This one is for anyone participating in the 50 units or less space. Looking to get some insight on capital raising for deals of this size and return expectations in the market right now.
I set a personal real estate goal a few years back of cobbling together $1M worth of real estate by my 30th birthday and fortunately set myself up to double that. Nothing huge or to write home about but not too bad for a kid from the projects.
I have recently set my sights on a deal with just under 50 units located on a major hospital corridor in my hometown. I have it under purchase and sale for $90k a door. Not too much deferred maintenance on the property. 7.5% in place cap rate with potential to push to double digit yields by lifting rents to market. There’s a bigger play further down the line of working with the hospitals to provide short and medium term housing for employees and families visiting the hospital. Penciling a deal IRR of 22% at base case and potential to hit 30% by achieving top of market rents for this product type.
Curious how you guys have seen these deals structured in the past and some of the obstacles I might face when raising capital. Also, who are the typical investors at this level? Should be $1.35M equity slug alongside 75% ltv and 6.25% rate on 5 yrs I/O. Debt has been quoted and am working to get a commitment.
Best advice I received is "only take money from people who can afford to lose it". Makes everything WAY less stressful. You'll have a lot of sleepless nights if you collect checks from friends and family that are >10% of their net worth and the deal doesn't perform well.
Also, I own some rentals near a hospital and it provides an excellent renter base. Two things to keep in mind is that it makes leasing VERY seasonal since a lot of 25-35 year old medical professionals in residency programs tend to relocate in the summer. If you go into the winter with a lot of vacancy it can be painful. You should also look into what the local residency program salaries are and make sure your target rents are affordable for them (I doubt this will be an issue at $90k/door rents).
I also keep some of the units furnished for the STR option and get a lot of hospital workers like travel nurses willing to pay big premiums for a 3-6 month furnished leases, would def recommend keeping at least some furnished units on hand to experiment with this. Renting 30 days is a pain and not worth it IMO, any extra profit is negligible once you factor in all the extra costs, and it will also affect your insurance and financing terms. People renting 3-6+ months treat the unit better too, every travel nurse and resident I've rented to has been excellent.
This is incredibly insightful and confirms a lot of my assumptions about the opportunity beyond the traditional rental play. Also super practical regarding check sizes and the percentage of net worth. I am seeing this in my full-time job at a family office where lots of our friends and family LPs Are asking to be bought out of underperforming deals. Thank you
Ill give you advice from my own experience. In 2022, I started a GP startup investment firm. I wanted to go out on my own and know I had the knowledge and experience to do so. I spent 10 months UW deals, touring assets, etc. I was trying to get a deal under contract and then go raise the money. Didnt work out so well. The idea that if you have a great deal and money will follow is so far from the truth.
So then in late 2023, I focused my attention on raising capital and building relationships. I have soft commitments for about $6M from HNW individuals, but the problem now is finding a deal that works for everyone. The marriage of raising capital and closing on deals is a delicate dance.
Some questions for you:
How much of the equity are you contributing?
Whats your track record with similar sized deals in the market?
How are you planning on going under contract and controlling the deal while you raise capital?
Makes sense. Have been talking to a lot my buddies experiencing the same challenge as independent sponsors. On this deal, I signed up through the FO I work for as a deal for the family. We typically are developers of shiny new product and acquire large scale 200+ unit value add workforce housing type product. That said, looks like my boss is souring on the deal as its in our backyard and fears of reputational damage once we execute the rental increases. I don’t agree with his decision and have led all DD and acquisition work to date. Planning to use the rest of DD to circle the capital before our deposit is required to go hard and assign the PSA to a separate entity to close. My boss will likely slot in as an LP to support.
Raising $1.35M in equity. This would be my first rodeo at this size as a GP. My personal deals to date have been much smaller but all in the same neighborhood with same tenant profile.
So if $1.35M is the entire slug. How much of that is your equity? Not being a debbie downer here. But it might be tough. But the deal sounds good on paper. Im just telling you from my experience. How long do you think you can keep the deal under your control (under contract)?
Feel free to PM me.
Sending PM now
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