96 Unit Apartment Cashflow Investment - Little Money Down

[Lucas Miles]

Investment Info:

Large multi-family (5+ units) commercial investment investment.

Purchase price: $2,000,000
Cash invested: $30,000

Portfolio of multifamily buildings in rural communities across Southern MN. 96 units total in 5 buildings. Off market deal I found through cold calling. I brought in another local multifamily investor, and we partnered on this deal. We ended up "double closing" on a 8 unit building, and still own the remaining 88 units.

What made you interested in investing in this type of deal?

Own other properties in the general area, local communities have a shortage of safe, quality, and affordable housing. Purchase price of ~20k/unit I knew would make money assuming could get through rehab without running out of money!

Properties were in fairly rough shape, vacancy around 70% physical occupancy and closer to 60% economical occupancy, with rents 20%-25% below the market, and an overall poor class of tenants. There was significant value add upside.

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

Found through cold calling multifamily owners in the area. Seller wanted to sell all of her properties in the area at once. She wanted 2 million, said the only way was if she would finance the remaining 20% in 2nd position, she agreed, and we negotiated to have this be interest only at very small interest rate. During inspections we found a sewer drain that needed to be relined, and a roof with hail damage, we worked with the seller to get these addressed prior to closing.

How did you finance this deal?

Commercial lender of a local bank provided 80%, seller the remaining 20% in 2nd position interest only for 3 years. Lender over funded our 80% to give us money for rehab. Sold the 8 unit, and lender let us use these proceeds to go directly into rehab. Will get a 2nd from the lender to pay off the seller in 2-3 years. Each partner kicked in 30k or so in MISC startup expenses. So really no substantial money out of pocket and no private money involved for this deal.

How did you add value to the deal?

Our management team kicked out the bad tenants. We rehabbed all vacant apartments, and brought in new quality tenants.

Trimmed trees, added lighting (interior/exterior), patched parking lots, cleaner landscaping.

Fixed all deferred maintenance items, vacant apartment gets new flooring/paint, new toilets and fixtures, counter-tops/cabinets as needed, and fixed any broken items.

What was the outcome?

6 months into ownership we have turned about 30 units, almost doubled what the revenue was at closing, and have met our proforma revenue. We still need to rehab/fill a handful of apartments, complete some Capex type projects, dial in our expenses, but the buildings are outperforming what are expectations were at this point.

These properties had terrible reputations and were in rough shape, but we are now proud owners of cash flowing buildings that are in the hands of awesome management team!

Lessons learned? Challenges?

Importance of partnerships, I could not of tackled this big of deal by myself at this point in my investing career.

Rehab went a lot slower than expected, management company is not a project manager. We hired a handful of "handyman" and we were involved with the "project management" type work during major rehab. Over budget for rehab, something will come up.

Weekly meeting with management company, and all effort into fostering this relationship.