Josh Cantwell: So, hey, everybody, welcome back to Accelerated Investor. Hey, it’s Josh. Today, I want to introduce you to a brand-new deal that we just bought and tell you why. It’s an excellent first multifamily deal. It’s an excellent first apartment property for someone like you to buy and for someone like me looking for more deals to turn, more value-add improvements to make, and more construction work for my construction team. We’re going to talk about why someone who’s already done 19 syndications would buy a little 28-unit. That’s what we’re going to talk about today on the podcast. Here we go.

[INTERVIEW]

Josh Cantwell: All right. So, welcome back. So, let’s talk for a second today about 28 Riverside. 28 Riverside is a deal that we just closed in the middle of May 2023. And it is just a small kind of I-shaped building, 28 units. And you might ask yourself, like, “Hey, if I was going to be buying my first apartment complex, what should it look like? What are some of the characteristics of a great first multifamily deal to buy?” And Josh, like after doing 19 syndications and buying 4,500 units of apartments and buying multiple 500-unit buildings and multiple 300-unit buildings and even a 730-unit building, why would you bother buying a 28-unit? Okay.

And the answer is pretty, pretty simple, man. Good deals go fast. Good deals are hard to find. Good deals are hard to get, your offers accepted. Sometimes they’re competitive. And long story short, I’m not going to run from a good deal. I’m going to buy every good deal I can, even if it’s a 28-unit. The other reason why I bought it was because I have a full-time construction team.

I’ve got a VP of Construction, I’ve got a payable accounts receivable director that works at our construction company. I’ve got a right-hand man for my VP of Construction who helps walk units and get projects done. And I want to keep them busy, right? So, if it’s a good deal and you’ve got crews that are ready to do the work, who cares if it’s a 28-unit or a 280-unit? Doesn’t matter.

And so, what makes this a great deal for new investors? What makes this a great deal for an investor? Maybe you’re kind of an advanced residential investor. Maybe you have even done a number of multifamily deals. What makes this a good deal? Well, number one, it’s located in a great B-plus, quiet west side of Cleveland residential neighborhood called Kamm’s Corners. It’s a 15-minute drive to downtown. It’s right by a number of freeways. It’s right by the Cleveland Airport. So, really good location.

There are a tremendous amount of jobs that are easy to get to. You can get to the east side, you can get to the west side of Cleveland, you can get downtown. You can get to the southwest suburbs really, really easily from this location. In addition, it’s also about a five-minute walk to a great number of golf courses in the Cleveland Metroparks. Cleveland Metroparks were ranked in the top 10 of the park systems in the country. And this is just actually a walk, not even a drive, but a walk into the golf courses and the metro parks. That is another great reason.

Another great reason is its proximity to the rest of our portfolio. We own over 1,200, 1,300 units on the west side of Cleveland. This is about 1.9 miles from our headquarters. It’s only 5.8 miles from a 220-unit that I own. It’s only about 4.3 miles from a 52-unit that I own. It’s only about six miles from 170-unit that I own, a 220-unit that I own. And we can actually manage this out of our headquarter main office with the same property manager that’s already managing a 52-unit for us, a 296-unit for us, and we’ll just tack on this little 28-unit. So, for those reasons, it’s something that made a lot of sense for us to buy.

In addition, we have investors, limited partners who are ready to get money deployed. They don’t care that the deal is small. They just care that the deal is profitable. They want deals that are profitable, that are low risk, deals that are high cash flow, that make a lot of sense for them. And so, it checks all of those boxes.

Now, from a financial perspective, why does it make sense? Well, one of the reasons why it makes sense is that the seller is actually a receiver. The property was in foreclosure, right? The property was bought about four years ago. It was a great deal when they bought it. Unfortunately, the seller had a lot of financial problems and went into default on a number of buildings and went into default on a gym that they owned.

Part of the gym, I actually remember seeing some videos about this owner. The guy owned a couple of gyms in downtown Cleveland that were basically ransacked during the George Floyd riots in the summer of the COVID summer, but they rehabbed part of the complex and then they went into default and foreclosure. So, the rents have not been raised in three years. The rents are easily $250 to $350 below market value. All 28 units and all the common spaces, we’ll renovate all of them with inside of six months, maybe a few that might take 12 months, just depending on when their lease expires, right?

We only need to focus really on 28 turns and 28 lease-ups and then to raise the rent to about $925 per month. Now, $925 per month, totally doable. These will be brand-new units, completely remodeled. And we already own about a thousand units in this area, this kind of submarket and submarkets around this. And we’re already getting that $925 per month in blended rents. We’ll invest about $9,000 on average into the paint, the kitchens, the baths, the flooring. We’ll improve the commons, the driveway, the boiler, the tuckpointing, the landscaping, and get a new sign. And our crews will remain active. Our construction crews will remain active even as acquisitions have slowed down a little bit due to these rising interest rates. And I already mentioned the property manager, right?

Now, the great news is that, look, the current existing financials don’t really matter to me very much because if you look at the existing owners, the existing– they haven’t done anything in the last three years. Matter of fact, did a fighting, trying not to go to prison, it’s my understanding, for fraud and for other problems and things that they’ve done wrong, defrauding investors, not having private placement memorandums, not doing disclosures, and then, of course, going into default and what looked like a Ponzi scheme. I don’t know all the details around that. That’s their problem, not mine. I’m just buying the building because there’s this distress in the marketplace.

But when we buy it and we go to stabilize it, if you take $925 per month per unit and you include the utilities. We’re not going to build separately for the utilities, but you include the utilities. Multiply that times 28 units times 12 months. Oh, that’s about $315,000 of rental income. We’re going get some other income from laundry, some late fees, application fees, pet fees, etc., minus the 5% vacancy, that’s going to leave us again, right back to about $316,000 a year of gross income.

Now, small building, we should be able to manage this building at about a 42% to 43% expense ratio, which leaves us at about $180,000 of net operating income. You take that $180,000 of NOI, and let’s say you take the cap rate at refinancing, so we refi or sell, and even though the submarket could easily get a six cap because this is a smaller building and because interest rates keep going up, I’m going to assume cap rate at refi or cap rate at sale roughly 24 months from now at around 6.75%.

Now, I firmly think that the rates are going to go down in the next 24 months. I firmly think that will be into a recession, that inflation will be more under control, and the Fed will have some incentive to reduce interest rates over the next two years. Also, as a side note, if we were to go into war with China or war with Russia, we’re already kind of in a proxy war with Russia in Ukraine. But if there were some other problems, if there were more bank defaults, all of that would push interest rates back down. That would mean our cap rate would go down as well.

But right now, 6.75% is our cap rate expected. Interest rates right now are around 5.75%. So, there’s about a 1% spread there, a 100-bp spread. If you take $180,000 divided by 0.0675, that being the cap rate, that puts our future value at $2.65 million. If we refi and put a new loan on it at 70%, 70% loan-to-value, that’ll give us a new loan of about $1.855 million. That’s going to be enough to pay off all of our existing investors and all of our existing acquisition costs.

So, the one thing I look at when I underwrite deals, I always look at future stabilized value, future stabilized rents, future stabilized cap rate. That is the most important number in multifamily real estate. You understand that, right? Like when you buy a property, you look at the price. I don’t really care what the asking price is, I don’t really care what the offering memorandum says. What I care about is, okay, here’s a deal for sale, I think I like it. I might want to buy it. What is the future rent look like? What’s the future net operating income look like? Let’s say in two years, three years, four years, five years, whatever, I’m going to be stabilized. And then divide by that cap rate to get a future value.

Then I’m also going to double check that number to make sure that on a per unit basis, like if I was going to sell the building for $2.65 million, there’s 28 units, that’s about $95,000 a door. Do I really think I can sell it for $95,000 a door? I know I can get an appraisal at 95 a door based on the net operating income. But can I sell it? Is somebody really going to buy this for 95 a door? Well, I’m not really sure, right? A value-add investor is not going to buy it because I’m going to take all the fun out of it. I’m going to do all the renovations. I’m going to do all the fix-ups. The building’s going to be at the stabilized value. We’re going to have stabilized rents. There’s going to be minimal growth after that, maybe 3%, 3.5%, 4% thereafter. So, I’m going to take all the fun out of it.

I take all the fun out of it, and you have to assume a higher cap rate. Somebody’s going to want to buy it for less, a little bit less because there is no real way for them to improve the building and push the value. So, at $95,000 a door, do I think it’s selling for 95 a door? Probably not. But maybe I could sell it for 85 a door, right? If I’m charging $925 a month in rent, that’s better than what we call the 1% rule. It’s better than the 1% rule. I think I could sell it for that, right?

So, 85, 90 a door definitely leaves us plenty of room for at least a $700,000, $800,000 profit. If I can make it 800 grand in the next two years on a fairly light construction for me anyway, light construction, 28 units, that’s pretty light for us, I would do that all day. So would you. So, the question now is, if it’s going to be worth $2.65 million if I refi, maybe $2.5 million if I sell it, what am I into it for? Well, repurchase is $1.1 million. Renovation cost is about 550 grand, it’s about $15,000 a door. I’m going to improve all the units but also do the commons, the lighting, the paint. I’m also going to do the boiler. I’m also going to do the driveway, new stein, really, really, really converting the entire building.

I’m going to have some holding costs. I’m going to charge a 5% acquisition fee. That’s about 55 grand. There’s going to be some cash burn, get some operating capital. All told, I’ll be into the thing for about $1.8, $1.85 million. So, all in for 1.8, it’s going to be worth 2.6, 2.7. That’s why you buy a 28-unit building, right?

So, imagine if you could buy it, and then you could go to your investors and say, “Look, I’ll pay you a 10% preferred return. And then when I sell it or refinance it, I’ll give you a 1% kicker.” Now, 1% kicker means if somebody does 100 grand, they’re going to get an additional thousand-dollar bonus, that’s 1%, 1% of their investment, $100,000, they’re going to get 1%. That’s another thousand bucks. So, you get 10% in year one, 10% in year two, plus the $1,000 kicker. You add that up, that’s $21,000 of value over 24 months. That’s a 10.5% true net annualized return.

To make a comparison, if you’re going to get that in a mutual fund in the stock market, you’d have to get about a 13% return in the mutual fund, right, in order to justify that 10.5% net because mutual funds have fees, commissions, expense ratios, etc., etc., etc. So, imagine getting a 10.5% return in this market where the stock market keeps going up and down, there’s lots of volatility, there’s lots of inflation, how do you outpace inflation and have little or no volatility? Wow, this is a pretty darn good option, right?

Now, this is not available for you guys to invest in, it’s already fully subscribed. We already have all of our money raised and actually sitting in the operating account for the closing. Already done. We already did all that. Okay. Now, if you want to learn more about our investment opportunities down the road, build a relationship with us, go to FreelandVentures.com/passive, and there, you can learn more about what we’re doing in the future.

So, listen, here’s the point. A little deal like this 28 Riverside, if you could buy this for a million bucks, put half a million bucks into it, have 200, 250 in holding costs, acquisition fee, cash burn, unit for 1.8 million, it’s going to be worth almost $2.7 million when we’re done with it. To me, that’s an ideal starter deal. That’s an ideal way for someone who maybe owns 100 units of residential, maybe does 50 flips a year, maybe does 100 wholesale deals a year, maybe does 25 fix and flips a year.

But you buy this, and now, you have the net-free cash flow. It’s going to cash flow about $50,000 to $60,000 to $70,000 a year, about $800,000 of equity or profit. You return all your investor’s equity back to them at the refi. If you sell it, obviously, they all get a profit from that, that 1% bonus. This is a great little deal.

Now, how do you find a deal like this? This is the question, right? How do I find it. How do I get started? Well, what I teach my mastermind members to do is we go into CoStar or we go into different softwares like Realeflow or Reonomy, Accelerated Investor Office, the commercial version, all these different softwares. And what we do is we export all of the buildings that are under 100 units, 99 units and under, so you’re talking about commercial real estate. So, it’s from five units to 99 units. That’s commercial real estate, anything over four units. So, 5 to 99, we export that list and then we create a direct mail, an outbound marketing, outbound phone calling campaign.

The campaign is not hey, I want to buy your building. The campaign is I am looking to expand into apartments and multifamily real estate and I just want to get to know all of the owners of all the buildings in the markets that I want to operate in. Again, I want to collaborate. I want to get to know who owns the buildings. I want to get to know who owns properties. Of course, down the road, when they’re looking to sell, yes, if they’re going to sell too, the people that they have relationships with, that would be you. Okay. Okay? So, that’s the idea.

It’s not hey, I want to buy your building. It’s hey, I see that you own multifamily real estate in this market, the submarket. And hey, can we grab lunch? Can we grab coffee? Can we grab a beer? Can we grab some Ludmila soup? And can we get to know each other so I can learn more about how you built your portfolio? And the whole goal is that whenever they’re ready to sell, then they’re going to want to sell to someone they have a relationship with. And their relationship with you, they’re going to want to sell it, they’re going to sell it to you, and hopefully, even sell it with owner financing.

So, that’s how we do it. We pull those lists out of CoStar, Realeflow, Reonomy, etc., etc. We get that list, we direct mail that list, we make relationships with the owners. And then when they’re ready to sell, they sell to us, right? And hopefully, with owner financing. All right. So, that’s exactly what I would suggest that you guys start with. That’s exactly what I would suggest that you do. Buy a little 28-unit like this.

You see, I worked with my mastermind students just a couple of weeks ago, and we met up in Sedona, Arizona, and we were having our masterminds, about 40 of us. It was awesome. We went out in the desert. We went for these amazing hikes. We had lots of cocktails together. We swam in the pool together. Some of us got massages. We went out to lunches. We did a tour out in the desert through this very rough obstacle course in these pink jeeps. We just had an absolute blast together.

And one of the things I was telling them is, “Look, if you started out in your first year of multifamily and you bought a 10-unit, then your second year, you bought a 20-unit, and then your third year, you bought a 40-unit, and then your fourth year, you bought an 80-unit, and then your fifth year, you bought 160 unit, and then in your sixth year, you bought a 320-unit, so you doubled up every year, from 10 to 20, 40, 80, 160, 320. By the time that’s done, you are essentially financially independent.”

And what plan, what program could you follow where in the next six years, you would have a proven model, a proven plan to be financially independent? Are you aware of any other proven financial plans where you can be completely financially free in six years or less? Right now, the question is, could you do that faster? Like in the first year, I just said let’s just buy a 10-unit, the second year buy a 20-unit, the third year buy a 40-unit, is it possible that you could buy the 10, the 20, and the 40-unit all in your first year and speed up the process by three years, so instead of six years, you do it in three years? Of course. Of course, you could do that.

And so, that’s what we’re working on in our mastermind group. That’s my specific mandate, my specific plan for each of our members is that they’re financially free in three years or less. They focus on buying that 10, 20, and 40-unit in the first year, and then they buy an 80-unit their second year, 160-unit in their third year, and then a 320-unit in their fourth year, so by the time that third, fourth year is rolling around, they’ve got those units and their cash flow in those units. There’s equity in those units and they’re financially independent. It starts with deals like this, this little 28 Riverside deal that I walked through today.

All right, guys, so listen, as I wrap up, a couple of things. You like the podcast, you like the case study, let me know, right? Subscribe, rate the podcast, review it, like it, wherever you get your podcasts, wherever you get your YouTube videos, go ahead and take care of that. Number two, live event-wise, we do these live events quarterly, every quarter, go to ForeverPassiveIncome.com and grab a ticket. Or you can apply, if you’re already an intermediate to an advanced investor, you can apply to be in my Mastermind program by going to JoshCantwellCoaching.com.

All right. So, those are your options. That’s what you can do. That’s how you can help me. That’s how I can help you. I hope we can work together. Hope you enjoyed the podcast today. And we’ll see you next time. Take care.