The CAP Strategy Explained

 

Years ago, my friend and longtime investor, Porter Stansberry, invited me to speak at one of his conferences. In the presentation, I explained how we made it through the Crash of '09 without ever being late on a mortgage payment or failing to deliver positive returns for investors. I used examples from our small-property portfolio at the time. Those same principles have kept us in good stead as we have grown to acquire, renovate and operate what would become award-winning hotels, best-in-class apartment communities, and essential-business shopping centers.

The following 22-minute video reveals the core investment principles behind The Pax Properties CAP Strategy.

Investing with Pax Properties

Pax Properties has sponsored over 40 property investments in nine cities in four states since 2002. During that time, through boom, bust and pandemic we have never been late on a single mortgage payment or failed to produce positive results for our investors.

Like others, we certainly have our opinions about the market. But we don't stake our success on our ability to read tea leaves. Instead, our strategy is to focus on three key elements we can control: cash flow, amortization, and positive leverage. We call this the CAP strategy.

With this approach, investors have the potential to make significant returns even if market prices never rise by a single dollar. And if they do rise? They may simply be in a position to see good investments turn into extraordinary investments. 

Pax investments are open exclusively for accredited investors. To learn about investing in our new CAP Plus Diversified Income Fund, Click Here...

Current & Future Value Opportunities

At Pax, we have invested extensively in search engines and lead generation.  We have also developed a “Birddog network” of fellow investors and commercial brokers who use our resources, training, and criteria to winnow for deals in a half dozen states.  This means we are able to review dozens of new opportunities each week and drill down on the two or three that offer the most promise. As a result, we have recently entered into a contract on three cash-flow properties, scheduled to close between mid-May and late July. 

 

These include a 91-unit apartment community in a solid, working-class area of Tulsa (a city that has grown faster than the national average for the last 10, 20 and 30 years), as well as on a 126-apartment community in Oklahoma City in an increasingly popular neighborhood close to downtown. We also just executed a Purchase and Sale Agreement on a 78,000 square-foot, shopping-center-anchored plaza on 10 acres near the intracoastal waterway on Florida’s rapidly growing space coast.

In addition to these, we have identified a number of other properties selling at reasonable prices relative to rents, and where we believe we have good prospects to grow the income after making improvements to the property and management. Conservative projections are for stabilized cash flow of 5% to 6% of the total investment.  When financing 70% to 75% of these investments with fixed-rate debt in the mid-3% to 4% range, our cash yields should rise to the 7% to 10% range, with total returns in the low teens, not counting appreciation.

Here are a few of the deals we are underwriting.

 

  • 170 garden-style apartment units in a B area, just off Highway 288, 40 miles south of Houston. The property is a half-century old, at 83% occupancy and ready for a new round of capital and more dedicated management to bring it back up to its best potential.  We’ve conservatively budgeted $10,000 a unit for renovations, on top of an acquisition cost of $55,000 a unit.  That would bring total costs to just under $85 a square foot, well below replacement cost.  At current rents, cash yields are expected to reach 8% in year two. The property is also in a county whose population is expected to grow by more than 60% over the next 15 years.

 

  • A 241-unit off-market apartment community in a growing community 80 minutes south of Atlanta.  After a $2.5 million renovation budget, our all-in costs come in at just under $60 a square foot. Conservatively assuming a 3% rent boost from the improvements, results in cash yields in excess of 9%.

 

  • A 118-unit affordable housing community in a growing market on the west coast of Florida. Initial yields are in the 5% range, yet governing covenants will reduce taxes and increase some rents over the next two years. Combined with favorable financing, cash yields should average over 7% the first five years. We may be able to acquire this 12-year-old property, in good condition and in a good area, for less than $80 a square foot.

 

  • A lender-owned, 114-unit extended-stay property in a good area in a major Texas market. This property is ideal for conversion to apartments as unit sizes range from 523 to 720 square feet, about twice the size of typical hotel rooms and instead right in line with one-bedroom apartments.  Also, all units also already have kitchenettes.  The property is of 2006 vintage, well maintained and can be bought and renovated for a total cost about 20% less than the market value of comparable apartments in the area.

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The CAP Plus Fund’s new Tulsa Property, soon to be renovated, repositioned, and renamed, "The Apex @ Midtown", at Contract

91 units, 99,550 sq. feet, 1962 construction frame & masonry, $42/sf, post-renovations: $55/sf; approx. 55% under replacement value; C+ neighborhood, 91% occupancy; projected stabilized cash yield: 8.6%.

Pax Growth Score: 90; Pax Value Score: 93

The CAP Plus Fund’s Oklahoma City Apartments, at Contract

 

126 units, 90,588 sq. feet, frame, stucco & siding 1968 construction, $59/sf, post-renovation: $81/sf; approx. 35% under replacement value; 90% occupied, B- area trending to B, projected stabilized cash yield: 9.1%.

Pax Growth Score: 88; Pax Value Score: 92

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The CAP Plus Fund’s Supermarket-anchored Shopping Center on the Space Coast of Florida, at Contract 

78,540 sq. ft, concrete block & stucco 1986 construction, $102/sf; post renovations: $111/sf, approximately 20% under replacement value; 97% occupied, on 10.1 acres across from the intracoastal waterway, projected year-one cash yields: 8.0%.

Pax Growth Score: 91; Pax Value Score: 90