All Forum Posts by: Matt Bell

You can check out the finished product at http://www.memorial-capital.com/ or just check out the Zillow listing for 1038 Woodley Road, Montgomery, AL.

@Pete Fiannaca Go to every community bank, credit union you can find with a good business plan and examples of your portfolio to date.  Someone will be a portfolio lender (they don't sell their loans off to fannie mae and freddie mac) and they won't make you wait 12 months - it might be a commercial loan product but you should at least be able to get down to a 3 or 6 month seasoning.

The key to our success thus far has been a great rehab contractor who is low-cost and trustworthy, a solid property management company, and an awesome realtor who can help us identify deals and get us good comps.  Good luck building your team!

@Ryan E. Mostly MLS (Foreclosures and estate sales) but we did have 2 properties brought to us off market by our realtor - our rehab contractor is very reasonable on his prices and there are not a lot of competitors in that market looking to do what we are doing (rehab to rent). We are looking to scale more quickly in our second year of existence so we are starting to network with some wholesalers and considering direct mail as well.

@Eliot M.  Exactly.  So, if you do it right, and you can purchase properties in your area for $30K and put $10K into the rehab and get a $50K appraisal, you would be able to use that $40K over and over.  Even if you could only buy, rehab, rent, refinance every 60 days, you would be at 32 houses in 5 years or so.  If you could get up similar to our pace, you would be at 32 properties in 2.5 years.

Race you to the finish line!  Although I have a Partner so I am splitting mine 50/50 and need 64 houses.

We have been provided first look at a property in Alabama where we invest.  The property is 6 acres, right off a main road and currently has a 4,000 sq ft house that would need be torn down.  The property is literally across the street from a University and based on the connection we have - we understand that we can purchase the property for $500,000.  Our long term goal has been to develop multifamily property at some point but this opportunity is presenting itself early in our investor life.  We need some help and advice from the experienced BP community.

1. Can anyone give us some metrics we should look at to determine if development of a multifamily property is feasible?  

2. How many units can you develop on 6 acres?

3. What are the typical per sq ft building rates for multifamily in the South?

Based on discussions with our property management company, they suggested building 2 bedroom/2 bath units in a mirrored floor plan so it is easy for roommates to share and split rent evenly.  The assumption is that such a unit would rent for $750 to $850/mo.  

My rough, back of the napkin estimates are below and based on quick internet research:

- 40 - 2/2 units that are each 1,000 sq ft for a total of 40,000 sq ft

- $100/sq ft building cost x 40,000 sq ft = $4,000,000

- Land purchase of $500,000 plus ground improvements of $500,000 (parking lots, gates, fences) brings the total capital needed to $5,000,000

- Assuming we raise 20% down ($1M) we would need to finance $4M

- Assuming an $800/mo average rent we would gross $384,000 per year on a pro forma basis

- Assuming 35% for all expenses other than debt service (management, insurance, taxes, utilities, marketing, vacancy, repair & maintenance) that results in a NOI of $249,600

- Assuming 30 year amortization at 4% interest on $4M the annual debt service is $229,200

All that only leaves a possible $20,400 profit at the end of the year on a $5M investment. Unless my numbers are way off, how do people make money developing multifamily properties?

@Eliot M. We reuse the same capital over and over and initially pay cash for the properties.  For example, we recently purchased a 2 bed 1 bath home (1,700 sq ft) for $35K cash and put $30K into a rehab to make it a 3 bed 2 bath home (kept existing footprint but added some walls) which then appraised for $110K.  Our bank allows us to take out up to 80% of the after repaired value in cash so we could have pulled out $88K - we didn't but we could have.  In that scenario, we had a total investment of $65K and were able to pull all the cash out plus extra and then use that for the next deal.  We do not put 20% down or leave our own cash in a deal if we can avoid it.  Our goal is to find houses in need of rehab and build the equity through the rehab to the point that we get 100% or more of our cash back usually within 30-45 days of the cash closing.  

In another deal we purchased a home for $50K and put $10K into the rehab.  House appraised for $82K and then we were able to cash out $65,600.  So at the end of the day, we had all our money back, plus $5,600 and a nicely cash flowing rental.

In a third deal, we purchase a home for $12K put $20K into the rehab and it appraised right at $40K.  So, we were able to cash out our investment but had to pay some closing costs so we have a couple thousand dollars that is "locked up" in that deal.

They haven't all been winners though - we did by a home for $22K and put $14K in the rehab.  Turns out the home was 500 sq ft smaller than all the public records and the information provided by the seller so it ended up appraising for $36K and we were only able to pull out $28.8K and with closing costs have over $8K locked up in that property.  Had it actually been the size we thought we would have been fine but just wanted to be transparent that you could run into a deal that you leave some cash in but that is by far the exception thus far and as you can see, we have made up that capital by pulling it out of other deals.

We don't wait 1 year to cash out refinance - that is the key.  We have been able purchase, rehab, rent, and refinance 8 properties in 10 months.  Doing it this way, you have to get a commercial loan and the best rates we have been given are 5.25% fixed for 5 years and amortized for 20.  It is not a balloon payment but the rate goes variable after 5 years.  If you could find a bank in Georgia that would do a similar set up - would need to be local community bank or credit union probably - you could scale up to 40 properties very quickly and then put the whole portfolio into a longer term portfolio loan before the 5 year fixed rate expired on any of your properties.

As for property management, I definitely see your point on their incentives, or lack thereof.  We have no other option since we invest from a distance but there are ways to creates incentives for them to manage you property well.  You just need to find a property manager who is willing to negotiate their management terms - might have to go to a smaller operation where your portfolio would make you the big fish.

@Eliot M.undefined

Are you managing the properties yourself?  I noticed you listed $200 for property management which equates to 2% of gross rent. You should budget 10% as a minimum if you want someone else to manage your properties - even if that won't be the case until much later - build it in to the model now.

Have you considered employing the BRRRR strategy to scale your business faster? We are employing this strategy for our rentals and have now purchased/rehabbed/rented 8 properties in 10 months - 6 of the 8 have been refinanced to get all our cash out (in one case an extra $20,000 on top of what we invested). The only reason we haven't cashed out the other 2 units is because we only did the cash closing yesterday but we will cash out by July 15 most likely. I am happy to discuss our metrics and the financing arrangements with the bank if you want to private message me. We do maintain at least 20% equity and try to get at least $200/mo cash flow after all the expenses and reserves you mentioned. So, you would need 42 properties using the assumptions of no rent increases and flat line cash flow of $200 per property (no payoffs or refinances) but if you matched our pace you would be to your goal of $100,000 in passive income in 4 years or so.