170 Valley Case Study — Raising $7.5M in 90 Minutes! – EP 238

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In today’s episode, I peel back the curtain on a 170-unit deal that I just got under contract, with an expected valuation of $14M. 

Listen in as I breakdown the deal, including how I secured it off-market, the $1.1M CapEx plan, and how I was able to raise $7.5M in only 90 minutes! 

The best part is, we only needed $2.5M to fund this property, so now our next two deals are fully funded as well.

Quick Overview

  • Purchase price: $9M
  • 170 Units
  • Price per door: $52,900
  • $1.1M CapEx budget
    • Unit Turns: $877K
      • 56% of the units needs a full turn ($7,500/unit)
      • 20% of the units needed a ½ turn ($3,000/unit)
      • 24% of the units are make ready ($1,500/unit)
    • Exterior
      • $25,000 for roofs
      • $20,000 for driveway sealing & striping
      • $37,800 to paint (13 common spaces @ $3k/space)
      • $50,000 for exteriors, yard, fencing, dog park and pavilion 
      • $90,000 buffer  
  • $270,000 acquisition fee (3%)
  • $300,000 in soft costs (closing, legal, title, survey, appraisal, pre-paids)
  • All-in for $10.6M  
  • Rents are 20% under market value. Plan to improve units and increase from $700 to $880 over a 3 year period
  • $300,000 of tax-free refi proceeds
  • Expecting $900,000 a year of net operating income and a 6.1 cap rate
  • Expected Cash flow: $240,000/year
  • Investors get 10% preferred return + 1% equity in perpetuity
  • $14M+ valuation.

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Josh Cantwell: So, hey, guys, welcome back to Accelerated Real Estate Investor with Josh Cantwell. I’m your host. Super excited to be with you today. I want to step you through our 170 Valley, most recent property that we got under contract. We just got through due diligence and we’re getting set to close.

 

[INTERVIEW]

 

Josh Cantwell: So, hey, guys, here we go with 170 Valley. I’m excited about this property, tell you more about this acquisition that we’re closing on. We schedule to close on this actually on December 5th. Today is November 5th, I’m actually recording this, and our due diligence period ended today. So, I want to step you through this deal real quick, show you the numbers through the CapEx plan, and then also tell you how we were able to raise $7.5 million in about 90 minutes when we only needed $2.5 million to fund the deal.

 

Alright, so here’s the high-level numbers. Purchase price $9 million, number of units 170, price per door $52,900. We have a $1.1 million CapEx budget. When we did our due diligence, we realized that 56% of the 170 units need a full turn, meaning kitchens, bathrooms, carpet, paint, flooring trim, cord around, etc., etc. Those are going to be about $7,500 each. Then about 20% of the units needed kind of a quarter turn or a half turn, most likely painting, flooring, that’s about three $3,000 a unit. And 24% of the units are make-readies, meaning they’ve been recently already improved and they only need about $1,500, mostly paint and some extra fix-ups.

 

We’re also going to spend outside of the unit turns. The unit turns is $877,000, of the $1.1 million budget is 877. The rest of it’s all exteriors. So, $25,000 for roofs, $20,000 to seal and stripe the driveways, $37,800 to paint the common spaces of all of the buildings, there are 13 common spaces. Those common spaces run about three grand a common for paint and for labor. And then $50,000 for the exteriors, the yard, the fencing, and we’re going to put in a dog park and a pavilion. We also have an additional $90,000 buffer for extra things like boilers, or just if we go over budget, so $1.1 million. We’re also taking a $270,000 acquisition fee, which is 3%, and we have about $300,000 in soft costs, closing costs, legal costs, total survey appraisal, and prepaid. So, we’re all in for $10.6 million.

 

Now, when we look at this deal on the surface, the current seller, the current owner, is generating about $1.25 million of effective gross income, and they have about 61% in expenses, so it’s $780,000 in expenses. So, their net operating income is about half a million bucks. So, looking at our purchase price divided into the net operating income, it appears as if we’re buying this at a 5.5 cap rate. And some people would say, “Oh my god, jeez, you’re paying a 5.5 cap rate in Cleveland. God, that sounds really low. You must be really overpaying.” Well, if you looked at it from that perspective, you might be right, but from every other perspective, you’re wrong, and here’s why.

 

Currently, the rents at these properties, it’s called Valley Park and Valley Plaza, you can actually look this up online if you want. Currently, the rents at this building are about 20% under market value. Market value for this area on a price per square foot basis is about $1.20 a foot. They’re currently only getting a dollar a foot, so they’re 20% under market value. The rents on average are about $700 to $725 per month. This would be considered a C-class property in a B-class location. When we look at the property based on that CapEx budget where we’re going to put in gray paint, white trim, white 5-½-inch trim, new luxury vinyl plank flooring, granite countertops, butcher block countertops, new vanities, new low-flow toilets, new mirrors, new lights, new tub surrounds, sealing and striping the driveways, glazing the tubs, you’d be putting $1.1 into the building, you should be able to raise the rents pretty significantly, and that is the plan.

 

They’re currently getting about $700 blended rent. When we’re done with it, we expect our blended rent to go up over $880 in rent. Now, you might look at that and say, “Wow, that’s a big jump, it’s $180 jump.” But remember, that’s three years from now with a huge CapEx budget. So, if rents are going up 3%, okay, 3% on $700, that’s $21 this year, $21 next year, $21 the year after, that’s $760 three years from now with no CapEx budget, with no big expenses, no big investment. We should be at $760 or $770 with no investment. So, if we can get to $880, that puts our value based on $880 blended rent, it includes our property taxes being reassessed and going up by two and a half times what they are now. Current property tax is about $100,000. We’re penciling it out that the property taxes are going to go up to 250 grand. That means our expense ratio normalizes out to about 51% and leaves us almost $900,000 a year of net operating income and a very conservative 6.1 cap rate. Remember, this area right now, people are buying and refi’ing between a 5.5 to 6 cap today. We’re penciling this out at a 6.1 cap, three years from now, $900,000 dollars divided by 0.061 leaves us a $14.1 or a $14.2 two million valuation.

 

So, let me just ask you, does that make sense? Let me just put this back to real high level. Buy for $9 million, put in $1.1 million, payer solves an acquisition fee of $270,000, all in for $10.7 million, raise the rents from $700 a month to $880 a month over the next three years, then refinance, pay off all of our investment, walk away with about $300,000 of tax-free refi proceeds, slap a new loan on it, and then we’re going to cash flow about $240,000 a year of net free distributable cash flow. That’s a home run deal. Okay, that’s a homerun deal. Not only that, because we can invest, we can syndicate it, raise all the capital from private investors, and then those investors will get all their money back in approximately three years, could be a little bit more, could be a little bit less, but approximately 36 months, we’re going to refi. And when we refi, they get all their money back, they get their whole $100,000 back or $500,000 back or whatever they invested. And then they get to keep equity in the building in perpetuity, forever.

 

So, they get a $100,000 investment, they get a 10% preferred return. So, they get $10,000 in year one, $10,000 in year two, $10,000 in year three. That’s paid out on a quarterly basis. And then they’re also keeping about 1%, it’s actually 0.8% equity for each $100,000 invested. So, on top of the preferred return, they’re going to get some cash-out refi proceeds and about $25,000 to $30,000 in equity that they’ll keep and maintain in perpetuity, and they’ll get somewhere between two to four grand in cash flow every year in perpetuity as long as we own the building with no money in the deal. Okay, no money in the deal. So, let’s talk about the profit centers here for a second. First profit center for us is our acquisition fee $270,000. The second piece is the refi proceeds, $300,000. The next is the net free cash flow, $240,000 a year, the equity, $3.2 million. Again, we’ll be all into this thing for about $11 million, call it $10.9, and the pencils out to be worth $14.2, that’s a $3.3 or a $3.2 million difference in valuation.

 

So, the question becomes, okay, well, look at all these different profit centers. Alright. Now, what do we have to do to get this deal right? Well, we were able to secure the deal off-market through our commercial broker that gave us the opportunity to buy this before anybody else. He’s been working on that relationship for years. But the other piece about this is the private investors. So, we’ve been recruiting and raising private capital with our investors for years. So, now, I go back to last Wednesday. Last Wednesday, we recruited and raised the private money. And what happened was I took our group of investors, plus a bunch of prospects, people that we had been talking with and people that requested information from us, opted in, wanted more information, registered on the investor portal, and I put together a list of all the investors who showed interest. And I invited them on a webinar, we had over 100 people register, we had nearly 100 people attend. Matter of fact, I’m looking at the listing on my other screen. It’s 103 people who showed interest, and we were able to secure $7.2 million in reservations last Wednesday on a 60-minute webinar.

 

People, they called, texted, went into AppFolio, reserved a unit, and said, I want in. Unfortunately, good news, bad news, we can only accept about $2.5 million of investment. So, $2.5 million in reservations is all we need. And so, what I had to do is go back to these investors and say, “Listen, I’m sorry, you made a commitment of $700,000, I can only let you come in for $100,000.” Another guy, “You made a commitment of $300,000, I can only let you come in for $100,000.” Another guy, $700,000 commitment, I can only let you come in for $100,000. Another guy, $200,000 commitment, I can only let you in for $100,000. So, basically, what I had to do was I had to tell investors, “Look, we’re only going to accept a minimum of $100,000 and a maximum of $100,000.” And we basically said, “Okay, listen, if you didn’t get in, if you didn’t make it, we’re going to put you in the next deal.”

 

So, the good news is they’ve had three other deals that we’re going to be closing by the end of the year and early in January. And because of that, the best part about it is we’ve now got our next two deals on top of this fully funded. So, with that $7.2 million in reservations, we were able to fund 170 Valley for $2.5 million, $4 million into– we call it Brookside Shady, which we’re buying on December 29th, and another $2 million for Stockbridge, which we’re supposed to close in January. So, because of the 170 Valley deal, because of the scarcity and the marketing, getting everybody on a webinar, and really having a dynamite offer for these investors, we were able to secure a tremendous amount of money, fund 170 Valley in two additional deals, all on the same webinar.

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