Josh Cantwell: Hey guys, what’s going on? Welcome back to Accelerated Investor, and I’m so excited to share with you today because yesterday, we closed on our biggest asset in the Cleveland, Ohio market called Stuart House. We bought it for $16.3 million. And so, what I wanted to do on this quick solocast is basically walk you through the business plan and tell you a little bit about what we’ve done over the last 60 days to prepare to buy it, to close on it. And what we’re going to do with it now that we bought it.

Interestingly enough, this was a property that the seller was selling a bunch of his properties at the same time, and the seller wanted to go through what’s called the process. A lot of people refer to it as the process, which is they’re going to get professional photos, they’re going to put together an offering memorandum, they’re going to tour buyers through the property, they’re going to run tours through for about a month, then they’re going have a call for offer date. Bunch of offers come in. That’s what happened on this deal.

Then, on the call for offer date, usually, in this case, I think there were 18 offers. There were six that stood out that were higher, better, more qualified buyers than the others. We were one of the six. So, then they asked those six people to resubmit and make a second call for offer. So, that took about a week. And then finally there were two buyers left, us and one other buyer, and kind of a David and Goliath scenario. I mean, we have a decent sized portfolio. We’ve done 18 syndications. We have a portfolio worth about $250 million, but we were David, not Goliath.

The other guy that was offering and bidding against us has over 50, 55 complexes, and I think a billion-dollar portfolio. So, sometimes when you present yourself on a deal, it’s important to present why you’re different. So, we’re not going to win every deal and we’ve certainly lost. I think we’ve lost seven or eight deals to this other buyer who is clearly larger than us, clearly bigger than us, clearly has deeper pockets, but I believe where we won on this deal is because we have a different business model. We do deep value add, meaning we’re going to add anywhere from $5,000 to $10,000 per unit. We’re going to upgrade the bathrooms, upgrade the kitchens. We’re going to upgrade the flooring, the paint, the trim. We’re going to update all the commons. We’re going to update all of the exteriors. It’s really going to give it a whole new brand.

And the seller, I believe, why we won the deal is because the seller saw what we plan on doing to the property. They saw our other properties. They saw our portfolio. They saw kind of upgrades we’ve made, the kind of upgrades that we’ve done. And the seller said, “Yes, I want that buyer to buy the property because I like what they’re going to do to it.” The seller, I don’t know him at all, I never met him, but my understanding is he’s a 70-something-year-old guy, some really, really well, made ton of money, but in the last four years or so, has put a lot of money back into the properties for various business and personal reasons.

So, maybe he was thinking, hey, these are the type of improvements that I would have made if I was going to keep owning these properties. These are the kind of improvements that I would have made. If I was going to keep it or if I had more time or I had more motivation, if I was going to own them for longer, I would have made these improvements. So, sometimes you win for reasons you don’t even know, but you got to get in the game to win, you got to get into the game, step on the field of battle, and start playing the game in order to win.

And sometimes, you win for reasons you don’t even know why. The touchdown is scored, the basket is stored. The most unlikely guy, Kirk Gibson, the Dodgers hit a homerun when nobody expected it. Sometimes you win for reasons you don’t know why. So, we won and we got our offer accepted, $16.3 million. And we had a 60-day closing. If we didn’t close in 60 days, our asking price actually would have gone up, would have more money go hard, and our price would have gone up.

So, here’s our plan for the property. We’ve got about a $2.5 million budget. There are 296 units. We’re going to take 148, half of the building, and we’re going to do full hard turns, $10,000 apiece. The other half of the building, we’re going to essentially do a half-turn, which is going to be about $4,000 to $5,000 per unit, where we’ll maybe keep the flooring, keep some of the cabinets, keep some of the appliances, and not do as extensive of a rehab. We’re going to spend about $150,000 on the commons, doing all new LED lighting, all new paint in all the commons, all new carpet squares and the flooring, new carpet treads.

We’ve got about five boilers that need to get replaced. We’ve got two roofs that need to get replaced. We’ve got the signage out front that needs to be swapped out, that’s going to be about 15 grand. We’re going to seal and stripe the parking lot, that’s $35,000. We’re going to renovate the leasing office, the property management office, the storage office. We’re going to add an Amazon package delivery center because there are almost 600 people who live on campus here in these 300 units. So, that’s going to cost about $50,000 to renovate the office.

We’re also going to add some park benches. That’s part of that. We’re going to paint the exterior of a number of the entryways. It’s not a lot of paint, but some paint that’s about $50,000 for new exterior railings, some concrete work, and some paint out in front of the commons. We also are doing the windows. So, this is one of the things we haven’t done on a lot of other properties, but we’ve got to do the windows.

There are 1,192 windows on this complex, and right now, there’s a mixture of the original, what we call the classic silvers, the classic silver windows. There are 373 of the classic silvers that need to be replaced. And then there are 266 windows that were replaced in 1999. So, we call those the prince windows. You know the song My Prince, 1999. So, we call those the prince windows. There are 266 prince windows from 1999 that were replaced, but the seals are broken. So, they’re fogged up and they need to be replaced.

So, what we decided to do was to look at that group of windows. And so, there are 639 total windows that need to be replaced, and the budget for that is $287,000 to do that. So, we have four different window contractors give us prices with one window contractor that came back with $1,200 per window. $1,200 dollars per window to replace them. So, you do a thousand windows at $1,200 a window, you’re talking about $1.2 million just for windows. So, that obviously got a DQ. That didn’t work.

What we ended up doing was we found a supplier, it was actually a famous supplier that was able to supply the windows. And then we found a separate installer who was able to install the windows for $160,000. So, we were able to find a price if we want to do all the windows in the entire complex. All 1,192 windows with a white finish were going to be $300,000 for the windows. So, let’s do the math, $300,000 divided by 1,192 windows. That’s $251 a window. That’s just for the material. And then we had an installer that said they would install them all for $160,000 for the window. So, it’s 1,192. It’s $134 to install.

So, what we decided to do was say, “Okay, well, let’s not do all the windows in the white finish. Let’s just replace the classic silvers and the prince windows that were replaced in 1999, but the seals are broken. So, we have 639 windows that need to get replaced with an average cost of about $450 a window, and then includes the installer taking the blinds down, setting the blinds aside, installing the window, caulking around the window, and then installing the blind and putting the blinds back up. So, they take the product out, they put the product back in, and it’s totally done all at one time. So, $450 a window times 639 windows, we’re going to be able to fix all of the broken windows and make them look like the previous windows that are in good shape. So, instead of $1.2 million, we’re going to spend $287,000. Because we got four different window quotes, that’s what we decided to go with.

We also have about $420,000 in soft costs and closing costs. The property essentially breaks even out of the gate from paying the expenses, paying the debt service, paying the pref return to investors, but we set aside $200,000 for cash burn. If it burns $50,000, $100,000 a year for two or three years, we’ve got plenty of money there for cash burn. We also set aside $450,000 for CapEx draws. So, we got almost $3 million in CapEx with the lender that we can draw against. So, we set aside $450,000 to spend $450,000 and then do a draw and spend $450,000 again, do a draw, spend $450,000 again, do a draw. Do that six times. That’s about $3 million bucks.

When it’s all said and done, we should be able to raise the rents on a two-bedroom to $1,025, on a one-bedroom to about $800, and that will give us approximately $1,000 because most of the units are two bedrooms. They would give us $1,006 a blended rent per unit four years from now, We do that. That’s going to put us over $3.5 million of gross income even with the vacancy factored in, even with some laundry income factored in. It’s going to put us at about $3.5 million of total gross income at a 50% expense ratio, and then taking into account about a six cap, that’s going to put us at a total value of the building at nearly $27 million.

So, we bought it for $16.3 million. We’re going to put about $2.5 million in plus the soft cost plus we’re taking an acquisition fee. We’re going to be all in for about $19.5 million, and it pencils out to be worth $27 million. And all of that really because the work we’ve done before, the brokers, the seller, they knew what our business plan was. Our business plan is to do heavy deep value add, spend a significant amount of money on the units for the unit turns, bring in a whole new crop of residents and really take it from a C class resident base to a B or a B-plus class resident base. This is clearly in a B, B-plus area. So, it’s in a good area, but the tenant base is not great because the former seller, he just didn’t have the motivation to fix the building up and to raise the rents. So, we won the deal because of our previous deals.

So, what I encourage you to think about as you’re investing, as you’re presenting, as you’re talking to brokers, sellers is to really have a niche. What is your niche? What is your business plan? And you can’t say, “Well, it depends on every deal.” That doesn’t jibe with me. I don’t like that. I don’t like having a different business plan for every deal, like if you think about any major business that’s made a lot of money like Hershey’s chocolates. Hershey’s chocolates didn’t say we’re going to make chocolate candy bars and we’re going to make toys and we’re going to make balloons and we’re going to have carnivals and we’re going to make go-karts. They didn’t do that. Instead, we’re going to be the best damn chocolatier and we’re going to make the Hershey’s Bar. And then they started making the Reese’s Peanut Butter Cup. Then it became M&M’s, and then it became a battle between Hershey’s and Mars. And they were the world’s best chocolatier.

So, in my market in Cleveland, I want to be known as the best apartment operator/syndicator who does deep value add on the west side of Cleveland. That’s who we are. I don’t want deals on the east side of Cleveland. I don’t want deals in the southeast side of Cleveland. I really don’t want deals that are retail. I don’t want deals just cash flow. I want a deep value add on the west side of Cleveland. That’s us.

So, what about you? As you think about your business plan, what do you invest in? You see, like, you don’t need to be something that you’re not. You don’t need to be like everybody else. You don’t need to be the second-best. You just need to be the best at what you do, whatever it is that you do. I mean, look, Apple Computer became a trillion-dollar company, not because of computers. They created the world’s best cellphone, the iPhone. That’s still responsible for the majority of their profit.

Even though they have iCloud and they have the App Store and they have Mac computers, which I’m recording this on, and they own other things and have made other investments, they hang their hat on being the world’s best cellphone maker and making all those apps just integrate seamlessly. And that made them one of the most valuable companies in world history. They didn’t say we’re going to make the best computers and the best this, the best that, the best next thing. They hung their hat on the iPhone. Where do you hang your hat?