Welcome to The Accelerated Investor Podcast with Josh Cantwell, if you love entrepreneurship and investing in real estate then you are in the right place. Josh is the CEO of Freeland Ventures Real Estate Private Equity and has personally invested in well over 500 properties all across the country. He’s also made hundreds of private lender loans and owns over 1,000 units of apartments. Josh is an expert at raising private money for deals and he prides himself on never having had a boss in his entire adult life. Josh and his team also mentor investors and entrepreneurs from all over the world. He doesn’t dream about doing deals, he actually does them and so do his listeners and students. Now sit back, listen, learn, and accelerate your business, your life, and you’re investing with The Accelerated Investor Podcast.

So, hey, welcome back to Accelerated Investor. And today we’re going to talk about apartments. And today we’re going to talk about how just two days ago, we successfully raised $2.55 million for a value add apartment portfolio in less than 60 minutes. Now I say that with sort of tongue in cheek because all the work didn’t happen in 60 minutes, but let me tell you what’s going on. So a friend of mine, Jack Petrick, who’s been a guest on the Accelerated Investor podcast before came to me. We’ve been talking for years about partnering up on an apartment, deal around, you know, a portfolio or partnering up on something. And Jack said to me about 90 days ago and said, hey man, I’ve got a LOI out on 164 unit apartment deal and if I get this under contract, I would love to partner with you on it.

I said, fantastic man, let’s talk it through. And so, Jack is a great operator. He’s a great at finding apartment deals. He’s put a lot of work into vetting out apartments, running the numbers, getting in touch with motivated sellers, talking with brokers, talking with commercial lenders. And so he’s built a reputation. He’s bought a 200 units and he’s built up a reputation of being able to acquire, you know, sort of tough to close apartment deals. And so he had a relationship with one of the commercial brokers here locally and found out about this deal. It’s 164 units, a $10 million apartment deal that was off market. And the broker brought it to Jack before he took it to the market before he brought it to anybody else. So the building today as it sits based on a six and a half cap, is worth $11 million.

So we already have an appraisal at $11 million. And Jack was able to negotiate the price to buy it for $9.2 million and brought me in and said, hey man, I know you’ve got a lot of experience in getting these deals, you know, funded, closed, getting all the disclosures done, the operating agreements, the private placement memorandums, the subscription agreements, the insurance, just putting all the pieces together. The jigsaw puzzle he’s like, why don’t you come in and partner with me on it? I said, fantastic. And so we ran through the numbers and we looked at it and said, well, you know, this really all starts with the investors, right? So if we’re going to buy the building for $9.2 million, we’re going to put about $400,000 into some improvements, about $2,500 per unit. And it’s also going to be about $260,000 in closing costs, holding costs, soft costs.

So we’re going to be all in for about $9.8 million. The question is, is what is the offer for investors and what’s going to be the stabilized value? So we went through the proforma of what it’s going to be worth in the future. We went through the actual financials right now. And so the actual financials, which I have here on my other screen, tell us that the property currently spits off $1.64 million of gross income minus vacancy. It’s $1.56 million of gross operating income after vacancy. Once you factor in all the expenses, the NOI, the net operating income is $803,000 per year. And so just, you know, doing the sort of back of the napkin math and if you’re watching this on YouTube, you’ll see me go through this calculation on my cell phone. So if you look at the $803,000 of net operating income and divide that by let’s say a seven and a half cap, right?

Seven and a half is, you know, a reasonable appraised value on a cap rate puts the value at about $10.7 million. And so we talked to the commercial lenders said, look man, you know, we’re getting appraisals right now on stabilized updated apartments. We’re getting appraisals based on a six cap. So if you take the current NOI and divide by 0.06 which is a six cap, that puts the value today, $13.4 million and Jack’s buying this, Jack and I are buying this for $9.2 million. If you take the current net operating income and divide by basically an eight cap, that puts the value of the building at over $10 million. And again, we’re buying it at $9.2 million. So we looked at, well, what can we do to reposition it? Because we know based on every appraisal, everybody that we talk to, commercial lenders, our own appraisal, our own valuation, the building’s worth at least $11 million today as it sits and we’re getting it for $9.2 million.

So we started to think about, well, how can we frame up an offer for investors, because we know the commercial lender is going to fund a bridge loan for us for basically 80% loan to cost. So the cost is $9.8 million, 80% of that is basically a $7.7 million, $7.65 million. So we’re thinking, okay, we’re going to have to bring in $2.2 million to closing $2.2 million down from our capital or from private investors or a combination. So we started thinking, okay, well what is this building going to be worth on it’s stabilized value? So we ran the proforma, we got with the commercial lender, we did a bunch of research. They did, we did. And we determined that based on doing some light cosmetic updates to the units, we could then bump up the rents and we already know we got about almost $2 million of built inequity.

And this is class a building in a class a, you know, neighborhood very stable, all brick, you know, very well maintained. We’re going to get based on the appraisals that are coming in for other buildings like this, they’re appraising at about a six cap, okay. And so based on new stabilized income, new net operating income, which is projected to be $924,000 and $924,000 divided by 0.06 puts the value at over $15.4 million dollars, $924,000, the new stabilized net operating income divided by 0.065. And again, the higher the cap rate, the lower the value divided by 0.065 puts the vote, $14.2 million. So we started thinking, okay, if we’ve got $7.7 million loan and we put down, you know, $2.2 million, whether it’s our money, other people’s money, what can we craft as far as an offer? Now, full disclosure on this podcast, I’m not soliciting money here.

This is not an offer. I’m just going through a case study. And so what we thought we could do is look for every $100,000 dollars that somebody invests, we could give up between one to one and a half percent equity in the building. We could pay a 10% preferred return and then they would owe one to one and a half a percent of the equity in the building, which means when the building is stabilized and we refinance the building into permanent financing, permanent longterm Fannie Mae, Freddie Mac financing, we’re going to be able to get a new value of between $14 and a half and $15 and a half million dollars at 75% loan to value. We’re going to get a new loan of around $10 and a half to $11 million, that’s going to produce about $800,000 to $900,000 of cash out refi proceeds. So we started thinking like, okay, what are we going to do here to recruit money?

Like how can we position this so it’s an unbelievably devastatingly irresistible offer? And so the 10% preferred return is irresistible, everybody loves that. If they own one and a half percent of the equity, you could do the math. You know right here, as you listen to me talking to you here, if you take $800,000 times 0.015 that’s $12,000 of cash out refi proceeds. So you add the $12,000 on top of the 10% prefi and you do that over 18 months. And if the refinance happens at 18 months, that’s a $27,000 of total profit or total return in 18 months, that’s an 18% annualized return or an 18% internal rate of return. It’s an amazing, amazing offer. Then the one and a half percent of the equity also allows the investors to retain about one and a half percent of the net free cash flow after net operating income after expenses and after debt service.

So we project that the net free cashflow is going to be about $217,000 after all expenses, and that’s going to leave one and a half percent of that is about $3,200 to $3,300 per year in regular recurring cashflow. Even though at the refinance at 18 months, they’re going to get all their principle back. So now they’ve got all their principal back, they’ve got their 18% internal rate of return, they have no money in the deal, and now they’re getting $3,200 to $3,300 per year in cashflow. And that also leaves equity in the deal, right? So we have a $10.5 to $11 million loan. The new value of the building is between $14 and a half and $15 and a half million dollars. That leaves about between $3 and a half to $4 million of equity. So if you do the math at $4 million of equity times 0.015, that’s $60,000 of equity.

If there’s $3.5 dollars of equity times 0.015, that’s $52,000 of equity. And so that’s basically what we structured. We structured it that the investors were going to get, you know, one and a half percent equity on the investment and 10% preferred return I want. And I held a webinar for all my investors. Now these are people that, you know, in full disclosure here, I already have relationships with some of them. A lot of them are already investing with me. I’d been investing in the last four or five years of my time building relationships with people. I invited about a hundred of them on the call, 76 of them registered, 48 of them showed up. And I told them, look, we’re only looking to raise here about one point $1 million. And literally within minutes, within minutes of the webinar starting, I had people texting me like, hey, I want a unit.

Hey, I want a unit. Hey, I want a unit. By the time we’re done, we had $2.55 million of pledges, of people who said, yes, I’m interested, hold and reserve me a unit. Now that doesn’t mean that they’re all going to invest. Like some people will fall out, some people may, you know, they might get the disclosure documents, the private placement documents, maybe they won’t be liquid at that time, but we’re going to be closing this in the next, uh, you know, three weeks or less. So these are all, this $2.55 million people that said they’re liquid, they’re ready to go, they’re ready to invest. So we basically received more than two and a half times the amount of money that we needed to raise. So how does that happen? How do you raise $2.55 million when you only need $1.1 million? When it comes down to a couple of things, first of all, number one, you’ve got to have a devastatingly irresistible, simple offer.

Something that people can invest in that they know that they can understand, that they don’t have to be, you know, a rocket scientist to get it, okay? And that irresistible offer was a preferred return plus equity with your principal return in 18 months or less. Investors love that. They love taking their chips off the table. So if you’re crafting your next offer, whether it be a residential, you know, flip a rehab a rental or an apartment deal, make sure that you show your investors a path that they can get their principal back in a finite period of time, like in the next six months, a year, or three years or less. I really find that three years and shorter is the best. It’s when people really want to get their money back. Anything longer than three years, many people have a hard time projecting, hey, you know, I’m going to get my money back and forth, five years, that sounds like a long time.

But if I can get my principal back in the next 18 months to 36 months, that’s pretty great. I get to take my chips off the table, get a return and own equity in the deal. So devastatingly simple, irresistible offer. Now I went back and forth with Jack for the past, you know, couple of weeks trying to determine like how much equity we could give up, what’s the return we could give them, you know, how do we structure the deal to make sure that there’s just an overwhelming response? Because the last thing you want is to be able, you know, to be tasked with raising two point $2 million. You hold a webinar and then it’s crickets, right? Nobody cares about the offer because it’s just not juicy enough. It’s not sexy enough for them. We don’t, we don’t have that problem, right? We needed to raise $1.1 jacks raising another $1.1 we’re partners in the deal.

And we’ve got $2.55 committed. So the first thing is that offer, second thing is you’ve got to understand like who’s your avatar? Who are you raising money from? And for me, I look at a couple of different avatar. One, I like to work with people who have an ecommerce business, somebody who’s going to sell the business exit the business, has a lot of net free cashflow and is looking to diversify outside of ecommerce. My second avatar is the corporate lifer the corporate fortune 500 lifer who’s now retired, has a big pension. And my third is active and passive real estate investors, people who already have an affinity for real estate. So we know what our avatar is. Second thing is where can we go meet people that fit our avatar? Where can we go to meet people, bump into people, share business cards, talk strategies?

Again, we’re not going to pitch them because the sooner you pitch somebody, number one, you have to make sure you’re compliant with the SEC rules. But the sooner you pitch somebody, the less likely they are to invest. The more you wait, the longer you take, right? The more they’re going to invest and the more often they’re going to invest. And so we slow roll it, but we want to make relationships. And when I get on the phone with people, I even tell them that straight up. I said, look, the SEC requires that we have an existing relationship with our investors. And so there’s no pressure here. This is not sales. We’re not going to sell you, we aren’t going to close you on this apartment deal, you know? Let’s just talk about what your goals are, what your objectives are. What do you want to accomplish, how much money you have, whether you’re accredited non-accredited, you know, do you have a financial advisor, an attorney, a spouse, or somebody who’s going to help you make investment decisions?

Are you sophisticated? Have you invested in stocks, bonds, mutual funds, real estate, oil and gas, cannabis, crypto, whatever in the past? Help me understand where you’re coming from, what your goals are, and people love it, my investors love it. When I get on the phone with them and they think that I’m going to sell them, they think that I’m going to pitch him and I don’t. They love the fact that there’s no pressure. They love the fact that we get on the phone. I’m all about relationships. I’m all about honoring people and the work they’ve put in and the money that they’ve made, the money that they saved. So I want to honor that by not like punching them in the mouth with an offer. I don’t want to do that. I want to slow roll it, take my time so that, you know they can feel comfortable, right?

People invest with people that they like. Even a financial advisor, you know, who just manages money in the market, stock market, mutual funds, etc. People invest in the market through that advisor because they like the advisor, okay? So if you’re a real estate investor and you’re looking to raise money for your next portfolio, your next multifamily deal, your next fix and flip, you basically are the advisor. You know, you’re not a financial advisor, you don’t have a license, you’re not regulated or registered as an advisor, but you’re sort of like a pseudo advisor. And when I tell them, look, I don’t care if you invest in my deal or not, I just want to tell you about some of the different advantages and disadvantages of real estate. What are the things you should look out for? What are the things that can make a deal really go?

What are the things that make a deal really happen? A good operator, a good deal, stuff like that. Here’s how they’re structured. And I’m like, listen, if you invest with me or not, I don’t really care. I could use your money but I don’t need it, okay. So I could deploy your money but I don’t need it. And so people really love that. And then at the end, like I told them about some different structures and we’re talking about, you know, high level stuff and I do not sell them. I do not offer them. I do not give them a deal to invest in. And inevitably I say like, okay, let’s just get together again. You know, I don’t even bring up an offer of a deal and literally they’re going to say whether it’s at the first appointment, the second, the third, the fifth, they’re going to say, look, well what do you have?

The fact that you did not offer them an opportunity, the fact that you did not have a specific property that you were going to pitch them or a specific multifamily deal or apartment deal and you slow roll it and you take your time. The fact that you don’t offer them, it’s like people want what they can’t have. People want to be in the inner circle, right? And so that’s a big part of raising money is educating without selling, educating without pitching and educating and educating and educating to the point where they say to you, hey, don’t you have a deal you’re going to sell me? Like don’t you have a pitch? Don’t you have a specific property? Because then, you know, when they say that like they’re in, you’ve closed them, you’ve closed them without closing them, like they’re foaming at the mouth to do a deal and they’re excited and ready to go and you didn’t even have to sell them.

That’s the absolute best way to recruit money. That’s exactly what we did this past Tuesday, presented the deal. And then we said, look, you know, we can only take 11 investors. We can only take 11 units. So the first 11 people to reach out to me and text me, you know, I’ll reserve a unit for you and boom, just like that within an hour, $2.55 million in pledges and commitments and we’re oversold. And so we’re really excited to share that deal. That’s a deal that we’re going to be closing here in the next couple of weeks when we close it and it’s under our care, under our ownership. We will definitely take it out to you and let you know.

So hope you enjoyed this, you know, little discussion around this particular, this is what we call The Heights portfolio. It’s 160, 40 units. It’s six different buildings. We’ll be closing on it in just a couple of weeks. And when we do a, we’ll tell you all about it. I appreciate your listening in. Hopefully it provided a lot of value to you today and some specific insights and strategies to, you know help you raise more money, help you structure your deals. You know, it starts with an irresistible devastatingly simple offer for your investors. Hope you enjoyed it. Talk to you soon.

You’ve been listening to Josh Cantwell and the Accelerated Investor Podcast. Leave a comment on our iTunes channel and let us know what you want to learn next, or who you’d like Josh to interview. While you’re there, give us some five star rating and make sure to subscribe so you can be the first to hear new episodes. Follow Josh Cantwell and his companies, the Strategic Real Estate Coach and Freeland Ventures on all social media platforms now and stay up to date on new training and investment opportunities to start your journey toward the lifestyle you’ve always dreamed of. Apply for coaching at JoshCantwellCoaching.com.