Re-positioning 2X24 unit multi family complex in small town

[TangoWhiskey]

A small town I invest in has opportunities to buy 2 24 unit buildings that are C minus grade and largely filled with a low class welfare tenant profile. Very bad reputation.... but the buildings are ok and situated on a large lot that could be fantastic with great landscaping/asphalted parking etc etc There are also opportunities to buy 2 12 plexes that are a cut higher in tenant profile, about a C to C+ grade. Not a great reputation but not as bad as the 2 X 24's. The town is about 7000 people with approx 20 larger apt buildings 6-50 units in size, a total of about 400 units in buildings bigger than 6 units. All buildings have fairly unique/distinctive reputations in the town ie each has a fairly specific tenant profile.



When trying to re-position a larger apt building in a small town, this represents a fair chunk of the rental accommodation supplied to that market. It seems likely that the tenant pool for each tenant profile would be relatively limited. Has anyone tried doing a large repositioning in a small community? How easy was it to change community perception to drive traffic from the desired/intended profile? Or do you have problems because there's only so much unserved tenant demand for the type of apt units you want to supply to the market? It seems to me the main way to tell if there is unserved demand from a tenant profile is to look at the people applying for units and who is being turned away. Anybody have any thoughts or experience with big repositionings in small communities?



Thanks guys



Tris.

 

[Thomas Beyer]

I have done it several times in small towns, 2x with poor results (i.e. lost money), 2x with flat result (i.e. break-even) and 8x with very good results (tremendous profits).



Small towns are high risk.



Proceed with caution, for the reasons you mentioned. If you can be local, spend a lot of money and time you may be able to re-position the asset but the area might still be bad.



The bigest issue is: it costs the same to fix a leaky roof or a bathtub or a carpet in a small town vs. a big city, but the associated rent increase is often not doable in a small town. I am now avoiding them, unless price is very very low and cash-flow with 35% vacancy is tremendous. Financing and selling is harder in a small city. Avoid anything below average, ie B area or better only.



Buying or owning A or B assets in C areas generally makes no sense, unless there is citywide activity that will change this C area to B over time.

 

[TangoWhiskey]

I've done a couple of value plays with multi family in small towns where the rent roll was below market but have not yet tried completely changing a tenant profile through renos and upgrades to substantially boost rents and revenue. The revenue/rent in the really tough C- buildings in this community is (incredibly) actually about the same or just a little less on a per unit rent basis as my own B- right up the street but on a complex level is a lot less due to the much higher maintenance/bad debt/vacancy issues. So the rent level is there, the issue is how accurate can I be in assessing whether there's a large enough pool of B- tenants that I could fill the buildings with before I start to run out of funds due to slower lease up rates. How can I figure out how many B- grade tenants there will be in my particular market? Its a key question especially given there will be about 25 units coming on line from another owner building new lower income units close by and its hard to see rejuvenated old competing with brand new.



Thoughts?



It may be we have different small town experiences overall. I generally grew up or worked in small towns that have all turned out to be great places to have invested (Stony Plain and Peace River AB, Keswick and Newmarket and North Bay in Ontario) and I find smaller towns to be great places so far. Also a small town really allows you to specialise in your marketplace which allows you to mitigate risks. In one industry towns find tenants with alternate sources of income especially non-employment and then I don't care so much if the industry changes for the worse.

 

[housingrental]

More important questions than you've asked in your post for you to research further:

If new buildings coming up is there enough population growth to absorb supply?

Will there be in future?

Are there sufficient barriers to entry for new construction to minimize future new supply?



Answer to your question: Easy, research your local market. What type of properties / people are on the adjacent lots?