I'm starting out trying to build my portfolio. I plan to acquire one fourplex every year and build up a portfolio that will support my family with passive income. If all goes well, I will graduate into commercial deals / syndications / private equity.

How did you find this deal and how did you negotiate it?

MLS. Paid $200k over asking. There were 20 other offers. Knowingly overpaid based on existing NOI, but was delivered with one unit vacant and another tenant left during escrow, leaving us with two vacancies and a lot of value to add. Seems like a lot of small multifam in LA lately is priced at ARV, which is crazy. Fortunately, I had the cash to renovate and climbing rents made this easier to say yes to.

How did you finance this deal?

Bought it with an 80% LTV 7-year interest-only ARM at 3% interest. Being my first foray into multifamily, I wanted debt that would ensure I could cashflow right off the bat to finance improvements. I'm in a high appreciation market, so paying down principal isn't as important to me. I know full well that rates will go up, but if I can refinance longer term debt after stabilizing at a much higher NOI, then I can lock it in long term and still cashflow AND get some cash out. Yes, I know I missed out on a once-in-a-lifetime opportunity to lock in extremely low long term debt ¯\_(ツ)_/¯

How did you add value to the deal?

Renovated two units and will be renting them at market rent. Plan to turnover the remaining units over the next couple of years and then refinance.

What was the outcome?

I fully expect to stabilize with $30k of annual cashflow with my current debt service. Cashflow will double when I am able to turn over the remaining units, at which point I plan on locking it in longer term. Even at higher interest rate, will still provide a similar amount of cashflow to now ($30k+), and a refinance should return my original capital. From then on, I'll refinance as I see fit, taking out big chunks every 5-10 years and using that to fund more acquisitions. Lots of ifs, but regarding downside risk, I expect to be able to service my debt when it goes up in 7 years and still cashflow. If I had originally purchased with a 30 year fixed, I would have lost >$100k over the first few years while renovating. I wasn't comfortable with the elevated carrying costs as a newbie, knowing that the rehab could have been a disaster and the possibility of cash-out refinancing is never a guarantee.

Lessons learned? Challenges?

I've learned the ins and outs of doing this kind of deal. Nothing specific, but the hands-on experience means I will be more equipped to evaluate further deals and may be quicker to get them stabilized. No significant challenges so far, everything has gone smoothly.

Los Angeles County, California

0 Votes