A Deal From Zillow! Just added 10 Units to my Portfolio!

[Curtis Bidwell]

I found a 10 Unit apartment (6 2-bed, 4 1-bed) that had been sitting on Zillow for more than 6 months!  I added it to my portfolio December 1st. I knew the area and market, drove by and did some basic numbers. The following week my broker called to tell me about it. I showed her my discovery info and we put in an offer. Though I ended up competing with an all cash offer, I won with 100% financing!

I’ll offer some detail in hopes of giving perspective for young investors, as well as for those wanting to move into smaller apartments. Feel free to ask questions and I’ll respond as I’m able.

• Asking price: $399k.
• Purchase Price: $389k (concessions came off the price rather than as a closing credit that would have reduced my closing costs but saved the seller almost $1,000 in commission, excise tax and capital gains).
• Appraised Value $450k (appraiser verbally said $500k but limited his exposure on paper!)

RENTS:

• Scheduled Rent at time of closing: $5655.
• Actual First Month: $6460 (listing agent didn’t include utility charge in proforma! We discovered the discrepancy while going through Income/Expense reports).
• Market Value Target $8370 (anticipate 12-18 mo to fully transition due to upgrades required).
• Rent after 1st round of increases (effective 3/16) $7335. Some tenants had not received an increase in 8 years (paying $525 for a $900 unit!) I had one unit empty at possession that the property management had listed at $625. We had it occupied in 4 days at $895!

Combined EXPENSES have run just under $2k month (taxes, Ins, maint, cap ex, management, utilities, etc). I will cut expenses on insurance ($100/mo less than previous owner), better mortgage terms, care for running water issues, and create other efficiencies (saving $300/mo). I will increase Cap Ex and Maintenance budgets for a net increase of about $500/mo.

FINANCING:
Due to the strength of the deal I was offered 80% commercial financing at 4.25% 10 year note, 5 year adjustment, 25 year amortization. (Payment $1697).

I had previously built a relationship with the Chief Credit Officer of the bank who gave me a signature LOC at 5.25%. I used a portion of this as my down payment (monthly pmt of $350).

UPGRADES NEEDED:

• The property was negligently maintained by both the owner and “professional” management company. Rents were $200-300/unit under market. Maintenance requests were routinely ignored.
• Water was flowing in the laundry room, toilets and faucets leaked continually.
• 2 Ranges had elements missing because they ‘sparked’.
• Phone cable between pole and building was hanging …at neck level!
• Zinsco electric panels had never been updated.
• Siding needs some minor repairs and full exterior paint job.
• Original 1942 Single pain metal windows need replacing throughout!
• Laundry room has no ceiling, insulation falling down.

SOLUTIONS:

• Working with weatherization programs from utilities and local agencies to change out windows and insulation at minimal cost.
• Commercially certified electrician has been installed a new panel and 2 GFI outlets for $300/unit on weekends.
• New Pex piping for water supply bid at $600/unit.
• Increase rents incrementally to existing tenants, and full market at turnover. 1 bed = $750; 2 bed $895.
• Sheet rocked laundry room ceiling.
• Repair siding and repaint in Spring. (Roof is solid)
• New paint, flooring, counter tops in each unit at turnover (aprox $2500/unit).

This was a cash flowing property from the beginning at about $1400/mo. With proper oversight it will increase to over $3600/mo. The value should increase from the $389k purchase price to over $600k given the same cap rate (11.5%). With interior and exterior improvements the cap rate should come down to about 9% giving it a value over $750k! (Anticipated time frame, 18 months).

[Curtis Bidwell]

UPDATE! Last week I finished the Brrr on the 10 unit I found on Zillow by completing a cash-out refinance after 10 months of repositioning. You can see my original numbers and expectations on the opening post. We came very close, except our timing was much shorter than I expected!

My outlook was 12-18 months. We hit our financial targets at 7, completing interior renovations of 7 units. Before purchase I knew I could get rents of $825 for a 2-bed. After closing we occupied our first vacancy at $895. Subsequently we boosted a couple units to $910 & $925. 1-Bed units are $750. Our first month’s income was $6460 and we are now over $8300. Out of the 10 units, we have totally renovated 7, and partials on the other 3 because they are still occupied by the inherited tenants who want to stay.

SO, WHAT HAS BEEN DONE?

FINANCIALS:

• Purchased December 1, 2015 for $489,000 (11 cap)
• Rehab spent to date: $60,000
• APPRAISED VALUE OCTOBER 1, 2016: $750,000 (8 cap, per appraiser)!
• Refinance Detail: 10 year note fixed for 7 at 4.25%, 25 year amortization, 75% LTV interest only for 3 months then 80% LTV with additional draw after completion of final projects (like a construction to perm loan), no prepayment penalties. This is commercial financing from a smaller local bank. I started with a single branch local business bank, but followed the Credit Officer to his new bank where they gave me better terms than the original bank would do.

REHAB:

My average cost per unit ran about $3500 (not including windows, which adds about $1800/unit. I went through 3 contractors until I landed a local handyman who has proven to be a financial windfall. He works for $15/hr and not afraid to try anything. He’s not detailed, but willing: he does paint, flooring, counters, minor plumbing, wall repair, etc. He’s great for this quality level of unit. I use professional contractors for major plumbing, electrical and window install).

• Paint: 7 interiors & entire exterior.
• Replaced 60 windows: (*This was a huge unbudgeted item: we assumed we could get energy assistance grants but the programs were cut in October just prior to purchase! We got several bids and were able to complete it for $18,000, $300/window installed) Home Depot ended up giving the best window bid and 0% financing for 24 months, I used my own contractor to install.
• Replaced 11 electrical panels (10 units + laundry).
• Replaced & repositioned main water supply from meter to building (80’) after a fountain erupted in the front yard! Pipe now runs under the building instead of being buried across the yard.
• Re-piped hot/cold water lines 7 units.
• Installed ceiling in the laundry room.
• Replaced flooring in 7 units: vinyl planking on main areas, carpeting up the stairs and bedrooms.
• Replaced cabinets & counters in kitchens and bathrooms.(replaced or repainted kitchen cabinets based on condition)

YET TO DO:

• Rehab 3 units when empty (could be years!).
• Strengthen and refinish parking structure walls & roof.
• Paint laundry room floor & walls, install folding table, replace leased appliances with our own.
• Install decorative shutters on upper windows.

LESSONS LEARNED:

• Do this as often as possible! The returns can be great!
• Contractors need specific scope of work and oversight until they get to know you and your expectations. Don’t assume they understand what you said as it relates to job expectations as well as financially. We agreed I’d pay on Fridays, but then they wanted payment as soon as they completed a given task (and threw a fit when I reminded them of our agreement! …on to the next contractor).
• Always budget more time and more $. Our windows were the biggest added expense, but even our plumbing quotes ended up going about 20% over when it was all said and done. There are lots of small things that add up. (Ex: We had to replace 2 old style kitchen fans that vent through the wall. Several units had 3 prong outlets with 2 wire electrical (no ground).3 prong doesn’t meet code when there is no ground. HD and Lowes are very expensive for 2 prong outlets! Found them online and waited for delivery.)

Feel free to ask questions and I will respond as I’m able.