From Buying a Duplex to Closing a HUGE Deal – 556 Unit Apartment

[Brian Adams]

Some background and to set the stage before I dive into this deal, I have shared my story on BP how I quit my CPA job to purchase large apartment complexes, here is a link:

I quit my CPA Job to buy Large Apartment Buildings

(If you haven’t seen this thread before, it is VERY long, lots of awesome people asking great questions on how I got started.)

I also did a BP Podcast and shared more of my story – so far over 110,000 people have listened to my show, here is a link:

BiggerPockets Podcast 135: Raising Money to Buy 1,000 Apartment Units with Brian Adams

Purpose of sharing this first - when I quit my CPA job I basically started at:

Zero

Essentially zero properties owned and zero private money raised from private investors.

Why I feel this is important to share with you, the road from a duplex to a 556 unit has been hard.

Many bumps and bruises along my real estate investing journey.

Many setbacks, challenges, loss of my own money, sleepless nights, uncertainty, confusion, unclear of direction, shiny object syndrome, etc. etc.

Depending on where you are on your own real estate investing journey, you might be where I started.

I am giving this quick pep talk as I know with determination, grit and a 100% commitment to your specific WHY, wrapped with emotion and action steps, progress and steps forward can be achieved.

Now on to this monster of a deal…

To sum up this deal and raising private money, and also in my opinion most everything in life, it is all about Relationships.

“It’s not what you know, It’s Who you Know” 

Most likely you have heard this saying before.

I have been very fortunate and have a deep respect for the connections I have made in building my real estate business.

This particular deal is the third deal I have done with a Broker relationship. I have "performed" or closed two other deals totaling 440 units with this Broker. My guess is the Broker felt comfortable giving me a shot on this large property.

• Bought this property for $27.5 million
• Property Appraised for $32 million
• Not a typo, $4.5 million of equity at closing.

Here’s what happened. 

The property had been under contract before at a higher purchase price than what I was willing to pay. 

I stuck to my guns on what I wanted to pay based on sound underwriting principles and understanding the numbers. 

Countless times I have used my CPA background and forensic accounting experience to my advantage to see numbers differently than probably other apartment operators.

With getting the property under contract, sure, there was negotiation, I came up on price and the seller came down and the agreed upon price was still in my strike price.

When I was looking at this deal, I knew this asset had upside potential. 

I know this particular sub-market very well as I own a 240 unit deal 2 miles away from this property. Here is link to that story Just Closed a 240 unit Apartment Complex

When I first started analyzing the deal and before my offer was accepted, the trailing NOI (net operating income) was trending in an upward direction.

When the independent third party appraiser got the financials, the NOI had increased almost 20%, which is crazy good, thus equating into a higher appraised value compared to my purchase price.

Here are some additional details about the deal:

• The deal was listed with a broker.

• I did a Fannie Mae loan execution.

This is a value add deal and anticipate holding the asset for 3 to 5 years. I decided to go with a 7 year adjustable rate mortgage amortized over 30 years.

At closing my interest rate was 3.11% with two years interest only. The loan is a floater meaning the rate is tied to the 1 month LIBOR with a spread. With potential interest rate risk I do have the option to lock the rate into a fixed rate loan product if I choose.

• This is my 5th syndication and work with accredited investors who are looking for passive income without the hassle of running a large deal like this. The investor capital raise was $10 million.

• For property management I use a local 3rd party management company who I have worked with before who will manage the day to day operations.

I am a very hands on operator and work very closely, in partnership with the management company to help me execute my value-add strategy on this asset.

If you haven't done your first deal yet, that is okay. Get really focused on your WHY and take deliberate action each and every day so you work toward the goals you seek.

This approach has worked for me and I believe with conviction it will also work for you!!

[Michael Le]

@David Zheng, there are many approaches to investing. Some people consider themselves multifamily buyers and never sellers. But if you measure returns using IRR, then usually sometime during year 3-5 is when IRR is at the highest and it's the optimal time to sell. The longer you hold on to it, the more of your return will be just from cash flow. Less of your overall return will be from the forced appreciation and so your IRR will go down. That's just one reason why you might choose this style of investment over buy and hold.