First Successful Exit!!!

[David Klein]

This post is a little overdue as this pesky pandemic has made life somewhat hectic lately but I thought I'd like to share my first successful exit as an investor. In October of 2018, with the help of some investors, I purchased a 16 unit apartment building in the Westwood area of Cincinnati for 520k. The property was owned at the time by 5 partners who from what I understood had no legal operating agreement in place as to who had the legal right to make decisions on behalf of the LLC, causing some in fighting between the partners. The guy who lived locally and who was doing work on the property was a middle school teacher trying to get into real estate on the weekends and from what I heard was in over his head. The property consisted of 13 2-bedroom units and 3 3-bedroom units and was 75% occupied when we bought it. The current property management company was getting an average of 575 a door for the 2br and 775 a door for the 3br. The value creation strategy was pretty straightforward. It was a C class property consisting of half market rate tenants and half Section 8 tenants with the Section 8 rents at the time being significantly higher than what we could get from market rents. It seemed the current property management company didn't like dealing with Section 8 tenants, so they chose only to accept 1 and 2 bedroom vouchers so as to have physically less people in the units to deal with. That meant however that they were leaving significant rent on the table. There was quite a bit of deferred maintenance on the property and the parking lot had to be re-paved but nothing too intense had to be repaired or replaced.

After we purchased the property and put a new PM in, the first thing we did was make a call the local housing authority in charge of section 8 and seek rental increases for the few subsidized tenants we already had. Immediately we were approved for rental increases on 2br units from 575 to 775, and for 3br units the rents went from 775 to 975. This increased NOI about 10k from the get-go. Over the next few months, we leased up all vacant units and made tenants aware of the rental increases. Some stayed, most of them left and we were able to turn their units, many of which hadn't been upgraded in years. Once the spring rolled around, we repaved the parking lot and while it didn't add value in the sense of NOI, the property looked much more presentable to the next buyer as a result.

I told my investors from the start we were going to acquire the property, fix it up, and sell it rather quickly to maximize their return. We just happened to sell this property in the middle of February at a time when I believe there were something like 6 Covid cases in the US. I take absolutely no credit for the timing but will take the good luck when I can get it as I’m sure many of us have been on the bad side of market timing in our lives. We learn things on every deal we do, but one huge takeaway in this type of deal is when you try to sell a property that doesn’t have a clean operating statement (mostly because you’ve spent the last few months dumping money into it to fix it up) it is going to be much harder to find a lender who is willing to play ball so you’ll likely have to take a lower price. Make sure you take this into your underwriting when you are trying to project your total return, especially if you have investors in the deal with you. We only held the deal for about 16 months and nearly doubled our initial capital infusion… not bad for a first exit. On to finding the next, much larger deal and hopefully achieving even better outcomes this time. Happy hunting everyone!!

Acquisition Price: 520k                                Sale Price: 785k

Effective Income: 96,528                                 Effective Income: 140,400

NOI: 42,374 NOI: 71,471

Total Capital infusion: 180k                             Total Proceeds: 346,341

                                                                      Total Profit: 166, 341