All Forum Posts by: Joel Florek

 I also own a Campground in Northern Michigan. I have had more than a dozen commercial loans over the years for the multifamily and campground. Buying, selling, refinancing. This deal was the first time I have done a Fannie Mae loan on the multifamily side. 

@Mike Smith Happy to help. Out of the gate total revenue for this deal was about $330k. The owners self-managed so my estimated expenses to run it professionally was with expenses at about $190k. We pay water/sewer at this property and rents were very low so it made sense that we were about a 55% to 60% expenses.  

Based on where rents and revenue are now we are currently at an annualized T3 of $456k in revenue and still expenses around $190k as our taxes were pretty fair going into the deal off our purchase price. This puts our T3 annualized NOI at $226k. Now we are running closer to 40% expenses on this property. If it were to trade taxes would go up which would probably push it to 46% to 52% depending on how harsh they were.

Just a week ago I closed on the refinance of my 48 unit apartment complex purchased just 18 months ago. Since I get a lot of questions from individuals asking what I look for in a multifamily property and what a good deal looks like I thought it would be helpful to provide a step by step description as to what the process looked like on this deal. Over this short period nearly $1.7 million in value was added to this property and I have gotten 100% of my original investment back in less than 2 years.

This deal came to me as a pocket listing from a regional commercial broker. I toured the asset, liked it and put in an offer. Unfortunately, it didn’t meet their expectations and they moved on. Fast forward 12 months and the deal went in and out of contract twice before coming back to me again. We landed on contract terms we could agree upon and closed the deal in August of 2021.

Upon closing the property with a purchase price of $2,610,000 the fully occupied rent roll was $29,167/month or $350,004/year.

The original loan on this asset was for $1,956,000 and a construction loan for $60,000. The term was 25 years at an interest rate of 4.00% with interest only payments for the first 18 months. During the I/O period payments were $6,700/month increasing to $10,609/month or $127,314/year.

To close I was required to come to the closing table with $680,000. These funds came from a 1031 exchange executed by selling a lower quality 26 unit and 8 unit property which I owned.

The value-add plan for this property was pretty simple. Replace all roofs to ensure longevity of the 1980s structures which were in very good shape for their years. Upon unit turning bring the units to market rate. For existing tenants bring their rent up gradually to market over a 3 to 4 year period.

Originally, I thought market rates were about $675 for a one bed and $850 for a two bed given the minimal market data in this smaller market. Upon purchase we quickly realized that market rates were closer to $750 and $950 respectively and now about $45 higher than that.

After 15 months of execution, I felt like I needed to make a decision on the asset.

1. - Sell and capture all the equity growth. This would result in a large brokers commission, capital gains event (mostly averted with a 1031 exchange if possible), and having to find a new deal.
2. - Hold to growth the NOI further and make assess again in 12 months.
3. - Refinance the asset and get cash out of the deal.

Ultimately, I chose to stay in the deal refinance out cash. Reasons include the following.

1. - This deal was performing very well and I see little risk in staying in it for the longer term. There are few major cap-x events forthcoming.
2. - We had great tenants coming in and continue to add great tenants. This is a low stress low drama property to own which is easy for my team and easy for me.
3. - With few deals on the market I didn’t see great opportunities to sell and transition the capital within my region.
4. - The cash in a refi was sufficient to meet my needs for accomplishing a project allowing me to move my business into the new construction side of the business.

As of the closing of the refinance with Fannie Mae, brokered by Walker and Dunlop, in March of 2023 our current fully occupied rent roll sits at $39,695/month or $476,340/year. All things equal in the expenses our NOI (net operating income) increased by $126,336. The appraised value was $4,300,000, an increase of $1,690,000.

The new loan sits at $2,760,000. This loan has an interest rate of 5.22% and is fixed for 10 years and has interest only payments for the entire term of the loan. Payments will be $11,962/month and $143,550/year.

After closing costs and refinance fees the cash out proceeds received were just over $600,000. Accounting for the cash flow received over the past 18 months and the cash out refi proceeds I have received over $700,000 back on my original $680,000 investment.

Moving forward we expect to increase our NOI by another $60,000 annually over the coming 24 months. As of today, I am expecting this property to cashflow $120,000 per year increasing to $180,000 per year over the next two years.

The goal with this refinance was to accomplish a few things.

1. - Take interest rate risk off the table. 2022 into 2023 has been a rollercoaster in the debt markets. As I look ahead in my family’s financial plan this asset will provide us the means to support our lifestyle regardless of the performance of the rest of our portfolio. With that said I wanted to avoid interest rate risk in 2026 when our original loan would have been due. Cashflow wise this move didn’t make a big difference when comparing the monthly payments on the original amortizing loan vs. the new interest-only loan. Now I can sleep easy knowing we are locked in for the next decade on this particular property.
2. - Pull cash to leverage equity. Getting over $600,000 in proceeds back allows for me to fund the next real estate project and keep working to multiply the equity that I have built over the years. I still have over $1,4000,000 in equity sitting in this property but am spreading out the $600k into new assets.

For those interested in investing and the nitty gritty behind a deal hopefully, this was helpful for you.

My biggest suggestion is to focus on finding the markets or types of markets your interested in investing into and then get to know who is investing in those markets. Some want to be in the hot markets, but you need to know those markets historically tend to be more up and down with valuations. It can be an exciting ride up but you need to know that over building or a major shift in cap rates can have a dramatic effect on valuations. Slower and steady markets are usually not as exciting on the way up but there can be less dramatic adjustments. Then its about working with who you feel you can trust based on track record of communications and results. I would also look to see who makes their money off of fees vs make their money off of cashflow/other businesses. 

Looking for answers  to this one too @Moroni Laulu-Pututau. I have Chief Architect but that is more a single-structure program. I am in my 30 day trial with Siteops by Bently and its got some robust tools but also falls short in the ability to customize a site. Vectoworks is another I am trying which seems like it may be better for my purposes in some cases.  The image below is an example of the types of site plan images I am interested in creating. My big thing is I want them to be dimensionally accurate. 

 From my experience you are likely to find owners that are not super satisfied with the way things are going and if there is a solution for greener pastures then you may have a shot. Its certainly harder but if you are good at networking in your market then this is a good option.  For instance, Ive got some friends that aren't super excited about their 22 unit management. Find 3 or 4 people like that and you are likely to hit your magic 80 to 120 unit number where a full time leasing and full time maintenance personnel make sense. You can also find that collectively you have $20k in lawn mowing. The equipment isn't much for cost, but if you hired someone to do that full time and then had them help with other jobs when its raining or during the winter you may be able to get a good part time employee for maintenance or renovations out of that person. 

@Nicholas R NovakAll about tenant types. I have a brick box with no yards or decks, a group of duplexes with a back patio area that is "meh" in functionality and quality, and I have a 16 unit on waterfront where 10 of the units have walk out patios with a small yard area. At my 16 unit most tenants treat this back yard area like gold. They make their own little doggy fences, plant all sorts of flowers, and make it their home. This is almost all retired folks. My brick box 4 unit attracted all single men or women who are professionals and just want a place to sleep and watch netflix after work. Most of them travel often so they never have to worry about anything. I am also buying a 15 unit duplex portfolio where all tenants mow their lawns and have a deck. Most take good care of this and tends to attract a lot of long term tenants as opposed to a transient type. 

@Simcha Davidman A few strategies. 

1. Partner up with some other operators and bring the collective group of properties to a management group and ask to get your own dedicated staff for the 80 to 120 units(maybe more). This way a 3rd party is the go between for you and the other owners, but for the management group they can hire a full time employee/employees and split the costs amongst the group. This may be challenging but it has been done and I have had property management companies recommend I try to do it when I have expressed interest in assets of the size you are talking about. 

2. Build your own management company. Maybe not ideal, but as you grow you can build your own management company. Maybe you need to go get some lawn mowing contracts and other fix it work to fill up your maintenance guys time. Maybe you need to subsidize your admins time with other work you may have. Maybe you can find folks who just want to work part time(they are out there). Not the easy, but could provide the best results for you long term as you maintain control.

3. Call until you find someone who will take over the asset. Probably not too many who will do it and they are probably not the best in the industry but if you dont want the work you are stuck with what you get.... Beggars cant be choosers. 

I am in the same boat. I have 23 units in one town I invest in and will have 23 after a new acquisition in a different region. I am hiring a part time handyman for each region at $20/hr and guaranteeing 10 to 20 hrs a month, most of it being work that can fill in as their schedules allow. My next goal is to find an admin who can help with leasing, calls, bookkeeping, and leasing activities (most of which can be remote). While it would be nice for onsite I am have to deal with the realities of these types of assets. This is the reason why I am focused on building investor relationships to leverage my current experience with additional capital to tackle larger projects where the property management work can get simplified. 

Investment Info:

Large multi-family (5+ units) buy & hold investment.

Purchase price: $345,000

Cash invested: $22,000

This was an 8 unit property (4 duplex buildings in a row) in a great class B neighborhood. The prior owners neglected the asset and it was a sight for sore eyes. I financed via 80% bank financing, 10% seller second and after prorations only 6.5% down. After cleaning up the exteriors and replacing a few bad tenants average rents are up nearly $125/mo/unit after just 18 months of operation.

What was the outcome?

Recently, a brokers appraisal came back between $525k and $575k based on the improved NOI on the asset. Looking forward to continuing to execute on the project and enjoy the great cash flow from it!

@David de Luna I typically always buy with no representation on my side. However I take on inspections myself and handle all work myself. If you are out of state it may make the most sense to pay the dollars to have someone manage the process who you really trust. If I were in your shoes I woul just fly in to inspect with my property inspector, meet with property management groups at that time and fly home after a few days. Might be $1500 in expenses for you but you end up saving $4500 at the end of the day so that would be a good deal for me.