All Forum Posts by: Travis Dillard

Hi Jason, thanks for the question. We used a larger, regional bank. Essentially, they ordered an appraisal for the "as is" value and the "finished and stabilized" value before we even purchased the property. This is a commercial loan and appropriate for anything over 4 units. The appraisal was based on an income approach which takes the final product proforma NOI and divides it into a trading cap rate indicative for the area to arrive at a future value. We already had proved the income and expense formula because the seller was getting decent rents for the units before we purchased the building. Keep in mind, these were decent rents for pretty run down units. This was due to a general lack of rentals in the area that keeps rents and occupancy strong. They would lend up to 75% of the "finished value". Because we purchased the property for so little, we had plenty of room for the bank to finance the initial acquisition PLUS a decent rehab budget and keep us within our Loan-To-Value (LTV) ratios. In addition to staying within the proper LTV, the bank is also going to need to see an adequate Debt Coverage Service Ratio (DCSR) of at least 1.25. This means the NOI the property generates (all income less vacancy and expenses with the exception of debt service) has to cover the total debt service (including any seller notes) plus 25%. We feel that a debt cover ratio should be closer to 1.5+. We have other properties that operate at a 2.0+ DCSR. We like high cash-flowing properties and feel 1.25 is too skinny. So, in essence, we borrowed all the money to purchase the property and rehab it upfront. Commercial lending, which is usually for properties over 4 units, is generally more creative, especially if you have a proven track record with the bank. Conventional lending, which is usually for 4 units and below, is backed by Fannie / Freddie and less flexible in my experience (although I haven't used conventional lending for rental properties for about 10 years now). Now with COVID-19, commercial lending could get quite a bit tighter. But no hard money / bridge loan required for this project. It worked great. I hope that answers your question.

Investment Info:

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

Purchase price: $550,000
Cash invested: $40,000

Contributors:
Mitchell England

16-Unit Class C, garden-style apartment building. The complex consists of one 10-unit building, two 2-unit buildings, and two cabins. The units are mostly 1 and 2-bedrooms with one converted 4-bedroom.

What made you interested in investing in this type of deal?

This was off-market with a burned-out mom & pop owner with an incredible amount of upside. We purchased 12 units initially and then purchased (from the same owner) two adjacent duplexes. Initially, we purchased the 12-plex way under replacement value ($380K).

How did you find this deal and how did you negotiate it?

My business partner, Mitchell England, found this property off-market via old-fashion cold-calling.

How did you finance this deal?

Bank with 25% down / 30-year amortization. We put $40K down and had the seller carry back $70K. We financed $170K additional capital into the note for rehab expenses. We spent $130K of that $170K over 6 months upgrading the property. The appraisal after rehab came in at $800K on the initial 12 units. So $380K purchase, plus $170K rehab, we created $250K in added value in 6 months! When adding the 4-plex, we refinanced the seller out and got our initial capital back out.

How did you add value to the deal?

Rehabbed most of the units with paint, cabinets, flooring, etc. Painted the exterior, New name and sign. Evicted problem tenants (drug dealers). Removed failing carport. Added exterior landscaping and lighting. We added additional bedrooms in a few larger units to include converting a now unneeded office into a fourth bedroom. We also converted the one bedroom units in the added 4-plex to 2 bedrooms, allowing us to increase rents.

What was the outcome?

In the end, we were able to create over $300K in additional value and $3000 / monthly cash flow. The best part is that we were able to pull out all our initial capital and add 4 units 6 months later. This one was a home run.

Lessons learned? Challenges?

We always like to buy below replacement cost and for cash flow. Although we came out way ahead, I think we might have underestimated deferred maintenance expenses. The seller was burned out, lived on the property with her tenants, and was in a maintenance spiral. So, when you buy from a distressed seller well below value, factor in a higher amount of deferred maintenance expenses. Also, if vetted correctly, tenants on government housing assistance can be great, especially during this pandemic

Thanks @Neal Collins!  It's exciting to see the downtown area revitalizing.  We're hoping this project will be a catalyst for that.  To this point, it seems as though it has.  

Investment Info:

Mobile home buy & hold investment in New Bern.

Purchase price: $1,080,000
Cash invested: $270,000

Contributors:
Mitchell England

Bridgeton RV & Mobile Village is located in New Bern, NC., a nice, quiet, coastal market. The property is about 8 acres and consists of 40 spaces which includes 20 mobile home pads, 20 long-term RV Pads, and a stick-built barn for storage and laundry. The park is full of trees, grass, a community garden, and a pet run. We inherited about 10 Park Owned Homes (POH) and campers in the purchase. The residents love the fact that it's quiet, well maintained, and has lots of space.

What made you interested in investing in this type of deal?

We were primarily interested in finding a mobile home park that was priced at a 10% cap rate (on lot rent only), generated over 20% cash-on-cash returns, had good management in place, was in a good market, and had a light value-add component.

How did you find this deal and how did you negotiate it?

We found the property on Crexi. We initially negotiated with the selling broker, and then eventually the seller. In fact, we actually stayed at the seller's house, adjacent to the property, while we were in negotiations .

How did you finance this deal?

We used a regional bank that has a fantastic appetite for MHP. The note is amortized at 25 years with 75% LTV.

How did you add value to the deal?

We've added a fenced dog run and community garden. We're in the process of adding laundry and sub-metering the electric connections with Metron meters, integrated with our Rent Manager software, once Metron makes them available. Since acquisition, we've sold off some of the POH inventory. We've also raised lot rents from $280 to $300 / month. We've also experimented with, and made some management changes.

What was the outcome?

The inexpensive value-add projects improved the lives of the tenants, especially during this COVID-19 time. We've improved occupancy from 85% to 95% and increased NOI.

Lessons learned? Challenges?

The RV component is tough. The previous owner would convert a single MH pad to 2-3 RV pads, swapping out a single pad rent of $280 for 2-3 pads at $450-$500 each (including utilities). The economics are exciting, but RV pads should be underwritten differently to account for increased vacancy, turn expense, and ultimately, a higher cap rate. It's much easier for somebody to hook up their truck to the RV and move, they don't even have to move furniture.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

American Commerce Bank has been great to work with. They also have an appetite for, and see the upside in MHP, which is refreshing.

Investment Info:

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

Purchase price: $1,800,000
Cash invested: $500,000

We purchased a historical 30,000 SF Building built in 1910. The first floor has 4 retail spaces, the upstairs housed apartments abandoned in the 1930's. We renovated two of the retail spaces and completely gutted and constructed 9 class A loft-style apartments upstairs. We took advantage of many public / private programs, including vertical housing tax credits, federal grants through the Urban Renewal Agency, and energy credits all totaling over $250K in benefit.

What made you interested in investing in this type of deal?

This was my first larger multi-family project. The area is in the scenic Columbia River Gorge, an hour east of Portland, Oregon. I was intrigued with the public programs that make this project make economic sense. The project has also been a catalyst in attracting other investors, leading to a downtown revitalization movement.

How did you find this deal and how did you negotiate it?

A local broker. There were personal reasons forcing the sale and I offered lower than asking price. It was accepted.

How did you finance this deal?

I acquired the building via a primary commercial note and the seller financing a second. Later, I financed the seller out with a second construction note, accompanied by gap financing through the Mid Columbia Economic Development District (MCEDD) which exists to assists local businesses and projects like this.

How did you add value to the deal?

Renovated two commercial spaces and built 9 Class A loft-style apartments on the second floor. I plan on adding 12 storage units on a mezzanine level to add income in the future.

What was the outcome?

All commercial spaces are leased. We started leasing the apartments in Jan. 2020. Even with COVID-19, we have 7 of the 9 apartments rented as of April of 2020.

Lessons learned? Challenges?

Construction projects = twice as long and 25% - 45% more cost than expected! Plan on carrying costs. Also, remember that your cash-on-cash / IRR is significantly altered when your cash is tied up for two years without income!

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Columbia Bank. The Main street Commission. Urban Renewal Agency. Mid Columbia Economic Development District (MCEDD).