner.
The Net Result
The owner now has a brand new building with layouts desired by today’s renter and off street parking in an area of Mission Hill that is on the upswing. The owner has had no trouble renting the units over the last few rental cycles and is generating great positive cash flow. The building is now bringing in $11,500 per month in net rent, including parking, which exceeds our initial estimate. The building is now at a true 8.25 cap rate which is higher than the surrounding market.
As you can see, we were able to cover all ends of the transaction for both the buyer and seller. The seller walked away very happy with the price and terms they received for the house and the buyer got a great asset to add to his portfolio. We walked away thrilled to have helped both parties throughout the process and with additions to our sales resume, rental division, and management portfolio. This was truly a start to finish win for everyone involved!