There have been some other posts regarding this deal in the multifamily forum, but I thought I'd post a summary here as well.
I started looking into REI one year ago, and was overwhelmed by all the strategies. I read endlessly on BP, talked to everyone that would listen, and went to countless conferences, classes, etc. I finally decided multifamily was where I wanted to be, and started looking for property last summer. Yes, I used a "guru" to do this deal, but hopefully it will be the best decision I have made in a long time. There is NO WAY I would have attempted this without the experience and EXTREME hand-holding of someone very experienced. I wanted 80+ units in order to afford full 3rd party management, but as a beginner with no track record, and everyone and their dog buying here in DFW, it was very difficult to find something that wasn't getting overbid (at least in my opinion?).
So a 32 unit off market deal was presented to the mentor mentioned above, and he brought it to me. There were several other "students" in this group that wanted to invest with me, so I knew the money was there. In the interest of hopefully not getting blasted for involving OPM while I'm learning the biz, all of these people are highly educated on the risks of this investment, and know that I have no RE experience, although I have been extensively learning the biz for a year. Many are looking for properties themselves, and have passive investments in other apt deals like this one. I also have the support and experience of others who have done the same thing, and are now on their 2nd, 3rd, or 4th deals.
Here are some details:
32 unit property purchased for $1.13M, plus $63k in rehab. Bank loan of 75% at 4.5%, 25 yr amortization, due in 5 years. First year is interest only.
I put down $50,000 of my own money, and raised $326,000 from others, mainly in $50,000 shares. We are likely a little bit overcapitalized, so they may get a little bit of capital back in 6 months or so. Property is ABP, and currently has only 1 vacant unit. Rents are a bit low for the area, and it appears we can increase them. Properties nearby are getting much higher rent, are in worse shape, and are completely full.
Using projections that are hopefully conservative, we hope to have a 100% return in 5 yrs. That is assuming 2% annual rent growth, 2% expense growth (except yr 2, where I assume our taxes are going to go up dramatically), 10% economic loss after first few years, and a cap rate increase by the time we sell or refi.
As I mentioned, this property is a bit small to afford professional asset management and full time staff (at least if we want to make our projections), so I will be self-managing it (keeping books, managing the manager, etc). Our budget originally included a part time on site mngr, and PT maintenance person, but I ended up reaching an agreement with the owner of the property next door to ours to share his manager. She is absolutely amazing, and is there full time. If occupancy in the area begins to soften, we may have to make other arrangements, as there could be conflict of interest issues, but for now I am thrilled to have her. In addition, that frees up our office, which we can turn into a rental unit, and immediately add $75000 to the value of the property.
As deal sponsor, I get 10% of cash flow and cap gains at sale or cash out refi. That is only after investors get 100% of initial capital returned though.
This is not the home run, value-add deal that I hoped for, but it appears to be a strong yield play using conservative projections, and has the potential to do much better than projected. With regard to getting a track record going, I'm hoping that this was a very good decision. We shall see.....
