#050: Structuring a $10 Million Apartment Deal to Create Long-Term Cashflow

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 Josh Cantwell back with you again. I’m so excited to be with you and to be sharing with you about real estate and entrepreneurship and I hope the content and the information that you’ve been getting from this podcast and from our social posts and our blog posts has been impacting you as an investor, as a person, as an entrepreneur. I’ve been getting so many different comments and reviews and likes on all these podcasts about the guests that we’ve had, the solo cast that I’ve done. And I just really love the opportunity to spend time with you today. Whether you’re, you know, I’m in your headphones, you’re going for a walk, you’re in your car, you’re at the gym, just to be able to share this with you and have an impact on your life and your business.

Just for me, recording this content is impactful for me, for me to get my ideas and thoughts out of my head into a recording device and have it, you know, forever. It’s therapeutic, it’s fun, it helps me organize my thoughts and I hope you’re really, really enjoying it. I also, one of my down the down the road goals with this podcast is to be able to have all this content available for my kids. As my kids get older, become entrepreneurs or whatever path they follow, there’ll be able to hear their dad and some of the journeys that I’ve gone through and learn from them. So thanks for the opportunity to share my journey with you and I hope we’re really having a huge impact on your journey along your way.

It’s been an interesting week for me. A about a week or two ago we closed a really big $10 million apartment deal, which I’m going to tell you about today called The Heights Portfolio it’s really interesting deal. I’ll tell you a little bit more about how it went. And then just last night, we actually closed another massive apartment deal of 493 unit called Vista Mac, which I’ll tell you a little bit more about that on another podcast. And so we’ve been able to partner with amazing operators, guys like Jack Petrick and raise lots of capital and getting involved in deals and underwriting and originating and private placements.

It’s been super, super exciting. And, you know, as look at the future and look at where we’re going, what’s going to happen with our economy in the next couple of years, for sure. I anticipate that we’re going to see some sort of slow down, some sort of recession in the next two years or so. And so what I’m trying to do in my own businesses become recession-proof, to make sure we have cashflow and passive income and equity, because that’s how you get through slow times with cashflow.

So I would encourage all of you to think about what are you doing? Are you transactional in your business or are you generating longterm, regular, consistent cashflow? So let me jump into the Heights deal. The Heights deal is 164 unit apartment complex and apartment portfolio, right in Shaker Heights, Ohio. This is a partnership with my friend Jack Petrick and my business partner Glen Lidell and we were able over the last several years, Jack and I have built an amazing relationship. My kids and his kids are very close. My wife and his wife are very close and Jack and I have talked about doing a deal together for a long time, whether it was assisted living, whether it was an apartment deal, you know some sort of rehab something. And we’ve been talking for a long time and finally this deal came together and it just closed about two weeks ago.

The Heights deal is 164 units. It’s a$9.2 million purchase price. We’ve scheduled $400,000 in improvements, which is just about a $2,500 per unit. So very cosmetic, minor fix ups. This property is in a class A area. It’s got a, it’s A class, a building with class A tenants and we could have gone into this building when we bought it with agency financing or right out of the get go. We could’ve got longterm permanent financing right from the start. Because out of the 164 units, 157 of them are already occupied. So we have a really, really high occupancy rate, very low vacancy. But our model has been to, you know, get equity investors into the deal, stabilize the property, increased the value by increasing the rents, by improving the units and then refinancing the building and being able to pay off the bridge loan and payback all the equity investors, all of their capital that they’ve invested.

And so when we looked at this deal purchase price of $9.2 million based on a cap rate of about six and a half percent, the building right now is valued at about $11 million dollars. But we were able to secure it for $9.2 million. And I’ll tell you a little bit more about how we found the deal in a minute. So purchase price of $9.2 improvements of $400,000, another roughly $200,000 of soft costs, basically lender fees, insurance appraisal, stuff like that. And that leaves us an all in number of $9.86 million. All in, we were able to secure a bank loan, basically a 18 month bridge alone for $7.65 million, which left us a need for capital, a need for private investors of about $2.2 million. And we were able to successfully raise that $2.2 million from investors that, you know, I’m already working with that I have existing relationships with people that are following us, people that know us, people that invested in my private equity fund or invested in one of my previous deals.

So we were able to secure that $2.2 million relatively easily. Actually, we held one webinar and we invited people that we had existing relationships with and previous investors and we actually raised $2.7 million in roughly 60 minutes. So we way over raised. So again, all in for now $9.8 million, right? All in for $9.8 million on 164 units. Puts us a little over $50,000 a unit, right? And puts us in a situation where we bought it about $55,000 a unit and we could have stayed in the deal with a permanent loan right from day one, but because we want to refinance and get the investors their capital back within the next, really one to two years, we put a bridge loan on it, okay. A Bridge alone was at 6.9399999999999995% interest and that interest rate, we’re going to be able to pivot into Fannie Mae, Freddie Mac financing in about 18 months.

So the goal is to add value to the building. And this is, you know, the most commonly used term in all of commercial real estate is value add value add, value add. So we’re adding value by increasing the rents and we’re also improving the units about $2,500 per unit. But that’s pretty minor. $2,500 per unit is really cosmetic. It’s, you know, it’s backsplash, it’s low flow toilets, it’s led lighting. It’s, you know, some new appliances. It’s remnant granite in the kitchen. Very basic basic stuff that we’re doing to improve the units. But through the improvement of the units, we expect to increase the net operating income from $800,000 to $924,000, okay. So the way you increase value in commercial apartment buildings is increasing the net operating income by increasing the net operating income that increases the value of the building.

Secondly, is by having a lower cap rate, the lower the cap rate, the higher the building, the more it’s worth. So we bought the building essentially at an eight and a half cap. But banks are valuing buildings today at about a six and a half cap. So when we bought it at eight and a half cap, knowing that banks, once it’s stabilized, we increased the rents, etc. A bank is going to value this at a six and a half cap for longterm permanent financing immediately makes the building worth about 14 and a half million dollars. Okay, so let’s talk about the math real quick. So for all in for $10 million and the building is creating $800,000 of net operating income, right? The $10 million divided by the $800,000 leaves this basically at an eight cap, right? That’s what we’re essentially acquiring it for. When you look at the building being worth the operating income worth $924,000, and then divide by 0.065, which is a six and a half cap, that puts a new value on the building at $14.23 million, okay?

So when we go to refinance in about 18 months, the Fannie Mae, Freddie Mac alone will come in and they’re going to, you know, loan us about 70%, 75% actually 75% is the number we’re targeting 75% of the $14.25 million, which is going to allow us to have about $800,000 of cash out refi proceeds. And so the investors are going to receive their prorated share of those cash out refi proceeds. We’re paying them a preferred return of 10% and they’re getting their percentage of cash out refi proceeds. Then in about 18 months they’re going to get all their money back, all their principal, plus they’ve gotten the preferred return, plus they’ve gotten cash out refi proceeds, then they’re going to stay in the deal in perpetuity forever with no money in it, okay. So really, really exciting stuff. So we’ll put a new agency loan on it at about $10.7 million that will pay off the $9.8 million that we’re all in for.

It’ll produce about $800,000 of cash out refi proceeds. It’s also going to leave about $3.55 million of equity in the deal, which is the difference between the $10.7 million and the $14.3 million of the new value based on a six and a half cap. Also, after all of our expenses and debt service expenses, our net operating income was going to be $924,000. But after we pay the debt service, we’ll have a net free cashflow of about $220 $230,000 per year of net free cashflow after we pay all the bills, all the debt service and everything else. So really, really exciting deal. If you have any questions about how it was structured, you know, just reach out to me, make comments on our pages and we’ll get in touch with you.

So let’s talk about, that’s the deal, that’s the economics around the deal right now. How did we find the deal? Well, we got Jack and I friends for the last five, six years. Jack was able to close. We were able to, we were Jack’s lender on a number of other smaller apartment deals, a 25 unit, a 30 unit an 18 unit. We were able to fund and close a number of other smaller deals that were kind of tough to close deals. Deals that were tough to get financing for deals that were tough to kind of structure. And Jack found those deals and we came in, I came in with, you know, debt financing as well as equity financing to help Jack get these smaller deals closed. And so one of our loan officers, one of the guys that refers business, one of the brokers that are out there, they saw that we were able to successfully close a lot of deals that were tough to close deals.

So when this deal came to their office, it was an off market property. The seller did not want this property to go on the market. They did not want anybody to know about it or have it gone LoopNet or Costar or anything like that, or the MLS. They wanted to make sure that it was off market. Nobody knew about it. So they brought it into the commercial loan officer or the commercial broker and said, hey, do you know anybody that’d be interested in buying this building? They said, well, hey, you know, this buyer Jack Petrick and you know, he’s been able to successfully get these deals closed. And you know, I think he’d be a great buyer because he could get this done. He could get it done. So we were able to successfully negotiate to buy the property for $9.2 million, even though it appraises out right now at over $11 million.

And Jack was able to find the deal because he performed on other smaller apartment deals, you know, a million dollar deal, a $500,000 deal, a $2 million deal. And those brokers said, hey, I know if we get this deal into Jack’s hands and works with Josh, we’re going to be able to get this deal closed and funded. Fantastic. So that’s how we found it. It was off market and it was through relationships. Now how do we structure the deal? Well, again, we brought in investors. We brought in debt financing, the bridge loan for 18 months. The plan is to refinance into permanent Fannie Mae, Freddie Mac agency financing in about 18 months from now, and we needed to raise about $2.2 million. So I structured the deal, essentially seven financial benefits to investors. All right?

Now this is going to be a public podcast that anybody can hear. So I want to make sure I make full disclosure. This is not an offer to invest in this deal. This deal is closed. It’s already been funded. You cannot invest in this deal, nor am I soliciting funds for this deal, okay? Because it’s already funded, I don’t need your money for this deal. But I just want to tell you how we structured it so you can use it for your own deals. So there are seven financial benefits to the way that we structured this for our investors, our passive investors. So the first thing is, number one is they got a preferred return of 10%, okay? So we pay that quarterly during the stabilization phase. Secondly, they’re going to, with their investment of $100,000, they’re going to own 1.5% of the building for each hundred thousand dollars that was invested. They own 1.5% of the building. So when we refinance and there’s $800,000 in cash out refi proceeds, the 1.5% of the $800,000 is $12,000 grand.

So they’re going to get $12,000 in cash out refi proceeds. So between their preferred return of $10,000 in year one plus $5,000 for half of year two, because we’re going to refinance it 18 months, that’s $10,000 plus $5,000 plus $12,000 in cash out refi proceeds is a total of $27,000 in 18 months, okay. $27,000 divided into 18 months is an 18% internal rate of return or an 18% annualized return. Pretty amazing stuff, okay. So it’s an unbelievable opportunity for them and we’re able to do the deal with little or no money out of our own pocket, okay. That’s the second financial benefit is the cash out refi proceeds. The third financial benefit is the cash flow after refi.

So after refi, each investor owns 1.5% of the building in perpetuity, so they get 1.5% of the cashflow every year. So again, after debt service, we expect the building to cashflow about $225,000 a year. They’re going to get 1.5% of the $225,000 after the refi, and they get that every single year, every single month in perpetuity. It ends up being about $3,200 a year in free cashflow with no money in the deal, because again, remember they’ve gotten their principal back at the refi. Then number four, they have equity in the deal, right? So remember, there’s $3.55 million of equity in the deal. They own 1.5% of the equity, which is about $53,000 of equity in the deal, which is an amazing, amazing opportunity. You can have no money in the deal but have $53,000 of equity and perpetuity.

Those are the first four, so preferred return, cash out, refi proceeds, cashflow, equity and perpetuity. Those are the first four. But investors are also going to get appreciation, so as the building appreciates in value over the next 5,10, 20 years, they’re going to have equity in perpetuity. So that benefit of appreciation, number six they get the benefit of depreciation, okay? Meaning you own the asset, you own 1.5% of the asset. So you get that that depreciation schedule flows down to the investors. And so that depreciation allows them to write that off on their taxes. So it offsets some of the cashflow income by having depreciation on their tax return. And then finally, benefit number seven is mortgage principal pay down, okay?

So the pay down means that every single month, okay, we’re going to be making a mortgage payment to the lenders over the next 5, 10, 20 years, and we’ll be paying down $20,000 a month, $30,000 a month, $40,000 a month, $50,000 a month in principal pay down. And that principal pay down will flow down to investors and thus create more equity, okay? Thus create more equity. So you can see with the way we structured this when I held the webinar for my passive investors and I said, this is the opportunity for you. They jump through the webinar, practically screaming through my cell phone to say, I want a unit, I want a unit, I want a unit, I want a unit. So that’s how we did. And Jack and I were able to close the deal.

Now people ask me all the time, Josh, what’s the exit plan? What do you plan on doing with the building? Well, the truth is, this is going to be a $15 million building. There’s no reason for us to sell it. There’s no reason for us to flip it. We’re in this for longterm cashflow, we’re in this for longterm equity gain. We’re in this for longterm tax benefits longterm, you know, longterm wealth, that’s what we’re here for. So maybe in 10 years from now, we’ll sell the building. Maybe we’ll do a 1031 exchange, maybe we’ll, you know, exchange into another property or another asset. And we’ll do that down the road. But right now the plan is just hold the thing longterm, create significant longterm wealth, significant longterm passive income, pay off the mortgage, and then we’ll figure it out down the road.

But that’s, you know, that’s how true wealth is built in the United States with real estate. It’s not flipping properties, it’s not flipping apartment buildings. It’s in owning the asset. Longterm funding equals freedom. Now there’s one more piece of this that I want to make sure that I talk about before I wrap up today, is, you know, these deals, when you’re doing a $10 million, $15 million or a $30, $50 million apartment deal, we’ve done deals from, you know, small hundreds of thousands all the way up to a $50 million apartment deal, is the largest deal that we’ve done, which we’re in the middle of these deals don’t happen unless you have an amazing team, right?

This is a huge essential partnership between me and my business partner, Glenn, Jack Petrick, and then Jack’s team, Jackson investors, our investors, the commercial lender, the bridge loan lender, the insurance broker, the motivated seller, the motivated seller and their lender, their broker that brought us the deal. You know, operations people that help us pull all of the documents together. The securities attorney that writes the private placement memorandum. So I just want to recognize some of these people. One because I want you to get to know who some of these people are for your own deals, but also because you know, this is a huge team effort. And so we want to be very transparent that this deal doesn’t happen just with me and Jack.

This deal happens because of many people that put in effort and time. So of course I want to congratulate my buddy Jack Petrick on securing this amazing deal. I’m excited to be involved. My business partner Glenn Lenel was instrumental in helping us, you know, get all the capital, organize the private placements organized. So, you know, Glenn was involved and that’s, you know, the core partnership is me, Glen and Jack. But then you have, you know, Darren Mangum who is our securities attorney, David Streater, our real estate attorney that worked on the operating agreements and the lease agreements. You’ve got the commercial lender that wrote the loans, Chris Littler with Pinnacle Financial Group, Marcus and Millichap. You’ve got the insurance broker who I can’t remember right now, but we have insurance broker. You have Jacks, you know, a operations manager her name is Erin, who’s an amazing, you know, person that keeps jacks affairs in order.

You’ve got all of our investors. We had I think 17 or 18 passive investors that invested in this deal, who had questions and comments and, you know, punching holes in the deal and making sure everything was secured. You know, all of those people were involved. You’ve got all of my team at Freeland who’s helped us raise capital for our private equity fund and funded deals for other investors. And then those investors said, hey, I like your fund and I like what you’re doing. What else do you have? Oh, you have this apartment deal. Awesome. I want to participate in that. So, you know, there’s just been so many people, my whole team at Strategic Real Estate Coach, you know, with getting these content out is, you know, it’s a massive, massive team effort. And I got to tell you that out of all this different stuff, right?

There’s the proforma, there’s the numbers on paper, everything looks fantastic, the underwriting looks fantastic, the projections look fantastic. But I got to tell you, the type of deal, like this only happens with an amazing operator with an amazing operator, boots on the ground. The guy that’s running the building, running the asset and making sure that the numbers on paper, the proforma actually comes to life, okay? Because you can’t, you know, you can’t eat equity, you can’t eat a proforma. What you can eat is cashflow. What puts food on the table and pays the bills and buys us an amazing lifestyle and luxury items is the actual proforma coming to life. And so every deal that we’ve gotten involved in with guys like Tim Rots and Georgia Brew and Eric Bottlewalla and Jack and Steve Morris and Augustino Pintas and all these various guys that do apartment deals.

The one thing that we look at that we absolutely has to happen that we have to have is an amazing operator, boots on the ground. In this case, that operator, that boots on the ground person is Jack Petrick. And so we’re really super excited to be involved in the deal with Jack. And Jack is an amazing operator. You know, his phone is always on. He’s available 24, seven, and he’s the one that’s making sure that the deal comes to life. You can’t just throw money in a deal and hope the operator does well. It’s just like a rehab. It’s just like a rental. If you buy a rehab and you’re boots on the ground contractor screws it all up, your deal is screwed up, right? You don’t make any money. Same thing here with apartments, just on a way more massive scale. And so we’ve got tons of people involved.

I want to congratulate them all on getting this deal put together. Tell them that I’m really excited to be on their team, have them on my team and just be doing these deals as a team. It’s really a massive partnership. There’s no one person that makes these deals go. And so I hope you’ve enjoyed this little talk about The Heights Portfolio, about how we structured the deal, how we found it, how we plan to exit it and all the people that were involved. Let us know what your thoughts are if you have comments, questions.

And yeah, if you’re an operator and you’re looking to joint venture on a deal, if you are looking for property management, mentorship capital, private placements, you know, some sort of partnership, joint venture, definitely let me know. Reach out to me directly. Visit my site, which is Josh CantwellCoaching.com. Opt in there and we’ll get on the phone with you and see how we can help you out. Okay, so thanks much for being here. I hope you enjoyed this episode of Accelerated Investor on The Heights Portfolio. We’ll 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.

What has been your biggest property purchase to date? 

I can tell you this: it doesn’t matter if you’re buying a $25,000 “needs to be torn down to the studs” dump of house or a luxury $50 million apartment complex… it you don’t have the right process and the right people in place, you won’t be successful. 

So, no matter which types of properties you invest in, I think you’ll take away some valuable information when you hear about my recent property deal – a $10 million apartment building called The Heights, which is located right here in my home state of Ohio. 

My team just closed on The Heights recently, and I’m here to share the entire process with you – everything from how we found the property in the first place (since it was off-market) to how we structured the financing to benefit our passive investors. 

Even more importantly, I encourage to you think carefully about your own real estate investing strategy. If you’re focused only on your number of transactions, without considering how you can generate long-term, consistent cashflow, you might be setting yourself up for failure. 

So, be sure to tune in for some inspiration, and learn how you can generate your own long-term wealth. 

What’s Inside:

  • How Josh’s team found The Heights property, which was off-market
  • How financing for this property was structured
  • How Josh and his team raised over $2 million from private investors for this property
  • The estimated annual cashflow for this property after bills are paid (hint: it’s 6-digits)
  • How the deal was structured to provide 7 financial benefits the passive investors involved
  • The long-term plan for The Heights property

Mentioned in this episode​