Saturday, December 17, 2011

59.4% Yield in One Year

The Marlborough Apartments is an 82-unit building in downtown Seattle. Built in 1927, this Gothic Revival architectural gem was purchased by a group on investors for $12.75 million in September 2010.

The new owners spent about $4 million on rehab costs and put the new Marlborough back on the rental roles in January 2011. By the middle of the summer, the building was fully leased.

The Marlborough just sold for $28.7 million or a sweet $321,000 per unit.

The cash-on-cash calculation is an approximately (less friction costs) profit of $11.95 million on an investment of $16.75 million over fourteen months.

Or about 59.4% for the year. Of course, using leverage the actual return for these investors is much, much higher, well into triple digits in less than a year and a half.

Still, I wanted to see how they pulled off this stellar accomplishment.  What lessons can be learned from their success?

I shot the video and photographs outside the Marlborough Apartments on very busy and noisy Boren Avenue in downtown Seattle. As you can see, the exterior of the building is gorgeous. Of particular note is the covered driveway which as far as I remember has been part of the building's original design. Here is an older picture of the Marlborough without all the shrubs and barriers setting off the street from the drive.

These investors made their money five ways and all real estate investors can apply the very same techniques whatever the size of the investments.

1.  Apartment buildings right now are hot commodities.  This investment group got out ahead of the trend by buying while others were still on the sidelines or selling.

2.  This was a foreclosure purchase.  The previous owner had tried to convert the building to condos but got burned when the bubble burst.  In other words, these investors bought cheap.

3.  The exterior improvements to this building are not expensive but impressive.  The dirty old Marlborough is clean and sharp again.  You expect to see Humphrey Bogart and Jimmy Cagney walking out the lobby.  The place has a museum feel.  The covered drive and the building's awning give this place a sense of class that others in the area lack.

4.  The bones of this building were solid and did not require much renovation.  You save money when you don't have to make major improvements.  Check out the interior detail of the building lobby and other tenant spaces in this photo gallery.

5.  They sold the building fully leased with a solid and growing cash flow statement.  All the above Steps #1-4 above are really designed to affect Step #5 which is to get tenants in every unit paying above market rents so the value of the property can be maximized to the extreme.

When you read about real estate investment successes in your area, visit the locations and see for yourself what you can learn.  Little details mean a great deal.  For example, on the Marlborough there are two banners hung on the corners of the front facade.  On many buildings these advertisements look cheesy and detract from the beauty of the building.  In this case, the banners highlight the architecture of the Marlborough.  Even the colors used on the banner is consistent with all the building's signage.  Notice in the old picture of the Marlborough above the banners on the building are an awful garish green!

This is an impressive achievement and I'm sure there were lots of celebrations when the contract was signed.  Super nice job.