41-Units No Money Down Deal $627K Profit in 15 Months - How?

[Michael Ealy]

Yesterday, we closed on this 41-unit apartment deal and netted $627,643.32 in profit (just from the sale). We actually made MORE than that because we've made good cashflow from the apartment building during the time we held it.

Here's the HUD Settlement statement:

Here's the picture of the front of the building:

True No Money Down Deal - No Capital Raised

This is a TRUE "no money down" deal as we did not need to raise private capital or used OPM (Other People's Money). It's a LAND INSTALLMENT CONTRACT (also known as Contract for Deed) with $0 downpayment. 

How Did We Find the Deal

This is a property we found through our relationships/network. We were already managing this property for the owner. We recommended 18 months ago that he increases the rent by about $200/month and we estimated that he needed to spend about $200,000 to improve the units to justify the rent increase. 

Even though he could invest the money, he was hesitant in increasing the rents. Given other things happening in his life at that time, he decided to let us just take over the OWNERSHIP and have us spend our own money in renovating the units ourselves. Of course, we structured it so that, we get the benefit of increased rents by structuring a LAND CONTRACT (this happened 15 months ago).

Through a land contract, it's totally passive for the owner and he does not have to worry about repair overruns. We took on the risks and hassles of ownership as well as its benefits as you can see below.

It Gets Better!

Going into the deal, we really thought we needed to come up or raise the money for the renovation. But, we were able to renovate the units as they become vacant USING THE CASHFLOW FROM THE PROPERTY! In other words, we acquired the building no money down and renovated it without any cash coming out of our pocket as well.

We increased the rents of the vacant units and then took the risk by announcing the higher rents for those with expired leases. We got some tenants to move out but most of them stayed and paid the higher rent especially when they see their improved apartments.

Our Profit from the Sale and Structure of the Deal

As you can see from the HUD-1 Settlement Statement, we received $1,620,947.06 from the sale. Our land contract to buy the deal from the owner is $1,250,000. On the HUD-1, an amount of $256,696.06 was sent to the owner's lender (as he stil has a mortgage on it). However, the owner's mortgage is "wrapped" with our $1,250,000 purchase (land contract). So the math works out the following:

Proceeds from HUD-1: $1,620,947.06
less Land contract: $1,250,000
add back Mortgage pay-off: $256,696.26
equals: $627,643.32 PROFIT FROM THE SALE!

What Did We Learn from This Deal

1.  Importance of Track Record - due to our track record of successfully operating apartment buildings (I've been doing this since 1999 and own 1,000 apartment units today), we were asked to manage this building and then later on, to be its owners. It takes time but the better you become at operating properties, the more deals and money you will attract.

2.  Importance of Being In-Tune With Your Local Market - knowing what your rents are for different bedroom types for section 8 and non section 8 (or market) tenants is key. You have to know which submarkets in your area are hot- that is where rents are trending up. And you have to be willing to increase the rents when justified by the market and your apartment quality.

3.  Importance of Cashflow Management & DELAYED GRATIFICATION - through disciplined cashflow management, we utilized the cashflow from the property in improving the apartment units in order to justify the $200/mo per unit rent increase. We did not pay ourselves for many months - in fact, we only started taking cashflow distributions about 6 months ago when we the property's financial performance has stabilized.

4.  Importance of Having the Right Relationships - aside from getting such an awesome deal from the seller (which is a client who became a friend as well), we were able to sell the property through one of our real estate brokers. We even structured the deal such that the higher the price he gets for the property, the higher the percentage commission he gets - and that's exactly what happened. Even though I am a licensed real estate agent, I let him have the entire $79,500 in commission to sweeten the deal to my broker.

That is BUILDING RELATIONSHIPS - it's not lip service or a pat on the back. It has to affect people's wallets. My broker made almost $40,000 more because I was willing to have him get ALL THE COMMISSION.

5. The more ways you know, the more deals you do and the more money you make. Good thing we know what land contract is and how to structure it. I realized that money is made when you have specialized knowledge and you implement that specialized knowledge creatively and diligently.

Maybe the reason why you're struggling in doing a deal is because you don't know some of these techniques so you're entry and exit strategies are limited.

Hope this helps and inspires you.

If so, reply to this and if you have questions, let's have a discussion here.