Q&A - Deal Breakdown: FREE 23-Unit via BRRRR Strategy - Courthouse Capital Investments

Hello all, I thought I'd provide everyone with an update on our most recent deal and how if all goes according to plan, we'll have acquired it for 0$, or even receive cash back at refinance. Below is context on how this strategy works with apartments along with how to value apartments based off cap-rate.
Price: $1,000,000 (20 units at time of purchase)

Total Leverage: $1,050,0001 Hard Money and 1 Private Lender: $725k and $325k (10% interest only and 7% interest only)(total payments around $8.5k per/mo)

Cap-rate: 9.44% Gross Income: $167,000 w/43% expense ratio (#'s based off T-12)

Property Details: The property is located about an hour and a half from the greater dc metro. At the time of purchase 90% of the leases were month to month and severely below market value... and I mean severely. 1BRs were going for 600 when 850 is market value. 2BRs going for 600 when 1100 is market value. It was a classic example of a mismanaged property neglected by the owner. There were two vacancies at the time of purchase, one of those units being a studio needing a full rehab. It's worth mentioning, the day after we purchased the property a tenant OD'd and passed away in one of the 3BR units which resulted in another vacancy. Lastly, after touring the property we discovered a storage area with room to add two additional studio apartments.

Value Add: First off, anything over 4-units we prematurely look for banks in the area that will refi specifically based off the income approach. Income approach is the method of valuing the property based on the income it produces. 

The formula consists of: NOI / MARKET Cap-rate = Property ValueThere are three main ways we plan to increase the NOI.. which is most important when it comes to APT value add;

1. Rehabbing one studio and adding the two additional units. Estimated at a total of 40k in costs, which we will pay out of pocket. Each studio will bring in $630 per month. Adds an additional $22,680 to NOI or $238,736 in total value
2. Raise rents and put tenants on a year lease. After raising rents and equalizing #'s across the board, gross income goes from $15,500 per month to $21,240 which is around a 37% increase.
3. Reducing expenses. Not only is increasing income important, cutting expenses also helps raise NOI. We cut property management to 8% from 10%. We have 30 units in town all under the same management. We cut the trash bill from 400 per mo to 250 per month.

New Value: $1,538,894

New Formula: NOI $146,195 / 9.5% cap = $1,538,894We actually believe the market cap-rate is more in the range of 8.5-9%, which would increase the value by more than listed above. 9.5% is a very conservative number for us to hit. It's important to be conservative and do your market research when deterring what the actual market cap rate is. There's a huge difference between the cap-rate you bought the property at and the actual MARKET cap rate. Lower cap results in higher value for you. This is the one number that is out of your control, the appraiser the bank uses will determine the cap rate. Do everything in your control to provide the appraiser with similar comps with your desired cap rate.

BEST CASE SCENARIO we refinance at a 75% LTV ratio which would make available $104,171 in funds available for a cash out refi.

Math: New Value $1,538,894 x 75% LTV = $1,154,170... then subtract that from our current loan of $1.05M = $104,171 available. We will likely pay ourselves back and not take any cash out to keep our loan balance as low as possible, and cashflow as high as possible.

Final Thoughts: The benefits of this approach are clear, #'s are fixed from the beginning which puts the majority of the uncertainty in your control. If you know your margins and the general market cap rate you have to hit, risk is relatively low.. ESPECIALLY if the property covers your loan payments at the time of purchase. This property cashflows $2-4k per month on our hard money payments and will bring in around $65-90k in cashflow post refi depending on loan terms and whether we decide to pull out cash.
Please feel free to ask any questions and hopefully use this information to buy your own apartments!