I have a deep, embarrassing, long term addiction to low price per sq ft deals.
There, I admitted it.
Do you know why I’m addicted?
It’s pretty simple:
1. On the tenant side, buying for a really low per sq means that you can offer large apartments at relatively low, per sq ft rents and still make money. Most tenants don’t think about things in these exact terms, but the effect is obvious when they walk in the door: They can’t believe they’re getting this much space for that little rent.
2. On the sale side: When you buy at a very low price per sq ft, the eventual exit is much, much easier. The reason is that, once you improve the building and raise the rents, you’re still not going to touch the established $ / sq ft comps on exit. For example, we sold 1947 Clinton St for around 11.3x the rent and 3210 Bellevue for around 11/4x the rent. But Clinton was a huge building, so the price ended up at $306 / sq and Bellevue was tiny, so the the price ended up around $440 sq ft (from memory). If you were an appraiser, which deal would you find easier to underwrite?
But there’s a downside to my addiction: I often get very excited about deals in areas where the rents simply won’t justify renovations, even if you acquire at a very low price per sq. These deals kill me, because I know in my bones they’re worth buying, but, because the value-add piece isn’t justified by present rents, I can’t use my value-add funds to buy them.
Some day, I’m going to have enough capital sitting around to snatch up these deals when I see them with the idea of just waiting around until the rents justify renovations. Until then, I mostly have to watch them go by…