Walnut Trails Apartments

Walnut Trails Apartments
Elkhart, IN.

Address: 3530 East Lake Drive North
Elkhart, IN. 46514

Year Built: 114 units in 1970 / 96 units added in 1986

Number of Units: 210

Unit Mix:

• 2 Singles
• 96 1BD/1BA Units
• 42 2BD/1BA Units
• 52 2BD/2BA Units
• 18 2BD/2BA + Den Units

Site Layout:

The property consists of 24 buildings with a separate clubhouse and leasing center.

Structure:

• Exterior: Brick and vinyl
• Electrical: Separately metered units with copper wiring
• Foundation: Concrete slab
• Roofs: Pitched roofs with asphalt comp shingles
• Parking Lot: Asphalt

Common Area Amenities: Controlled Access, Playground, Swimming Pool and Tennis Court

The 210-unit Walnut Trails Apartments is located in desirable Elkhart, Indiana. This acquisition gives the fund an opportunity to break into a new untapped market. Walnut Trails is conveniently located 1.5 miles south of a major interstate/toll road and is only 3 miles northeast of downtown Elkhart. There are numerous commercial developments, service businesses, retail establishments, restaurants, and large retailers 3.5 miles northwest of the property. At nearly 50%, the Elkhart-Goshen MSA currently has the largest share of manufacturing jobs of all MSAs in the country, a sector where it’s maintained a strong presence since the 1940s. Elkhart’s two primary industries include recreational vehicles and musical instruments, and for decades have been referred to as the “RV Capital of the World” and the “Band Instrument Capital of the World”. Approximately 80% of all RVs produced in the United States are manufactured in the MSA. Other notable industries in Elkhart include pharmaceuticals, electronic components, and manufactured housing. Elkhart is also home to the Robert Young Rail Yards, which are the second-largest freight classification yards in the world.

There has been zero new construction in the area since 2009, and only 8% of the total inventory has been built since 2000. This has lead to sub-national average vacancy rates and healthy rent growth. The MSA’s current vacancy hovers under 3%. Walnut Trails is being purchased substantially below the cost of replacement, and with Elkhart’s low inventory levels, management is not concerned about any new units entering the market and having any affect on the property.

One of the main demand drivers for apartments at Walnut Trails is its proximity to good schools. The property is located half a mile from the best elementary school in the area. Pinewood Elementary is rated 8/10 by greatschools.org and one of the main reasons why young families want to live at the complex.

Walnut Trails was another off-market deal brought to the fund by one of its current property management partners. Although the property appraised for $11.67 Million, it was purchased for less than its appraised value at $11.25 Million in August 2017. Approximately $237,000 of deferred maintenance remediation will be done on purchase to bring the property up to management’s standards, $75,000 of which will be paid for by a credit from the seller. The property was mismanaged by the prior owner, and should see substantial upside from professional management following takeover.

Purchased substantially below the cost of replacement, Walnut Trails immediately meets our criteria for return. At current rents, the acquisition cap rate was 8.6, and with one year of interest only financing, the year one cash on cash return is projected at an 18.2% ROI. After the interest only period on the loan runs out and principle payments begin in year two, cash on cash returns are anticipated to remain strong at 13.5% as management’s takeover and ability to more aggressively increase rental rates takes effect. Walnut Trails should be a solid performer for us with less variability in earnings given the area, projected to provide a 10-year IRR to investors of 24.1%.