Josh Cantwell: So, hey, guys, welcome back to Accelerated Real Estate Investor, Josh here, and well, I want to quickly give you guys an update on 52 Lake and teach you a couple of things about running a CapEx team and doing rehabs on apartment buildings using this real-world example. So, just yesterday, I was out in the field and look, man, roll up my sleeves, put my work boots on and go out and hang out with our construction team. First of all, I just think it’s important that as you’re building a company, building a culture that you realize that nobody’s more important, CEO down to the guy that’s just working in property management, doing maintenance calls, and making 17 bucks an hour when you realize that you all need each other, you’re all part of an ecosystem and a business that needs each other.

I think it’s wildly important that even if you’re in a leadership role in your company that you go roll up your sleeves, you throw in your boots, you put on your dirty jeans, and you go work on-site side by side with your guys. So, I did that yesterday. The funny thing was my boots, actually, I had a pair of Sorel boots from Sorel, they’re kind of expensive, like $200 boots. Well, they’ve been sitting out in my garage for the past year, and I put them on, I was wearing them for about half the day, and the guys got a kick out of them because they actually were dry rotted, and the bottom, the base, like the silicone waterproof base of the boot cracked off from the leather. And sure enough, halfway through the day, they literally fell apart while they were on my feet. I had to throw my boots away because they were dry rotted because they’d been sitting in my garage, in the closets, out of the garage, and they totally fell apart while they were literally on my feet. I was walking around for the second half of the day in my socks. The guys thought it was hilarious.

Anyway, we bought 52 Lake for three million bucks. The original plan was to put $250,000 in it in CapEx, about $50,000 on the exteriors, and 200,000 on the interiors. And as we’re getting into the building, we’re definitely noticing that the opportunity to raise the rents even more is there. And we’re also realizing that we plan on putting $50,000 into the commons and the exteriors. If we really want to do it right, we should probably put about $75,000 or $80,000 in the exteriors. And instead of putting $200,000 into the units, we’re realizing, like, let’s blow this thing out. Let’s add another $100,000, $150,000 to the budget in order to really block the interiors of the units and make it like laid out like a butcher block. What we decided to do is actually punch some holes in the walls between the living rooms and the kitchens to open up a picture window and add a breakfast bar in between the living rooms and the kitchens.

Now, 52 Lake is in the Gold Coast of Cleveland. This is really nice. It’s right by the parks. It’s right by Lake Erie. It’s right by the lake. It’s walkable. It’s right by West 17^th Street, you can look it off. It’s called Clifton Lakes Apartments on Lake Avenue in Cleveland. And look, part of this comes down to like, where can you get the value? So, I had a call with my lender. I said, “Look, Chris, we’re thinking about purposely going over budget here because we really would like to lay out the courtyard. We’d like to do all the carpets and all the commons. We’d like to paint all the commons. We’d like to paint all the doors. We’d like to add new security doors to the front, add new security cameras to the front, add Wi-Fi to the entire building. We want a seal and stripe all the parking spaces in the garage.” And instead of spending $250,000 on CapEx, I really think we’re going to spend $450,000 on CapEx. And I went back to Chris, I said, “Chris, if we blow this out, if we raise the rents, instead of getting a $5 million stabilized value, can we get closer to a $6 million stabilized value?”

And I talked to Chris, Chris said, “Look, if you do everything that you’re thinking about doing and you can achieve these higher rents that you think you can get, there’s no question that you can get $110,000 a door, which puts the value at about $5.7 million or even $120,000 a door, which puts the value at $6.2 million.” So, instead of a $5 million value, we could possibly push this thing to a $6.2 million value by doing the extra interiors, the extra CapEx to the commons, the Wi-Fi, the courtyard. And so, I made that decision literally last week to purposely go over budget. Now, we told our investors, look, our limited partners, we’re going to own this building for about two years. This is probably going to push us south to maybe two and a half years, maybe even three years, okay. But it makes sense, it makes sense to harden the asset now, raise the extra money, the extra $200,000, $300,000, plus we’re going to bleed a little bit of cash because we have more vacancy. We’re going to bleed about $150,000 in cash. So, all-in, we’re probably going to go over budget about thousand dollars. I’m okay with that.

In this particular circumstance, we know that we can push this value to between $5.7 million and $6.2 million, we’ll still be able to refinance. Look, we’re going to be all-in. Instead of $3.5 million all-in, we’re going to be all-in for $3.9 million. At $110,000 or $112,000 a door, that puts us at $5.7 to $5.8 million dollars of value. When we refi 75% loan to value, that new loan is going to come back in at about $4.3 million. We’re still going to pay off the $3.9 million that we’re all-in to it for. We’re still going to have tax-free refi proceeds to the tune of about 400 grand tax-free. So, we’re pushing up the budget, but we’re also pushing up the value. Now, there’s a limit to this because in this area, we’re not going to get much more than $120,000, maybe $125,000 a door. Right now, I want to be conservative, I want to be at about $110,000 a door and know that the deal still works. It still works at $110,000 a door, and it does. So, if we get $115,000 a door, $120,000 or $125,000 a door on the refi a year from now, two years from now, we’re definitely winning, we’re definitely to the positive there.

So, yesterday, I was on site all day, and we were hustling. I was talking to the contractor. So, the electricians, they’re installing all new LED lights, and he tells me, “Hey, out of the eight hallways and commons, I’ll have six of them done by the end of the day yesterday, and the other two, in the B building, B2 and B3, those are going to be done today.” So, as of today, all the LED lights in the whole building are done. The building used to look dark and dingy. Now, it looks bright, LED lights everywhere, and we’re saving on the electric bill. That’s fantastic. Second thing is, all of the common spaces are painted. Kevin, the painter, is finishing up painting all the walls, all the trim, all the unit doors are being done. This beautiful blue that’s very bright, vibrant blue. Kevin’s wrapping all that up. He’s got 95% of it done. Then, we decided to put a new commercial carpet on the main floors, do new treads on all the staircases, and then new carpet in the landings. And that’s 80% done. Right now, the treads are actually on backorder for two weeks, so they’re going to come back two weeks, and I’ll finish it.

And yesterday, one of the things I did is I walked every unit, I looked at all of the contractor lists. We created punch lists for every unit. We walked about 22 units that are vacant that are almost done with CapEx and we may punch list for all that stuff. And we had two of our maintenance guys there today finishing the punch lists. They’ll be there Monday, Tuesday, and Wednesday of next week. And then all of those punch lists will be done, and all those units will be ready. So, not only on top of the punch list I was there, we were also placing all the appliances, stainless steel appliances as far as the refrigerator and the stoves. We were ripping them out of the boxes. We were throwing away the Styrofoam. We were taking off all the tape, unpacking these appliances, lifting them into the units. One of the units, the doorway into the kitchen, was too small. We actually had to lift the refrigerator up through the picture window that we just cut out of the wall between the living room and the kitchen and then push it in, so four of us lifting up the refrigerator, lifting it in, and dropping it into the unit. One of the stoves we took out, we opened it up out of the box, and the stove was damaged, and a huge debt net, so we had to return that, order a new one. That’s going to come in next week.

So, we’re so close now with all of this that we decided to put together a leasing of that next Saturday. So, I love deadlines in business, and I think this is one of the takeaways. When you put your flag in the ground and say, this is a deadline, we need this stuff done and we’re having a leasing of that next Saturday. So, today’s January 7^th, next Saturday is January 15^th. And we’re going to have a leasing of that. Well, guess what? Now, by next Thursday, the LED lights are already done, that’s great, but the security cameras I discussed, they better be in. The front doors that we’re repainting, that better be done. The treads to the staircases, the front of each staircase need painted, that better be done. The final punch list of the units, it’s got to be done. The mapping of the second, third, and fourth floor, which are hardwood floors in the hallways, that’s got to get done. The painting of all of the doors, we’re painting all the unit doors this bright, vibrant blue, that’s got to get done. The appliances, the three or four appliances that were damaged or we were shorted on, that’s got to be delivered and installed. There are three tubs that need to get glazed, and tile that needs to get glazed, that’s got to get finished.

So, we’re going to go there, Monday, not the weekend. Monday, we’re going to go check and make sure that all of this is rolling and that everybody understands that Thursday is the deadline. And then Thursday morning, we’re scheduled to go back and have an owner walk through, the owner being me, walking back through the building with Dave, my VP of construction, and making sure that all of this is completed because we’re going to have a big turnout with this leasing of that next Saturday and we’re going to have all these units. And I’m hell bent on making sure that these 20 vacancies that have all been hard turned, that those are all leased and filled, and rents and leases are signed by the end of March.

So, we’ve upgraded to a premium subscription of Apartments.com. It’s costing us about 600 bucks a month for the next six months. We’re investing in swoop flags and signs out front. We’re doing a bunch of Facebook Marketplace advertising. It’s a great place to find residence for your deals, Facebook Marketplace, it’s free. We’ve also syndicated through Apartments.com, all of our new photos, all of our new pictures, all of our new pricing because Apartments.com controls about a dozen other websites. Check this out, the Wi-Fi, we wired the entire building. We know Wi-Fi and internet connectivity are two different things. Wi-Fi is Wi-Fi, it’s in the air, right? It’s wireless internet. Then we also have the internet hardline connectivity in each of the units. So, we basically told people if they signed leases before the end of March, that they will then get free Wi-Fi, which is a $75 value per month, Wi-Fi and internet connectivity until they renew their lease next year. So, the internet is being installed, the Wi-Fi is being installed. We got a couple of things that are on the backwater, they’re called these aggregate devices. The internet comes into the building. The aggregate device then splits out the Wi-Fi from the internet connectivity. Anyway, it’s Wi-Fi geek speak, don’t worry about it, but we got to have those installed. Those are on backorder. Those are coming next month. So, we tell people, “Look, once the Wi-Fi is installed, you get free Wi-Fi until your renewal. And then at the renewal, your rent’s going to go up 75 bucks for the Wi-Fi.” And we’re going to bump their base rent as well next year. So, the Wi-Fi is essentially going to be free for about a year.

And so, now, we’re expecting that by April 1, this building has turned, it’s hardened, it’s cash flow positive, it is fully leased up. The stairs are done, the treads are done, the lighting is done, the security cameras done, the Wi-Fi is done, the courtyard is done, the building’s hardened, and we’re basically at pro forma a year in advance. We bought this building last May, it hasn’t even been a year. And we got a slow start in turning units. Now, once this is done, it will be, again, $400,000 over budget between the CapEx budget plus the cash bleed. But once these units are leased, we will be damn near at pro forma a year in advance. And then we’ll see what happens with the other roughly 25 units in the building. We may need to hold the asset for an extra year as we cause organically raised rents on the other units. Maybe not. Maybe we’ll just be able to bump those rents because of all the amenities that we’ve added, the lighting, the carpet, the courtyard, new signage out front, covered parking in the garage.

I can tell you that, back in September, I felt like we were starting to fall behind. Here we are, January 7, 2022, and we are now going to be way ahead of schedule. So, what did we learn? First of all, look, sometimes you’ve got to go over budget as long as you understand where you’re making the investments, how it’s going to impact the rent, how the rent impacts the value, and if you could still refinance or sell to get out, to get your investors out. Alright, it’s okay to go over budget as long as it fits within a new business plan. Number two, I’m going to tell you lighting, lighting, lighting. The LED lighting in this building makes all the difference. Install LED lighting everywhere you go. Number three, make sure as a leader in your organization, you roll up your sleeves, you put on your boots, even if your boots fall apart like mine did, get on-site, work side by side with your guys. I was asking them questions about construction. I felt like a total moron because I’m a CEO.

But look, construction is not in my swim lane. So, I’m asking them questions about, “Hey, Dave, what’s the difference between shoe mold and quarter round?” “Dave, show me how to install this new P-trap.” Like, “The flange in the toilet, what is that? How does that work?” Alright. Like, I want them to know that I care by asking questions, it shows that I care. I care, I ask questions. Look, I’m involved, I want to know, and I want to create relationship connectivity with my team. The more connected they are to me, the more they feel like I’m a man, I’m a regular guy, I’m a person, and I care about them and they care about me. Then I can ask them, hey, if they’re into the Indians, they’re into the Browns, they’re into the Steelers. (Barf!) We can talk about things like that. They can laugh about my boots, that’ll be a memory. They’ll be thinking about that a year from now, we’ll be laughing about it. They’ll be talking about when the CEO showed up and had to climb over one of the refrigerators to get into one of these units because the refrigerator was stuck in the doorway. Yeah, that happened yesterday. These kinds of things, they’ll remember. And it creates relationships.

You see, as a CEO in your business, you can’t expect everybody to care like you care, or you can’t expect everybody to hustle like you hustle or work extra hours like you do. It’s bullsh*t to think that the CEO is going to expect all the employees who have different goals and different objectives to care as much as you do, they’re not. Okay, don’t expect that from them. But what you should expect is that if you do want them to work harder, you want to have a great culture, you got to go side by side with your people and build relationships, have conversations. How are your kids? Who’s your favorite team? Where are you from? That matters. It matters.

And so, yesterday was a big day because not only did we build relationships, we got an incredible amount of things done, and I was able to see with my own two eyes all the updates on the security doors, the paint, the carpet, the security cameras, the Wi-Fi, all the unit turns. I’m not relying on somebody else to asset manage my building. Go asset manage your building, build relationships, build a great business, and you’ll go from being behind schedule to being ahead of schedule.