The Fastest Way To Build A Six Or Even… Seven Figure Real Estate EMPIRE!
In this episode, I’m sharing a case study for one of our most recent properties, “54 Niles” — a 54 unit apartment building that we bought off-market for $2.43M, and could now sell for over $4M in less than a year!
The seller originally bought the building for $1.2M in July 2020 and only 6 months later, our commercial broker brought it to us with an asking price of $3M.
Find out how we negotiated a better deal, raised rents to increase value, hired a property management firm to fill vacant units, mitigated risk, and created multiple exit strategies.
If you want to get a behind-the-scenes look at our proven business model for creating million-dollar deals in real estate, you won’t want to miss this video walk-through!
- How one deal can literally change your life.
- The 5-step business model we use to create million dollar deals in real estate.
- The 10 pillars of risk mitigation when buying property.
- How we negotiated the seller down from $3M to $2.43 with a contract provision to improve 34 vacant units.
- How we leveraged a 3rd party property management company to fill all vacancies — and the fee we agreed to pay them.
- The scary moment when the building’s occupancy dropped from 20 to 15 units.
- Raising rents, refinancing, and paying off the existing loan.
- Having the guts (and the business plan) to buy a building that’s only 40% occupied.
- The importance of building multiple exit strategies into your deal — and how this deal could make us over $1M in less than a year.
Connect with Josh Cantwell
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Josh Cantwell: So, you guys, how are we doing? Welcome back to Accelerated Real Estate Investor with Josh Cantwell. So excited to be your host and so excited to come into your life, in your ears, in your brain and share strategies with you around leadership, entrepreneurship, and multifamily and apartment investing, both active and passive. Today, I have a special treat for you. It’s just a brand-new case study of a property that we just bought. We call it 54 Niles. And I’m going to step you through this deal that we bought for $2.43 million. That is ultimately going to be worth $4.2 million when we’re done with it, with very, very little improvements spent.
So, you guys, we’re excited to share this case study with you, 54 Niles, we call it, and it’s a 54-unit apartment complex with over a million dollars of profit, over a million dollars of equity. This one deal will again make us millionaires, even though we already are from our apartment holdings. We’ll again add a million dollars of equity to our bottom line. And the reason why I say that is not to brag, but to basically just impress upon you that one deal can literally change your life, one deal can change your life. And so, if you’re catching this on podcasting and just hearing the audio version, there’s also a YouTube version of this with video. So, go to the Accelerated Real Estate Investor YouTube channel and make sure you subscribe. And you can also watch the video around this.
Let me first talk about our business model in this episode and talk a little bit about what we do and how we’re able to create a million dollars of profit or equity. The business model that we subscribe to, that we invest in through apartment investing is really a five-step model. That five-step model is number one, to buy a distressed or an undervalued property. And it could be distressed or undervalued because of bad management, low rent, deferred maintenance, distress upon the owner, could be an owner that simply just is out of sight, out of mind owner, we’ve seen plenty of those; properties that are in good B-class locations that are being managed as a C-class asset, but they’re distressed and they’re undervalued for a reason.
Number two, we stabilize the property once we buy it with renovations and better property management, a better experience for tenants, a better experience for the residents, better grounds, better units, less leaks, less headaches, just overall, better experience. And when we do that, we can charge more rent, which makes the building worth more. Step number three is to be all-in for roughly 75% of the stabilized after-repair value. That just simply means if a building’s worth $10 million, we want to be in for $7.5 million. Step number four is to refinance then at 75% loan to value within 36 to 60 months or less of our ownership. So, if we buy it today, we want to refinance within really, 36 to 60 months, sometimes much sooner than that, and repay our investment, capital investment, and repay off our bank loan and put stabilized long-term nonrecourse financing on it.
Step number five is to simply hold the property in the long-term wealth, a property that cash flows and grows long term and provides more cash flow, more equity, more principal paydown growing value through rent bumps. That is our model. And when we are buying the property, we do several things to mitigate our risk. Number one is we always buy at a discounted price. Number two, we always create appreciation through value-add improvements and a value-add improvement process. Number three, we never speculate. Never speculate on what the value could be. We always pencil out, what are the rents today? What are our rent comps? What are the other rents, the other buildings renting out for? And what does that income look like today? So, we do value-add improvements, we’re not hoping and speculating on appreciation over the next three to five years, but we’re really trying to just get to market value today through a value-add process that any growth after that is basically cherry on top of the cake.
Number four, we buy for cash flow. So, we look for cash flow, preferably assets that have cash flow on day one, if not assets that can cash flow within three to six months, once we stabilize the building and raise the rents. Number five, we stick to A Class, B and C-plus areas, primarily B class. We don’t even really buy a lot of A class, but we don’t do anything in C class areas. We don’t do anything, whether it’s government subsidies or Section 8 type of rental assistance. We don’t do anything like that. Step number six, always complete and stress the due diligence, and make sure that we do all the due diligence, and we walk every unit. We don’t walk 50% of the units, we walk all the units. We look at all of the utilities, we look at the bills, the operating cash flows, the operating statements for the past three years. We look at rent comps, rent bumps. We look at appreciation, job growth, all these different kinds of things. We complete all the due diligence. We don’t shortcut it.
Number seven, we stress the underwriting, meaning if interest rates go up, if cap rates go up, if values go down, if rent rates go down, what can we kind of live through or live with as far as harder times, lower values, higher cap rates, higher interest rates. Number eight, obtain favorable financing terms, which typically means we want long-term permanent financing. That’s not always the case. Sometimes we buy a building, like I just bought 54 Niles, the deal that I’m telling you about. We bought that building. We bought that building with 20 units occupied out of 54 so basically, 40% occupancy. Alright. We also want to cash out our investors very quickly and have multiple exit strategies.
Okay, so those are the 10. Always find a discounted price. Great appreciation to the value-add process. Never speculate. Buy for cash flow. Stick to A, B, and C-plus areas. Always complete all the due diligence. Stress the underwriting. Obtain favorable financing terms. Cash out investors quickly and have multiple exit strategies. That’s what we do to mitigate risks. Now, this particular property on 54 Niles is a great, great, great opportunity for us because we were able to buy the property for $2.43 million. It’s exactly $45,000 a door. What happened is that the current seller, his name was Nick, a great guy, bought the building for $1.2 million in July of 2020, right in the middle of COVID. He bought it, and it was actually an independent market rent apartment building, but primarily, had an older population because it was attached and on the same complex as an assisted living facility.
Well, Nick ended up buying that parcel. They split the parcels, bought that parcel, which is just a 54-unit apartment building. He bought that separately from assisted living. So, they were no longer connected. He bought the 54-unit apartment building for $22,000 a door for just $1.2 million. Then we saw the building in December, so just six months later. The commercial broker brings it to us as an opportunity for us to buy it. And they want $55,000 a door, so they want $3 million. And we’re like, dude, there’s no way I’m paying $3 million, $55,000 a door, especially when we found out that the building was only 40% occupied.
So, we end up negotiating back and forth. We settled at $45,000 a door, totally off market, nobody ever knew about it. Our commercial broker brought us in. We got our first crack at it. We made the offer and we bought it, and it worked out. So, in that scenario, we were in a really good position, really good shape as far as buying the property, getting on a contract, but what we did was we bought the property assuming and as completed the purchase agreement, meaning that Nick, the seller, had to improve the other 34 units that were vacant. And he did. We agreed to that. Now, he got a little bit behind because of COVID, had some family members passed away actually because of COVID, and also supply chain issues and things like that.
So, it wasn’t until April 21, 2021 that we actually closed on the building, bought it for $2.43 million, but when we got the building. We got it, it definitely didn’t cash flow from day one, but there were 34 improved units, already completed, new LVP flooring, new paint, new electrical boxes, they swapped out all the old Federal Pacifics for new electrical boxes, painted all the cabinets, cabinets were in great shape, new hardware on the cabinets, new appliances, new AC units in the walls. Basically, the whole unit was improved, new bathrooms. Everything was improved, it was great. So, when we bought it, we set aside $230,000 for capital improvements to do the exteriors, fix up the remaining 20 interiors, take care of the driveways, the curbs, the landscaping, and things like that by $230,000, but at this point, that’s not even our strategy, that’s not even our main thing that we’re focused on. We’re focused on right now is the 34 improved units and getting them leased out as fast as possible.
Now, this building is about an hour and 15 minutes from my office and from where I live. So, we interviewed third-party property managers. We hired a third-party property manager called REM. They were managing other buildings in this area. And we said, “Look, all we want you to do is lease this up.” So, we agreed to a bulk price with this property management company of $250 per door that they would lease out because they have 34 doors to lease out, and then they would get a 5% property management fee on the gross income that they collected. They collect from the rents that they collect from the laundry, that they collect from all the other income of 5%.
So, this was a fairly simple value add because the value add was already done. It was already completed. All we had to do was lease out 34 units. So, we just hired a property management company leasing agent who knows what they’re doing to lease it out. So, we bought this property on April 21st and really, for the first two weeks, it was just onboarding the new residents, getting them signed up with Appfolio, getting them the notices that we took over the property. And on May 10th, about 20 days later, the property management company took over. And we’ve been busy tracking them from May 10th. Well, today’s June 10th, it’s been about a month and we’ve been tracking their progress. And on May 27th, basically after about a two-week onboarding, we said, “Okay, we’re going to start leasing out units,” started marketing the building, putting up Swooper flags, marketing the property in the area, those kinds of things.
And really, for the first two weeks, it was total crickets. We had like a couple of showings, like one new lease. Meanwhile, we had like four new people move out. We have one person who passed away. So, all of a sudden, it went from 20 occupied down, like, 15 occupied, and only one new lease. So, I’ve said with a 54-unit building and only 15 occupied units. And by the way, those 15 occupied units, they’re already at the lower rent because these are the people that had lived there before. So, lower income, lower rent, only 15 occupied units, we’re like, oh my God, what did we do something wrong here?
Well, again, you got to be patient in this game. You got to be patient when it comes to multifamily investments. You got to be patient when it comes to apartments because over the last two weeks, all of a sudden, the marketing is starting to take hold. The marketing is starting to work, the flags at apartments.com, marketing online, and people are starting to realize, oh, my God, this building has been improved. The units were some of the nicest looking units in the entire area, they’re better than all the comps. And when we did it, it was in a two-bedroom unit, we’re marketing those for $850 a month, but that includes everything, that includes the water, the sewer, the electric, and the gas. So, $850 all-in, you rent one shack, you move in, you’re done. No frills, no nothing. None of that other stuff. Do anything out of papers if you want to do your laundry, that’s it. Use the laundry machines, $850.
And so, in the last two weeks, all of a sudden, we’ve got nine new leases signed. We’ve got seven people moved in. We’ve got two additional people about to sign leases. So, it’s going to put us at 11 out of the 34 units that we need to lease at the new lease rates, at the higher rents. So, on the two bedrooms, it’s $850, and on the one bedrooms, it’s $725 a month. And that’s going to put us at a pro forma where we’re going to be able to refinance and pay off our existing one and go into permanent financing with Fannie Mae and Freddie Mac. So, we’re excited about that.
So, oftentimes, a deal comes and you have to have some guts. You’ve got to have some planning. You’ve got to have some kahunas, if you will, to buy a building that’s only 40% occupied, but knowing what your business plan is. So, we set aside $230,000 for CapEx. We’re not even spending that money right now. It’s just sitting in our operating account. We know we’re going to burn about $50,000 because we don’t have enough income coming in to pay the mortgage, to pay the debt service, to pay the property taxes, to pay the insurance, to pay some of the bills, but if we could simply focus on leasing right now, it’s only to focus on. We don’t even need to improve the five units that just became vacant, because if we improve them, what are they going to do? They’re going to sit there. So, why even spend the money on that? So, all we’ve done is the landscaping. That’s it.
We edged all the beds. We threw down new mops and flowers. We edged around the front signs so when you drive up the parking lot, you see it looks really, really nice. And we’re showcasing these new units with LVP flooring, beautiful white cabinets with new hardware, new countertops, beautiful bathrooms, and essentially a brand-new feeling in the whole building. The building also sits off a ravine. So, if you’re on the back of the building, you’ve got a beautiful view of the woods and the ravine. That helps a lot. But the truth is that sometimes when you buy a building, it comes down to your business plan. And then sometimes when you have a business plan, it comes down to doing the one thing right. And in this scenario, the one thing we’ve got to do is lease-ups. That’s all we’re focused on right now. All our property management company is focused on these lease-ups because we bought the building for 2.43, we’ve got about $230,000 in renovations scheduled, we took an acquisition fee when we bought it of about 3%, which was about $75,000. And we know that based on a six and a half cap, the building’s going to be worth about $4 million to $4.2 million. And so, we feel like we can just lease up, lease up, lease up, lease up, lease up.
And there possibly have two exit strategies: 1- Refinance. When we’re at stabilization, or 2- Sell the building with a little bit of meat on the bone, sell the building to the next buyer for a little bit of a discount and get out of the building. It will be all-in for 2.4 plus and closing costs and our acquisition fee will be all-in for about $2.6 million and sell the thing for maybe $3.5 million in less than a year and make over a million bucks. So, multiple exit strategies, stress the underwriting, but focus on one thing to complete your business plan and your business model, okay.
So, there you have it, guys. Just want to give you that one quick update down and dirty really fast, 54 Niles. The actual address is 1500 Hillcrest. You can look it up online, 1500 Hillcrest in Niles, Ohio. Go ahead, look it up online if you’d like. And I also wanted to remind you, don’t forget about the five steps of our business model. Buy undervalued, stabilize with renovations, all-in for 75%, refinance and return investors capital, and hold to build long-term legacy wealth. And then don’t forget about our 10 pillars of risk mitigation. I hope you enjoyed this podcast on the Accelerated Real Estate Investor show with Josh Cantwell. If you did, leave us a five-star rating review. Don’t forget to hit the Subscribe button so you’d never miss another episode. Also, make sure you follow on wherever you get your podcasts and also on YouTube in case, for example, on this one that you can see the slides that I’m also going with and not just the audio. Alright.
Oh, by the way, one thing I forgot to tell you, we bought the property for $2.43 million, and it was appraised before we bought it. The week before we bought it, the appraised value came back at $3.15 million. So, it got built in the day we bought it, over $700,000 of profit. I hope you enjoyed this episode of Accelerated Real Estate Investor. We’ll see you next time. Take care.