Less than two months ago, I received a call from a San Jose based apartment investor who had become disenfranchised with the continued rise in commercial real estate prices throughout the Bay Area. A simple comparison of apartments for sale in both Sacramento and San Jose (within specific parameters) resulted in an average difference in cap rate (annual yield) of 3%. The San Jose apartments we considered offered an average cap rate of 5.7%, while the Sacramento apartments offered 8.7%. It doesn’t take a genius to realize that a higher yield on a commercial real estate investment means more cash in the investor pocket. Naturally, the investor decided it made more sense to invest in commercial real estate (apartments) here in Sacramento, which is once again becoming quite a predictable phenomenon, as discussed in this 1st Quarter 2012 Multifamily Investor Newsletter.
Upon searching the market, we settled on a 13 unit apartment property at 4720 Roosevelt Ave, less than 1/4 mile west of Stockton Blvd in South Sacramento, between 14th Ave and Fruitridge Road, and within the purview of The Stockton Boulevard Partnership. The property had been acquired only six months prior by an opportunistic investor who had flipped 20 single family residences and apartment complexes during 2011. As you can see from the picture below, the apartments needed some work and had several units boarded up at the time of purchase in October 2011.
It was actually worse than the picture would even suggest. This South Sacramento property was actually in foreclosure by the commercial real estate lender. The previous owner had passed away and his wife let the property go. At the time of closing, only one of thirteen apartment units was occupied with a tenant paying rent. The remaining units were either vacant or had squatters living in them. Over the next six months, the previous owner invested significant capital renovating the property with new roof, stucco, asphalt, windows, flooring, appliances, etc. and leased up the apartments to nearly full. Nearby neighbors constantly expressed their appreciation to the owner for the much needed need attention and improvements. Upon closing on the apartments purchase transaction with the San Jose investor in late June 2012, the property looked dramatically better, as shown in the picture below. The final cash purchase price was $430,000 ($33,077 per unit) for a mix of 1, 2, and 3-bedroom units with an un-leveraged cap rate exceeding 10%.
I recently had the opportunity to sit down with Frank Louie (Board Chairman) and Terrance Johnson (Executive Director) of The Stockton Boulevard Partnership. Both community leaders are men of vision and conviction when it comes to leading this South Sacramento commercial business district towards economic recovery and sustainability. While there are certainly many commercial real estate buildings currently available in this South Sacramento community, the future is most definitely bright. The Stockton Boulevard Partnership continues to nurture critical alliances with neighbors, law enforcement, city and county agencies, elected officials, philanthropic and benevolent partners for the betterment of this vibrant and culturally diverse South Sacramento community.