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Updated almost 7 years ago, 12/25/2017
BRRR Cash Out $250k Case Study
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.
Originally posted by @Henri Meli:
Congratulations @Lonnie Freeman Really seems like you hit a home run there. A few questions.
Are you planning to keep the property for a while or are planning to eventually sell it in a few years.
Also, If there is one thing you believe you could have done to drive more value from this, what would it be?
Hey Henry, thanks for the message. Good questions. I plan on keeping this for a while (5+ years). To answer your 2nd question regarding adding more value....I mean we did add $700k in value in 6 months ;) haha I'm JK. All jokes aside, that's a tough question. Given the market this apartment is located, there is a ceiling that tenants can pay in rent and I don't think we could have gotten much higher. When we purchased the property we ran numbers with market rent being $650/month per unit. Using those numbers, it was a good deal to us. Once we got into the renovations and lease up phase, we ended up getting $750/month per unit. We have a couple units at $800 but we didn't have a strong response to those units and they took longer to lease up. We did a lot of renovations and upgrades to the units that allowed us to get to $750/month in rent. We could have probably done less in renovations and still got $650-$700 but I don't think we could have done more upgrades and received more rent. Since MF apartment values are based on income/expenses, financials are more important then physical upgrades (those are tied together though....usually physical upgrades lead to higher rents, which leads to higher value, but if you can't increase rent with the upgrades you do to a property, the value doesn't change a whole lot). Hope this answers your question.
Originally posted by @Reuben H.:
Originally posted by @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.
I'm very interested in the cold-calling process. I'm looking at doing a 8-12 unit MF in a certain area, but the market is very tight. I'd like to do some cold calls. Any suggestions on how to get started? I'd like to do higher volume vs googling apartments and looking up tax records.
Reuben, thanks for the message. Marketing to MF is VERY similar as marketing to SFH!! Whichever marketing method you choose (mailing, cold calling, online ads, etc) Consistency is key!! Good luck with the 8-12 MF!!
Lonnie, thanks for sharing your deal. I always get so much inspiration from hearing other peoples stories. I live in the San Francisco Bay Area sand hearing what other people are doing is very helpful.
Best of luck Lonnie!
Originally posted by @Ed Berlo:
Hey Lonnie, congrats on the amazing return. Would you mind sharing the rents and size of the units, HOA fees?
Thanks, Ed.
Hey Ed, thanks for the message! I appreciate it. Great questions! All 20 units are the same size and style; 2 bed, 1.5 bath, 900 sqft townhouse style units, with basements. Washer/dryer hook ups in basements. No HOA fees. Our lowest rent is $650/month (long term tenants). Our highest rent for new leases in our more 'renovated' units is $800. Our average rent across all 20 units right now is $751/month. We believe 'market' is $750/month. We will continue to lease up between $750-$800 when tenants move out next year.
Originally posted by @Sean H.:
Thanks and great work @Lonnie Freeman!
You mentioned the importance of the property management company. How did you go through vetting different companies and ultimately deciding on one?
Hey Sean, thanks for the comment. Since I've been in the real estate market full time for 5 years now I've built relationships with all types of professionals, including PM companies. When it came time to hire 1 for this complex, I first asked for referrals from within my network. Then, I looked for a company that has a team, systems, and processes. Head PM, property specific PM, full time maintenance, and financial controller. # of units was a factor....we wanted a company with at least 5 properties and over 200 units, but we didn't want a company too big with thousands of units where we wouldn't be a priority. There are lots of good posts on bigger pockets with all types of tricks and tips on management companies, but these were the big ones for us when we started our initial search. Hope this helps!
Originally posted by @Jonathan Pflueger:
Lonnie, thanks for sharing your deal. I always get so much inspiration from hearing other peoples stories. I live in the San Francisco Bay Area sand hearing what other people are doing is very helpful.
Best of luck Lonnie!
Johnathan, thank you for the kind words! I get joy from helping other people, so I'm glad I could inspire you! I love SF but I couldn't afford any MF out there ;) haha That's why I buy in Ohio :) Good luck with your endeavors, let me know how I can help!
Ha, the SF area is a hard nut to crack. The game out here is so different than most places, fundamentals are the same but numbers sure work differently.
I do love it out here though and the deals I have been able to do have been great. It's definitely a long term buy and hold strategy for the most part. Same goes for you, if you are ever in the greater Bay Area feel free to hit me up. I'm small time, but I am slowly building my network.
Jonathan
@Lonnie Freeman thanks for sharing this story! Well written as well with some excellent take aways. I know it has already been written several times in this thread but as a small MF investor (2-4 units) and flipper I've often watched these larger deals from afar and hearing people say, "Its not as hard as you think." Reading the progression of your deal actually puts boots to the ground on that statement and genuinely doesn't seem all that different from doing a smaller deal but with more comma's.
Thanks again for sharing.
Hi Lonnie, fellow Ohioan here (Cinci). Long time BP reader, first time poster ;-) so you get to be my first. Thanks for sharing first and foremost.
Question about the lending requirements: You mentioned "track record and liquidity" in your response to Rob in the first page of this post. Could you please elaborate?
Regarding track record, you said this was your very first commercial deal, so did they just look at your sf track record? Was that track record relevant because you'd been doing the same BRRR model with those? Had you already used any of these banks you considered for this deal in your sf deals, or the one you ultimately choose for this deal?
In Smaller banks, are you referring to local credit unions or just regional banks?
Any idea what the liquidity requirements were most of them were looking for?
Again, thanks for sharing. In reciprocation, being as we're both "local" I'd be happy to speak with you and possibly even partner on a deal if circumstances / opportunities permit. I have been pretty serious on and off for a few years about getting into MF but never wanted to start with a 4 unit or 8 unit. I spent almost a year trying to acquire bigger ones (75-150 units) but you're right, the market is crazy competitive here. Before I could finish due diligence they'd be under contract and gone? Literally days after I'd first see them.
However a close friend of mine just bought a multi million dollar commercial office property (his first) and so direly needs MF to diversify his risks. We both have similar goals for RE and so have decided to partner up on deals moving forward. We are looking to be MF buyers start of the year.
Best, Greg
@lonnie freeman
Thank you for sharing this story! And to everyone who responded with questions it sure does bring a lot of answers and many more questions to my mind.
I am very new to RE and have not and any "investment" deals, only past sfh for myself and old family. I too am seriously interested in the MF sector. I also would love to talk to you more Lonnie about going commercial and how crucial you believe it is to start residential loan size first before moving to larger mid sized properties such as was mentioned earlier in post as a good niche.
My issue is finding the best area and what would be required to have the right amount of skin in the game for the bank, and what I can find to make myself capable of such a deal in regards to creative financing. Being in the Bay Area makes it obviously very hard for a beginner and so out of state is very attractive because of that.
Hi Lonnie
Excellent Job!!! Thank you for sharing. This sounds like a great success. You were able to rehab 12 units in short time frame. That was really good. Did you already have contractor lined up before purchase? How many contractors did you use? Or you use only one company?
Lynn