BRRR Cash Out $250k Case Study

[Lonnie Freeman]

I am closing on the re-finance on a multifamily in Ohio where we will cash out $250k and I wanted to share my case study with others so they can learn from our mistakes and successes. First, here are the quick numbers:

20 units - all 2 bedroom, 1.5 bath town house style units.

Purchased for $368k

Renovations: $175k

All in for $555k

New Appraisal: $1.1M 

Bank willing to loan 75% LTV = $825,000

Cash out on refi: $270k

So here's my case study: I have plenty of experience with single family/residential properties and creative deal structures but this was my very first commercial deal I'v purchased. I found the property through cold calling (my partner is a MF broker and has access to certain tools so could get the guys phone number when data basing). The seller happen to be in foreclosure and his property was distressed, 50% occupied, rents were way too low, and the property needed a lot of work done to it. He owed around $263k to the bank, but hadn't been paying the mortgage for a long time, so it was actually set to go to sheriff sale when we talked to him (we ended up closing 1 week prior to the sheriff sale). We ended up buying this property for $368k but bought the property subject to the existing mortgage. We brought about $105k cash to closing which went in the sellers pocket, and we kept the $263k mortgage in place and started making the mortgage payments. We raised an additional $150k from private lenders for the construction improvements. 

For the rehab and construction of the units, we used a combination of subs and GC to make the improvements to the property. I focused on the rehab and the contractors and hired a 3rd party professional property management company to focus on the marketing and lease up of the units and they did a killer job! We had weekly meetings with the property management team which helped keep everyone on the same page and allowed them to lease up the units as fast as we renovated them. 

We ended up renovating 12 out of 20 units and leasing them all up. The tenants we kept, we had sign new leases at increased rents. We bought the property in May and as of the October 1 rent roll we were 100% occupied and all 20 units have new/fresh leases signed at new/market rents. 

We talked to 10-12 local banks throughout the time we owned the property about what we wanted to do (re-fi after stabilizing) and continued to give them updates every month or two. Once we were 100% occupied the banks were willing to get serious, which we then narrowed down to 4-5 banks that were serious about us and our property. This part (talking with banks) was new for me and I wasn't sure how they would view a 'full time house flipper' when giving me a $1M dollar loan. It turns out, it was easier then I thought! We got pre-lim terms and concerns with 4-5 banks and paired that down to the 2 we liked the best and had them give us term sheets. We picked the bank with the best terms and fees (we were more concerned with terms then fees...we have a 10 year term with 25 year amortization, 4.5% interest rate, most the banks offered 5 year term and 25 year am, 4.75-5.5%). Like I said above, the re-fi process has been easy....2 years of personal tax returns, personal financial sheet, credit check, rent roll, and 2 year projections of the property. Note, I don't have w2 income and my 'job' has been flipping houses full time the last 4 years, so I didn't think banks would like to loan to me, but literally no issue (mostly because the property is such a good deal and well positioned). Bank is willing to give us 75% loan to value and no seasoning period. We provided the bank with the financials and where we think the value should be ($1M-$1.1M), and the final appraisal came in yesterday: $1,100,000. The bank is willing to loan us between $825,000. We are all in for $555k (with paying interest to our lenders), so we should put $270k+ in our pocket, if we choose to take all 75%. We might take 70% so we have a lower monthly mortgage payment and we cash flow higher, yet still can pay off our private lenders and put $215k in our pocket. 

This deal finished ahead of schedule and out performed our financial projections in terms of monthly rent amount and value, which we believe is partially due to our conservative underwriting but also in part to the current market conditions (gotta give credit where credit is due!) so we don't expect all our deals to be this good! 

In the end, lessons learned and advice I would give:

1. Go big. It's a lot easier then it seems. Once you rehab 1 unit, you have the scope of work to turn the next unit. Just add a couple commas and a couple zeros to your numbers. 

2. Interview tons of PM Companies and don't cheap out. The management company is almost more important than the actual property you buy. Good management can turn around a bad property and bad property management can ruin a good property. 

3. Talk with local and regional banks before you start your project and keep them updated throughout. Find the banks willing to build relationships and loan on 'smaller' commercial deals that big banks won't (because of loan size). Ask for their commercial loan requirements, they are similar but different at each bank. If they require borrower to have 10% skin in the game or a net worth equal to the loan amount and you don't meet either of those requirements, be transparent with the bank. They are OK with you bringing in a partner simply to meet the liquidity requirements. You will be surprised at what banks can do for you. 

4. Stay focused - these deals can go south, quickly, if you don't have a game plan and don't stay on top of executing it. But if you have a plan and follow it, you will be fine. 

I hope this short case study can help someone else or inspire them to take the next step in their business! I love flipping houses but after this commercial deal, I think I MIGHT love commercial MF properties more! Our goal is to purchase 200 units in 2018 with a minimum of 20 units per building (anything 20-200 units). 

Feel free to reach out with any questions or if you want to talk more about these types of deals. I'm here to help.