Josh Cantwell: So, hey, guys, welcome back to Accelerated Investor. Hey, it’s Josh, your host. And listen, today, I wanted to record a quick podcast for you and an update on one of our assets, we call it 220 Chevy, otherwise known as Forest Ridge Apartments. And today, I’m going to tell you about where we bought it at, kind of the high watermark of where we got to with operations with collections, and then where exactly where we’re at today and how the value of the building has changed throughout the last couple of years that we’ve owned it. So, you’re going to see a true kind of A to Z analysis, a true beginning, middle, and near the end here of stabilization on a true value-add apartment complex. So, that’s we’re going to talk about today. Here we go.

[INTERVIEW]

Josh Cantwell: Okay, guys, well, welcome back. Listen, 220 Chevy, so let’s talk about this deal for a quick minute. If you remember, the property here is called Forest Ridge Apartments. You can look it up online if you want, if you want to check it out. It’s on Chevrolet Boulevard in Parma, Ohio. So, if you’re listening to this in front of your computer or your phone, go ahead and type in Forest Ridge Apartments, Parma, Ohio, and you’re going to find the Apartments.com link. There, you can check out the photos and the pictures of the property.

And if you do that, you’re going to see that the property looks amazing. It did not always look this way. If you’re looking at the Apartments.com photos, you’ll see all the new– I mean, all the granite, all the butcher blocks, all the LVP flooring, the grounds, the new awnings that we put at the leasing office, you’re going to see the new signs that we put in. It’s really, really amazing what we’ve done to this building.

But let me tell you how we started if it’s the first time you’ve seen an update on this property. We bought this property all the way back in April of 2021. So, this was a little over two years ago. And in April when we bought it, the total revenue that had come in that month was only $115,000 of revenue. We bought the building. It was about 91% occupied. But the rents, let’s just do the math together real quick, if you take 220 units at 91% occupied, that’s roughly 200 occupied units. If you take $115,000 a month divided by 220 units, it’s only $522 a month, if you factor in all of the units. If you take $115,000 and divide it by 200 occupied units, the average rent was only $575.

Now, this deal is in Parma, Ohio. I went to high school in Parma, Ohio at the Padua Franciscan High School. This is a very white-collar, blue-collar town. There’s every business, every retail shop that you can ever imagine. Parma is the fifth largest city in the entire state of Ohio. It is a major suburb of Cleveland. It’s extremely safe. It’s very B class. There’s five high schools there, including Padua, Holy Name, which is another private Catholic school. And then there’s three public high schools. It’s a huge, huge, huge city but very just suburban, right?

So, this property is essentially being managed like a very C-class property by an out-of-town landlord. And we end up buying the building for $11.65 million. So, you take $11.65 million and divide by 220 units. We bought it for only $53,000 a door. It’s very hard to find a deal like that in today’s marketplace, in today’s environment, because prices have gone up all around.

But the important thing to remember here is the price per door, $53,000, remember that. Also remember that it was making $575 per month in rent, which is extremely low. So, if you’re only charging $565 for rent, you’re probably attracting more of a C-class or even a D-class tenant that can afford 500 or 600 bucks a month. That’s very, very low rent.

Now, fast forward, from the time we bought it in April of 2021, fast forward to October of 2022, which is about six months ago from the time of this recording. And in October of 2022, the rent collected had grown from $115,000 a month to a $176,000 a month, $176,000 just in rental income. I’m actually looking at the financials on my other screen here as I’m recording this. And we had some other income come in, we had some miscellaneous income, we had some late fee income, some laundry income, pet fee income, utility reimbursement income. We brought in about $184,000 and we didn’t even get paid any laundry income that month.

And so, you add it all up, about $184,000. Well, if you take $184,000, let’s do the math, $184,000 and divide by 2, let’s assume it’s a 50% expense ratio, and then multiply times 12, that’s $1.1 million of net operating income. That’s the trending T1. It’s just one month of financials but a T1, right? And you have $1.1 million of net operating income, divide that by a 6 cap. That puts the building in that month worth 18.4 million bucks. So, remember, I bought it for $11.65 million. Now, it’s worth $18.4 million. If you take $18.4 million and divide by 220 units, that raised the value from $53,000 a door to $83,000 a door in roughly 18 months. Again, we bought it in April 2021. This is October of 2022, 18 months later.

Now, one of the things that happens in Cleveland in our market is the weather. So, we’ve learned over the last several years, five, six years of owning apartments that the leasing season stinks in December, January, February, March because you have Christmas, nobody wants to move at Christmas. You have January, February, it’s 20 degrees outside. There’s a lot of snow, a lot of ice, a lot of rain. The weather’s just not great.

And so, we began migrating all of our leases where the leases terminate, they end basically from April to October, April to maybe March to September. We do not want leases to terminate in November, December, January, or February because that’s the hardest time to fill a unit, just because it’s very seasonal, the weather is very seasonal. And so, that was in October.

Then, in November, December, January, February, just like I mentioned, there were some leases that came due. People decided not to renew and move out. We turned a bunch of units. We turned those units, but we had a hard time leasing them all out because the weather sucks and people don’t really want to move and the Christmas holiday and then New Year’s and then people didn’t want to move. So, in December, January, February, our income actually went down. And so, you have a new kind of value of the building, right?

So, instead of collecting $184,000 of total income in March, a couple of months ago, at the end of Q1, we collected a total of $167,000. Now, it’s still a huge improvement from collecting $115,000 to $167,000 within two years. It’s still a huge improvement. So, take $167,000, again, cut that in half for a 50% expense ratio, multiply times 12 to get your annualized income. That’s a million dollars divided by a 6 cap, puts the building value at $16.7 million. Again, bought it for $11.65 million. Based on this analysis, we have $16.7 million. $16.7 divided by 220 units, that would be around $76,000 a door, bought it for $53,000 a door.

Now, the interesting thing that’s happened is over the last basically 30 days or so, now that the weather’s gotten nicer at the end of March, April, I’m recording this basically the first of May, we have seen a tremendous amount of leases. One, because tax seasons overlap, people got their tax refunds. So, now they’re buying cars or buying houses, they’re renting new units, people are moving out. Also, the weather’s much better. People are getting out for leasing events, they’re getting out for marketing, they’re doing tours. They’re not worried about moving their stuff in the dead of winter. And so, just in the last 30 days, we’ve leased out 15 additional units. And so, our occupancy has gone up tremendously.

Well, now, we’re leasing the two-bedroom units if they’re fully turned and fully remodeled, fully upgraded. We’re leasing those out for, my slide right here, a full turn is leasing out for $975. Now, remember what I said before, we bought the building, the blended rent was $575. So, if we raise the rent on a two-bed, one-bath full turn, raise that by 400 bucks a month. So, if you take 400 and divide it by 575, that’s a 70% rise in the rent in two years, 70%.

Now, you don’t get that in a lot of organic situations, you won’t get that in the south, you won’t get that in the Sunbelt, you won’t get that in Columbus, Ohio, you won’t get that in Atlanta, Georgia. But because this was a B-class building in a B-class market, being managed like an E class or even a C-minus, there was a tremendous opportunity to do pretty heavy value-add and raise the rents. And so, if you look at that total bump, it’s a huge bump.

So, now, we’re on pace this month. I just got the rent roll, it just came into my inbox. And when I look at the rent roll for this month, our rent roll has grown substantially, especially with filling the vacancies that we had. So, our scheduled rent that we’re scheduled now to collect in the month of May, based on these 15 move ends, is actually $189,000. So, let’s say we don’t collect cap 5% vacancy or non-collection, rescheduled to collect $189,000, 5%, that would be nine grand. So, we collect $180,000, plus the other income, laundry income, late fee income, etc., it’s going to be around $185,000. So, again, let’s do the math. $185,000 times 0.5, it’s 92.5 per month, times 12. It leaves me a net operating income of $1.1 million divided by a 6 cap, puts the value back at 18.5 million bucks.

And so, that’s one of the reasons why we love this business, one of the reasons why investing in Cleveland makes a lot of sense for us, but especially because we have the ability to execute our value-add plan, the ability for us to handle the construction, the ability for us to turn units, remodel units, upgrade units, and that allows us the ability to really force the appreciation in buildings from $11.65 million to today, which would be about $18.5 million. Even if you take October, it was at 18.5. It dipped down in the middle of the winter to about $16.7 million. So, all these are off of the trailing one month.

But once now we’re going to be stabilized this summer, we’ll stay highly collected, highly occupied, very few evictions, very few move outs, we’re also adding some amenities, a dog park, we put in new laundry facilities there, we don’t expect much of a move-out, right? We should be at full occupancy, maybe with 5% vacancy, 1% maybe with non-collections. So, you’re collecting 94% of the income that’s on your rent roll. Then, this building’s value is running around $18.5 to $19 million.

We go into Q4. My plan is that over the summer, I think interest rates are going to top out. Then by Q4, they’re actually going to start going down. And the forward-looking curve indicates that interest rates are going to start going down next year. And then, by then, we should go to get lower interest rates. I’m still sticking with the 6 cap. I canceled this originally at a 6.25 cap. Interest rates have gone up, so maybe interest rates affect cap rates. Cap rates expand a little bit, go up, which means values go down. And I think interest rates are going to go back down by the end of the year, which means cap rates will stick at around six to six and a quarter, leaves our value at somewhere around 18 and a half million bucks, which leaves us really for about 13 and a half, which leaves us almost $5 million of booked equity on my balance sheet, my partners balance sheets, my limited partners balance sheets. You really can’t do that unless you do some significant value-add, some significant program that allows you to raise the rents by that much or raise the rents from literally $575 to $895 on a one-bed and $975 on a two-bed. It’s amazing, right? And so, that’s how you operate a building. That’s what we’ve done. That’s how we’ve gotten there.

We spent about $1.4 million in capital improvements. We improved all the commons, all the lighting, the paint, the carpets. We turned over 140 units. And when I say turned, I mean remodeled, significantly upgraded, significantly remodeled 140 units. That’s what allow us to charge more rents. And we’re just going to stabilize it out. We’re going to refi it and we’re going to cash flow it forever. That one deal. If you did that deal or someone else did that deal, that one deal changes someone’s life. I mean, when we structured this deal, we paid our investors a 10 pref and we gave up about 22% of the equity, which means me, Glenn, and Tyler own 78% of the equity.

And so, let’s just round it up to 80%, 80% of $5 million is $4 million. And so, that adds that $4 million to me, Glenn, and Tyler’s balance sheets. That’s a game changer for a lot of people to have one deal that’s $4 million to the collective balance sheets. That’s significant, right? Many people never even buy a million dollars, let alone $18 million worth of real estate to get $4 million to add to their balance sheet, allows them to do a lot of things like to sponsor a lot of loans, buy more real estate, get more cash flow, all the things that you want to do to create long-term wealth, long-term forever passive income. That’s what we’ve done here at 220 Chevy.

So, I hope you enjoyed this case study. If you did, like, subscribe, rate, review. As always, it would mean so much to me if you would share this all over social media. And if you want to do this for yourself, you got a couple of options, one, join me live during our live events. You can get a ticket to one of our virtual live events at ForeverPassiveIncome.com. You can also apply to be part of our mastermind group and coaching program at JoshCantwellCoaching.com. That’s primarily intermediate to advanced residential investors who are also kind of new to intermediate commercial investors, and they’re trying to be advanced commercial apartment investors. That’s who’s in that group. So, that’s you, that it’s a perfect group for you to help you pivot and level up to be an advanced commercial multifamily investor. Go apply, see if you qualify.

My program director, JJ, and Alec, they will interview you to see if you’re a fit. And if you are, they’ll extend you an invitation. You can jump in. So, ForeverPassiveIncome.com, JoshCantwellCoaching.com, like, subscribe, rate, review, share. Thank you so much for being here. We’ll see you next time. Take care.