#155: 80 Unit Apartment Case Study

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 your investing with The Accelerated Investor Podcast.

So, hey, guys, what’s up? Welcome back to Accelerated Investor. Hey, it’s Josh. I’m excited to be with you. As always, to share strategies, ideas for becoming a better investor. For becoming an accelerated investor. Today, I want to share with you some deals, specific deals. Actually, one in particular is a brand new 80-unit apartment building that we just bought. We closed on it five days ago as I record this. It is Wednesday, October, like whatever 15th. And we closed on this on October 9th and we’re just excited to have this new piece in our portfolio.

This brings us up to over twenty-eight hundred units of apartments. And so we’re excited to add this one to our portfolio. This is a local deal. So a cool thing about this property, local deal. It’s about 35 minutes from where I live. A lot of our portfolios in other parts of the country. We’ve got about 15 hundred units down in the Albany, Georgia, Macon, Georgia markets. We’ve got 198 unit in Mobile, Alabama, 216 unit in Crosby, Oklahoma. We’ve got 264 unit here in northeast Ohio in Shaker Heights. We’ve got some other development deals going on as well.

But this is a little 80-unit deal. Let me tell him about this. This is what we call 80 Maple. It’s 80 units in Maple Heights, Ohio. Maple Heights is considered a C class location because of the age of these buildings, is considered a C class apartment building. The buildings themselves, the outside, the roofs, the windows, the doors, the brick exteriors are in fantastic condition. It’s about six miles from downtown Cleveland. It’s already been, you know, had a long history, three, five, seven, 10 years long history of being well over 90 percent occupied. These are what are known as garden style apartments. There’s On-Site management, onsite leasing, onsite maintenance, onsite laundry. There’s 40 garage units.

And it’s you know, it’s walking distance to shopping. It’s walking distance to grocery stores, Home Depot, Giant Eagle, every gas station, every you know, it’s kind of, you know, a class, fast food restaurant, Arby’s, Wendy’s, you know, all those McDonald’s burgers and all that kind of stuff. Now, the reason why we’re able to get this other the other thing that’s cool of it is a number of our tenants work at some pretty nice locations. Guys at work at Amazon, there’s an Amazon fulfillment center that’s about two and a half miles away. There is a shopping center that’s a walking distance across the street. There’s a Sherwin Williams automotive finishing plant that’s two point three miles away. The Cleveland Clinic main campus. We’ve got a number of nurses and teachers that are tenants here is about 10 miles away. The Jack Casino, there’s  aracino like racing and slot a slot, you know, kind of casino by two and a half miles away. Downtown Cleveland is about 11 miles away. And I can I can get here pretty easily.

So couple of things that we liked about this building when we first got introduced to us. So one of the strategies for finding apartment buildings is to find them through commercial brokers, commercial brokers, guys that work at large commercial brokerage offices like a Marcus and Millichap, like a Colliers International. Those kinds of places, these, you know, commercial brokers represent a lot of off market inventory. Matter of fact, I played golf yesterday with our broker. His name is Will. And we were having a conversation about a different deal that we lost. I recorded different podcast on that, but Will and I were talking and said, hey, like, why did we lose that other deal?

And Will said, while the guys that were your competition on the other deal are probably twelve to 13 years ahead of you guys in your apartment portfolio. I said, OK, well, what do you mean? He said, well, those guys started in 2005 and they owned 15000 units of apartments and they’ve done fifteen thousand units, primarily with one broker. So I’m talking to Will yesterday or golf. And he says, you know, Josh, as we build our relationship, I would love to grow with you guys. I would love to help you guys go from about 3000 units to 15000 units because we made a full price offer on that deal, six point one million, and we lost it. I was pissed off and like, why do we lose it? This is you know, I’m not happy about this. And was like, look, you made a full price offer. They made a full price offer. You guys are fully qualified. The other buyers fully qualified. You put up one hundred thousand of earnest money. They put up a hundred thousand of earnest money.

The difference is, is that Will’s boss was representing the other group that already did fifteen thousand units. So Will’s boss. Right. So Will’s got gotta, you know, give it get give us some room to his boss and the boss. His other client had fifteen thousand units, you know, which is we have a lot of units but they have a lot more than us. So and so Will and I are talking or so we just need to do a lot more deals like this. Eighty maple deal. This is the deal that I’m telling you about now. And so these brokers represent this is one of the strategies for finding deals. They represent off market deal flow that you’re never, ever gonna hear about.

Because in the commercial space, a lot of these guys do deals that are off market that are basically pocket listings. And in the residential world, you can’t really hold a pocket listing for a long time, maybe a couple days. Then you have to bring it onto the MLS. Well, in the commercial world, you can hold the pocket listing forever and never bring it on to the public markets, never bring it onto LoopNet, never bring it to Costar. Never bring it onto the market. Because in the commercial world, you know, everybody assumes everybody’s a big boy. Everybody’s an adult. And people do deals with people that they like, OK.

So Will brings us this deal. Eighty Maple and says, look, the landlord’s been around a long time. He’s kind of tired. He’s been he’s own this building for twenty seven years. His seller depreciation and his tax benefits have run out. You know, he’s on this property for so long, next year he’s going to start paying taxes. So he’s been able to take his interest expenses, his capital improvements and the depreciation schedule and almost eliminate his taxes altogether. People wonder why Donald Trump paid 750 dollars in federal tax. That’s because the tax code is written for landowners and for property owners. So I’m not surprised at Trump paid no taxes. I could’ve told you that four years ago when he was elected.

For us, I don’t want to pay any taxes either. The tax code was written by both Democrats and Republicans who a lot of these politicians were supposed to be public servants on both sides of the aisle. They both get rich over time, being politicians, being public servants. So they’ve obviously written the tax code to benefit themselves as well. They’re thinking about the Americans. They’re thinking about us as citizens, but they’ve written a tax code to benefit themselves as well. Politicians own real estate, so they want to pay as little tax as possible. I’ll bet you that most politicians on both sides of the aisle pay far less tax than they should because a lot of them own real estate. They’re not dummies. So don’t be a dummy. Buy some real estate.

The other thing about this deal, when Will brought it to us, the commercial brokers, you know, again, the long occupancy history. But he said, look, the sellers pretty burned out. He hasn’t really raised the rents much in the last five years. So the rents are fifty five dollars to a hundred seventy dollars below market value. And he says, look, a lot of the units need to be fully updated, but they’re cosmetic. You know, you’re talking about five to eight thousand dollars of cosmetic improvements. You’re talking about new carpet, new paint.

You’re talking about updating the kitchens and the bathrooms. OK? And if you do all that, it’s going to be about seven to eight thousand dollars a unit. If you just update the bathroom, it’s about twenty-five hundred dollars a unit. If you just do the carpet and the paint, it’s about three thousand dollars a unit. And if you do the kitchen, it’s another twenty-five hundred to three thousand dollars a unit. So you’re talking seven to eight grand to do a two bed or a three bed one bath property and then be able to jack the rents up.

So all these units we plan on updating over the next four years, but we only need to update about 40 of the units and raise the runs on 40 units to get to what let’s call our first recapitalization. That recapitalization is when we refinance the building, get a new appraisal, a higher appraisal. That appraisal is high enough to refinance it, put a new loan on it. Seventy five percent loan to value and pay off the initial loan, pay off our initial investment, pay back our initial investors. And so that’s fantastic. So that’s the plan. We also notice what was cool is there’s 39 nine garages here. There’s thirty-eight, two car garages and one single car garage.

And I was actually onsite yesterday walking the buildings, making a plan. We’re going to move some of the tenants out of certain garages, move them over to other garages because we need about six of the garages just for our own stuff, for our lawn mowers, for our storage. Mobile storage trailer. I couldn’t think of the word trailer mobile storage trailer. Put that in there.

All the old ladders, all the plow for the snow, all that’s going need to go plus stuff from my office. So we just want virtual and we, we were virtual for a long time. We went into an office about three years ago. We let the lease expire and now everyone’s back to working from home. But when we bought this building, we took one of the one bed, one bath units, and we turned that into an onsite management and leasing office. It’s about 500 square feet. It’s all we need. So  my current corporate office is now in this apartment building.

OK, pretty cool. One of one of the beautiful things is when you move home, you’ve got a you know, I’ve really moved my office. So now I’m recording this for my home office. Obviously, stuff get starts, get lost, stuff gets it gets misplaced. One of the things that happened is my SD card to record these podcasts fell on the ground.

It disappeared for a week, saw my dogs chewing on something about a week ago. So I recorded some amazing podcasts and some of those recordings got completely deleted because my dogs are chewing on the SD card. Matter of fact, for those of you that are on video here, here’s the chips of the SD card.

If you’re listen to this on iTunes, you got to check this out in YouTube. Here’s the chips and the pieces of the SD card all busted up. So anyway, we move back home. It’s fantastic because now we’ve got this onsite management leasing a basically corporate office at this new apartment building, which is fantastic. Now, let’s talk for a second about if you want to get into multi-family and apartment buildings.

Small, medium, large size apartments. But you don’t have a lot of cash. You don’t have a lot of credit. You don’t have a lot of capacity to raise money yet. Maybe you don’t have a big balance sheet. How do you participate in this? OK. Well, the answer is doing deals. Big commercial deals is definitely a team sport. OK. It’s not like you’re playing tennis. It’s not like you’re playing, you know, ping pong and you’re a single player by yourself. This is much more like basketball where you need four or five different players to kind of come together, partner on a deal and do deals together. Now, in my case, I could do these deals all by myself. I could sponsor the loans. I have a big enough balance sheet to sponsor the loans. I can raise all the capital. We manage about 40 million of capital. I could manage the deals if I wanted to be the onsite manager. All these things. But we don’t do it that way.

So I partnered up with Mike, my good friend Glenn Lytle and Tyler Bromet. And combined, we own over three thousand units of apartments, over 200 million dollars in assets. And so if you don’t have that kind of balance sheet or that experience, what can you do? Well, you can source deals. For other investor groups, it’s one thing that everybody needs is deal flow. And then you bring in somebody who could sponsor the loan, who’s got a big enough balance sheet to sponsor the loan. And what that typically means is you have a net worth equal to the loan amount. So if the loan amounts 10 million, you got to be worth 10 million. If the loan amounts three million about war, three million. It also means you have to have a liquid net worth liquid meaning in stocks, bonds, mutual funds, cash, money markets, et cetera, a liquid net worth of about a million bucks or more cash. So we’ve got both of those. Check those off the list, OK? And so if you don’t have the capacity to do that, well, then you could source deals for someone like us.

And I would love to have more deal finders to help source deals for us to pay an assignment fee, some sort of acquisition fee, or keep you in the deal and give you some equity so you can build your balance sheet. OK. So that’s how you kind of play the game. I’ll do a separate podcast on that some other time on how you can participate in multi-family deals as a as a new residential investor.

All right, so here’s the deal details, here’s the numbers. All right, again, if you’re watching this on YouTube or where you can see my screen, then you’ll be able to see all the numbers if you’re listening to this and iTunes. Just try to put the numbers together, maybe pull off the road. Grab a pen and a piece of paper. I’ll walk you through this. You can also check this out on YouTube. The 80 Maple case studies, you can actually see the numbers. So here’s the numbers, how they flushed out. Can we close this deal about four days ago?

Purchase price, three point seven four five million. Renovation costs threatened. Fifty thousand dollars. OK. We’re going to turn 40 of the units at about seventy-five hundred dollars each. OK. That’s about 300 grand. The other fifty thousand dollars is going to go into point of sale violations and improving the bathrooms. On the other 40 units case a threat. Fifty thousand. We pay ourselves a three percent acquisition, an asset management fee, which is one hundred twenty thousand dollars.

And then we’ve got about two hundred and forty thousand dollars of other miscellaneous costs, which is money that we had to put in escrow. It’s points. Lender points. The appraisal, the legal the private placement memorandum. The attorneys’ money that we had to put in to escrow with the lender for principal and interest and taxes and insurance reserves, stuff like that.

So we’re all in for basically four point four, six million dollars. We got a primary loan from Fannie Mae, Freddie Mac. It’s a Freddie Mac loan for three million forty thousand. And we raised one point five million dollars of equity. So we got four point five, five million dollars of total capital. And we need about four point four or five. So we were actually raised an extra hundred thousand dollars just to be safe. Keep money in the operating account. Now, the current net operating income, as you know, all these commercial buildings, especially apartments, are determined value better based on net operating income. The current net operating income is about three hundred thousand dollars through the capital improvements, the unit turns.

We’re gonna be able to bump the rents to three an eighty thousand dollars and then value the building at about six point one million dollars based off of a six-point two five percent cap rate. OK, the cap rate is determined by the lender and that’s what determines your appraised value. So three hundred eighty thousand divided by point zero six to five leaves us a value of about six point one six point two million.

So now we’ve got a high end of value, let’s say in 21 months, 21 months from now, the building’s totally improved. The 40 units are turned. The cap ex is done. We’ve also done 40 of the bathrooms. We raise the rents on all those units. And now the buildings worth six point one to six two six point two million. So.

What are we actually going to make in profit from the building? Well, first thing is one hundred twenty thousand our acquisition fee. So that’s one form of profit. The second form of profit is when we refinance it. We will be all in for about four point four million. And the new loan we’re going to put on it is four point five, eight million. That means we’ll have about one hundred eighty thousand dollars of tax-free refinance proceeds. That’s the second form of income.

Then the property will have annual cash flow after paying all the expenses and all the debt service of about one hundred and ten to one hundred twenty thousand dollars a year. So about ten thousand a month of profit after all expenses and after all, debt service and the fourth income stream is the equity. We’re gonna have a new loan on it for four point five, eight million. It’s going to be worth six point one six point two million, which means we got at about one point five, one point six million of equity or profit. OK. Which is really cool. So those four income streams, plus the rents will go up every year for the next, you know, five, eight, 10 years.

Plus, the principal of the loan will be paid down by the rents. OK, so 30 years from now, this building will be paid off, probably worth seventy-eight million dollars. Ten million dollars. And we will owe nothing on it. Will owe nothing on it.

We’ll be able to hand this down to my kids, my grandkids, you know, a 10-million-dollar asset paid off. Free and clear with someone else’s money, someone else’s rent. Everybody needs a place to live. Right. So it’s not like I’m gouging someone or, you know, taking from one person to put profits into my pocket. This isn’t a socialist economy. All right. That affects some of the socialist stuff that you’re hearing out there right now during this election cycle is pretty freaking scary stuff.

But this is capitalism 101.This is, I bring value to the building by raising money and bringing value to private investors, giving them a 10 percent return on their money. Plus, refinance proceeds. So my private investors are earning at least 10, 11 percent return or more. That’s value I’ve brought to the table. Secondly, I’m improving the community by improving these units. Right. That’s going to lower crime. It’s going to make for a better place to live. OK. That’s going to make the surrounding area better. That’s a value I’m bringing to the community. I’m bringing value to the seller because he’s able to move on and do a 1031 exchange. He’s able to move on with his next investment, move on from this property’s been here twenty-seven years. He’s ready to move on, bringing value to his life, bringing value to the commercial lender who wrote the loan. He’s making in the income from writing the loan are bringing value to the commercial broker who brought us the deal. Who’s the realtor? The real estate agent. He’s making money.

And by making a better place to live, the tenants are paying a little bit more in rent. Not a lot. 50 bucks a bond. One hundred one hundred fifty bucks a month. Not a lot. They have a nicer place to live that have less leaks, less electrical issues. The toilets all work, the kitchens all work. The disposal’s all work.

New countertops, new cabinets, new bathrooms, new flooring, new paint value to every one of the tenants. And that value exchange, which is pure capitalism, has allowed me to make five or six or seven different streams of income. Eventually have this building paid off and the building be worth down the road, probably eight to 10 million dollars at some point. Free and clear and all. Let me my children and my grandchildren will have this asset.

Dining out with. Now, at the end of the day, how much money that I have to bring to the table? The answer is zero. I didn’t put a nickel into this property.

Funded 100 percent by a bank loan. And again, it was a non-recourse bank loan. Non-recourse means they’re not leaning. I’m not personally guaranteeing the loan. They’re not leaving my house or not, you know, making me sign personally or out to put up my assets and put up my house and my other real estate holdings in case the building goes bad, the building goes bad.

That’s not good. It’s not going to happen. But it’s a non-recourse loan. So that’s the value exchange. That’s capitalism 101 that is part of this election cycle. One of the things that scares me is the attack on capitalism, because if you take this economy and this the foundations of who we are as Americans, you turn this into a socialist and then ultimately a communist economy. There’s no incentive for someone like us, someone like me, to step in and improve this building and look at all the value that I’ve brought to all these other people. Why? Because as a capitalist economy, risk reward. OK. So at the end of the day, this deal is a fantastic deal for us. You know, it’s not. I would say it’s a great double. This is not a grand slam. This is not a homerun. This is a good deal. It’s not going to set the world on fire.

OK. But it’s a great deal. It’s a fantastic deal to add to our portfolio. This is not something where to get rich on by having appreciation over time. This is something that you get rich on because you have principle pay down on your mortgage. And you have small rent bumps.

So it’s really cool about this is also the investors, the passive investors that stepped in. And we did a webinar. We went in to raise a million five or raised about three million dollars in about 90 minutes doing a webinar. Now, a lot of those relationships were already teed up. They were warm relationships. People that know us.

But we’re paying those investors a 10 percent preferred return, plus a one percent kicker on their principal at the refi. So if somebody throws in 200 thousand dollars, they get 20 thousand dollars in year one. Twenty thousand dollars in year two. Let’s assume the refile happens in month 21 or month twenty-five. Whenever it happens, they get another one percent at the refinance, which is another two grand. If they put in two and a thousand and another two grand.

And so you look at that deal and you think, OK, that’s pretty cool, man. Like, everybody’s winning here. OK. The deal makes a lot of sense. And we closed on it now. One of the hiccups was that due diligence. At the due diligence when we went to walk the units and I did another podcast and talking a little bit about the walkthrough and how it was. You know, I had one woman that said she had a gun with another guy that came out of his unit naked. We had other guys that have been living in these units for so long. There’s literally like the cigarette smoke and the ash almost feels like it’s like melting the walls. It’s got like that black shoes on it. The black goo.

So but again, it’s all part of our budgets to improve those units. I would rather turn a unit for seven or eight grand than flip a house and put an eighty thousand dollars in there in a rehab. OK, I’ve done lots of those. We made lots of money on them, but I’d rather turn a unit for seven or eight thousand than turn a single-family flip for eighty thousand dollar renovation budget. It’s just so much easier to manage. You know, I could turn ten of these little units and bump the rents on all those instead of one single family home. And so that’s our case study today, guys. That’s 80 maple.

A lot of other nuggets in there for you guys to take away nuggets about providing value when you buy deals, that’s pure capitalism. Little couple nuggets on the comparison of socialism versus capitalism. A couple of nuggets on how you can participate in these big multi-family deals, even if you have a big balance sheet or even if you don’t have a lot of capital. And ultimately, also a couple of nuggets in there on why this seller wanted to sell and some multiple layers of motivation that sellers have, not just with residential with commercial deals. And how you can find sellers that have multiple layers of motivation in the commercial apartment space. A lot of times you’re going to find those through commercial brokers. Through commercial realtors, real estate agents.

So I hope you guys enjoyed this podcast. What we’ll do is we’ll put in the show notes. We’ll put a link over to our webinar that we’re hosting about how to find sellers with multiple layers of motivation. We’ll also put some links in the show notes to some of the other podcasts that we’ve done that are related to this podcast, this case study and some other podcasts I’ve done on commercial multi-family investing. Also, put some notes if you want to register, if you want to learn more about our multifamily offerings, as a passive investor, you can go visit our Web site, which is ProfitPro.invportal.com/signup. OK. That’s a mouthful. So we’ll put that in the show notes. ProfitPro.invportal.com/signup.

You can go to our Web site and actually sign up to see some of our future offerings. Now in order to invest in those deals, if you’re coming from like a podcast, you’re coming from e-mail marketing or a Facebook post or a Facebook ad that’s known as general solicitation. So you’ve got to be an accredited investor to be able to invest in that stuff. But you can go check it out. ProfitPro.invportal.com/signup. So, guys, I hope you enjoyed this case study. I had a blast kind of sharing this with you. See some of the stuff that I’m up to.

And we’ll talk in some other case studies here coming out very shortly after this one about some other deals that we’re doing right now in this crazy COVID world that we live in, this crazy election cycle that we live in. There’s lots of deals happening if you’re out there doing deals. The election doesn’t matter. COVID doesn’t matter. They’re real. These are real things that we’re dealing with. But there’s still amazing deals happening by amazing entrepreneurs and capitalists in this economy. Check it out. Hope you enjoyed it. Leave us a five-star rating, five-star review. We’ll talk to you on the next episode. Take care. 

Hey, Josh here. And do you want to win a free Accelerated Investor T-shirt? All you have to do is give Accelerated Investor our podcasta rating and a review on iTunes. OK. Do that now then send us a screenshot on Facebook, Instagram or Twitter. What we’re going to do then is every week we’re gonna pick our favorite rating in review and we’re going to send that person a free T-shirt and maybe again, some other cool fun stuff as well from Accelerated Investor. So, again, don’t forget to take a screenshot, leave a rating review, take a screenshot, send it to us so we know exactly who you are. And then once a week, every week on the podcast, we will announce a new winner. Don’t forget to take a screenshot and send it to us so we know exactly who you are. We’ll announce a new winner every week.

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.

I’ve said this a hundred times, but my latest failed deal really nailed home this point: Real estate is all about relationships. After that disappointing loss on a deal I offered full price for, I am so psyched to close on an 80-unit apartment that’s had the same owner for the last 27 years. This building is in great condition for its age, and has several different income streams that it’s going to bring in.

One of our strategies for finding apartment buildings is working through commercial brokers because they represent a lot of off-market inventory. In the residential world, you can’t hold pocket listings for very long without bringing it on to the MLS, but in the commercial world, they’ll hang onto pocket listings for a long time. That means that if you don’t know the right commercial broker, you may never even see a commercial listing about any potential properties.

If you don’t have experience or a hefty net worth, how can you purchase commercial real estate? Remember that doing big commercial deals is a team sport. You need four or five players to come together and partner with each other, and they’ll make up for what you lack.

Our purchase price for 80 Maple is $3.745 million, but we’re all in for $4.46 million. I’m going to break down the costs for you and the other expenses that come into play like:

  • Renovations
  • Asset Management Fee
  • Lawyer’s fees
  • Point of Sale Violations
  • Capital Improvements

My long term goal for this property is to use someone else’s money to pay it off in 30 years, and then pass it down to my kids. There are so many awesome possibilities for your family when you start investing in real estate, and the American tax code is built for investors like us.

What’s Inside:

  • Why our last deal fell through, and how we’re going to prevent that next time.
  • The numbers on my new property at 80 Maple.
  • The value that real estate investors bring to the economy.
  • The different forms of profit that we’re going to make from this building.

Mentioned in this episode​

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