Get a brief overview of the multifamily case study.
- [Instructor] Alright, welcome back. We're going to do another example in the next couple lectures and this time we're going to focus on the multifamily asset class. So, specifically for our example, we're going to look at this target property that is a Southern California 1970's built multifamily building. It's eight units, so it's quite small. It's mostly made up of one bedroom and two bedroom complexes. And let's look at some deal economics.
Alright, so we're going to look at buying this property for one and a half million at about a 6% cap rate on current rent. We're going to need to make major renovations within the next 10 to 15 years. It is kind of old. There has been some renovations, but it wasn't recent. So now we can look at two investment options. One is to do a light initial renovation and then do a major renovation at the exit.
Option two is to do a major renovation up front and then do a light touch up at the exit. So we're going to go through both scenarios and see what the considerations might be when we look at these two different scenarios for the analysis. Alright, some additional information is that in this market we are lookin' at other listings of similar types of smaller apartment units that are comparable.
And in these markets what we're seeing is around five to 6% cap rates for those types of properties as well that are comparable, though they're generally slightly newer than the product we're lookin' at, our target property. And the other listings tend to cost about 15 to 20,000 more per unit. So the way we're lookin' at our target property, it might be a better value add play, right? So what does the market rents tell us? Well, if we look at existing and market rents for the one bedroom, so the current one bedroom units in the target property, they're only achieving $800 a month, but the comparable one bedroom units are averaging over $900 a month.
And if we look at the two bedroom units, the two bedroom units are getting 1,000 a month in the existing, the target property, but the market comps are showing almost 1,200 a month. Right, just 1,150. So there's a 15% discount to the market due to probably the fact that it's a older unit and quite possibly the current owner might be conservative.
They might have been burned before tryin' to overcharge or they just don't want to raise the rents on their existing tenants. Whatever that may be, the target property is not realizing its full market rental potential. So there might be so opportunities here. Now, something else to keep in mind for this market for the target property is that it's five minutes from a major employer and there are over 75,000 jobs within five minutes of the target property, right? So this means that there's really good, strong long-term job figures.
Disney isn't expected to go anywhere. It's only getting more crowded. So although Disneyland does employ a lot of temporary short-term jobs, there is a major industrial park in that area that's hosting over 2,600 businesses That's creating another 55,000 jobs that are within five miles, or five minutes from this target property.
So, overall, it's actually very good. It's not super tourist reliant. If there's a downswing in tourism, it might hurt some of the local businesses, but overall it seems like there's some good, long-term market dynamics there. Now, demographically in this market, we've seen some steady population. It hasn't been growing, but it hasn't been shrinking either. And it's only been growing at about a 1% a year. It's mostly consisting of working class families that make up to 75% of the households.
Moderate income levels. The average household income is 50,000 a year, which means that this is one of the more affordable cities that is sandwiched between much higher cost cities, both north and south of it. Alright, north of this area is Los Angeles where housing prices cost a lot more, as well as south of that is Orange County. Again, much higher household incomes than this sort of city right around Disneyland where it's much more moderate.
So in the next two lectures we're going to look at this example in more depth. First one we're going to try to do the low upfront renovation, and then the second one we're going to do the higher upfront renovation and see what the differences are.
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