The case of the Bradford Apartments is one that is wrought with aspects that make it difficult to conceptualize whether or not this will be a positive purchase for Jake. Through careful examination of the property, its offerings, and the various real estate theories and guidelines, the view ultimately emerges that this will not be a beneficial project for Jake Henson to attempt to make money for him and his investors. This claim will be explored in several parts that highlight the benefits and drawbacks of purchasing the Bradford Apartments.
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The very first section of the case study that is dedicated to the Bradford Apartments and Jake Henson’s evaluation of the situation details the area in which the apartment is located. It is revealed that the apartments are not only near the area that Henson had experienced prior success, but that it was “less than one mile from the core of the Central Business District” and still bordered by several other affluent areas in town ( The Bradford, 2015). The fact that this apartment is located in such an important area of the city shows immediate potential in terms of its value in real estate. At this point the mantra of location, location, location begins to garner appeal.
After all, it is not enough that the apartments are located near a business district or near an affluent area within the city, but that there have already been significant changes around the city. According to the case study, “much of the inexpensive housing was also disappearing” (The Bradford, 2015). This is ultimately beneficial because it shows that there is an ongoing degree of the wealthier areas driving out the poorer, less cost-effective areas in the city. While this is not necessarily beneficial for the individuals that live in the poorer areas, as something which is akin to gentrification, it is beneficial to Jake Henson as he evaluates the areas for the potential it has to make money and return on investment. This is one of the first signals that the Bradford would make a good investment.
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Another aspect of the overall apartment situation that has to be evaluated in terms of the benefits that it can offer to Jake Henson as an investment is the general comparison between the Bradford Apartments and the buildings that are in the immediate area. The case study outlines the fact that there has been an ongoing revitalization process that stalled in the early 80s and then began to exhibit a tremendous amount of growth in the year 1983. The Northside section of the city at present was able to boast of tremendous growth for the retail businesses and other rental properties, all showing that there should be an attempt to capitalize on this market. Therefore, from the perspective of a basis investment, the area seems to be financially sound.
Still, there are many other different areas that must be considered in light of the apartment complex being for sale and how it is worth the investment. In examining the neighborhood, the first hindrance to the entire prospect of purchasing the property is that it is in an area that is rent controlled. While this generally has the effect of ensuring that people will be able to afford the rent, thereby guaranteeing payment each month, it does limit the amount of money that can be made from the building.
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Even worse than the fact that there is a cap on the amount of rent rollover that can be expected each month, it was revealed that even though the building was structurally sound, there were several problems to be found. Among the most noteworthy ones were that “appliances were at the end of their functional lives. Kitchen and bathroom fixtures and much of the electrical wiring was outdated and needed to be replaced” (The Bradford, 2015). These are very significant costs when it comes to purchasing any property. Even though the building is not in danger of collapse or violating codes, as so many of its age, so much has to be replaced that it might override several years of outright profit depending on the cost estimates. Still, several key aspects of the building were still in decent shape including the roof and the boiler. While this might drive away people who would be looking to buy and flip a property on their own, it is important to remember that Jake Henson has investors who are willing to put up money for the rehabilitation of the property.
Even though it is possible to get past the overall consideration of the condition of the Bradford Apartments, there are many legal constraints that are placed upon the building since it is in a rent-controlled area. The fact was that due to the building being mostly occupied, there may not be a way to ask the people that are currently living in the area to relocate for the benefit of the rebuilding project. This is where the project begins to become unmanageable and the first major reason why this project should not be undertaken by Jake Henson and his rebuilding crew. According to the case study, the Housing Commission in the city will not allow Jake to simply end the leases of people that are already living in the building. Since he does primarily work within the realm of remodeling rather than renovation with people still living in the building, this presents an immediate issue insofar that he will be working well outside of his own specialty.
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Another problem that emerges from the case study in direct reference to the Housing Commission is that the people living in the apartments would have to be located at the cost of the company represented by Jake Henson. While this is a large cost to take on, the fact that the individuals would have to be allowed to have new leases upon completion of the renovation means that there will be even further problems for finances. After all, the rest of the area is upscale and there is little affordable housing, so the Housing Commission deems it necessary to only allow a 30% of less increase of the rent that is being charged in the building. Not only does this have the potential to isolate investors, but it could stymie the effort to make money off of the property before it even has the chance to flourish. Since this part of the process is left up to conjecture, it is entirely possible that this alone could result in the end of venture unless the Housing Commission decided to move from its position.
Even though there are many issues that were discussed based on the location of the project as well as the interior renovations that were required, there are many economic areas that have to be examined in order to come to a thorough conclusion about the property. At first glance, the property does have a great deal of value in terms of the finances. For example, once the renovations are completed in the rent-controlled area, the rent would be allowed to increase at a rate of 10% above the highest approved rent in the area for similarly price buildings. Since the majority of the buildings that are currently in the area have been developed for the more affluent elements in the area, this means that the rent will be able to surge forth. Of course, this is ultimately hindered by the inability to remove the current tenants from the building.
The costs for renovating the every one of the apartments are an important factor when it comes to determining if Jake Henson should take the risk in renovating this particular building. According to the prospects that have currently been outlined by the people in charge of construction, the cost for refurbishing each of the units is “$3,500 for refurbishing each unit and $65,000 to do all the common areas” (The Bradford, 2015) According to these calculations, it will ultimately cost $105,000 to perform the refurbishments on all of the thirty units that are in the entire Bradford complex. Adding in the common areas, this price ultimately rests at $170,000 to perform all of the different refurbishments that are required at the present time.
However, there are other financial factors that have to be considered in the total costs that are facing the company. For example, even before the project of the refurbishment can be taken on, each one of the tenants that currently occupy the building have to be placed in another tenancy at the cost to Henson and his investors. The unfortunate part about this is that he has to pay the rent amount that they are currently receiving along with any fees associated with security deposits. Based on the average monthly income of the rental units that is derived from their total payments, the costs to displace these individuals per month is $8,950. The upfront costs would most likely be over $10,000 seeing as Henson’s group would have to pay the initial fees for other apartments. At this point, the apartments are getting very expensive, and Jake Henson only has a limited amount of money to work with. At present, he needs at least $180,000 in order to complete the restoration project, without even making an offer on the building. While the restorations are happening, he will need an additional $45, 550 for general upkeep in the building, bringing the total for a year of restoration up the $225, 550. This does not take into account any of the associated problems that can occur such as the roof needing to be changed in four years time.
The investors for the project have only shown a limited amount of support for the project. According to the case study, Jake Henson only has the support of five investors for the project. Out of these five, they will only invest $30,000 each on the project, leading to $150,000 total. This leaves a massive deficit that will have to be shouldered by Jake Henson and the bank investments and loans that were mentioned in the beginning of the process. Even if he managed to get this money, he has put himself at incredible financial risk.
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Still, there are means that he can use to prove that the project is worth justifying the amount of money that will have to be invested. One of the ways that the project could prove to be beneficial would be by examining the fact that the overall rent in this area is steadily increasing due to the calculations that were made by the Consumer Price Index. According to this, the rent is projected to increase another 4%. This will increase the overall income from the apartments if they remained static to $9,290 each month for a total of $111, 475.2. However, if the apartments are renovated successfully, this will rise up to thirty percent to $144,917.76. Based on the other apartments in the area that are similar, such as the Syphax House, this number can rise quite a bit. After all, the law is that the apartments can only raise the price up to ten percent of the highest apartments that are in the area, which would raise the average price of an apartment that was once vacant from an average of $447.5 to upwards of $650 for a one bedroom apartment once the renovations are complete. This means that a fully renovated an fully occupied apartment complex will bring in about $151, 650 before the annual upkeep, which could ultimately be reduced as a result of the refurbishments.
In the end, the cost of renovating the apartments exceeds the initial means that Jake is able to obtain through his investors, and he would have to take out tremendous loans just to cover the possibility of a refurbishment. If the average one bedroom apartment is set at a price of $79,500 for purchase and two bedrooms is 107,500, the total offering price for the building would be $2, 553,000, which, with improvements could actually become a successful venture after all of the process has been completed.
Even though it is economically feasible to make this purchase, there are still doubts as to whether Jake will be able to garner the money that is required for this purchase. Moreover, there are too many things that could potentially drive up the cost to significant amounts such as the electrical system and the possibility that the roof will need to be replaced. Also, it may take too long to replace the tenants in the building which will adversely affect the amount of money that Jake could resell the building for. Overall, this endeavor would be too expensive and too risk for Jake Henson to take on, and should be avoided by him as a sound financial move.
References
The Bradford Apartment Case. (2015). Retrieved from: NYU Real Property Case Study.
