Property Spotlight - The Morada Apartments

This week’s newsletter is an inside look at our most recent investment: The Morada (formerly known as Barcelona Apartments) in Crystal, Minnesota. In March 2024, Ridgeview Property Group teamed up with Invest Wise Capital to acquire the 71-unit complex, and we immediately initiated a large-scale renovation. This case study showcases navigating a challenging market to create value for our investors.

The Property

The property was listed for sale during a time of heightened uncertainty. Several headwinds were wreaking havoc in the multifamily market: rising interest rates on debt, escalating insurance costs, and declining sales prices. Despite these challenges, we pursued the property, and ended up getting awarded the deal after 2 rounds of offers.

We were attracted to this asset by a combination of factors. The property is situated on the border of Crystal and New Hope, MN, in a quiet residential pocket with low crime. The neighborhoods on either side boast a strong median household income of $90,000. The apartments themselves are spacious, with balconies or walk-out patios on every unit, and laundry rooms on each floor. The building's infrastructure was solid, with newer windows, recently replaced boilers, and a newer parking lot. Lastly, the property had seen minimal upgrades since being built, presenting a clear opportunity for modernization and value creation.

Our Value-Add Strategy

We teamed up with a designer and property management company with experience in property repositions. The cornerstone of our strategy was an extensive renovation program, with an overall budget of $1.6M. Each unit receives $18,500 worth of upgrades. This includes a complete kitchen overhaul with new cabinets, granite countertops, and stainless steel appliances. Bathrooms get new vanities, granite countertops, and updated fixtures. Luxury vinyl plank flooring is installed throughout, except for the bedrooms, which receive carpeting to keep noise transmission down. The units also receive fresh paint, LED light fixtures, and nickel door hardware.

Our vision for Morada extends beyond the apartment units. We allocated $150,000 for enhancing common areas, recognizing the importance of community areas in tenant satisfaction and retention. This includes giving the common spaces new carpeting, paint, lighting, and "Morada" branding throughout to reinforce the property's new identity. We saw an opportunity to convert an 800 sq ft storage room into a fitness center, which is currently under construction. Upcoming projects include renovating the original sauna and adding a dog wash station, further enhancing the property's appeal to modern renters.

The exterior wasn't forgotten in our plans. We budgeted $75,000 for exterior paint and deck rescreening, ensuring that Morada's curb appeal would match its renovated interiors. A dog park was installed on the east lawn, and frisbee golf baskets were also added. Next spring, the property will see landscaping upgrades as well.

Financing the Deal

Structuring the right deal was pivotal to the success of our Morada project. We secured a purchase price of $6.64M and obtained a construction loan totaling $6.6M. This loan would make $4.5M available at closing, and the remaining funds would be accessible via construction draws to fund the renovations. The interest rate was locked in at 6.96% for 5 years, with a 30-year amortization. To complete the capital stack, Invest Wise and I raised $2.75 million from 25 investors.

Results: Exceeding Expectations

Seven months into ownership, we're seeing impressive results that validate our approach. We've completed renovations on 56 out of 71 units, all of which are now rented, and are on track to complete all renovations by the Spring of 2025. Our average renovation cost per unit has held steady at $18,500, including $1,600 for necessary electrical panel upgrades.

The market's response to our renovations has been even better than we anticipated. We're achieving rents significantly higher than pro forma projections. For one-bedroom units, we've moved from original rents of $988 to $1,275, surpassing our pro forma target of $1,230. Two-bedroom units have increased from $1,095 to $1,475, well above our $1,430 pro forma. Additionally, we've implemented a Ratio Utility Billing System (RUBS) charge averaging $75 per unit, further enhancing the property's income potential.

These rent increases translate to an additional $55 per unit over our pro forma rents. Once all units are stabilized at these rates, this will result in $46K in annual income over our projections—a significant boost to the property's cash flow and overall value.

Key Takeaways and Looking Ahead

The success of the Morada Apartments project highlights the role of execution in real estate investing. Construction costs can make or break a project like this, and we’re proud of the fact that our renovations have come within budget. Moreover, the Morada project demonstrates the value of conservative underwriting. By setting realistic pro forma rent targets and exceeding those projections, we have successfully underpromised and over-delivered to our investors.

This deal also speaks to the critical role of investor trust. Raising $2.75 million from 25 investors in a challenging market is no small feat, and we're deeply grateful for the confidence our investors placed in us.

As I look to the future, the success of Morada Apartments reinforces my confidence that the value-add strategy is the winning multifamily strategy in 2024. I’m gearing up to tackle ground-up projects in the next few years, but today value-add reigns supreme. I’m continuing to hunt for similar opportunities, leveraging my experience and expertise to identify properties with untapped potential.

-Ben Michel

Ben Michel is the founder of Ridgeview Property Group, an investment firm specializing in multifamily real estate. Register Here to be notified of available investment opportunities.