2020 Goal Update: April Edition

[Brendan Chisholm]

The past couple newsletters have been about my experience in our new normal. All of us are finding ways to adapt. I set out at the beginning of 2020 to acquire 50 rental units. I am still pushing towards that goal. So, I thought I would ramble about the deals that have come across my desk and offers made.

Let’s start with the two properties that came from my broker relationships. The first portfolio was a total of 26 units that was spread across four properties. The properties were being sold individually or as portfolio. Each property was in the same neighborhood, but they were scattered throughout. This city is well known for being a cash flow market. Cap Rates have historically been above 10+. However, the month’s prior to COVID-19, I was noticing a transactional trend where buyers were acquiring at cap rates in the high single digits. The per unit prices were the highest in the past decade. Regardless, I conservatively underwrote the deal thinking that there would be some form of impact to the pandemic. I held a conference call with my preferred property management company in the area. We discussed the neighborhood, some means to add ancillary revenue to improve income, and other means to decrease expenses. I submitted the letter of intent. Shortly afterwards, I found out from my broker that one apartment with the highest unit count was under contract. I knew going in, that this was an all or nothing opportunity. There was greater opportunity as 26 units. So on to the next one. (I found out last week that the entire portfolio is once again on the market).

The next property came as a surprise to me. This 17-unit portfolio is comprised of a 15-unit apartment complex and a duplex. Unlike the last property, they are right next to one another, and share a parking lot. So why did this property come as a surprise, I was in best and final in the summer of 2019. After doing some digging, I found out that the team that won the best and final could not obtain a loan. I found my file on the property and updated my spreadsheets. Little had changed in the portfolio’s net operating income, and I felt comfortable with my original number. I reached out to a lender, to get their thoughts on the opportunity. I received a crash course on the new Fannie and Freddie Lending Standard (subtle hint at future blog). Once again, made the offer at my previous price point. Same numbers, same results.

Now on to the off-market opportunities. I kicked off a direct mail marketing campaign at the beginning of the year. As expected, the responses from the first couple touch-points were scarce. In most cases sending only one mailer will most likely not fetch someone a deal. I make sure that I have at least six touch-points. Now halfway through the campaign, I am seeing candid responses. I will not bore everyone with all the details of the underwriting for these two properties. Although we were close on numbers, the owners were not willing to sell.

So what benefit is there to writing about another two properties that I did not get under contract. I will say that I find more enjoyment in the art of the off-market deal. I do my own direct mail and answer inquiries. Through these experiences, I speak directly with the owners. The conversations with both owners are priceless. They bestow their knowledge of the market, and experience in real estate. It is worth the weight in gold. When one door closes another one opens. Both owners own more than one property. They passed along other properties in their portfolio that they are looking to sell. I am still in discussions with both for their other properties.

All of these “rejected” offers makes me ponder and contemplate my conservative underwriting. Is this approach withholding me from having letter of intents accepted? Should I approach this differently and see what bears itself during due diligence? I am trying to seek answers to those questions. My actions in the past, now and in the future is to underwrite these assets that align with my financial metrics for each asset class. I learn more and more from each opportunity. It makes me a better real estate investor, and investor in general. If it is my money or working with other people’s money, I make sure that I stick to the business plan. The journey to acquiring 50 units continues.

Stay Healthy and Safe,