I’ll preface this post by saying I have the “Ima” personality (shout out to @Gino Barbaro) where I feel I have to do everything myself whether that means finding deals or plunging toilets. Two years ago, I cured my Chasing Shiny Object Syndrome and focused on multifamily investing. It’s no secret that focusing on one specific goal whether that be multifamily investing or training to win a gold medal in the 400M will deliver results.
While I have successfully acquired several smaller multifamily properties and used the BRRRR strategy in my hometown of Milwaukee, WI, I wanted to scale to a 40+ unit property via a syndication. After gaining experience in my own multifamily deals, becoming educated through multifamily syndication courses (thanks @Michael Blank), attending dozens of summits and meetings, listening to hundreds of multifamily podcasts, reading, networking, analyzing hundreds of deals, and making offers for the past two years, guess how many large deals I got under contract? ZERO. ZILCH. NADA.
Two years’ worth of hustle yielded no result which is discouraging for someone who is used to succeeding in all of his endeavors. Luckily, I am persistent and believed in my goal enough to continue. This leads us to the next segment of our story: Partnerships.
I did quite a bit of business with one particular commercial lender, and any time I would propose a financing package for a new multifamily, he would always tell me, “I’ve never seen such detailed analyses in my 20 years of working here. I only have one other client that may compete with your level of detail. I should get you two together some time.” As it turns out, three deals later with my lender resulted in a lunch with him and my now current business partner, Andrew.
Andrew is an engineer and has held senior executive roles in several Fortune 500 companies, and he has established himself as a local top multifamily real estate Sponsor over the past decade. His family also owns some large multifamily buildings in Manhattan and Houston. In addition to owning and sponsoring multifamily syndications, he also owns a successful property management company that he is growing. Rounding out his resume, he is a commercial realtor.
Andrew and I both had very different problems. He had access to off-market deals through managing other owners’ properties, and he had first opportunities at deals being a realtor, yet he tapped his investor network out through his previous long-term hold syndications. My problem was lack of deals that would produce good returns; however, I have access to capital. I still work full-time as a pharmacist and have developed a good rapport with my colleagues and physicians and constantly talk about what I do in multifamily real estate. We quickly discovered we have the same goals and focus, yet we also possess complementary talents. Needless to say, him and I hit it off and talked about doing a deal together since January.
Long story short, the owner of a 44-unit property he manages asked Andrew if he was interested in purchasing his property because he didn’t want to list it and pay commission. The owner developed the property in 1992 and had been micro-managing Andrew for the past four years because this development was like a child to the owner. The owner’s wife decided he needed to get a life and retire from owning the property so he could travel the world with her and live closer to their son in Washington. Guess who won? You guessed it, the wife won this battle, and he offered to sell it to Andrew.
After much negotiation, I am proud to say we have this property under contract for $3.8M as of 3pm yesterday! We are buying at a heavy discount – 6.9% cap rate with the market at a 6.2% cap. One of our lenders said they had Marcus and Millichap do an analysis which resulted in a 5.9% cap. Being conservative, we obtained this at a $400,000 discount. While I cannot disclose the exact location due to owner wishing this to be a private deal, it is located near the shores of Lake Michigan in the city of Kenosha, Wisconsin. Last year, Kenosha was named one of the top 15 fastest growing metros for job growth, and our property will be only a few short miles from the new Foxconn facility that will create 14,000+ jobs once complete in the next couple years. I never would have predicted SE Wisconsin to be the next tech hub, but analysts have already started calling this Wisconn Valley with the impact Foxconn will have and the venture capital they are pumping into this area. We also just received some information about a large new commercial retail development that will be built right across the street from our property and include 80+ acres developed into a high-end subdivision.
Because my partner already manages this property, he knows everything about it including the financials. The property is in mint condition and doesn’t need any work at all, except for some rust on a couple of the balcony railings. It is built on a slab so no foundation issues. The owner and my partner kept it in pristine condition – you can really see pride in ownership the second you walk onto this property. This is one of the premier properties in the area, and occupancy has been very close to 100% over the past four years.
Not only did we obtain this turn-key ready property in a fantastic location at a significant discount, but there are plenty of value-add opportunities as well without spending any money! The rents are below market, the current owner does not charge any rent for outside parking spaces, the parking garage rents are below market rate, there is a beautiful unit being used as an office that could command $900/month, storage fees are not implemented, water is being paid by owner, etc. It is standard for tenants to pay most of these in this area, but we will implement all of these value-add strategies over time rather than overnight in order to keep occupancy levels close to 100%.
One fear I had was how the property taxes were going to skyrocket after we purchase this. The current assessment is ~$3M, but after purchasing for $3.8M, our taxes would jump up close to 25%. The solution? We purchase the membership interests in the LLC that owns the property rather than transfer title. This allows us as purchasers to take title to the real estate without changing the legal owner of the real estate and triggering a property tax reassessment. We also avoid the transfer title fee which is equal to 0.3% of the purchase price. This strategy is not perfect for every acquisition - since purchasers of LLC membership interests are purchasing both the assets and the liabilities of the acquired LLC, it is important for the purchaser to conduct adequate due diligence to minimize the risk of any undisclosed liabilities. My partner has known the owner for a long time, and we have done our due diligence such as title insurance policy, lien searches, etc.
Andrew and I will be Sponsors in this JV while I raise money from investors who will be our members in this deal. We have four bank commitments on this deal already with loan terms of 10+ years fixed at 4.8%-4.9% amortized over 25-30 years. In fact, two of the banks want to personally invest into our deal. We will finance ~77% with the bank, and I will raise the other $1M from investors. I am proud to say I'm already past the halfway mark in raising capital on this deal in just a short week, but I only have until September 15 to get commitments from investors. I always keep hearing, if the deal is good, the money will follow, right? I'll officially open it up my inner circle of investors tomorrow since we just got it under contract so the race is on!
Since this is a lower-risk, turn-key investment, we are offering a 7.5% preferred return to the investors for 50% ownership. This is unlike most syndications where the Sponsor wants to hold for only a couple years after a major rehab and reposition in hopes of selling resulting in a high-teen IRR. This property is in such fantastic condition and in a phenomenal area so we want to hold this for 10+ years and just keep milking the cow. This does not appeal to most investors as most want to get in and out quickly so I may find I have a difficult time making this deal appealing to most passive investors. However, I see this almost as a pension or annuity for investors because after all capital is returned through a refinance, the investors still retain the same ownership so at this point, the investors have an infinite cash on cash return until we sell, which hopefully is not for a long time. My partner is very proud of over-delivering on all of his syndications so we purposely projected lower than expected returns in our Prospectus. I can't wait to hear how elated our investors will be five years from now - this is what truly makes these deals a win-win for both parties. I enjoy providing value to others, and that is exactly what we are doing on these deals.
As a Sponsor, I won’t even come close to being able to quit my W-2 job with this deal, but my partner and I are planting seeds with our investors and developing a great relationship that will prompt growth in our company to scale and take our talents to the next level. We have already set our sights on a 100+ unit property.
While I see this partnership as a fairy tale, my girlfriend does not view this as the classic Cindarella story because she thinks I am having more of a relationship with my business partner than her now. Oh well, I told her to start reading Rich Dad, Poor Dad and maybe we can incorporate her into our conversations!
I really want to take a minute to thank the BiggerPockets community as I would have never even known what a real estate syndication was four years ago. This community alone has changed my life, and I thank you all for being a part of it. I want to give a shout out to @James Kandasamy for his motivating articles and @Joe Fairless for being in my car every day to teach me something new about multifamily investing via his podcasts.
My goal this year was to get a 40+ unit under contract before my 32nd birthday (August 29) which I did just in the nick of time. My next goal is a 100+ unit before my 33rd birthday so I want everyone to hold me accountable for this! None of this would ever be possible without partnering. Lesson learned: 1+1 = 3.
