Keeping Rents Affordable After Upgrading

Posted on Jun 13 2018 - 8:06pm by Lance Edwards
Investors benefit by keeping rents affordable following renovations.

Freddie Mac NREI Article Image_June_1(NREI Online Article —  Historically, multifamily investors would purchase an older property and completely renovate it — bringing it up to Class A standards. And, of course, realize the return on their investments by charging Class A rents. But there’s another trend we’re seeing — investors upgrading properties a bit more modestly — and keeping rents affordable. Why?

When the renovation budget is more reasonable, owners don’t need to raise the rents dramatically. Properties that are affordable to those making less than the area median income (AMI) generally remain fully occupied with lower tenant turnover. This presents a more consistent net operating income for the investor.

For example, Chairman and founder of BH Equities LLC Harry Bookey discovered Vicino on the Lake, a 1967-vintage property sitting amid more affluent rental properties in St. Louis. He knew upgrading the property would bring it more in line with the market. Yet, he was aware of the many benefits of keeping rents affordable.

“Vicino on the Lake is a gem in the rough. With high demand for workforce housing, we wanted to keep rents affordable after renovations were completed, so we could retain the current tenants,” said Bookey, who borrowed close to $3 million to upgrade the property, including $1 million in site improvements. Renovations extended to $10,000 per unit for interior work and $8,000 per unit for exterior enhancements. “Vicino needed to provide a market-comparable quality of life for its workforce renters.”

Bookey also acquired The Reserve at 77, formerly Lenexa Pointe Apartments — a fixer-upper in Lenexa, Kansas built in 1972. Thirty-nine percent of its units housed very low-income renters — families earning 50 percent or less of AMI. Monthly rents averaged $140 less than the surrounding property rents, providing room to make a profit while keeping rents low. Bookey worked with Dustin Dulin of JLL Capital Markets and L5 Real Estate Investments LLC to secure about $25,000 per unit for renovations.

Dulin contacted Freddie Mac Multifamily to work with them on this project. “This was a great fit for Freddie Mac, a company with a mission and a passion to preserve workforce housing. They offer the only Moderate Rehab Loan  on the multifamily market suitable for funding properties in dire need of renovations,” he said. “It allows our borrower to stay on top of the amenities and upgrades today’s renters want.”

By creating a flexible moderate rehabilitation loan customized for multifamily, Freddie Mac helps borrowers fund renovations at reasonable costs. This offering can help investors realize steady returns while creating quality rental homes for families who make too much for subsidized housing, but too little for growing market-rate rents.

Learn more about Freddie Mac Multifamily’s Moderate Rehab Loan as well as other innovative ways to acquire and preserve affordable housing.