Josh Cantwell:   Welcome to the Accelerated Investor Podcast with Josh Cantwell. If you’re looking to retire early with forever passive income, you’re in the right place. This podcast is the go to destination for real estate investors, both active and passive, and multifamily apartment investors, both new intermediate and advanced. Now sit back, listen, learn, and accelerate your business, your life, and your investing with the Accelerated Investor podcast.

[INTERVIEW]

Josh: Different types of apartment syndications are, number one, value add. Number two, what we call turnkey. And number three is distressed or deep construction, or some people call it deep value add.

Josh: Okay, value add.

Josh: Let’s talk about what that means for a minute, okay, because there’s money to be made in all three types of deals, okay? You don’t have to just do value add, okay, some of you may like cash flow turnkey deals. Maybe some of you have a 1031 exchange like we talked about, where you’re selling some single families and you want to move it over to multifamily and it’s your own money. Maybe you’re going to match that up with some limited partners and pull their money in.

Josh: Maybe you prefer turnkey or cash flow. Okay, there are some deals that are turnkey, cash flow and value add at the same time. And then lastly is deconstruction or distressed, which I do not recommend for newer investors, new multifamily investors. Okay, so let’s talk about value add, because that’s where most of you are going to spend your time. Value add means, number one, the building is not stabilized, which means it’s probably hovering between 85% to 90% occupied, but it’s not 95, 98% occupied.

Josh: Number two, the rents are below market value, okay? They’re usually at least 10%, sometimes 2030, 40% off of market value for rent. Number three, it needs just cosmetic updates. Hey, the building I saw today, 403 units, all 403 units are in good condition. Meaning you could clean the carpets, you could paint the units, and you could move people in. But you could also decide to do, instead of a make ready, you could decide to do more of what I would call a half turn.

Josh: You could spend $5,000. That’s a half turn. A full turn is usually around ten grand. A half turn where you could keep the cabinets and paint them, put on hardware on the cabinets, keep the appliances, because the appliances are in good condition.

Josh: Okay.

Josh: So the reason why it’s not a full turn is you’re keeping the cabinets, keeping the appliances, and if you keep the cabinets, keep the appliances. You’re probably saving yourself about $2,500 to three grand between the material, the install, the labor, the material. You’re saving 2500 to three grand. So you’re dropping now from 8000 down to five. Okay, so it just needs cosmetic updates. So paint flooring, painted cabinets, maybe it needs hardware, maybe a new top, maybe not. Maybe a new countertop, maybe not.

Josh: That’s the kitchen. Then paint the unit and possibly do all new flooring. So the flooring could be just all carpet or it could be LVP.

Josh: Okay?

Josh: And here’s what I would recommend, guys, write this down. If you’re going to own the building for less than five years, just put in carpet, because the carpet is going to last three to five years. You can shampoo it. You can move people out. You can move people in. So cosmetics, right? It’s not a lot of structural work. It’s not a lot of major problems with the roof or the windows. It’s not major problems with the foundation or a lot of mortar work. It’s none of that type of stuff.

Josh: Okay?

Josh: And number four, it’s in b and C class markets.

Josh: Okay?

Josh: The market I was in today across the street is a major grocery store. Across the street is every major a class. Every major a class. Like Verizon wireless at T, Chipotle mattress firm, giant Eagle, Mark’s grocery stores. There’s a speedway, there’s a bowling alley. Like all of that stuff is across the street. That’s b and C class. They’re dense areas, which means they also have a lot of single family homes.

Josh: The area that I was in today, the house itself, are between two hundred thousand dollars to eight hundred thousand dollars.

Josh: Okay?

Josh: The building I saw today is on the water. It’s on the lake.

Josh: Okay?

Josh: So if you walk out on your balcony, you turn right, you turn left. Lake area is right there. That’s a value add opportunity.

Josh: Okay.

Josh: Primarily rents are below market value. And when I say below market value, what I mean is at least $200 below market value.

Josh: Okay?

Josh: That’s value add. Let me stop there. Any questions around value add? Next is turnkey cash flow.

Josh: Okay?

Josh: And think of value add as doing a kind of light remodel on a single family home.

Josh: Okay?

Josh: Maybe it’s a bank owned property and you buy it. Value add. It’s a light value add and you’re going to turn it into a rental. Maybe you’re going to do. People call it the burr method, right? Buy, remodel, rent, refi, repeat. That’s value add. Turnkey or cash flow would be essentially buying a property at its market value.

Josh: Okay?

Josh: You’re not really buying it at a discount at all. You’re buying it at market value.

Josh: And.

Josh: You’Re buying it for cash flow. So it’s turnkey, right? Think of Turnkey or cash flow as if you bought a done for you rental. Think of single family and think of some of the guys that sell turnkey rental properties. They buy the rental, they remodel it. They put a tenant in it, then they sell it to an investor. Turnkey, or cash flow is exactly that. It’s already at market value. It does not need any cosmetic updates or very little.

Josh: It’s already stabilized at 95% occupancy. It’s usually in an a or b class market. And you can buy it and just cash flow it and incrementally, organically raise the rents. Now, the reason why that doesn’t work for most of us is because there’s not a big enough return for investors. Write this down. There’s not a big enough return for your limited partners. And number two, there’s not a quick enough return of capital, return of principal.

Josh: For limited partners. It’s essentially a buy and hold for five to seven years, and they just get cash flow. The turnkey cash flow deal is great if you have a 1031 exchange. It’s great if you have limited partners willing to take, like, a 5% preferred return or a 6% preferred return, and they have a five to seven or longer year time horizon. Now, turnkey cash flow is good because you can get permanent financing right off the rip.

Josh: You can get Fannie Mae, Freddie Mac, or HUD financing right away.

Josh: Okay?
Josh: Now, in this market, higher interest rate environment, the downside of that permanent financing, that Fannie Mae, Freddie Mac, HUD financing, is going to have a very low loan to value. So you’re going to have to recruit more equity. So turnkey cash flow, maybe there’s a five to 6% bump in the rent. With value add, we might have a 15% to 30% bump in the rent. Okay, any questions so far? When I say recruit more equity, what I mean is recruit more limited partners.

Josh: And if it’s a turnkey cash flow deal, you’re going to have the bank loan or the Fannie Freddie loan is going to be a lower loan to value, which means you have to recruit more limited partners, you have to recruit more equity, you have to recruit more money, and you’re going to give up a lot more of the deal because the limited partners want a good return.

Josh: Okay.

Josh: Number three is deep construction or distressed.

Josh: Okay.

Josh: So when we bought 54 niles and 54 niles was only 20 units occupied out of 54, and it was 39% occupied. That’s deep construction or distress.

Josh: Okay.

Josh: When we bought 52 lake and 52 lake only had 30 units occupied out of 52, it was only 60% occupied and had a recent fire. That’s deep construction or distress.

Josh: Okay.

Josh: When we bought 28 riverside about 75 days ago, and that was in foreclosure receivership.

Josh: Right.

Josh: And the rents were only $500 and the market rent is 950. And the whole building needs to be turned. It needs heavy rehab, heavy construction, including new windows unit turns, commons boiler work.

Josh: Right.

Josh: That is a problem.

Josh: Okay.

Josh: Needs heavy rehab, needs heavy construction. And so for deep construction or distrust, most of you are going to and most of us are going to have to get bridge financing. Well, the challenge with bridge financing today is that it comes with about a nine handle on the interest rate.

Josh: Okay.

Josh: So we could buy deep construction or distress, but only if you have a highly capable contractor. Only if nine handle means a 9% interest rate.

Josh: Okay.

Josh: So I love Rebecca because she is not afraid to ask questions. I love it. I love it. I know a lot of you guys are like, what does nine handle mean? And Becca’s like, what’s a nine? So, like, she is not afraid to ask questions. I love that. I love so deep construction, eight and a half, 910 percent interest rate. A nine handle.

Josh: Okay.

Josh: So the only way you buy deep construction or distress is if you have a very capable contractor, very capable construction company that can jump in and remodel a lot of units right off the.

[CLOSING]

Josh Cantwell: Well, guys, there you have it. I really enjoyed that episode with Liz. Man, being responsible to others is such a motivator. Giving to others, I feel so good about myself, right? Such and such a good place when I give to others. Number three, making a new decision. I remember when I was diagnosed with cancer and came out of my hospital bed and had an opportunity to restart my life, I had to relearn how to eat, I was not going to go back and redo my life the way I had been doing it, so making that decision. And then finally, as Caleb and I mentioned, don’t quit.

Guys, listen, everybody can do this business. Everybody can be successful. Everybody can be a multimillionaire with real estate. Keep getting your education, keep listening to podcasts like this. But most of all, go execute, raise capital, make offers. Don’t quit. We’ll see you next time on Accelerated Investor.