Stratford Lakes Apartments

Stratford Lakes Apartments
Canal Winchester, Ohio

Address: 6611 Seahurst Drive
Canal Winchester, OH. 43110

Year Built: 1996

Number of Units: 124

Unit Mix:

• 84 2BD/2BA Units
• 40 3BD/2BA Units

Structure:

• Exterior: Wood frame, brick, and vinyl siding
• Roofs: Pitched composition shingle
• Parking: Asphalt

Stratford Lakes Apartments is strategically located in the solid secondary metro area of Columbus, Ohio, the 14^th largest city in the United States. Located just 15 miles south of downtown, the property is in the well-positioned and popular suburb of Canal Winchester. Columbus is Ohio’s state capital, its most populated city, and home to the famed Ohio State University. This market’s diverse stable of established demand drivers, including a large renter population, stable employers, and strong rent growth, inspired management’s desire to enter the market.

Columbus enjoys a solid economy that boasts a strong 3.4% unemployment rate, well below the national average. Local employers provide nearly one million jobs in the Columbus metro area, and the labor market is expected to expand at an annual pace of 1% over the next five years as the region’s employment base becomes more diversified. In addition to the strength that local employers bring to the economy, major corporations are attracted to Columbus’ lower business costs, stellar education system and strategic location. The metro is home to five Fortune 500 companies including Cardinal Health, American Electric Power and Nationwide, as well as many regional and subsidiary operations. Columbus has a strong tradition of nurturing local enterprises into national and global powerhouses. Wendy’s and L Brands, both with headquarters in Columbus, support thousands of jobs in the metro area and are very involved in community development. Information technology is a growing sector in Columbus with the recent addition of IBM’s Client Center for Advanced Analytics. Announced expansions include 1,500 full-time hires for Amazon’s new local distribution center.

Low vacancy in the Columbus metro has supported robust rent growth during the past four years and the market is on track for a fifth year. Gains are motivating investors to purchase apartment properties, creating heated competition for local assets. Even with the multifamily building boom in downtown Columbus and throughout Central Ohio, supply is still not satisfying rental demand. Increased competition means lower initial cap rates when purchasing in Columbus. However, this can lead to a higher IRR over the hold period along with sharper price appreciation that can be realized during refi’s and when the assets are finally sold.

The Stratford Lakes Apartments was another off-market deal brought to the fund by one of its current property management partners who is very active in the area. This Class B property has 124 units composed of a great marketable mix of two and three bedroom floor plans. The Property boasts tenant-desired appointments such as walk-in closets, built-in microwaves, pantry, and washer and dryer connections in all units. The partnership group that owned the property was having internal issues and was looking to divest from each other. As a result, Stratford Lakes was successfully acquired for $8,500,000 on May 31, 2017 with favorable financing, including two years of interest only.

Part of the upside for Stratford Lakes is that it suffered from mediocre management. Its been proven from similar deals that taking a property from a poorly,  privately managed investor to a professionally managed investor can immediately boost the profitability of the asset. During a visit to the property for due diligence, it was found that current management had not raised rents for two years. In addition, the property had about 24 Section 8 renters that rely on vouchers to pay their rent. Not only can it lead to more turnover, but it can also drive down rents and drive out the best tenants. Due to the strength of the market, this should not be the case. Upon takeover, management will reposition the property by no longer accepting Section 8 renters. As these 24 units are turned over, they will be rented to regular tenants.

Being constructed in 1996 will reduce potential repair and maintenance outlays. In addition, the first two years of interest only should provide the added cushion needed to get the properties performing like they should be. At current rents in year one, the initial cash on cash return on investment with interest only is projected at 13.5%. With a more aggressive management style, year two cash on cash should rise to 26% with interest only, and 20.2 % without. This is primarily due to the complex being so far under market after 2 years of not increasing rents. With the lower cap rate on this property, we get nice leverage on that increased net operating income, and the 10-year IRR to investors is projected at 36.9%.