52 Lake Case Study: Increased Value from $3M to $5.2M! – EP 223

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Today, I’m breaking down a 52 unit deal we recently purchased on the Gold Coast of Cleveland. 

We purchased it for $2.7M (total cost is $3M with the wholesale fee) and after it’s renovated it’s projected to have a stabilized value of $5.2M!

Here’s where things get exciting: Once the renovations are complete, we’ll refinance at 75% LVR and be able to pull out $500k of tax-free refinance proceeds. And while it’s not a huge building with hundreds of units and millions in profit, we’re still going to have about $100k per year in tax free cash flow. 

Funny enough, this property was offered to me 15 years ago, but I let my lack of confidence and limiting beliefs hold me back. You’ll hear me explain why I could have made it happen back then, if only I had the mindset that I have today. 

I will also walk you through our steps for acquiring the building, making upgrades, bumping rents, and increasing the value to $5.2M!

Key Takeaways

  • Negotiating the deal and making it happen after 2 years of persistence! 
  • The steps we’re taking to push gross income up from $425k to $619K. 
  • After renovations are complete, refinancing at 75% LVR should generate $500k in tax-free proceeds with enough equity to generate $100k per year in net-free spendable cash flow.
  • Never underestimate the power of a positive mindset.
  • Why I mistakenly turned down this deal 15 years ago. 
  • Why networking is critical to your success in sourcing deals.  
  • Confidence is a choice. It doesn’t really matter what other people think of you, what matters is what you think of yourself.
  • Don’t let fear or a lack of confidence hold you back.

Josh Cantwell Tweetables

“If you think highly of yourself, then other people will think highly of you. You don't get your confidence from them. They get their opinion from you.” - Josh Cantwell


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Josh Cantwell: So, hey there, welcome back to Accelerated Real Estate Investor with Josh Cantwell, I am your host. And today, I want to walk you through yet another case study, another property that we just bought. I want to walk you through yet another apartment building, and I want to walk you through the case study, the deal, and talk a little bit about it and how it’s helping us achieve our goals of forever passive income.

 

This is 52 Lake. 52 Lake is a 52-unit apartment building. It’s on Clifton Lakes, Clifton Boulevard. It’s in the Gold Coast of Cleveland. The Gold Coast of Cleveland is actually one of– it’s on the near west side. It’s only about a five-minute drive from the Gold Coast into downtown Cleveland. It’s right on the border of Cleveland and Lakewood. This is one of the absolute best rental markets in the area. And I’m super excited about this deal because I think we got it for an absolute steal. I think we got it for the absolute right price.

 

This is a deal that Tyler, my partner, worked on for almost two years. We kind of partnered up with a wholesaler, a friend of mine named Adam Ziegler. And Adam and Tyler started working on this deal over two years ago. They started both kind of nudging on the seller, meeting with the seller, talking with the seller about selling the property. And they were able to kind of co-negotiate the deal together. Well, he bought the deal for $2.7 million, and on top of that, we decided that Adam would get a $300,000 wholesale fee. So, the total purchase price ended up being 3 million bucks. We closed on this in May of 2021, so just a few months ago. The stabilized value of this building is $5 million to $5.2 million. It’s about $100,000 a door.

 

So, one of the ways that we underwrote the deal is that we looked at the net operating income and we divided that by the cap rate. The cap rate is about 6.25% because it’s a little bit smaller building, a little bit smaller deal, but the truth is, is that we also underwrote the deal based on an appraisal per door. So, we talked to our lender. The lender says, “Look, when you guys stabilize this, we’re easily going to be able to get an appraisal at $100,000, $220,000 a door. So, you take 52 doors, multiply times $100,000, worth $5.2 million. It could be worth more than that on an appraisal.

 

So, our CapEx budget for this building is $250,000. We’re going to put in $200,000 into the interiors. That’s 40 units times $5,000 a unit, plus we’re going to put $50,000 into the exteriors, which includes new landscaping, new bushes, new signage, new awnings at the front doors, a courtyard, this is a U-shaped building, so a courtyard in between the middle of the U, the common spaces, power washing, all that’s going to be about 50,000 bucks. Matter of fact, the courtyard, we’re just approved this morning, just approved the plan for the courtyard, the landscaping, the signage, and the power washing. All of that was about $2,100, approved that this morning.

 

The goal for us is to raise the rents. The current gross income is $425,000. The rents are way below market value. And so, the goal is over the next two years to turn the units. So, it’s a super updated building, super updated units, new modern floor plans, new LVP flooring, new kitchen cabinets, new bathrooms, and to raise the rents, so our gross income goes up to $618,000. The rents right now are around 700 bucks. The goal is to get the blended rents up to roughly a thousand bucks on average. There are some large two-bed, one-bath units that will rent out for $1,300 to $1,400 a unit. There are some one-bed, one-bath largest that will rent out for $1,100 a unit. There are also some one-bed, one-bath smalls and some efficiencies or studios that will rent out in the $800 to $900. So, we feel very confident to push the rents

 

Then we’ve got some other income that we’re going to add – storage locker income, parking income, those types of things over the next 21 months or so. So, we’re starting to dig in now. Right now, we bought this just about two months ago, three months ago. It’s taken us a minute just to get all the quotes back to deal with contractors. Obviously, we’re dealing with COVID. So, contractors are short of laborers. They’re short of guys. And so, it’s taking us a little bit longer to get the quotes back, but since now, we approve the plan for the exteriors, that’s going to start in two weeks. And by the end of the summer, early fall, the exterior of the building is going to look phenomenal. So, when somebody walks into the building and they see that, it’s going to be like, okay, this is a little bit of an upgraded building compared to everything else in the Gold Coast. And then when we own that, then we’re going to take people into the leasing office, that’s going to look dynamic. Then from the leasing office, we’re going to take stuff, take people up to the units to show them. So, it would be an amazing experience from start to finish.

 

So, this case study we’re really excited about because it’s kind of a knockdown home run. It’s like the pitcher throws the ball right down the middle, and you’re expecting a fastball and you swing and you keep your head down. The ball hits the bat, you see the ball hit the bat, and it just flies out of the park. That’s this deal for us. Now, this deal isn’t a huge deal. It’s not a 500-unit, but it’s a 52-unit.

 

So, here are some of the things that we’re excited about when it comes to kind of the returns, the profits, stuff like that. We’ll be all into this thing for about $3.4 to $3.5 million, including the purchase price, renovation costs. We took an acquisition fee of 3% so that was a $90,000 acquisition fee. We’ve got a little bit of principal and interest reserve and holding costs. So, we’re all in for $3.4 million. And then when this thing stabilizes out at roughly $100,000 a unit, that’s going to be $5.2 million. We’re going to refinance at that point, refi, it’s 75% loan to value. We’re going to slap a new loan on it, roughly two years from now at roughly four million bucks. That’s going to create over $500,000, possibly $600,000 of tax-free refinance proceeds. And we’ll still have about $1.3 million of equity and we’ll make about $100,000 to $110,000 a year of net free, spendable cash flow.

 

One of the metrics that we use for apartment buildings is we want to make at least $1,350, $1,400 per year per unit. That’s our net free cash flow metric. This stables out to almost $1,900 per year per unit in net free, spendable cash flow. Now, why do we like the deal? Obviously, the price, number 1. Number 2, the rents were low. Number 3, there hasn’t been a significant capital improvement plan. Number 4, we could raise the rent. Number 5, we could force the appreciation. Number 6, we know that this is in demand. We know that this is one of the best parts of the area. There’s Lakewood Park, there’s Lake Erie, there are all kinds of shops. It’s very diverse. There’s a white community, a black community, a gay community, an older community, a younger community. The schools are good. There’s a lot of private schools and just literally, a five-minute walk, you can walk to Lake Erie, and there are multimillion-dollar homes, two-million-dollar, five-million-dollar homes on the Lake. And this isn’t in California. So, we don’t have 50-million-dollar homes. It’s Cleveland, but we’re doing okay. Alright. And so, we raised over a million dollars from our private investors and we paid them up 10% preferred return plus an equity kicker. So, when we refi, we’ll give them all of their principal back, plus a bonus, plus a kicker. So, that’s 52 Lake.

 

Now, what the interesting story about this is that I remember when I first got started in real estate, started back in 2005, 2006, 2007, my business partner, Greg and I, we became friends with the Browns player. His name was Jamel. And Jamel was kind of like third-ranked running back on the Browns roster. And Jamel was a pretty good player. He would sometimes get in the game. Sometimes, he would be a real sort of good player, sometimes not. His name was Jamel White. And Jamel and I, we were in our late 20s. Jamel was in his mid-20s, and we became friends with Jamel. We went over to his house. We hung out with him.

 

And I remember back then 2006, 2007, and 2008, Jamel had bought buildings in the Gold Coast. And I remember going to these buildings, and Jamel, when he got traded from the Browns and he played for the Tampa Bay Buccaneers, he played for the Ravens, he wanted to sell his properties in the Gold Coast. And I just remember thinking, like, this is way out of my league. This is way out of my league. I don’t know how to evaluate these apartment buildings. I don’t know how to get loans. I don’t know how to raise capital. I don’t know any of this stuff. And Jamel was ready to sell his buildings. He sold on us in a second. I mean, Jamel literally would come to my office and sit on my couch and hang out during the day because when it was off-season, he didn’t have anything to do. And it’s not like Jamel was a superstar. I mean, Jamel was kind of a journeyman, if you will.

 

But what sticks out to me now, roughly 15 years later, is the only thing that stopped me from buying these same types of buildings from Jamel 15 years ago was my mindset. The only thing that I didn’t know or didn’t think about 15 years ago was that I was capable, I was ready, I could do it, I was confident because I had the seller motivated. I had the buildings, good deals. And I talked myself out of it instead of talking myself into it, instead of like manufacturing confidence, instead of faking it till I made it, instead of manufacturing confidence, I talk myself out of it. And I said, Jamel, these buildings look great. We’re interested. Totally faking it.

 

And now, here we are, like, it took me a minute. I had to grow into it, but it was step by step. I did residential deals and then big rehabs and then raised private money. I started in a private equity fund and then ultimately started investing in apartments, but I could have bought these apartment buildings 15 years ago if my mindset was right. Instead of manufacturing confidence to say, I can do it, I manufactured the opposite and told myself and talk myself out of it. So, like the choice is yours, I mean, I am blown away when I meet young people in their 20s, early 30s, some of the amazing stuff that they’re doing, and they just feel totally comfortable with it because they’ve talked themselves into it, they’ve manufactured the confidence. They told themselves they were worthy, they were capable, they would get the resource, they would find a way.

 

Fifteen years ago, I told myself, I’m not going to find a way. Just imagine if I had bought this building 15 years ago, I probably could have bought it for $20,000 a door. We bought it for $3 million, 52 units. What do we pay for it? We probably paid $57,000 a door. So, $3,000 divided by 52 units. That’s $57,000 a door. Imagine if I bought these things for $20,000 a door, that’s a 300% increase or 300% return on my money. And the only reason why I didn’t have that is because I talked myself out of it. I manufactured doubt. I manufactured not confidence, but doubt in myself that we could do it. And I had no clue what I was doing. And so, I talked myself out of it. It’s unfortunate.

 

So, what are the lessons here? Number 1, make friends with NFL players. Just kidding. Number 2, seriously go network with all kinds of people. Be baffled by how many people have money, need to deploy money to come from all walks of life. They’re farmers with money. They’re NFL players with money. They’re 30-year-olds that work 70 hours a week as a partner in a law firm that have money. There are people starting tech companies that have money. There are old people with money. There are people all over with money. Manufacture your own self-confidence, and then go talk to the people with money. That’s number 1.

 

Number 2, again, confidence is choice. It’s a choice. All of us get talked down to. My eighth grader, Giuliana, I keep talking to her like, hey, doesn’t really matter what other people think of you, matters what you think of yourself. If you think highly of yourself, then other people will think highly of you. You don’t get your confidence from them. They get their opinion from you. You create the aura, the being, the confidence that you want to have, and then other people will see that confidence and gravitate toward it. We all want to be around people who are confident. And so, those are the types of lessons, the things that I think that I would take away from this podcast, I’m excited to do this deal. We covered the case study. It’s very profitable, but what if I had done it 15 years ago? What if I had bought it in 2006 instead of 2021? What if I had bought it from Jamel when it was available 15 years ago for $20,000 a door? What if, what if, what if? The good news is even it took me a while to learn the lesson, I learned the lesson. That’s what matters.

 

Guys, thanks so much for allowing me again to share this with you. Always so grateful to just jump on, record, talk about our deals. Hopefully, you get a lot out of these case studies. It’s kind of real-world facts and what the hell is actually going on, not just some guru shit talk on Facebook of some deal that they’re claiming that they’re doing. Like this is the real-world stuff, right? This is how it’s actually going. And I just want to thank you so much.

 

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