We recently acquired a 128-unit apartment community in the stable and growing city of Omaha, Nebraska in the Midwest. The project is called ‘Oakwood Trails’ on a parcel size of 7.7 acres.
We plan to increase rents organically by 10–15% in addition to renovating/upgrading the property to achieve a 30% return on cost. The investment is expected to generate an average 7.5% cash-on-cash return and a net IRR of 13% over seven years.
The investment was made through Blue Field Capital where I’m a General Partner.
WHY OMAHA?
After the pandemic, many young families want to move out of expensive overcrowded megacities with urban blight, for less expensive and less stressful cities with good livelihood and employment potential. Think of the recent “quiet quitting” trend.
Omaha is a growing Midwest city with a great lifestyle potential. Omaha is home to Warren Buffett’s Berkshire Hathaway, and major employers like the USAF Offutt Air Base, Mutual Insurance of Omaha, Union Pacific group, TD Ameritrade, among others. It is definitely a city on the sunrise path.
A great quality of life, low cost of living, and favorable business conditions are attracting people to move here. In 2022, Omaha was ranked #9 as one of the best cities for families in US News Real Estate, and #4 for young professionals by Smart Asset. Local unemployment is well below the national average of 3.5%. The population grew by almost twenty percent from 2010 to 2020. The metropolitan Omaha area alone is expected to surpass one million residents by 2024.
According to real estate observer Redfin, the Omaha housing market is very competitive. Homes receive an average of two offers and sell in around sixteen days. The average sale price of a home in Omaha was $235,000 last month, up almost two percent since last year. The average sale price per square foot in Omaha is up almost five percent since last year.
One attractive fact about multifamily investing in Omaha is that apartment dwellings cost around half of the average for the entire United States. That plus the good quality of life, plenty of fresh air, with a healthy mix of urban and healthy pursuits should ensure a steady level of growth in the next few years.
THE PROPERTY
Oakwood Trails was built in 1983 and has been well-maintained despite its age. This Class B community is adjacent to a large city park (Rambleridge) with a lagoon, walking trails, soccer fields, and large green open space. We aim to make it better.
We felt this property would fit well in our real estate portfolio which is currently light on multi-family as we sold many of our assets when interest rates were low and values hit historic highs. We bought this property well below replacement cost and plan to hold it for approximately 7 years.
Our business plan is to invest over $500,000 into capital upgrades including unit renovations, common area enhancements, parking lot improvements, landscaping, and other miscellaneous improvements. We plan to spend $6,000 per unit to renovate 53 apartments. These upgrades will allow us to charge a $150 premium on top of the standard market rent, which represents a 30% return on cost. Garage rents, application fees, and utility reimbursements are other revenue streams that can be enhanced as well.
Monthly rental fees at Oakwood Trails only increased by half of the average 4.2% rent increase in Omaha of the past three years. Average rent price growth in Metro Omaha also reached almost eight percent during the third quarter of 2022, which means that the current rents at Oakwood are below where they ought to be. In addition to the renovation premiums, we expect to push rents 10–15% organically.
Rental vacancies in the area were below the ten year national vacancy average as of 3Q’2022. This can partly be attributed to the strong growth of non-farm jobs locally that reached 13,000 openings last year and increased housing demand. This speaks to the volume of potential renters looking for residential units at any given time. I do not foresee the possibility of an oversupply of multifamily dwellings in the immediate and even distant future.
NEW MANAGEMENT
The Omaha based Lund company will replace the current management to professionally manage the property on our behalf. Toilets need to flush, air conditioners need to work, pests need to be managed, grills and walls need to be painted, and hedges need to be trimmed. Lund was founded in 1981 and currently manages thousands of properties in the area. They are very familiar with Oakwood Trails. We strongly believe that Lund’s operational property management expertise will help to grow the value of this property for many years to come.
Over the last 12 months, rental prices have increased nationally on average by 8.3%, and home purchase prices by 12.5%.
Because of the national trend of moving out to less crowded cities after COVID, and an increasingly bustling and growing urban activity for Metro Omaha, I foresee a healthy and sustained growth for this investment for years to come. Data from Redfin said that “Los Angeles homebuyers searched to move into Omaha more than any other metro followed by Lincoln and San Francisco.” Also, Redfin considers the Omaha market as “very competitive” meaning there is less supply than demand.
Eventually every family wants to own their own home. However, while they are still renting, they deserve quality rental residences for a reasonable rental rate especially if they haven’t decided where to permanently settle yet. That’s where we add value.
WHAT’S NEXT?
We think this is a great time to invest in real estate with increasing distress in the market. We’re currently in the process of acquiring another multifamily property with a strong return profile and are happy to speak with accredited investors if you’d be interested in investing in our projects.
While the market is down and prices are depressed, now is the time to acquire properties whose true value will shine in the upcoming years ahead. We at Bluefield can help pick out the valuable gems from the pile.