Case Study: The Esther Buildings

Investment Type: Multifamily Rental

This 17-unit apartment building built in 1911 was acquired in early 2003 for $910,000 from a private out-of-state owner.  The property was not listed with an apartment broker and was identified through a targeted search of gentrifying downtown Denver neighborhoods.  A search of public records led us to the owner who we contacted and proposed a sale.  The price of $53,500 per unit and a capitalization rate of 8.6% was the best acquisition in the central Denver submarket in three years according to one of the top multifamily brokers in Denver.  The price per unit was even more remarkable because the property contains 6 large two- and three-bedroom units representing almost ½ the rentable square footage.

Property Operations/Improvements
After acquisition, three units that were basically abandoned by the previous owner were renovated and brought on line.  Other value-adding capital improvements were completed including replacing the old leaking roof with a historically appropriate green cement tile roof and replacement of a fire escape.  In-unit improvements including refinishing wood floors, painting custom colors, installing new sinks and light fixtures were completed as tenant moved out allowing the owner to raise rents.  Based on the original acquisition price plus the capital improvement dollars spent, the capitalization rate on current Net Operating Income is just over 10%.  The increase in cash flow equates to a 22% increase in property value. 

Future Redevelopment Potential
From the beginning, part of the owners strategy included holding open the possibility of renovating the apartment units, separating them legally and selling as individual condominiums.  Accordingly, in 2007 the adjacent house and lot were purchased directly from the owner.  Again this property was not listed for sale to the general public.  We were able to work out a deal with the owner's estate and purchase for a below market price.  The acquisition complemented the existing property in two ways.  First the owners were able to separate the house into 2 desirable rental units and produce additional rental income.  Secondly, the addition of the adjacent lot gives the property off street parking which will greatly enhance the value of future condo sales.

Summary
The Esther investment embodies several of Radford's fundamental investment philosophies.  Both properties were purchased at a substantial discount relative the the market through a combination of hard work and being in the right place at the right time.  The owners were able to greatly improve the cash flow/value of the property through value added property improvements especially bringing the unused rental units online.  The investment allows the owners to be flexible with the strategy and take different courses based on what direction the market is moving.  For example, given the current depressed real estate sales market, the owners are able to operate the property as apartments and wait until the sales market returns.  The rental market in this submarket is very strong given the current barriers to mortgage financing that exist.  We believe having the ability to not just survive but take advantage of market conditions is critical to the success of our investments.