How We Just Got an $8.5 million 150 unit Apartment w/ OPM

[Ryan Enk]

I wanted to share this step by step journey that we just went through to acquire this 150 unit apartment in Orange Texas: and the lessons learned at each step

1) We had to loose quite a bit of deals.  Found  a deal in Lafayette. Lost it. Found a deal in Lake Charles. Lost it. Found a deal in Orange around 62 units.  Lost it, but the broker liked us so he let us look at an off market deal down the road that was 150 units and in a better location.  Seller wanted 9 mil, and we negotiated it down to 8.5 million.

Lesson- It's a numbers game, and you only get the deal if you take action and play the game to increase your numbers.

2) To get a deal like this we needed a total of about $125,000 to cover the $85,000 earnest money deposit and the due diligence.  Instead of tapping into our own cash on hand, we formed a general partnership with 3 other investors, and for the rest of the expenses we utilized credit lines.

3) We had to raise 2.7 million in capital to close the deal which was somewhat stressful because if we did not raise that in 30 days, we would loose about 30k of our earnest money deposit.  I honestly was not sure we would be able to do it.  There's always that doubt and fear in the back of your mind no matter how many times you've done it. Lesson- no guts no glory and you never know until you try.  We raised all of the capital needed within 6 days and had a $700,000 waiting list for the investment.

4) To get investors, we structured it very favorable for them.  We did an 8% preferred return with a 65/35 split (65% to the passive income limited partners, and 35% to the general partners putting the deal together).  Lesson:  There is no better way to get investors than to ad a "pref" to your deal.  In other words, if you were to invest $100,000 and the pref was 8%, that means that BEFORE THE general partners make any money, the investors get a guaranteed $8000 a year.  Whatever the balance of the cashflow is after the pref is paid, is split 65/35.  The GP doesn't make money until the investor is taken care of first.

5) It got a little intense at the end because we did a CMBS loan. The bank was really dragging their feet. After 60 days the contract was null and void. And if we didn't close the deal, not only did we risk the $125,000 due diligence and earnest money, but we would have to pay wiring fees to return all of our investors capital if the seller held our feet to the fire on the contract. In reality, the seller wanted to sell so he would have extended it. But it was nerve racking nonetheless. We were worried because the apartment appraised at a quarter million more than what we had it under contract for. So there was a slight risk that he would want to end the contract and put it back on the market for a higher value. We literally closed and wired funds 5 minutes before the deadline. Lesson- I have no idea what that lesson was or how to prevent it in the future.  Sometimes things get uncomfortable for no apparent reason.

6) At the time of closing we were under budget on expenses and returned $125,000 in capital to all the investors (total) which made them and us ecstatic.  In the general partnership, we shared in a $180,000 acquisition fee, and if the occupancy stays where it is or higher, the general partnership will cashflow $8000 a month and the limited partners, around $25,000.  Lesson: I've spent more time on less lucrative real estate activity.  The day I stopped trying to play it small, I made more money with less effort.  The only difference in my small thinking and large thinking was knowledge of the process which was easy to acquire.

Boom! Onto the next one...hope you got value from this.

[Erik W.]

@Ryan Enk, sounds like a great deal.  Congratulations!

The question on my mind and probably many others: how do you find 3 people who had both the capacity and the willingness to put $2.7 million into this deal?  Were they personal acquaintances?  Business associates?  Rich uncle/aunt/grandparents?   Random strangers?

I am moving toward the multi-family sector, having been a buy and hold land lord of SFH's, duplexes, and a quad plex since 2005. We are profitable and successful, but want to move into this full time and a higher level. I have found 2 money partners so far, but we are in the $150,000 capital range, not the $2.7 million range. To approach the level of your deal, I would need to either find people with much more capital at their disposal or find about 33 more people with $75,000 each.

I do not regularly associate with multi-millionaires but would like to start moving among those circles.  I realize the stock answer is "network" but that is too vague to be useful and actionable.  How/when/where are the most effective networking steps to take if very wealthy individuals are not already in one's SOI?

Thank you in advance.